Fairfield Sentry Limited (In Liquidation) v. Theodoor GGC Amsterdam

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

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In re: : Chapter 15 Case

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FAIRFIELD SENTRY LIMITED, et al., : Case No. 10-13164 (SMB)

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Debtors in Foreign Proceedings. : Jointly Administered

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FAIRFIELD SENTRY LIMITED :

(IN LIQUIDATION), acting by and through the : Adv. Proc. No. 10-03496 (SMB)

Foreign Representatives thereof, :

: Administratively Consolidated

Plaintiffs, :

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-against- :

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THEODOOR GGC AMSTERDAM, et al., :

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Defendants. :

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MEMORANDUM DECISION AND ORDER DENYING

MOTION FOR RECONSIDERATION

A P P E A R A N C E S:

BROWN RUDNICK LLP

Seven Times Square

New York, NY 10036

David J. Molton, Esq.

Marek P. Krzyzowski, Esq.

Of Counsel

- and –

SELENDY & GAY PLLC

1290 Avenue of the Americas

New York, NY 10104

David Elsberg, Esq.

Lena Konanova, Esq.

Attorneys for Plaintiffs

CLEARY GOTTLIEB STEEN & HAMILTON LLP

One Liberty Plaza

New York, NY 10006

Nowell D. Bamberger, Esq.

Of Counsel

Attorneys for Defendant HSBC Securities Services

(Luxembourg) S.A., HSBC Private Bank (Suisse)

S.A., HSBC Bank USA, N.A.1

STUART M. BERNSTEIN

United States Bankruptcy Judge:

In Fairfield Sentry Ltd. v. Theodoor GGC Amsterdam (In re Fairfield Sentry

Ltd.), Adv. Proc. No. 10-03496 (SMB), 2020 WL 7345988 (Bankr. S.D.N.Y. Dec. 14,

2020) (“Fairfield II”), the Court ruled, inter alia, that the safe harbor under 11 U.S.C. §

546(e), made applicable pursuant to 11 U.S.C. § 561(d), barred the Liquidators’

avoidance claims under the law of the British Virgin Islands (“BVI”) (the “BVI

Avoidance Claims”), but did not bar the Plaintiffs’ BVI common law claims to impose a

constructive trust (“Constructive Trust Claims”). The Defendants now seek

reconsideration through the Motion of the latter ruling, arguing that the Constructive

Trust Claims are also barred by the safe harbor. The Liquidators oppose the Motion,

arguing that the Court did not overlook controlling authority and the Defendants have

failed to show a clear error or manifest injustice. (Letter from David Elsberg, Esq. to the

Court, dated Feb. 17, 2021 (“Opposition”) (ECF Doc. # 3073).)2 I agree and deny the

Motion for the reasons that follow.

1 The other Defendants in these administratively consolidated proceedings that have joined in this

motion and their counsel are listed, respectively, in Appendix A and B to the Letter from Nowell D.

Bamberger, Esq. to the Court, dated Feb. 17, 2021 (the “Motion”) (ECF Doc. # 3072). “ECF Doc. #” refers

to the electronic docket in Adv. Proc. No. 10-03496.

2 By agreement of the parties and the Court, the Motion and the Opposition were presented in

letters on an expedited basis.

BACKGROUND

The background to the Motion is set forth in the Court’s prior decisions, Fairfield

Sentry Ltd. v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 596 B.R. 275

(Bankr. S.D.N.Y. 2018) (“Fairfield I”), appeal docketed, No. 1:19-cv-03911-VSB

(S.D.N.Y. May 1, 2019) and Fairfield II. I assume familiarity with those decisions and

limit the discussion to what is germane to this decision.

The plaintiffs are the Liquidators appointed by the BVI Court to oversee the

liquidation of Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda

Limited (the “Funds”), feeder funds that invested all or substantially all of their assets

directly or indirectly with Bernard L. Madoff Investment Securities LLC (“BLMIS”).3

Madoff ran his notorious Ponzi scheme through the investment advisory division of

BLMIS. When BLMIS collapsed following Madoff’s arrest, so too did the Funds. The

Liquidators filed chapter 15 cases as foreign representatives, and the cases were

recognized as foreign main proceedings.

The Liquidators filed over 300 substantially similar adversary proceedings

against various entities that had redeemed their shares in the Funds prior to the Funds’

collapse and the revelation of Madoff’s 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 worthless or virtually worthless. The

Liquidators asserted avoidance claims under sections 245 and 246 of the BVI Insolvency

Act of 2003 (“Insolvency Act”) to claw back redemptions paid with inflated prices as

3 Different individuals have served as Liquidators at different times over the years. Any reference

to the Liquidators means the persons serving as Liquidators at the relevant time.

“unfair preferences” and/or “undervalue transactions” and common law and contract

claims under BVI law.

In Fairfield I, the Court dismissed all of the Liquidators’ claims except for the

BVI Avoidance Claims and the Constructive Trust Claims against the so-called

Knowledge Defendants who, according to the Liquidators, knew when they redeemed

their interests in the Funds that the redemption prices were inflated because they were

based on Fairfield Sentry’s fictitious BLMIS account statements listing securities that

did not exist. In Fairfield II, the Court dismissed the BVI Avoidance Claims pursuant to

the safe harbor under 11 U.S.C. §§ 546(e), 561(d), but denied the motion to dismiss the

Constructive Trust Claims.

The remaining Knowledge Defendants had made a straightforward argument in

support of their motion to dismiss the Constructive Trust Claims: (i) the Constructive

Trust Claims sought the same relief as the barred BVI Avoidance Claims, (ii) common

law claims that seek the same relief as barred avoidance claims are also barred, and

therefore, (iii), the Constructive Trust Claims were barred. (Consolidated

Memorandum of Law in Support of Defendants’ Renewed Motion to Dismiss Pursuant

to 11 U.S.C. §§ 561(d), 546(e), and 546(g) and for Insufficient Service of Process Under

the Hague Service Convention, dated Mar. 16, 2020 (“Defendants’ Brief”), at 29-31

(ECF Doc. # 2903).)

In response, the Liquidators identified what they considered to be a fundamental

fallacy with the Defendants’ argument. The Defendants’ supporting authorities involved

dismissed U.S. common law claims and were decided on preemption grounds under the

Supremacy Clause, but neither preemption nor the Supremacy Clause applied to foreign

law claims. Rather, Congress must explicitly displace foreign law, but section 561(d),

the hook that drew the BVI Avoidance Claims into the safe harbor under section 546(e),

only mentioned avoidance claims and did not refer to foreign common law claims like

the Constructive Trust Claims. (Memorandum of Law in Opposition to Defendants’

Renewed Motion to Dismiss, dated May 29, 2020, at 13-16 (ECF Doc. # 3033).) The

Liquidators also argued that principles of comity counseled against dismissal of the

Constructive Trust Claims, id. at 16, an issue the Court did not decide, and the

Constructive Trust Claims concerned intentional fraudulent transfers that the safe

harbor would not prohibit, id. at 17, but the Court ruled that the Liquidators had not

asserted intentional fraudulent transfer claims. Fairfield II, 2020 WL 7345988, at *8-9.

In reply, the Defendants reiterated that the safe harbor barred the Constructive

Trust Claims because, like the BVI Avoidance Claims, they sought to unwind the same

transfers even though sections 546(e) and 561(d) do not explicitly displace foreign law.

(Consolidated Reply Memorandum of Law in Further Support of Defendants’ Renewed

Motion to Dismiss, dated June 19, 2020, at 10-11, 12 (ECF Doc. # 3036).) The

Defendants also argued that comity did not provide a basis to sidestep the safe harbor

and the Constructive Trust Claims were not intentional fraudulent transfer claims. (Id.

at 12-13.)

The Court agreed with the Liquidators. The Defendants’ authorities relied on

principles of preemption under the Supremacy Clause which did not apply to foreign

law unless foreign law was explicitly displaced by Congress. 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. Fairfield II, 2020 WL 7345988, at *9-10. Hence, the

Court denied the motion to dismiss the Constructive Trust Claims.

DISCUSSION

A motion for reargument or reconsideration is governed by Local Bankruptcy

Rule 9023-1.4 “The movant must show that the court overlooked controlling decisions

or factual matters that might have materially influenced its earlier decision.” In re Asia

Glob. Crossing, Ltd., 332 B.R. 520, 524 (Bankr. S.D.N.Y. 2005) (citation and internal

quotation marks omitted). Alternatively, the movant must demonstrate “the need to

correct a clear error or prevent manifest injustice.” Perez v. Progenics Pharm., Inc., 46

F. Supp. 3d 310, 314 (S.D.N.Y. 2014) (citation and internal quotation marks omitted). A

manifest injustice exists when a “verdict is wholly without legal support,” ING Glob. v.

United Parcel Serv. Oasis Supply Corp., 757 F.3d 92, 97 (2d Cir. 2014), and the error is

one that is obvious to all who view it. Spizz v. Eluz (In re Ampal-Am. Isr. Corp.), Adv.

Proc. No. 14-02110 (SMB), 2020 WL 5242956, at *2 (Bankr. S.D.N.Y. Sept. 1, 2020); cf. .

Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228 (7th Cir.) (“To be clearly

erroneous, a decision must strike us as more than just maybe or probably wrong; it must

. . . strike us as wrong with the force of a five-week-old, unrefrigerated dead fish.”), cert.

4 Local Bankruptcy Rule 9023-1(a) states:

A motion for reargument of a court order determining a motion must be served within

fourteen (14) days after the entry of the Court’s order determining the original motion, or

in the case of a court order resulting in a judgment, within fourteen (14) days after the

entry of the judgment, and, unless the Court orders otherwise, shall be made returnable

within the same amount of time as required for the original motion. The motion must set

forth concisely the matters or controlling decisions which counsel believes the Court has

not considered. No oral argument shall be heard unless the Court grants the motion and

specifically orders that the matter be re-argued orally.

denied, 493 U.S. 847 (1989). “These criteria are strictly construed against the moving

party so as to avoid repetitive arguments on issues that have been considered fully by

the court,” Griffin Indus., Inc. v. Petrojam, Ltd., 72 F. Supp. 2d 365, 368 (S.D.N.Y.

1999), and a motion for reconsideration is not an opportunity to present the case under

new theories, secure a rehearing on the merits, or otherwise take a “second bite at the

apple.” Sequa Corp. v. GBJ Corp., 156 F.3d 136, 144 (2d Cir. 1998).

The Motion makes three points. First, the Constructive Trust Claims are actually

avoidance claims. (Motion at 2-7; id. at 4 (“The Liquidators’ constructive trust claim is

an ‘avoidance’ claim and therefore within the scope of Section 546(e) regardless of how

it is labeled.”).) Second, the Liquidators stand in the “same shoes” as a U.S. case trustee

whose constructive trust claims would be barred. (Motion at 5 (“Fairfield [II] thus erred

in permitting a foreign representative to use foreign common law claims to achieve what

a domestic trustee cannot do under state law or foreign statutory law.”).) Third, the

purpose of the safe harbor would be defeated if it did not bar the Constructive Trust

Claims. (Motion at 6 (“[A]llowing the constructive trust claim that seeks to unwind safe

harbored transactions to proceed would frustrate the purpose of Section 546(e), an

incongruous result that overlooks the substance of the claim at issue and would defeat

the purpose of the application of the safe harbor in Chapter 15 proceedings.”).)

The first argument is new. The Defendants had argued in their motion to dismiss

that the Constructive Trust Claims sought the same relief as the BVI Avoidance Claims

and should be barred for that reason, but never argued that the Constructive Trust

Claims were avoidance claims. (Defendants’ Brief at 31 (“It is irrelevant that the

Liquidators’ claims for knowing receipt sound in unjust enrichment, rather than U.S. or

BVI bankruptcy law.”).)

While this is sufficient to reject the argument on a motion for reconsideration, it

is also wrong. The BVI Avoidance Claims and the Constructive Trust Claims require

proof of different elements. To establish a constructive trust claim under English law,

which would apply in the BVI, “the plaintiff must show, first, a disposal of his assets in

breach of fiduciary duty; second, the beneficial receipt by the defendant of assets which

are traceable as representing the assets of the plaintiff; and third, knowledge on the part

of the defendant that the assets he received are traceable to a breach of fiduciary duty.”

El Ajou v. Dollar Land Holdings Ltd. [1994] 2 All E.R. 685, 700. Neither breach of

fiduciary duty nor the defendant’s knowledge, two of the three elements of the

Constructive Trust Claims, are elements of the BVI Avoidance Claims. See Fairfield I,

596 B.R. at 302 (discussing the BVI Avoidance Claims). Conversely, insolvency is an

element of the BVI Avoidance Claims but not the Constructive Trust Claims. Id.

Furthermore, while the defendant’s knowledge is an element of the Constructive Trust

Claims, it is part of the “good faith for value” affirmative defense available to fraudulent

transferees, see Insolvency Act § 250, that a transferee can assert or waive but the

plaintiff need not prove. Thus, while the two sets of claims may ultimately lead to the

same result, a money judgment for the amount of the redemption payments, the

Constructive Trust and BVI Avoidance Claims proceed on different theories and

different proof.

Finally, the Defendants argue that the Constructive Trust Claims are not true

constructive trust claims because they are not premised on a breach of fiduciary duty or

another tort. (Motion at 3.) If the Defendants believe this to be the case, they should

move to dismiss the Constructive Trust Claims for failure to state a claim rather than

argue that the absence of a breach of fiduciary duty makes them avoidance claims

subject to the safe harbor.

The other two points, the “same shoes” and the “frustration of purpose”

arguments, are variations of the argument that the Defendants’ made and the Court

considered and rejected in Fairfield II. I assume, as the Defendants’ argue, that similar,

constructive trust claims asserted by a U.S. case trustee under state law would be barred

by the safe harbor because they would “frustrate the purpose of Section 546(e).”

“Frustration of purpose” is the language of conflict preemption under the Supremacy

Clause. See Goonan v. Fed. Reserve Bank of N.Y., 916 F. Supp. 2d 470, 492 (S.D.N.Y.

2013) (“Conflict preemption ‘occurs when compliance with both state and federal law is

impossible, or when the state law stands as an obstacle to the accomplishment and

execution of the full purposes and objective of Congress.’”) (quoting United States v.

Locke, 529 U.S. 89, 109 (2000)). The Liquidators do not stand in the “same shoes” as a

U.S. case trustee because U.S. preemption law, the basis for the decisions by the

Defendants’ authorities, does not apply to foreign law claims, and sections 546(e) and

561(d) do not expressly preempt or displace foreign common law claims. Fairfield II,

2020 WL 7345988, at *9-10. Thus, even if the assertion of the Constructive Trust

Claims frustrates the purpose of the safe harbor, the safe harbor does not bar them. To

paraphrase the District Court when it addressed whether the Securities Litigation

Uniform Standards Act barred claims under Brazilian law,

Despite how well a ban on foreign law claims might fit within the larger

statutory scheme, this Court is bound by the statute’s plain language.

[Citation omitted]. Because the plain language of [Bankruptcy Code §§

546(e) and 561(d) do] not bar foreign law [constructive trust] claims, [the

Defendants’] argument fails.”

In re Petrobras Sec. Litig., 169 F. Supp. 3d 547, 551-52 (S.D.N.Y. 2016).

At bottom, the Defendants have failed to identify any controlling authority or

facts I overlooked, clear error or manifest injustice. Instead, they have either raised a

new argument or repackaged old ones that the Court considered and rejected in

Fairfield II. Accordingly, the Motion is denied.

So ordered.

Dated: New York, New York

February 23, 2021

/s/ Stuart M. Bernstein

STUART M. BERNSTEIN

United States Bankruptcy Judge