BURTON R. LIFLAND, Bankruptcy Judge.
This is a pure and simple case of seller's remorse. A Chapter 15 foreign representative sold his Madoff SIPA
The foreign representative now turns to this Court in another attempt to undo the transaction. The instant application (the "Application")
Accordingly, the Foreign Representative's attempts to persuade this Court to disapprove the Sale, the bona fides of which are untainted by the slightest hint of fraud or foul play, are simply unavailing. The Foreign Representative challenged the validity of the Sale before his home court in the BVI and lost. His Hail Mary, last-ditch effort to renew that challenge before this Court is without any basis and is therefore DENIED.
Fairfield Sentry was established for the purpose of allowing mainly non-U.S. persons and certain tax-exempt United States entities to invest with Bernard L. Madoff Investment Securities ("BLMIS"). See In re Fairfield Sentry Ltd., 440 B.R. 60, 62 (Bankr.S.D.N.Y.2010). It was a customer of and feeder fund to BLMIS, where it invested 95% of its assets, see id., and maintained four direct customer accounts (nos. 1FN012, 1FN045, 1FN069, and 1FN070), Picard v. Fairfield Sentry Ltd. et al., Adv. Pro. No. 09-01239, (Dkt. No. 69) [hereinafter "Settlement Motion
Prior to July 2, 2009, the bar date for filing claims in the substantively consolidated SIPA liquidation of BLMIS (the "SIPA Liquidation"), Fairfield Sentry filed three customer claims (assigned claim numbers 008037, 007898 and 11251, collectively, the "SIPA Claim") in the SIPA Liquidation. See Settlement Motion, ¶ 10. The SIPA Claim at the time of the filing, if allowed in full, amounted to approximately $1.2 billion under the Trustee's "net equity" method for determining customer claims, as set out in this Court's Net Equity Decision. See id.
On or about May 18, 2009, Irving H. Picard (the "Trustee"), trustee for the SIPA Liquidation, commenced an adversary proceeding (the "Adversary Proceeding") against the Chapter 15 Debtors and other defendants in this Court seeking recovery of $3.054 billion under various provisions of the Code, SIPA, and New York Debtor and Creditor Law. See Amended Complaint, Picard v. Fairfield Sentry Ltd., Adv. Pro. No. 09-1239 (Dkt. No. 23). The Trustee also asserted claims for turnover and accounting, and for disallowance of the claims filed by the Chapter 15 Debtors, as well as threatened to seek equitable subordination of the SIPA Claim pursuant to section 510(c) of the Code. See id.
The Foreign Representative, on behalf of the Chapter 15 Debtors, engaged in negotiations with the Trustee during 2010 and 2011 to resolve the Adversary Proceeding. See Krys Decl., ¶ 6. In May 2011, the Foreign Representative and the Trustee reached a global settlement (the "Settlement"). See id. at ¶ 7; Settlement Motion, ¶ 19. Subsequently, the Court entered an order approving this Settlement on June 10, 2011, followed by the BVI Court that approved the same on June 24, 2011. See Krys Decl., ¶ 7. Pursuant to its terms, Sentry is entitled to an allowed SIPA Claim in the BLMIS Proceedings in the amount of $230 million, subject to the Foreign Representative's payment of $70 million of Sentry's cash to the Trustee. See Settlement Motion, ¶ 22. Prior to November 2012, the Foreign Representative had paid $24 million to the Trustee, resulting in an allowed SIPA Claim in the
The SIPA Claim is presently one of Sentry's primary assets. Apart from the SIPA Claim, Sentry's liquid, non-contingent assets total approximately $115 million in value, comprised of (i) approximately $71 million in cash in an account at Citco Bank Nederland N.V. Dublin branch, which is currently unavailable to Sentry and subject to an order of attachment from a Netherlands court; (ii) approximately $6.7 million in non-BLIMS investments; and (iii) approximately $36.7 million in other cash. See Krys Decl., ¶ 9.
During the final four months of 2010, the Foreign Representative conducted a competitive auction for the SIPA Claim. See id., ¶ 10. At that time, there were many publicly available facts suggesting that the Trustee could obtain substantial returns for the BLMIS Customer Funds. See Declaration of Patrick M. McKee in Support of Farnum Place LLC's Objection to Foreign Representative's Application (Dkt. No. 658), ¶ 17. For example, the Trustee had already brought many adversary proceedings, including the one against the Picower defendants seeking more than $7 billion. See Declaration of Scott C. Shelley (Dkt. No. 657) [hereinafter "Shelley Decl."], Ex. 19. On December 7, 2010, the Trustee announced a $550 million settlement with the family of Carl Shapiro. See id. On December 2, 2010, the Trustee and his counsel filed a lawsuit against JP Morgan Chase, Madoff's primary banker, and related entities, seeking more than $6.5 billion in fees, profits, avoidable transfers and damages. See id.
The Foreign Representative elected to accept Farnum's offer to purchase the SIPA Claim for 32.125% of its ultimate allowed amount. See Krys Decl., ¶ 11. The Foreign Representative indicated that Farnum's bid was "in the best interest of the estate of Sentry." See Shelley Decl., Ex. 18 (Forbes Hare Letter to Conyers, Dill & Pearman, dated December 6, 2011, Concerning the BVI Applications).
Accordingly, in early December 2010, the parties negotiated, documented and signed, with representation by U.S. counsel, a trade confirmation (the "Trade Confirmation") setting forth the material terms and conditions of the SIPA Claim Sale for 32.125% of its ultimate allowed amount. See Declaration of James F. Mooney in Support of Farnum Place LLC's Objection (Dkt. No. 659), ¶¶ 9-11.
At the heart of the Trade Confirmation was a mutual assumption of risk: Farnum assumed the risks associated with having to collect an uncertain amount of distributions on an unknown timeline through the SIPA Proceeding, while Sentry assumed the risk that the recovery rate on customer claims in the BLMIS Proceeding might rise above 32.125%, which it ultimately did. See id.
On December 14, 2010, BLMIS customer claims were trading for approximately 20% to 30% of their face value. See Application, ¶ 5. Just three days after the Trade
Under "Other Terms and Trades" in the Trade Confirmation, the parties themselves agreed that the Transaction shall be subject to, inter alia, (i) "[a]pproval by the BVI Court of the terms of this Trade Confirmation," and (ii) "[a]pproval by a Final Order of each of the U.S. Bankruptcy Court and the BVI Court of the assignment of the Claim by Seller [Sentry] to Buyer [Farnum]." See Krys Decl., Ex. B, p. 4. Under the terms of the Trade Confirmation, the Foreign Representative was obliged to "endeavor to obtain promptly the approval of the BVI Court of the terms and conditions of this Trade Confirmation." See id., p. 10. However, that obligation was expressly made "[s]ubject to Seller's exercise (in Seller's sole discretion) of its fiduciary duties or obligations as court-appointed liquidator." See id. The Trade Confirmation expressly provides that it is governed by New York law. See id., p. 9.
On or about May 31, 2011, the Foreign Representative filed an application in the BVI Court recommending that it disapprove the Trade Confirmation (the "First Sentry BVI Application"). See Krys Decl., ¶ 21. At the hearing on this application, held on June 7, 2011, the Foreign Representative withdrew the First Sentry BVI Application to "consider issues raised by the BVI Court with respect to the approval of the Trade Confirmation under BVI law." Application, ¶ 25. Subsequently, on or about June 29, 2011, the Foreign Representative submitted an application to the BVI Court (the "Second Sentry BVI Application"), requesting leave to file an application with this Court to consider the Sale and the Trade Confirmation pursuant to section 363 of the Code, as made applicable to the Sale by section 1520(a)(2) of the Code. See id. The BVI Court denied the Second Sentry BVI Application without prejudice on the basis that the Trade Confirmation, as a contractual matter, contemplated the BVI Court's consideration and approval prior to making an application to this Court. See id.
On October 27, 2011, given that the Foreign Representative had failed to submit an application to secure the BVI Court's approval of the terms and conditions of the Trade Confirmation, Farnum (through BVI counsel) filed an application in the BVI Court (the "Farnum BVI Application")
From March 13 to March 15, 2012, the BVI Court conducted a three-day evidentiary hearing regarding approval of the Sale. During that hearing, the BVI Court heard the testimony of fact witnesses, as well as experts for each side on both New York state law and United States bankruptcy law.
Consequently, on April 18, 2012, the Foreign Representative filed the Application with this Court. Following an unsuccessful attempt at mediation, a hearing (the "Hearing") was held on January 9, 2013.
The threshold issue in the instant Application is whether the Court should conduct a best interests of the estate review under section 363 of the Code ("Section 363"), as urged by the Foreign Representative, in considering disapproval of the Sale. Based on its analysis of the papers and the arguments set forth at the Hearing, the Court finds that a Section 363 review is not warranted under section 1520(a)(2) of the Code ("Section 1520(a)(2)"). Such finding is consonant with the origins of Chapter 15 and the notion of comity, a central tenet therein. Accordingly, the Application is DENIED.
In considering whether a Section 363 review must be undertaken by this Court, the parties focus on Section 1520(a)(2), which provides:
11 U.S.C. § 1520(a)(2). The parties dispute whether the instant Sale involves a "transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States" ("Section 1520(a)(2) Transfer"). See 11 U.S.C. § 1520(a)(2) (emphasis added). The Foreign Representative argues that a Section 363 review is necessary because the Sale involves such a transfer "within the territorial jurisdiction of the United States:" the "interest" is the SIPA Claim and the "property" is the Customer Funds, both of which are within the United States. Farnum, on the other hand, maintains that a Section 363 review is not necessary because there is no such transfer in the United States: the "interest" is the ownership interests in the SIPA Claim and the "property" is the SIPA Claim itself, both of which are intangibles located in the BVI.
The Court finds that the Sale does not involve a Section 1520(a)(2) Transfer and, therefore, a Section 363 review of the Sale is not warranted under the present circumstances.
The instant Sale does not involve a Section 1520(a)(2) Transfer because the allowed SIPA Claim is not "within the territorial jurisdiction of the United States." Rather, according to applicable non-bankruptcy law, it constitutes an intangible asset located in the BVI.
Section 1502(8) of the Code defines "within the territorial jurisdiction of the United States" as:
11 U.S.C. § 1502(8). Therefore, with respect to intangible property, in order to find that "an interest of the Debtor in property" is "within the territorial jurisdiction of the United States," a court must find that such interest is located within the United States under applicable non-bankruptcy law. See id.; see also Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (finding that in assessing the quality and situs of property interests, bankruptcy courts are to apply non-bankruptcy law); Peterson v. Islamic Republic of Iran, 627 F.3d 1117, 1131 (9th Cir.2010) ("To determine the location of an intangible right to payment, we must look to [applicable] state law."). Thus, New York law, as set forth in the Trade Confirmation and agreed upon by the parties, determines the appropriate situs.
Here, the property in question is the allowed SIPA Claim and Sentry's ownership rights therein. The SIPA Claim Sale contemplates the transfer of Sentry's ownership interest in its rights against
In determining the location of intangibles under New York law, the flexible test annunciated in Severnoe Securities Corp. v. London and Lancashire Insurance Co., 255 N.Y. 120, 123-24, 174 N.E. 299 (1931), which has been adopted by many New York courts and is referred to by both parties, applies here:
Id. (emphasis added) (internal citations omitted). Indeed, "determination of situs for one purpose has no necessary bearing on its determination for another purpose" and the corresponding analysis is highly contextual. Bankers Trust Co. v. Equitable Life Assur. Soc. of U.S., 19 N.Y.2d 552, 556-57, 281 N.Y.S.2d 57, 227 N.E.2d 863 (1967) ("Stated another way, [determining the situs of intangibles] is fundamentally a question of ease of administration and of equity."); see Yayasan Sabah Dua Shipping SDN BHD v. Scandinavian Liquid Carriers Ltd., 335 F.Supp.2d 441, 448 (S.D.N.Y.2004) ("[P]inpointing the location of intangible assets ... is a dilemma that calls for a practical judgment"); In re Iroquois Energy Mgmt., LLC, 284 B.R. 28, 31 (Bankr.W.D.N.Y.2002) (emphasizing that "the concerns for justice and the convenience of all parties who may have an interest in that asset" must be adequately apprised in ascertaining the location of that intangible asset).
In applying the Severnoe test, the Iroquois court shed light on the relevant considerations regarding the situs of an intangible in the context of a right to a payment from a third party. There, the court found that right constituted an intangible property interest. In re Iroquois, 284 B.R. at 32. In determining the situs of such interest, the court then found that it was located at the domicile of the debtor, not with the third-party obligor. Id. The court reasoned that the relevant interest "arises not from contacts in the jurisdiction of any [third-party] obligor of the [debtor], but principally from contacts with the debtor's domicile or principal business location" because: (i) "[t]o its own secured creditors, the owner of an intangible asset provides the one certain link between the secured claim and the payment of cash. From a transaction secured by intangibles, the source of cash is a step removed," (ii) the underlying dispute involved only the debtor and the creditor, and (iii) the dispute arose "principally from contacts with the debtor's domicile or principal business location."
As in Iroquois, justice, convenience and common sense dictate that this Court find that the SIPA Claim is located with the debtor in the BVI, and not the third-party obligor. Indeed, the Sale involves the transfer of the SIPA Claim by a BVI incorporated entity, being administered by the BVI Court. The Liquidator was appointed by, and must answer to, the BVI Court. This Court has recognized that the Liquidator is deemed to "have custody and control of all the assets" of Sentry under the BVI Insolvency Order, In re Fairfield Sentry Ltd., 452 B.R. 52, 56 (Bankr. S.D.N.Y.2011), and that the Liquidator conducts the business of administering Sentry's assets in the BVI, see In re Fairfield Sentry, 440 B.R. at 64-65. The Liquidator himself, in arguing that this Chapter 15 Court was not the proper forum to examine the Settlement, emphasized: "The BVI court oversees the [Chapter 15 Debtors'] activities and administers [their] estates.... That is the proper venue for dealing with the reasonableness of this settlement under applicable law in connection with the fiduciary duties of the Fairfield liquidators." See Transcript Regarding Hearing Held on June 7, 2011, Picard v. Fairfield Sentry Ltd., Adv. Pro. No. 09-1239 (Dkt. No. 93) at 14:4-11. In addition, at this time, the Foreign Representative seeks relief against his claim to BLMIS Customer Funds; he is not seeking relief against those funds themselves. See Trade Confirmation, p. 1 (providing for the sale of the "Claim," which is defined as "[a]ll Seller's rights, title and interest in and to Seller's claims against BLMIS in the Proceedings"). Finally, any proceeds of the SIPA Claim Sale will be administered in the BVI pursuant to BVI insolvency law to primarily foreign creditors.
In sum, in undertaking a common sense appraisal of the requirements of justice and convenience in the instant circumstances, this Court finds that the SIPA Claim is not within the territorial jurisdiction of the United States and, therefore, the Sale does not involve a Section 1520(a)(2) Transfer.
Such finding is consistent with Chapter 15's origins and its governing concept of comity. The origins of Chapter 15 rest in section 304 of the Code ("Section 304") and the Model Law on Cross-Border Insolvency ("the Model Law"), each of which were specifically designed to formalize cross-border coordination and cooperation, as well as delineate the role of an ancillary court as an aid to the foreign main court in international insolvency proceedings. See, e.g., H. Rep. No. 95-595, 95th Cong. 1st Sess., 324-325 (1977), 1978 U.S.C.C.A.N. 5963, 6281; S. Rep. 95-989, 95th Cong., 2d Sess. 35 (1978), 1978 U.S.C.C.A.N. 5787, 5821 (indicating Section 304 "governs cases filed in the bankruptcy courts that are ancillary to foreign proceedings"). Integral to these objectives is the governing concept of comity, which is the "recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens, or of other persons who are under the protections of its laws." Hilton v. Guyot, 159 U.S. 113, 164, 16 S.Ct. 139, 40 L.Ed. 95 (1895).
Both parties cite to the Fifth Circuit's recent decision in In re Vitro S.A.B. de CV, 701 F.3d 1031 (5th Cir.2012) and the Delaware Bankruptcy Court's decision in In re Elpida Memory, Inc., No. 12-10947, 2012 WL 6090194 (Bankr.D.Del. Nov. 20, 2012), recent cases that are at odds with each other regarding the role of comity in Chapter 15. While the Vitro court elevated comity to a "principal objective," see 701 F.3d at 1043, 1064 (finding comity to be "the rule ... not the exception"), the Elpida court found that comity is "not the end all be all of the statute," 2012 WL 6090194, at *8. For the reasons stated below, this Court disagrees with the Elpida court's downplay of the role of comity in Chapter 15.
The doctrine of comity predates the United States Bankruptcy Code, see Hilton, 159 U.S. at 164, 16 S.Ct. 139, and was placed as one of six factors to be considered in granting relief under former Section 304. See REORGANIZING FAILING BUSINESSES: A COMPREHENSIVE REVIEW AND ANALYSIS OF FINANCIAL RESTRUCTURING AND BUSINESS REORGANIZATION, VOL. II, American
240 F.3d 148, 156 (2d Cir.2001); see also Reorganizing Failing Businesses, p. 13-12.
The importance of comity has been codified in Chapter 15 to emphasize its primacy by inserting it in the preamble of section 1507(b) of the Code, rather than listing it as one of the source factors of displaced section 304(c) of the Code. See Vitro, 701 F.3d at 1064. The analog to section 1507 is article 7 of the Model Law ("Article 7"). The United States delegation to UNCITRAL (Working Group V), of which the undersigned was, and is, a member, was instrumental in inserting language of comity status elevation to Article 7 (section 1507(b) of the Code): "Therefore, in section 1507(b), comity is raised to the introductory language to make clear that it is the central concept to be addressed." See Burton R. Lifland, Chapter 15 of the United States Bankruptcy Code: An Annotated Section-By-Section Analysis, CROSS-BORDER INSOLVENCY AND CONFLICT OF JURISDICTIONS (Bruylant, 2007); see also Suggested Modification to Ancillary Proceeding Statutes, 4 AM. BANKR.INST. L.REV. 530 (1996) (same author).
Indeed, Chapter 15 emanates from and was designed around this central concept of comity, as evidenced by its primary purpose and deferential framework for international judicial cooperation. See, e.g., 11 U.S.C. § 1501(a) (specifying Chapter 15's "most basic objective is to foster the orderly administration of cross-border restructurings"); 11 U.S.C. § 1504 (indicating that "any case commenced under Chapter 15 is `ancillary' to a foreign proceeding pending elsewhere"); 11 U.S.C. § 1525 ("[T]he [ancillary] court shall cooperate to the maximum extent possible with a foreign court") (emphasis added); 11 U.S.C. § 1527 (stating cooperation "may be implemented by any appropriate means") (emphasis added); see also In re JSC BTA Bank, 434 B.R. 334, 342 (Bankr. S.D.N.Y.2010) (emphasizing that ancillary cases are "meant to support, not supplant, a main proceeding in a foreign jurisdiction"). All in all, "Chapter 15 provides courts with broad, flexible rules to fashion relief appropriate for effectuating its objectives in accordance with comity." Vitro, 701 F.3d at 1053. In fashioning such relief, courts must "take into account the interests of the United States, the interests of the foreign state or states involved, and the mutual interests of the family of nations in just and efficiently functioning rules of international law." Id. (internal quotations omitted).
Considering the facts before the Court, as established above, it is clear not only that the SIPA Claim is located in the BVI, but also that the BVI Court has the paramount interest in the sale of the SIPA Claim. Moreover, this Court lacks a meaningful interest in the disposition of the SIPA Claim. Once this Court approved the Settlement between the Trustee and Fairfield Sentry and the claims allowance procedure order in the SIPA Liquidation, it relinquished its stake in the adjudication of the Sale of the SIPA Claim, parking it squarely in the BVI Court. Even if requested to do so, this Court is
Failing to grant such comity to the BVI Judgment under these circumstances "necessarily undermines the equitable and orderly distribution of a debtor's property by transforming a domestic court into a foreign appellate court where creditors are always afforded the proverbial `second bite at the apple.'" See SNP Boat Serv. Sa. v. Hotel Le St. James, 483 B.R. 776, 786 (S.D.Fla.2012) (reversing bankruptcy court decision permitting discovery for the purpose of determining whether a judgment creditor's interests were sufficiently protected in a foreign proceeding). This Court, supervising an ancillary proceeding, declines to offend principles of international comity by second guessing the BVI Court's approval of the Sale when the United States' interests are so minimal. Chapter 15 was not designed to permit parties to mix and match multiple countries' laws, which would lead to "haphazard, erratic, or piecemeal" adjudication of the distribution of assets, In re Atlas Shipping A/S, 404 B.R. 726, 738 (Bankr. S.D.N.Y.2009), as the administration and disbursement of the same assets would be handled by "different tribunals in different countries according to different laws," see Daniel M. Glosband, et al., THE AMERICAN BANKRUPTCY INSTITUTE GUIDE TO CROSS BORDER INSOLVENCY 6 (2008). As the drafters of the Model Law emphasized, "inharmonious legal approaches" — such as ones in which parties can obtain duplicative, cross-border review on the basis of a contrived relationship to an ancillary court — "hamper the rescue of financially troubled businesses, are not conducive to a fair and efficient administration of cross-border insolvencies, impede the protection of the assets of the insolvent debtor against dissipation and hinder maximization of the value of those assets." UNCITRAL, LEGISLATIVE GUIDE ON INSOLVENCY LAW, ANNEX III, 310, ¶ 13 (2005). Furthermore, an absence of "predictability in the handling of cross-border insolvency cases impedes capital flow and is a disincentive to cross border investment," id., which is exactly the outcome Chapter 15 was designed to prevent, see Fogerty v. Petroquest (In re Condor Ins. Ltd.), 601 F.3d 319, 322 (5th Cir.2010).
For the reasons set forth above, this Court declines to conduct a plenary Section 363 review.
To the extent that this Court has been requested to express its view of the Trade Confirmation, this Court finds no basis for disapproval thereof. Accordingly, the Application is DENIED.
