Case of the Day: In re Fairfield Sentry Ltd.

The case of the day is Morning Mist Holdings, Ltd. v. Kenneth Krys (In re Fairfield Sentry Ltd.) (2d Cir. 2013). Sentry was a British Virgin Islands company and the largest “feeder fund” that had the misfortune to invest with Bernard L. Madoff Investment Securities LLC. Sentry had invested 95% of its assets, or more than $7 billion, with Madoff. Talk about diversification to reduce management risk! Sentry’s registered office, registered agent, secretary, and corporate documents were in the BVI. The fund was managed by Fairfield Greenwich Group in New York. Sentry’s three directors, Walter Noel Jr., Jan Naess, and Peter Schmid, lived in New York, Oslo, and Geneva.

After Madoff’s arrest, Naess and Schmid suspended all share redemptions (Noel, who was a principal of Fairfield Greenwich Group, was recused). Naess and Schmid wound down the business, during which time they participated in many board meetings held by teleconference but initiated by the registered agent in the BVI. They communicated with shareholders on letterhead with Sentry’s BVI address. Sentry’s assets were primarily in Ireland, the UK, and the BVI: its other assets were choses in action.

In 2009, Morning Mist Holdings, a shareholder, brought a shareholder derivative action in the New York Supreme Court against Sentry’s directors, managers, and service providers, alleging a breach of fiduciary duty. Meanwhile, other shareholders in the BVI applied for appointment of a receiver, and the High Court of Justice of the Eastern Carribean Supreme Court entered an order commencing liquidation proceedings under BVI law and appointing Kenneth Krys as liquidator. Krys then filed a petition in the Bankruptcy Court in New York for recognition of the BVI proceedings under Chapter 15 of the Bankruptcy Code. The judge granted recognition, which had the effect, under § 1520 of the Bankruptcy Code, of automatically staying Morning Mist’s derivative action. Morning Mist appealed to the District Court, which affirmed. Morning Mist then appealed to the Second Circuit, which affirmed.

Chapter 15, based on the UNCITRAL Model Law on Cross-Border Insolvency, permits recognition of a foreign proceeding if it is a “foreign main proceeding,” which is defined by 11 U.S.C. § 1502 as a “foreign proceeding pending in the coutnry where the debtor has the center of its main interests.”1 Under § 1517, the bankruptcy court is required to recognize a foreign main proceeding, subject to certain exceptions, “if it is pending in the country where the debtor has the center of its main interests.” Section 1506 of the Bankruptcy Code provides for an exception to the rule of recognition if recognition “would be manifestly contrary to the public policy of the United States.”

Chief Judge Jacobs construed § 1517, which uses present tense verbs, to focus the inquiry on where the debtor had its COMI on the date of the Chapter 15 petition. This is the majority rule, and also the rule of the only other appellate decision on point, In re Ran, 607
F.3d 1017 (5th Cir. 2010). Judge Jacobs looked to the EU Council Regulation on Insolvency Proceedings (the EU’s insolvency convention provided the concept of a center of main interests for UNCITRAL, according to the judge), which also uses the present tense and which emphasizes the importance of ensuring that a business’s center of main interests is “ascertainable by third parties.” See, e.g., In re Eurofood IFSC Ltd., Case No. C-341/04, 2006 E.C.R. I-3813 (E.C.J. 2006) (focusing on “objective and ascertainable” criteria for determining a center of main interests). The judge also reasoned, contrary to Morning Mist’s contentions, that any relevant activities, including a firm’s activities in liquidating itself, could be considered in determining the COMI of the debtor. (The basic rule of the statute, though, is simple: there is a rebuttable presumption that the place of the debtor’s registered office is the COMI). The court affirmed the bankruptcy judge’s findings of fact and thus the conclusion that the BVI was indeed Sentry’s COMI as of the petition date.

The court also rejected Morning Mist’s public policy challenge. The claim was that because the BVI insolvency proceedings were confidential and under seal, recognition of the proceedings would violate US public policy relating to open access to court records. Chief Judge Jacobs observed, first, that the statute requires not just that recognition be contrary to public policy but that it be manifestly contrary to public policy. The public policy exception applies only in “exceptional circumstances concerning matters of fundamental importance for the enacting State.” Second, the judge noted that public summaries of the proceedings had been made available and that under BVI law, “any non-party may apply to the court for access to sealed documents.” Third, the judge noted that even in the United States, “the right to inspect and copy judicial records is not absolute.” The right can “easily give way” to privacy interests or “other considerations.” In short, Morning Mist had not pointed to a violation of an “exceptional and fundamental value.” I think the decision was correct given the narrowness of the public policy exception, though I would have liked a more full-throated defense of the value of public access to court records.

  1. The statute also permits recognition of foreign non-main proceedings, but I leave that to the side.

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