596 B.R. 275
Bankr. S.D.N.Y.2018Background
- Fairfield Sentry, Sigma and Lambda (the Funds), BVI funds, invested almost entirely with Bernard L. Madoff Investment Securities (BLMIS); Madoff's fraud rendered those investments worthless after redemptions were paid.
- The Funds' Articles required Directors to determine NAV and provided that any certificate of NAV "given in good faith ... shall be binding." Citco performed NAV calculations as administrator.
- BVI litigation (the BVI Redeemer Actions) challenged March 2004 redemptions; BVI courts (and Privy Council on appeal) held that certified NAVs fixed the redemption price and that redeeming members gave good consideration, foreclosing restitution in those cases.
- Liquidators then filed 305 U.S. adversary proceedings (U.S. Redeemer Actions) seeking to recover later redemptions, alleging Citco certified NAVs in bad faith and asserting common-law, contractual, and BVI-avoidance claims.
- Defendants moved to dismiss primarily arguing preclusion by the BVI/Privy Council decisions and that U.S. bankruptcy safe-harbor provisions (11 U.S.C. § 546(e) and § 561(d)) bar avoidance of these settlement-style redemption transfers.
- The Bankruptcy Court denies leave to amend except to plead constructive-trust claims against defendants who knew the NAV was inflated ("Knowledge Defendants"), dismisses common-law and contract claims (subject to that Knowledge-Defendant exception), and denies dismissal of the BVI avoidance claims without prejudice to renewed §546(e)/§561(d) arguments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Preclusive effect of Migani and prior BVI rulings on common-law and contract claims | Migani did not decide Citco's alleged bad faith; Liquidators may litigate new facts showing bad faith to avoid binding NAVs | Migani and related BVI decisions foreclose challenges to certified NAVs and bar restitution/contract claims | Court: Migani and related authority strongly favor finality and bar common-law and contract claims except where a defendant knew NAV was inflated (Knowledge Defendant — constructive trust allowed) |
| Ability to plead bad-faith certificate as escape from "binding certificate" provision | Bad faith by administrator (Citco) makes Article 11(c) certification not binding | Articles bind NAVs certified in good faith; administrator's bad faith generally imputed to the Funds/Directors or, if imputed, defeats Funds' ability to recover | Court: Administrator's bad faith either is imputed (then Funds cannot recover because of their own breach) or, if not imputed, still does not permit restitution except against a redeeming party who actually knew the NAV was false |
| Implied contractual terms / covenant claims to require repayment of overpayments | Terms should be implied (obviousness, business efficacy) to permit recalculation and recovery of overpayments | Implying such term would undermine finality, predictability and make the fund scheme unworkable | Court: Rejects implication; contract claims dismissed for same finality/workability reasons |
| BVI avoidance claims under Insolvency Act §§245/246 (unfair preferences/undervalue) | Liquidators can avoid redemptions as preferences/undervalue transactions by using hindsight to show consideration was worthless | Defendants say redeemers gave good consideration and redemptions were ordinary business; also raise bankruptcy safe-harbor defenses | Court: Denies dismissal of BVI avoidance claims now; allows amendment to plead them, but leaves open §546(e)/§561(d) safe-harbor challenges for later renewed motions |
| Applicability of U.S. bankruptcy safe-harbor (§546(e)) and §561(d) to bar foreign avoidance claims | Liquidators: §546(e) is not extraterritorial and §561(d) does not convert it into a bar to foreign avoidance claims | Defendants: §561(d) makes §546(e) apply in chapter 15 ancillary proceedings and therefore bars avoidance of these settlement payments (to the same extent as in chapters 7/11) | Court: §561(d) plausibly extends the bankruptcy safe-harbor protection to chapter 15 proceedings and to avoidance claims tied to covered settlement payments; but because Merit changed law on who qualifies as covered entities, court denies §546(e)/§561(d)-based dismissal now without prejudice to renewed, fact-specific motions |
Key Cases Cited
- Allen v. McCurry, 449 U.S. 90 (U.S. 1980) (res judicata principle: final judgment on merits precludes relitigation)
- EEOC v. Arabian American Oil Co., 499 U.S. 244 (U.S. 1991) (presumption against extraterritoriality)
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (U.S. 2010) (two-step extraterritoriality analysis focusing on statute"s domestic focus)
- Merit Management Group, L.P. v. FTI Consulting, Inc., 138 S. Ct. 883 (U.S. 2018) (clarified §546(e) requires the transferor or transferee itself be a qualifying financial entity; curbed conduit theory)
- Chambers v. NASCO, Inc., 501 U.S. 32 (U.S. 1991) (federal courts' inherent authority to control abusive litigation and sanction misconduct)