13‐3000    

Krys v. Farnum Place, LLC

1 

2 In the 

3 United States Court of Appeals 

4 For the Second Circuit 

5 ________

6 

7 AUGUST TERM, 2013

8 

9 ARGUED: MAY 21, 2014

10 DECIDED: SEPTEMBER 26, 2014

11 

12 No. 13‐3000

13 

14 IN RE: FAIRFIELD SENTRY LIMITED

15 Debtor.

16 

17 KENNETH KRYS, in his capacity as the duly appointed liquidator and

18 foreign representative of Fairfield Sentry Limited,

19 Appellant,

20 

21 v.

22 

23 FARNUM PLACE, LLC,

24 Appellee.

25 ________

26 

27 Before: NEWMAN, WALKER, CABRANES, Circuit Judges.

28 ________

29 

30 Appeal from the July 3, 2013 order of the United States District

31 Court for the Southern District of New York (Hellerstein, J.)

32 affirming the January 10, 2013 order of the United States Bankruptcy
2

1 Court for the Southern District of New York (Lifland, J.) declining to

2 conduct, in a Chapter 15 ancillary bankruptcy proceeding, a section

3 363 review of a sale of the claims of Fairfield Sentry Limited

4 (“Sentry”), a British Virgin Islands investment fund, in the

5 liquidation of Bernard L. Madoff Investment Securities LLC

6 (“BLMIS”) under the Securities Investor Protection Act (“SIPA”)

7 because: (1) the sale does not involve a section 1520(a)(2) transfer;

8 and (2) comity dictates deference to a British Virgin Islands Court’s

9 judgment approving the sale. Because we conclude that the sale of

10 the SIPA claims is a “transfer of an interest of the debtor in property

11 that is within the territorial jurisdiction of the United States,” 11

12 U.S.C. § 1520(a)(2), and therefore the sale is subject to review under

13 section 363, and comity is not warranted, we vacate and remand.

14 ________

15 

16 PAUL D. CLEMENT, Bancroft PLLC, Washington,

17 DC, (David J. Molton, May Orenstein, Daniel J.

18 Saval, Marek Krzyzowski, Brown Rudnik LLP,

19 New York, NY, on the brief) for Appellant.

20 

21 KATHLEEN M. SULLIVAN (Robert C. Juman, Scott

22 C. Shelley, Cleland B. Welton II, Eric D. Winston,

23 Shane McKenzie, Matthew Scheck, on the brief),

24 Quinn Emanuel Urquhart & Sullivan, LLP, New

25 York, NY for Appellee.
3

1 ________

2 

3 JOHN M. WALKER, JR., Circuit Judge:

4 Appeal from the July 3, 2013 order of the United States District

5 Court for the Southern District of New York (Hellerstein, J.)

6 affirming the January 10, 2013 order of the United States Bankruptcy

7 Court for the Southern District of New York (Lifland, J.) declining to

8 conduct, in a Chapter 15 ancillary bankruptcy proceeding, a section

9 363 review of a sale of the claims of Fairfield Sentry Limited

10 (“Sentry”), a British Virgin Islands investment fund, in the

11 liquidation of Bernard L. Madoff Investment Securities LLC

12 (“BLMIS”) under the Securities Investor Protection Act (“SIPA”)

13 because: (1) the sale does not involve a section 1520(a)(2) transfer;

14 and (2) comity dictates deference to a British Virgin Islands Court’s

15 judgment approving the sale. Because we conclude that the sale of

16 the SIPA claims is a “transfer of an interest of the debtor in property

17 that is within the territorial jurisdiction of the United States,” 11

18 U.S.C. § 1520(a)(2), and therefore the sale is subject to review under

19 section 363, and comity is not warranted, we vacate and remand.
4

1 BACKGROUND

2 Sentry is a British Virgin Islands (“BVI”) investment fund that

3 invested approximately 95% of its assets with BLMIS, a limited

4 liability company wholly owned by Bernard Madoff. In December

5 2008, Madoff, who is now in prison, revealed that he used customer

6 funds to perpetuate a massive Ponzi scheme. Consequently, BLMIS

7 collapsed and was placed into liquidation by the U.S. bankruptcy

8 court under SIPA. Irving Picard was appointed trustee of BLMIS

9 and charged with the task of overseeing the BLMIS liquidation and

10 recovering stolen assets in this fraud.

11 Sentry filed three customer claims in the SIPA liquidation

12 (collectively, the “SIPA Claim”), to which BLMIS objected. The

13 BLMIS trustee countered with its own claims. Although Sentry’s net

14 losses in BLMIS were approximately $960 million, negotiations

15 between Sentry and the BLMIS Trustee resulted in a settlement that

16 allowed Sentry’s SIPA Claim in the BLMIS liquidation in the amount

17 of $230 million, subject to a cash payment of $70 million to be paid

18 by Sentry to the BLMIS Trustee.

19 In July 2009, Sentry itself was placed into liquidation in the

20 BVI (the “BVI Liquidation”), and the High Court of Justice of the
5

1 Eastern Caribbean Supreme Court (the “BVI Court”) appointed

2 appellant Kenneth Krys liquidator. On June 14, 2010, Krys filed a

3 petition in the U.S. bankruptcy court seeking recognition of the BVI

4 Liquidation as a “foreign main proceeding” under Chapter 15, 11

5 U.S.C. § 1517. On July 22, 2010, the bankruptcy court entered an

6 order granting recognition. Upon recognition of the BVI Liquidation

7 as a foreign main proceeding, an automatic stay was imposed on all

8 proceedings against Sentry in the United States, including a

9 derivative action brought by Morning Mist, a Sentry shareholder.

10 The order of recognition was affirmed by the district court and

11 subsequently by this Court. See Morning Mist Holdings Ltd. v. Krys (In

12 re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013).

13 Among Sentry’s assets in the BVI Liquidation is the SIPA

14 Claim. During the summer of 2010, an auction process to sell the

15 SIPA Claim commenced. Appellee Farnum Place, LLC (“Farnum”),

16 a limited liability corporation organized under the laws of Delaware,

17 offered to purchase the SIPA claim for 32.125% of the claim’s

18 allowed amount. Farnum’s bid was several percentage points higher

19 than the other bids, and Krys accepted it. The transaction, however,
6

1 was subject to approvals by the BVI Court and the U.S. bankruptcy

2 court.  

3 In December 2010, Krys and Farnum negotiated, documented,

4 and signed a trade confirmation (the “Trade Confirmation”) setting

5 forth the material terms and conditions of the sale of the SIPA

6 Claim. The Trade Confirmation specifically stated that it is governed

7 by the laws of the State of New York. The Trade Confirmation

8 provided that the transaction was subject to approval by both the

9 U.S. bankruptcy court and the BVI Court. The Trade Confirmation

10 also provided that Sentry’s liquidator, subject to its fiduciary duty

11 and obligations, “shall endeavor to obtain promptly the approval of

12 the BVI Court of the terms and conditions of this Trade

13 Confirmation.” J.A. 42.

14 Three days after the Trade Confirmation was signed, Irving

15 Picard announced that he had entered into a settlement agreement

16 with the estate of Jeffrey Picower for the forfeiture and repayment of

17 approximately $7.2 billion, of which $5 billion would be paid to the

18 BLMIS Trustee and $2.2 billion would be paid to the federal

19 government. The influx of $5 billion to the BLMIS Trustee increased

20 the value of Sentry’s SIPA Claim from 32% to more than 50% of the
7

1 $230 million allowed amount of the claim (an increase of

2 approximately $40 million).

3 In October 2011, because Krys had failed to submit an

4 application asking the BVI Court to approve the terms of the Trade

5 Confirmation, Farnum filed an application with the BVI Court

6 seeking an order compelling Krys to satisfy the conditions of the

7 Trade Confirmation, or, in the alternative, granting permission to

8 commence proceedings against Sentry for specific performance.

9 Krys asked the BVI Court not to approve the transfer to Farnum at

10 the bid price because, given the sudden increase in the value of the

11 SIPA Claim, it was not in the best interests of the Sentry estate. Krys

12 also argued to the BVI Court that the Trade Confirmation required

13 U.S. bankruptcy court approval pursuant to 11 U.S.C. §§ 1520(a)(2)

14 and 363.

15 After a three‐day evidentiary hearing, the BVI Court on March

16 27, 2012, “approve[d] the terms and conditions of the Trade

17 Confirmation” and “the assignment to Farnum of Sentry’s claim in

18 the SIPA liquidation of BLMIS at the price stipulated for in the Trade

19 Confirmation.” J.A. 117. In its order, the BVI Court, fully cognizant

20 of the required approval proceeding in the U.S. bankruptcy court,
8

1 stated “it would be unwise for [it] to express views on the issues that

2 will arise for determination by the US Bankruptcy Court.” J.A. 116.

3 The BVI Court directed Krys “to take the necessary steps to bring

4 before the US Bankruptcy Court the question of approval (or non‐

5 approval) by that Court of the Trade Confirmation.” J.A. 117. And

6 the BVI Court made “clear that it must be done in such a way that

7 the US Bankruptcy Court is presented with a choice whether or not

8 to approve it.” Id.

9 On April 18, 2012, Krys filed an application with the United

10 States Bankruptcy Court for the Southern District of New York,

11 seeking review of the Trade Confirmation under 11 U.S.C. § 363(b)

12 and an order disapproving the trade. On January 10, 2013, the

13 bankruptcy court denied Krys’s application. The bankruptcy court

14 characterized the application for section 363 review as “seller’s

15 remorse” and a “last‐ditch effort” to undo the transaction. In re

16 Fairfield Sentry Ltd., 484 B.R. 615, 617, 618 (Bankr. S.D.N.Y. 2013). The

17 bankruptcy court held that “a Section 363 review is not warranted

18 under section 1520(a)(2) of the Code . . .,” id. at 622, because the

19 “[s]ale does not involve the transfer of an interest in property within

20 the United States,” as statutorily mandated by Chapter 15, id. at 618.
9

1 The bankruptcy court also stated that “comity dictates that this

2 [c]ourt defer to the BVI Judgment.” Id. at 628. And that “[f]ailing to

3 grant such comity to the BVI Judgment under these circumstances

4 ‘necessarily undermines the equitable and orderly distribution of a

5 debtor’s property by transforming a domestic court into a foreign

6 appellate court where creditors are always afforded the proverbial

7 “second bite at the apple.”’” Id. (quoting SNP Boat Serv. Sa v. Hotel Le

8 St. James, 483 B.R. 776, 786 (Bankr. S.D. Fla. 2012)).

9 Krys appealed the denial of his application to the district

10 court. After a hearing, the district court affirmed the bankruptcy

11 court’s decision. The district court stated that “[i]t is not clear that

12 Section 363 . . . applies,” however, “even if Section 363 applies,” the

13 bankruptcy court’s “denial of the foreign representative’s challenge

14 was proper” because “[c]ourts should be loath to interfere with

15 corporate decisions absent a showing of bad faith, self‐interest, or

16 gross negligence.” Krys v. Farnum Place, LLC (In re Fairfield Sentry

17 Ltd.), No. 13 Civ. 1524 (AKH) at *1, 2 (S.D.N.Y. Jul. 3, 2013) (internal

18 quotation marks omitted). This appeal followed.
10

1 DISCUSSION

2 “An appeal from a district court’s review of a bankruptcy

3 court ruling is subject to plenary review.” Warex Terminals Inc. v.

4 Halstead Energy (In re Halstead Energy Corp.), 367 F.3d 110, 113 (2d

5 Cir. 2004). We review a bankruptcy court’s conclusions of law de

6 novo and its findings of fact under the clearly erroneous standard. Id.

7 at 114.

8 The primary question before this Court is whether the

9 bankruptcy court was required to conduct a review under section

10 363, which “requires that a judge . . . expressly find from the

11 evidence presented before him at the hearing a good business

12 reason” to approve the sale. In re Lionel Corp., 722 F.2d 1063, 1071 (2d

13 Cir. 1983). The bankruptcy court recognized the BVI Liquidation as a

14 “foreign main proceeding,” which protects Sentry’s United States

15 assets from creditor action and allows Krys to obtain the rights and

16 benefits of Chapter 15. An asset sale in a Chapter 15 bankruptcy

17 proceeding requires section 363 review of the sale if it is a “transfer

18 of an interest of the debtor in property that is within the territorial

19 jurisdiction of the United States.” 11 U.S.C. § 1520(a)(2). The

20 question here thus turns on whether the SIPA Claim is such a
11

1 transfer of an interest. We must also consider whether

2 considerations of comity, codified in Chapter 15, require deference

3 to the BVI Court’s judgment approving the transfer, irrespective of

4 whether section 1520(a)(2)’s territorial prerequisite has been

5 satisfied.

6 I. Application of Section 1502(a)(2)

7 In considering whether section 363 review is required in an

8 ancillary U.S. bankruptcy proceeding when there is a “foreign main

9 proceeding,” section 1520(a)(2) instructs the bankruptcy court to

10 apply section 363 to a “transfer of an interest of the debtor in

11 property that is within the territorial jurisdiction of the United States

12 to the same extent that the sections would apply to property of an

13 estate.” 11 U.S.C. § 1520(a)(2).  

14 The parties dispute whether the sale of the SIPA Claim

15 involves a “transfer of an interest of the debtor in property that is

16 within the territorial jurisdiction of the United States.” Krys argues

17 that section 1520(a)(2)’s territorial prerequisite is satisfied because:

18 (1) the SIPA Claim is an interest in the BLMIS Fund, which is

19 property located in the United States; and (2) the SIPA Claim itself is

20 property located in the United States. Farnum maintains that (1) the
12

1 relevant “property” is the SIPA Claim itself, not the BLMIS Fund;

2 and (2) that the SIPA Claim is in the BVI and thus not located within

3 the territorial jurisdiction of the United States.  

4 We agree with Farnum that the “property” is the SIPA Claim

5 itself, not the BLMIS Fund. The SIPA Claim is not an ownership

6 interest in the BLMIS Fund. By selling its SIPA Claim, Sentry is not

7 transferring a claim or right to the BLMIS Fund; it is selling Sentry’s

8 “rights, title and interest in and to [Sentry’s] claims against BLMIS”

9 in the BLMIS proceedings. Trade Confirmation, J.A. 33. In other

10 words, the SIPA Claim is a “chose in action.” See Black’s Law

11 Dictionary 294 (10th ed. 2014) (defining “chose in action” as “[t]he

12 right to bring an action to recover a debt, money, or thing”).

13 But we disagree with Farnum and the bankruptcy court that

14 the SIPA Claim is not within the territorial jurisdiction of the United

15 States. “Within the territorial jurisdiction of the United States” is

16 defined in section 1502(8) as:

17 [T]angible property located within the territory of the

18 United States and intangible property deemed under

19 applicable nonbankruptcy law to be located within that

20 territory, including any property subject to attachment

21 or garnishment that may properly be seized or

22 garnished by an action in a Federal or State court in the

23 United States.

24 
13

1 11 U.S.C. § 1502(8).

2 The bankruptcy court held that “under applicable

3 nonbankruptcy law” (agreed by the parties to be the law of New

4 York), the situs of the intangible SIPA Claim is the BVI. The

5 bankruptcy court relied on the “common sense appraisal of the

6 requirements of justice and convenience” annunciated in Severnoe

7 Sec. Corp. v. London and Lancashire Insurance Co., 255 N.Y. 120, 123‐24

8 (1931), to determine the location of the SIPA Claim. In re Fairfield

9 Sentry Ltd., 484 B.R. at 624. In applying the Severnoe test, the

10 bankruptcy court concluded that “justice, convenience and common

11 sense dictate . . . that the SIPA Claim is located with the debtor in the

12 BVI.” Id. at 625. The bankruptcy court’s analysis, however, was

13 incomplete. Section 1502(8) deems “any property subject to

14 attachment or garnishment that may be properly seized or garnished

15 by an action in” a United States court to be “within the territory of

16 the United States.” 11 U.S.C. § 1502(8).

17 The SIPA Claim here is subject to attachment or garnishment

18 and may be properly seized by an action in a Federal or State court

19 in the United States. Under New York law, “any property which

20 could be assigned or transferred” is subject to attachment and
14

1 garnishment. N.Y. C.P.L.R. §§ 5201(b), 6202. For attachment

2 purposes, with respect to intangible property that has as its subject a

3 legal obligation to perform, the situs is the location of the party of

4 whom that performance is required pursuant to that obligation. In

5 ABKCO Industries, Inc. v. Apple Films, Inc., 350 N.E.2d 899 (N.Y.

6 1976), “[the New York Court of Appeals] recognized that a

7 contractual agreement could constitute contingent property interests

8 attachable and assignable, and thus subject to CPLR 5201(b).”

9 Verizon New England, Inc. v. Transcom Enhanced Servs., Inc., 990

10 N.E.2d 121, 124 (N.Y. 2013). Here, although Sentry and the SIPA

11 Trustee do not have a contractual relationship, the SIPA Trustee is

12 statutorily obligated to distribute to Sentry its pro rata share of the

13 recovered assets. Therefore the situs of the SIPA Claim is the

14 location of the SIPA Trustee, which is New York.  

15 Farnum argues that even if the SIPA Claim’s situs is New

16 York, the claim may not be “properly seized by an action” in a

17 United States court because such action would be stayed by the BVI

18 Court, see BVI Insolvency Act, 2003 § 175(1)(c), and the U.S.

19 bankruptcy court, see 11 U.S.C. §§ 362, 1520(a)(1). But this argument

20 would render the “subject to attachment or garnishment” phrase of
15

1 section 1502(8) a nullity. “[W]e must construe [a] statute ‘so that no

2 part will be inoperative or superfluous, void or insignificant.’”

3 Gordon v. Softech Int’l., Inc., 726 F.3d 42, 48 (2d Cir. 2013) (quoting

4 Corley v. United States, 556 U.S. 303, 314 (2009)). There is always an

5 automatic stay in bankruptcy proceedings so it would make no

6 sense if the existence of a stay could affect the construction of the

7 term “interest” under section 1502(8). Moreover, the statute speaks

8 of property “deemed under applicable nonbankruptcy law” to be

9 subject to attachment or garnishment. 11 U.S.C. § 1502(8) (emphasis

10 added). This provision thus cannot be read to mean that the

11 determination of whether section 363 review is necessary can be

12 affected by factors that are the quintessential features of bankruptcy

13 law: the existence of the automatic stay under sections 362 and

14 1520(a)(1) or, in a proceeding ancillary to a foreign proceeding under

15 section 1517, the automatic stay provisions of the foreign

16 jurisdiction.

17 Therefore we conclude that the sale of the SIPA Claim is a

18 “transfer of an interest of the debtor in property that is within the

19 territorial jurisdiction of the United States,” 11 U.S.C. § 1520(a)(2),
16

1 and that pursuant to section 1520(a)(2) the bankruptcy court must

2 apply section 363.  

3 II. Comity

4 As an additional reason for denying section 363 review, the

5 bankruptcy court held that the role of comity, codified in Chapter

6 15, dictates deference to the BVI Court’s judgment approving the

7 sale.

8 Congress specifically directed courts, “[i]n interpreting

9 [Chapter 15], . . . [to] consider its international origin, and the need

10 to promote an application of this chapter that is consistent with the

11 application of similar statutes adopted by foreign jurisdictions.” 11

12 U.S.C. § 1508. But, “Chapter 15 does impose certain requirements

13 and considerations that act as a brake or limitation on comity.” In re

14 Vitro S.A.B. de C.V., 701 F.3d 1031, 1054 (5th Cir. 2012) (stating that

15 comity is “an important factor in determining whether relief will be

16 granted” under Chapter 15, but is not a per se rule). The express

17 statutory command that, in a Chapter 15 ancillary proceeding, the

18 requirements of section 363 “apply . . . to the same extent” as in

19 Chapter 7 or 11 proceedings, 11 U.S.C. § 1520(a)(2) (emphasis

20 added), is one such limitation. “[W]hen a statute’s language is plain,
17

1 the sole function of the courts—at least where the disposition

2 required by the text is not absurd—is to enforce it according to its

3 terms.” Sebelius v. Cloer, 133 S. Ct. 1886, 1896 (2013) (quoting Hartford

4 Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000))

5 (alteration omitted). The language of section 1520(a)(2) is plain; the

6 bankruptcy court is required to conduct a section 363 review when

7 the debtor seeks a transfer of an interest in property within the

territorial jurisdiction of the United States.1 8   

9 Moreover, it is not apparent at all that the BVI Court even

10 expects or desires deference in this instance. The BVI Court

11 expressly declined to rule on whether the Trade Confirmation

required approval under section 363.2 12   

 

1 Notably, the automatic application of section 363 pursuant to section

1520(a)(2) expressly deviates from the discretionary grant of relief that

“may be granted” upon filing a petition for recognition of a foreign

proceeding pursuant to section 1519, and upon recognition of a foreign

proceeding pursuant to section 1521. This contrast further suggests that

the statutory requirement that section 363 apply automatically acts as a

“brake or limitation on comity” in the circumstances presented here. In re

Vitro S.A.B. de C.V., 701 F.3d at 1054.

2 On March 27, 2012 the BVI Court issued a judgment stating that: (1)

“it would be unwise . . . to express views on the issues that will arise for

determination by the US Bankruptcy Court,” J.A. 116; (2) “[i]f [the U.S.

bankruptcy court] decides, for whatever reason, to withhold approval of

the Trade Confirmation, that will bring the Trade Confirmation to an end”

id.; (3) the BVI Court “direct[s] [Krys] to take the necessary steps to bring
18

1 Therefore we conclude that the bankruptcy court erred when

2 it gave deference to the BVI Court’s approval of the transfer of the

3 SIPA Claim and failed to conduct a review under section 363.

4 III. Section 363 Review

5 As stated above, the sale of the SIPA Claim is a “transfer of an

6 interest of the debtor in property within the territorial jurisdiction of

7 the United States” within the meaning of 11 U.S.C. § 1520(a)(2). The

8 language of the statute makes it plain that the bankruptcy court was

9 required to conduct a section 363 review. Deference to the BVI Court

10 was not required. We therefore vacate and remand to the district

11 court with instructions to remand to the bankruptcy court to

12 conduct the section 363 review.

13 While we intimate no view on the merits of the section 363

14 review on remand, we provide some guiding principles from our

15 case law. We have held that “a judge determining a § 363(b)

16 application [is required to] expressly find from the evidence

17 presented before him at the hearing a good business reason to grant

 

before the US Bankruptcy Court the question of approval (or non‐approval)

by that Court of the Trade Confirmation,” id. at 117; and (4) the necessary

steps “must be done in such a way that the US Bankruptcy Court is

presented with a choice whether or not to approve it,” id. (emphasis added).
19

1 such an application.” In re Lionel Corp., 722 F.2d at 1071. “In

2 fashioning its findings, a bankruptcy judge . . . should consider all

3 salient factors pertaining to the proceeding . . . .” Id. Such salient

4 factors include “whether the asset is increasing or decreasing in

5 value.” Id. We have also recognized that bankruptcy courts must

6 have “broad discretion and flexibility . . . to enhance the value of the

7 estates before it.” Consumer News & Bus. Channel P’ship v. Fin. News

8 Network Inc. (In re Fin. News Network Inc.), 980 F.2d 165, 169 (2d Cir.

9 1992). And we have recognized also that the bankruptcy court’s

10 “principal responsibility . . . is to secure for the benefit of creditors

11 the best possible bid.” Id.  

12 Applying this framework here, we note that the bankruptcy

13 court must consider as part of its section 363 review the increase in

14 value of the SIPA Claim between the signing of the Trade

15 Confirmation and approval by the bankruptcy court. Cf. In re Martin,

16 91 F.3d 389 (3d Cir. 1996) (upholding a bankruptcy court’s order

17 denying approval of a stipulation agreement after debtors were

18 victorious in a state court litigation filed in violation of the

19 stipulation agreement); In re Broadmoor Place Invs., 994 F.2d 744, 746

20 (10th Cir. 1993) (finding that a bankruptcy court has “power to
20

1 disapprove a proposed sale . . . if it has an awareness there is

2 another proposal in hand which, from the estate’s point of view, is

3 better or more acceptable”). Nothing in the language of section 363

4 or our case law limits the bankruptcy court’s review to the date of

5 signing the Trade Confirmation.

6 CONCLUSION

7 Accordingly, we VACATE the district court’s July 3, 2013

8 order affirming the bankruptcy court’s order denying Krys’s

9 application for section 363 review and REMAND to the district court

10 with instructions to REMAND to the bankruptcy court for such

11 review.

12