IILR_2015_30001_1 IILR 1 ARTICLES Jeffrey A. Lesemer 1 Farfeld Sentry and the lmts of comty n Chapter15cases Introducton In the cross-border nsolvency case of Farfeld Sentry Lmted, the Unted States Court of Appeals for the Second Crcut held that U. S. bankruptcy law governed the sale of ntangble property of a foregn debtor, Farfeld Sentry Ltd. (``Farfeld''), whch was n lqudaton proceedngs n the Brtsh Vrgn Islands (``BVI''). The BVI court overseeng the lqudaton had approved the sale of the ntangble asset under BVI law. When the sale was brought before the U. S. bankruptcy court overseeng Farfeld's ancllary cross-border case under Chapter 15 of the Unted States Bankruptcy Code, the bankruptcy court declned to revew the merts of the proposed sale under U. S. bankruptcy law and deferred nstead to the BVI court's approval of the sale, under the doctrne of nternatonal comty. On appeal, the Second Crcut rejected the bankruptcy court's rulng, notng that nternatonal comty cannot overrde the Bankruptcy Code's plan language. The Second Crcut nstructed the bankruptcy court on remand to evaluate the merts of the sale under U. S. bankruptcy law. On January 13, 2015, the Second Crcut dened the losng party's moton for rehearng and thus cemented ts rulng. Over a century ago the Unted States Supreme Court descrbed the doctrne of nternatonal comty as the ``recognton whch one naton allows wthn ts terrtory to the legslatve, executve, or judcal acts of another naton, havng due regard both to nternatonal duty and convenence, and to the rghts of ts own ctzens, or of person who are under the protecton of ts laws.'' Chapter 15 of the Bankruptcy Code ± whch ncorporates the Model Law on Cross-Border Insolvency (``Model Law'') promulgated n 1997 by the Unted Natons Commsson on Internatonal Trade Law ± adopts a ``pro-comty approach'' to transnatonal nsolvency cases. Chapter 15, among other thngs, provdes for recognton of foregn nsolvency proceedngs and ``for ancllary relef n a broader structure that mandates cooperaton wth foregn courts and foregn representatves and coordnaton of multple proceedngs nvolvng a common debtor.'' Courts have characterzed the doctrne of nternatonal comty as ``central'' to or a ``prncpal objectve'' of Chapter 15 of the Bankruptcy Code. Yet, n Farfeld Sentry, the Second Crcut ruled that deference to a foregn trbunal n accordance wth nternatonal comty cannot overrde the plan language of the Bankruptcy Code when that language leaves no room for deference or dscreton by the bankruptcy courts. Farfeld Sentry thus jons an emergng lne of court decsons holdng 1 Ths artcle was frst publshed n the Insolvency & Restructurng Newsletter of the Internatonal Law Offce ± www.nternatonallawoffce.com. Satzspegelhæhe: 192mm
2 IILR IILR_2015_30001_1 that the doctrne of nternatonal comty s not wthout lmts n Chapter 15 cases. Background Farfeld was a BVI ``feeder fund'' that nvested approxmately 95% of ts assets wth Bernard L. Madoff Investment Securtes, LLC (``BLMIS''), a frm wholly owned by Bernard Madoff. Shortly after Madoff's massve Ponz scheme was unmasked n 2008, BLMIS collapsed and entered lqudaton proceedngs before the U. S. Bankruptcy Court for the Southern Dstrct of New York under the U. S. Securtes Investor Protecton Act. A trustee was apponted to admnster the lqudaton of BLMIS. Havng suffered net losses approachng $1 bllon, Farfeld fled three customer clams n the BLMIS lqudaton, whch the trustee dsputed. The dspute eventually was resolved, wth Farfeld recevng an allowed clam of $230 mllon (``SIPA Clam''). Facng fnancal dstress of ts own, Farfeld was placed nto lqudaton before the BVI court. The BVI court apponted a lqudator, who, n turn, pettoned the U. S. Bankruptcy Court for the Southern Dstrct of New York to recognze the BVI lqudaton under Chapter 15 of the Bankruptcy Code. The bankruptcy court granted the petton, and recognzed the BVI lqudaton as a foregn man proceedng. As a ``prmary asset'' of Farfeld, the SIPA Clam was put up for aucton n the BVI proceedng, and after compettve bddng, a company named Farnum Place, LLC (``Farnum'') emerged as the successful bdder. Farnum had offered to purchase the SIPA Clam for 32.125% of ts allowed amount, whch was several percentage ponts hgher than the competng bds. In December 2010, the BVI lqudator and Farnum sgned a ``trade confrmaton'' settng forth the materal terms of the sale of the SIPA Clam. The trade confrmaton stated that New Yorklaw would govern the transacton, and provded that the sale was subject to the approval by the BVI court and the bankruptcy court n New York. Three days after the trade confrmaton was sgned, the BLMIS trustee n New Yorkannounced that he had settled an unrelated dspute, the result of whch would brng $5 bllon nto the BLMIS estate and ncrease the potental recoveres of those holdng allowed customer clams aganst BLMIS. As for the SIPA Clam specfcally, the settlement boosted ts value from 32.125% of ts allowed amount to 50% of ts allowed amount, an ncrease of about $40 mllon. After that dramatc rse n value, the Farfeld lqudator faled to seekapproval of the sale of the SIPA Clam to Farnum. Farnum thus tookmatters nto ts own hands, askng the BVI court to compel the lqudator to comply wth the trade confrmaton, or n the alternatve, to grant Farnum leave to sue for specfc performance. The Farfeld lqudator, n turn, asked the BVI court not to approve the sale of the SIPA Clam to Farnum because the sale was not n the best nterest of Farfeld's estate, gven the sudden ncrease n value. The BVI court ultmately approved the terms of the trade confrmaton and the sale of the SIPA Clam to Farnum at the bd prce. The BVI court nevertheless nstructed the lqudator ``to take the necessary steps to brng before the U. S. Bankruptcy Court the queston of approval (or non-approval) by that Court of the Trade Confrma- Satzspegelhæhe: 192mm
IILR_2015_30001_1 IILR 3 ton,'' whle makng ``clear that t must be done n such a way that the U. S. Bankruptcy Court s presented wth a choce whether or not to approve t.'' The proceedngs then shfted to the bankruptcy court n New York, where the Farfeld lqudator asked the court to dsapprove the sale under Secton 363 of the Bankruptcy Code. In partcular, the lqudator argued that the sale faled to satsfy Secton 363 because t lacked a ``good busness reason'' n lght of the SIPA Clam's precptous jump n value. The bankruptcy court rejected the lqudator's request, holdng that Chapter 15 of the Bankruptcy Code dd not mandate the applcaton of Secton 363 because the sale dd not ``nvolve the transfer of an nterest n property wthn the Unted States....'' In addton, the court explaned, nternatonal comty was Chapter 15's ``governng concept,'' and comty dctated that the court defer to the BVI court's approval of the sale. ``Falng to grant such comty... under these crcumstances,'' the court sad, ``necessarly undermnes the equtable and orderly dstrbuton of a debtor's property by transformng a domestc court nto a foregn appellate court where credtors are always afforded the proverbal `second bte at the apple.''' Havng lost n the bankruptcy court, the Farfeld lqudator appealed to the U. S. Dstrct Court for the Southern Dstrct of New York, whch affrmed the bankruptcy court's rulng. On further appeal, the Second Crcut vacated the dstrct court's decson and remanded wth nstructons to the bankruptcy court to revew the merts of the sale under Secton 363 of the Bankruptcy Code. The Second Crcut's decson addressed three ssues: (1) whether the sale of the SIPA Clam nvolved a ``transfer of an nterest of the debtor n property that s wthn the terrtoral jursdcton of the Unted States''; (2) the extent of nternatonal comty under Chapter 15; and (3) the legal standard that the bankruptcy court should apply on remand n ts revew of the sale under Secton 363. Terrtoral Jursdcton In Chapter 15 cases that are ancllary to a ``foregn man proceedng,'' Secton 1520(a)(2) of the Bankruptcy Code provdes for Secton 363 to ``apply'' to a ``transfer of an nterest of the debtor n property that s wthn the terrtoral jursdcton of the Unted States to the same extent that... [Secton 363] would apply to property of an estate'' n a plenary case fled under Chapter 7 or Chapter 11 of the Bankruptcy Code. Wth respect to ntangble property, Secton 1502(8) of the Bankruptcy Code defnes the phrase ``wthn the terrtoral jursdcton of the Unted States'' to mean ``ntangble property deemed under applcable nonbankruptcy law to be located wthn that terrtory, ncludng any property subject to attachment or garnshment that may properly be sezed or garnshed by an acton n Federal or State court n the Unted States.'' Invokng New York law as the ``applcable nonbankruptcy law,'' the Second Crcut determned that the SIPA Clam was ``wthn the terrtoral jursdcton of the Unted States'' because t was ``subject to attachment or garnshment and may be sezed or garnshed by an acton'' n the Unted States. Under New Yorklaw, ``any property whch could be assgned or transferred'' was subject to attachment or garnshment. The SIPA Clam was assgnable or transferrable property. For attachment purposes, the Second Crcut noted that the stus of ntangble property that has as ts subject a legal oblgaton to perform s the locaton of the party legally oblgated to render that performance. Here, the court explaned, the BLMIS trustee was oblgated to Satzspegelhæhe: 192mm
4 IILR IILR_2015_30001_1 dstrbute to Farfeld, as holder of the SIPA Clam, ts pro rata share of the recovered assets. Because the BLMIS trustee was located n New York, that state was the stus of the SIPA Clam. The Second Crcut rejected Farnum's argument that the SIPA Clam could not be properly sezed n the Unted States because such a sezure would be stayed by the BVI court. The court of appeals sad that Farnum's argument ``would render the `subject to attachment or garnshment' phrase of secton 1502(8) a nullty.'' As there ``s always an automatc stay n bankruptcy proceedngs,'' the Second Crcut reasoned, ``t would make no sense f the exstence of a stay could affect the constructon of the term `nterest' under secton 1502(8).'' In addton, the Second Crcut noted that Secton 1502(8) spoke of ntangble property ``deemed under applcable nonbankruptcy law'' to be subject to attachment or garnshment. ``Ths provson,'' sad the court, ``thus cannot be read to mean that the determnaton of whether secton 363 revew s necessary can be affected by factors that are the quntessental features of bankruptcy law,'' such as a stay of credtor actons. Thus, the court concluded, the sale of the SIPA Clam was a ``transfer of an nterest n property wthn the terrtoral jursdcton of the Unted States.'' Accordngly, Secton 363 of the Bankruptcy Code appled to the sale. Comty The Second Crcut also rejected the argument that consderatons of nternatonal comty necesstated deference to the BVI court. Whle acknowledgng that comty plays a role n Chapter 15 cases, the Second Crcut observed that ``Chapter 15 does mpose certan requrements and consderatons that act as a brake or lmtaton on comty.'' One such requrement was the express command n Secton 1520(a)(2) that Secton 363 ``apply... to the same extent'' as n bankruptcy cases fled under Chapter 7 or Chapter 11. ``The language of secton 1520(a)(2) s plan,'' noted the court. ``[T]he bankruptcy court s requred to conduct a secton 363 revew when the debtor seeks a transfer of an nterest n property wthn the terrtoral jursdcton of the Unted States.'' Furthermore, the Second Crcut observed, t was not ``apparent at all that the BVI Court even expects or desres deference n ths nstance'' snce the BVI court drected the Farfeld lqudator to obtan a rulng on the proposed sale from the bankruptcy court. Thus, the bankruptcy court erred ``when t gave deference to the BVI Court's approval of the transfer of the SIPA Clam and faled to conduct a revew under secton 363.'' Secton 363 Revew The Second Crcut remanded the case so that the bankruptcy court could consder the sale under Secton 363. Although t gave no vew of the merts of the proposed sale under Secton 363, the Second Crcut nevertheless llumnated ``some gudng prncples from our case law'' to facltate the Secton 363 revew on remand. After revewng the case law nterpretng Secton 363, the Second Crcut concluded that on remand ``the bankruptcy court must consder as part of ts secton 363 revew the ncrease n value of the SIPA Clam'' that followed the sgnng of trade confrmaton. Satzspegelhæhe: 192mm
IILR_2015_30001_1 IILR 5 Comment The Second Crcut's decson n Farfeld Sentry demonstrates that, despte beng a ``governng'' or ``central concept,'' the doctrne of nternatonal comty s not wthout lmt n Chapter 15 cases. Because Secton 1520(a) of the Bankruptcy Code requres that Secton 363 ``apply'' to the transfer of an nterest n property wthn the terrtoral jursdcton of the Unted States, the Second Crcut determned that there was no bass for deferrng to the BVI court on the sale. In sum, comty cannot trump the plan language of a statute that leaves no room for deference to a foregn proceedng. Such a holdng s not wthout precedent. In a separate case predatng the enactment of Chapter 15, Maxwell Communcaton Corp., the Second Crcut observed that, because ``the prncple of comty does not lmt the legslature's power and s, n the fnal analyss, smply a rule of constructon, t has no applcaton where Congress has ndcated otherwse.'' Although t dd not cte to Maxwell n ts Farfeld decson, the Second Crcut essentally ruled that Congress ``ndcated otherwse'' when t enacted Secton 1520(a)(2). Satzspegelhæhe: 192mm