Second Circuit Denies Petition For En Banc Review Of Fairfield Decision

On January 13, 2015, the U.S. Court of Appeals for the Second Circuit denied a petition for en banc review of the Second Circuit's September 2014 panel decision holding that bankruptcy courts are required to review the propriety of a Chapter 15 debtor's transfers of property interests within the territorial jurisdiction of the U.S., even if such a transfer has already been approved in the debtor's foreign proceeding. This decision represents a departure from prior cases, in which U.S. judges often enforced foreign court orders based on principles of comity and prohibited challengers from "re-litigating" such disputes in the U.S. Absent consideration and reversal by the U.S. Supreme Court, the Second Circuit's opinion and subsequent denial of en banc review could signal a paradigm shift in Chapter 15 jurisprudence and is sure to be cited with fervor by litigants in future Chapter 15 proceedings. The decision may also create new burdens or requirements for foreign liquidators using estate property located in the U.S.

Procedural History and Second Circuit's Panel Decision

Fairfield Sentry, Ltd. ("Fairfield") is a British Virgins Islands ("BVI") investment fund that invested approximately 95% of its assets with Bernard L. Madoff Investment Securities LLC ("BLMIS") prior to the financial crisis. Following exposure of the Madoff fraud and commencement of BLMIS's liquidation in December 2008 under the Securities Investor Protection Act, Fairfield entered into a settlement with the BLMIS trustee fixing its claims against BLMIS at $230 million (the "Fairfield Claims").

In July 2009, Fairfield voluntarily initiated liquidation proceedings in the BVI. Then, in 2010, the Fairfield foreign representative filed a Chapter 15 petition in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") requesting recognition of the BVI liquidation as a "foreign main proceeding," which was granted. Fairfield's foreign representative thereafter agreed to sell the Fairfield Claims to Farnum Place, LLC ("Farnum") for 32.125% of the claims' value, which was conditioned upon approval of the sale in both the BVI court and the Bankruptcy Court.

However, three days after the sale agreement was executed, the BLMIS trustee agreed to a massive settlement in the BLMIS proceeding that increased the value of the Fairfield Claims by approximately $40 million dollars. The Fairfield foreign representative, believing that the deal with Farnum was no...