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Bernie Madoff, Haven Jurisdiction, and the End of COMI?

posted by Andrew Dawson

The liquidation of the largest Madoff feeder fund, Fairfield Sentry, recently made a major mark on Chapter 15 of the Bankruptcy Code. The lynchpin of Chapter 15 (and the Model Law on Cross-Border Insolvency) is the ability to locate a debtor’s center of main interests (COMI). If a debtor files for bankruptcy in the location of its COMI, then it is entitled to certain automatic protections from ancillary proceedings in other countries, e.g., the imposition of the automatic stay to bar all collection activities.

Shutterstock_170061494Fairfield Sentry is being liquidated in the British Virgin Islands, its place of incorporation. Prior to its liquidation, its day-to-day operations were conducted in New York. When the Madoff scheme imploded, Fairfield's shareholders commenced a liquidation proceeding in the BVI and all operations in New York ceased. Roughly a year later, the BVI liquidators filed a Chapter 15 petition in the New York bankruptcy court, arguing that the debtor’s COMI was in the BVI.

About four years ago, I predicted that following the Bear Stearns decision, courts would no longer find a debtor’s COMI to be in a haven jurisdiction.  Haven incorporated companies do not conduct business there, and thus in no way could they be said to have a center of main interests there based solely on their place of incorporation. The Second Circuit's recent decision in In re Fairfield Sentry Ltd.,  however, proves that prediction flat wrong.

The COMI dispute came down to timing: if the court looked at Fairfield’s COMI as of the time the BVI liquidation commenced, then the debtor’s COMI was arguably in New York; if the court looked at the debtor’s COMI as of the time the Chapter 15 petition was filed, then the debtor’s COMI was in the BVI, as the only corporate business remaining was its liquidation.

 The Second Circuit held Fairfield's COMI was in the BVI because Section 1517 requires looking at the debtor’s COMI as of the Chapter 15 petition. The result appears to be that a U.S.-based debtor can file bankruptcy in a haven jurisdiction (or any jurisdiction it deems desirable) and, so long as it waits until all U.S. operations have ceased, be able to establish that its COMI is in the haven. That is, it appears that forum shopping is alive and well in cross-border insolvencies.

While this is a blow to the structure of Chapter 15, perhaps we could shrug this off with a “so what?” Just because a court finds that the COMI is in a haven, this does not mean that the court will then automatically surrender all U.S.-based assets to be distributed in that haven proceeding. The court can tailor that relief based on the interests of U.S. creditors. No harm, no foul.

I suggest there are two concerns. First, the ability to forum shop undermines the perceived legitimacy of the Model Law, undermining efforts to attract more adopters. Second, and potentially more importantly, courts are likely to tailor relief to protect U.S. creditors only if those creditors object.  If the creditors are unrepresented - perhaps general unsecured creditors, tort/fraud victims - there may be no objections even if deference to the forum shopped jurisdiction would be detrimental to U.S. creditors.  

Carribean Island photo courtesy of Shutterstock.


It might be nice to move my practice to a small tropical island and process liquidations. Sounds nicer than living in New York or Delaware.

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