The U.S. Bankruptcy Court for the S.D.N.Y. provided clarity in the Fairfield Sentry litigation on the implication of Sections 546(e) and 561(d), U.S. bankruptcy safe harbor laws, on foreign claw-back claims. Judge Stuart M. Bernstein - who retired on September 30, 2020 but is currently serving on recall through early next year - authored the opinion.
In effect, Judge Bernstein decided that Bankruptcy Code Section 546(e) - the "safe harbor" - barred BVI statutory avoidance claims being pursued in bankruptcy proceedings in the U.S., but not claims asserted at BVI common law, including constructive trust claims based upon recipient knowledge. The U.S. Bankruptcy Court held that the safe harbor barred BVI statutory avoidance claims that were analogous to preference claims or constructive fraudulent transfer claims. The Bankruptcy Court declined to treat the BVI statutory avoidance claims as analogous to Section 548(a)(1)(A) intentional fraudulent transfer claims, which are exempted from the safe harbor. The Bankruptcy Court then addressed the remaining disputed issue concerning the applicability of the safe harbor to the BVI statutory avoidance claims, which was whether the redemptions were made "by, to, or for the benefit of a qualifying entity such as a 'financial institution' of a type identified in the statute." On this issue, the Bankruptcy Court held that the transfers made by the Fairfield Funds were made by "financial institutions," on the theory that Citco Bank - itself a "financial institution" - was acting as "agent" for the Fairfield Funds, its customers.
The Bankruptcy Court, however, held that the safe harbor did not bar the BVI common law constructive trust claims. Applying the well-established principle that courts will not assume that foreign law is preempted by U.S. law "absent express statutory language to that effect," the Bankruptcy Court allowed the constructive trust claims to continue because the defendants did not identify any U.S. statute explicitly preempting such claims. This holding will likely apply to the remainder of the common law claims, now on appeal in the U.S. District Court for the S.D.N.Y., if those claims are reinstated.
The Bankruptcy Court also rejected the defendants' request to dismiss the claims for lack of service.
The implication for shareholders in Fairfield Sentry is that billions of dollars of claw-back claims remain, and that all redemptions will be live for recovery by the Joint Liquidators if the remaining common law and contract claims are reinstated by the District Court.
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