Sections 546 (e) and 561 (d) Are Limited to Avoidance Claims, Do Not Explicitly Bar Foreign Common Law Claims
February 23, 2021, Southern District of New York – The plaintiffs are the liquidators appointed by the British Virginia Island Court to oversee the liquidation of three funds – Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited. (the ‘Funds’). These feeder funds invested all or substantially all of their assets directly or indirectly with Bernard L. Madoff Investment Securities LLC. ( ‘BLMIS’ ). Madoff ran his notorious Ponzi scheme through the investment advisory division of BLMIS. The Funds collapsed when BLMIS crumpled following the arrest of Madoff.
The liquidators filed over 300 substantially similar adversary proceedings against various entities that had redeemed their shares in the Funds before the collapse of Funds and the revelation of the Ponzi scheme. The redemption prices the Funds paid to these redeemers were based on the erroneous belief that the BLMIS investments had substantial value when, in fact, they were virtually worthless. The liquidators asserted avoidance claims under sections 245 and 246 of the BVI Insolvency Act of 2003 to clawback redemptions paid with inflated prices as unfair preferences or undervalue transactions and common law and contract claims under BVI law.
The court ruled that the safe harbor under §546(e), made applicable under §561(d), barred the liquidators’ avoidance claims under the law of the British Virgin Islands, but did not bar the common law claims of the plaintiffs to impose a constructive trust. ( ‘Constructive Trust Claims’ ) . The Defendants filed a motion for reconsideration. The Defendants argued that the safe harbor provisions also bar the Constructive Trust Claims.
The liquidators opposed, arguing that the supporting authorities upon which the Defendants relied involved dismissed U.S. common law claims, decided on pre-emption grounds under the supremacy clause, but neither pre-emption nor the supremacy clause applied to foreign law claims.
The Court agreed with the liquidators and held that the Defendants were not entitled to reconsideration. The Court stated that Sections 546(e) and 561(d) are limited to avoidance claims and do not explicitly bar foreign common law claims even if they seek the same relief. The Court stated that the Defendants failed to identify any controlling authority or facts that were overlooked or manifest injustice. Further, the Defendants did not raise any other new argument. They merely repackaged the old arguments that the court had already considered and rejected.
The Court denied the Defendants’ motion for reconsideration.
In re Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam, 2021 Bankr. LEXIS 405