In re Fairfield Sentry Ltd.
539 B.R. 658
Bankr. S.D.N.Y.2015Background
- Fairfield Sentry Ltd. (Sentry), a BVI investment fund that had most assets with Madoff’s BLMIS, was placed in BVI liquidation and its joint liquidators (including Kenneth Krys) sought chapter 15 recognition in the SDNY; recognition as a foreign main proceeding was granted.
- Sentry held customer claims in the BLMIS SIPA liquidation; a May 2011 settlement with the SIPA trustee fixed Sentry’s allowed customer claim at $230 million (the Sentry Claim).
- In 2010 the BVI liquidation ran an auction; Farnum Place, LLC won and executed a Trade Confirmation to buy the Sentry Claim for ~32.125% of the allowed claim, subject to U.S. Bankruptcy Court approval.
- After the Picower settlement increased expected recoveries in the BLMIS liquidation, the value of customer claims rose (to ~50%+), making the Farnum purchase much less favorable to Sentry; the BVI Court nonetheless ordered the Foreign Representative to seek U.S. approval or disapproval.
- The Second Circuit held that sales of a debtor’s interest in U.S. territorial property in a chapter 15 main proceeding are subject to review under 11 U.S.C. §§ 363 and 1520(a)(2), and remanded for § 363 review.
- On remand the Foreign Representative moved to disapprove the sale under § 363(b) (arguing changed value and sound business judgment); Farnum moved to (i) modify the Recognition Order to avoid § 363, or (ii) confirm § 363 did not apply (Entrustment and Ordinary Course arguments). The bankruptcy court disapproved the sale and denied Farnum’s motions.
Issues
| Issue | Plaintiff's Argument (Foreign Representative) | Defendant's Argument (Farnum) | Held |
|---|---|---|---|
| Does § 363 apply to the sale of the Sentry Claim in chapter 15? | § 1520(a)(2) makes § 363 automatically applicable to transfers of debtor property in the U.S.; Court must review under § 363. | § 1521 entrustment and Recognition Order limit § 363; court should defer to BVI approval or modify recognition. | § 363 applies automatically via § 1520(a)(2); Farnum’s modification/entrustment arguments fail. |
| Should the court disapprove the pre‑existing Trade Confirmation under § 363(b)? | Changed circumstances (substantial increase in claim value and interim distributions) provide a sound business reason to disapprove; selling at 32.125% is now adverse to estate. | Auction finality, integrity of the process, and BVI approval counsel for enforcement of Trade Confirmation. | Disapproved: Lionel factors (esp. asset increasing in value) favor disapproval; auction finality and comity do not override § 363 review. |
| Can Farnum invoke an ‘‘entrustment’’ under § 1521(a)(5) to avoid § 363 review? | N/A (Foreign Representative argues entrustment does not override § 1520(a)(2)). | Entrustment of administration/realization authorized the Foreign Representative to realize assets without § 363 approval. | Rejected: Entrustment does not exempt parties from § 363; argument is foreclosed by Second Circuit mandate. |
| Is the sale an ordinary‑course transaction exempting it from § 363(b) review? | N/A (argues sale is non‑ordinary course). | Sale is part of liquidating operations and thus ordinary course for the Foreign Representative. | Rejected: Under vertical/horizontal tests, sale is not ordinary course of Sentry’s business as an investment fund; § 363(b) applies. |
Key Cases Cited
- Krys v. Farnum Place, LLC, 768 F.3d 239 (2d Cir. 2014) (§ 363 review required for transfers of debtor property within U.S. in chapter 15 main proceeding)
- Comm. of Equity Sec. Holders v. Lionel Corp., 722 F.2d 1063 (2d Cir. 1983) (bankruptcy courts must find a good business reason to approve § 363(b) sales; list of salient factors)
- Consumer News & Bus. Channel P’ship v. Fin. News Network Inc., 980 F.2d 165 (2d Cir. 1992) (broad discretion to enhance estate value; sale approval within court’s discretion)
- Licensing by Paolo, Inc. v. Sinatra (In re Gucci), 126 F.3d 380 (2d Cir. 1997) (creditors who allege diminution of estate value have standing to challenge sale)
- In re Muscongus Bay Co., 597 F.2d 11 (1st Cir. 1979) (bankruptcy court may refuse to confirm highest auction bid when better interests of estate justify reopening or rejecting sale)