A series of related decisions issued by the United States Bankruptcy Court for the Southern District of New York in the ongoing Fairfield Sentry U.S. redeemer litigation — Fairfield Sentry II,1 Fairfield Sentry III,2 and Fairfield Sentry IV3 —  provide insight into, among other things, the interplay between the safe harbor provision of section 546(e)4 of the Bankruptcy Code (the “Safe Harbor”) and chapter 15.  Relying on section 561(d)5 of the Bankruptcy Code, which makes the Safe Harbor applicable to chapter 15 cases “to limit avoidance powers to the same extent as in a proceeding under chapter 7 or 11,” the court extended the Safe Harbor to bar the avoidance of certain foreign transactions based on foreign law claims which resembled preference claims under section 547(b)6 of the Bankruptcy Code and constructive fraudulent transfer claims under state and federal law.  However, when the defendants attempted to use the Safe Harbor to bar certain constructive trust claims under foreign law, the court did not agree, finding that the constructive trust claims proceeded on different theories and different proof than the preference and constructive fraudulent transfer claims, denying application of the Safe Harbor to bar those claims.


Fairfield Sentry Limited, Fairfield Sigma Limited, and Fairfield Lambda Limited (collectively, the “Funds”) were funds organized under the laws of the British Virgin Islands (“BVI”) that  sold shares to investors and directly and indirectly invested the proceeds with Bernard L. Madoff Investment Securities LLC (“BLMIS”).7  The Funds’ shares were redeemable at a price equal to each Fund’s net asset value (“NAV”) per share, as determined by the directors of each Fund.8  The directors, in turn, delegated the duty to compute the NAV to Citco Fund Services (Europe) BV, one of the many affiliates of Citco Group Limited (collectively, “Citco”), which was retained to perform administrative and custodial functions for the Funds.9

In December 2008, after Madoff admitted to operating the investment advisory business of BLMIS as a Ponzi Scheme, BLMIS was placed into liquidation under the Securities Investor Protection Act.10  Shortly after, the Funds were also placed into insolvency proceedings in the Commercial Division of the Eastern Caribbean High Court of Justice, British Virgin Islands, which appointed liquidators (the “Liquidators”).11  The Liquidators subsequently commenced ancillary proceedings under chapter 15 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York, which granted recognition of the BVI liquidation proceedings as foreign main proceedings.12

Thereafter, the Liquidators commenced over 300 adversary proceedings to recover the redemption payments paid by the Funds to the defendants named therein (the “Defendants”), asserting, among other things: (i) BVI common law constructive trust claims (the “Constructive Trust Claims”), seeking to impose a constructive trust as to any Defendant who allegedly knew the redemption prices were inflated when they redeemed their shares, and (ii) “unfair preference” and “undervalue transaction” claims under the BVI Insolvency Act of 2003 (the “BVI Avoidance Claims”), seeking to claw back redemption payments made at inflated prices.13  The Liquidators alleged that the redemption payments were based on inflated NAVs because the redemption prices were calculated using fictitious account statements provided by BLMIS.14 

Fairfield Sentry IV (2021) – Reaffirming that the Safe Harbor Does Not Bar Constructive Trust Claims

In Fairfield Sentry IV, the Defendants sought reconsideration of the court’s determination the year prior in Fairfield Sentry III that the Safe Harbor, which limits a trustee’s ability to avoid certain covered transactions made by or to a covered entity, did not bar the Constructive Trust Claims.15  In denying the motion for reconsideration, the court concluded that the Defendants had not identified any overlooked facts or controlling authority, there was no clear error or manifest injustice, and the arguments asserted were either new or previously rejected in Fairfield Sentry III.16  Before we explain the court’s reasoning, a brief overview of the long history of these cases would be helpful and is set forth below:

  • Fairfield Sentry II (2018) – Safe Harbor Applies in Chapter 15 Cases to Bar Avoidance of Foreign Transfers Under Foreign Insolvency Laws

In Fairfield Sentry II, the court considered the Defendants’ motions to dismiss the Liquidators’ claims, arguing that the Safe Harbor provided a complete defense to the BVI Avoidance Claims and Constructive Trust Claims.17  The court held that the Safe Harbor applies to proceedings brought by foreign representatives in a chapter 15 case seeking to avoid purely foreign transfers under foreign insolvency laws.18  However, the court declined to rule on the merits of whether the redemption payments were protected by the Safe Harbor because within weeks of the parties’ submissions, the Supreme Court issued its decision Merit Mgmt. Grp., L.P. v. FTI Consulting, Inc., 138 S. Ct. 883 (2018) (“Merit”), changing applicable law.19  Weil Restructuring Review articles on Merit and related case law can be accessed here and here.

The court found that the “unfair preference” claims and “undervalue transaction” claims under BVI law resembled preference claims under section 547(b) and constructive fraudulent transfer claims under state and federal law, respectively.20  In finding that the Safe Harbor was applicable, the court explained that section 561(d) provides that the Safe Harbor “shall apply in a case under chapter 15 . . . to limit avoidance powers to the same extent as in a proceeding under chapter 7 or 11”22 and section 1521(a)(7)22 of the Bankruptcy Code prohibits a foreign representative from exercising the avoidance powers available to chapter 7 or 11 trustee.23  Accordingly, the court reasoned, “section 561(d) is necessarily referring to avoidance powers available under non-U.S. law” and, therefore, the Safe Harbor was applicable.24  This interpretation was consistent with section 561(d)’s dual purpose, as identified by the court: preventing interference with a non-debtor counterparty’s exercise of close-out rights, regardless of whether the property is located domestically or abroad, and limiting a foreign representative’s ability to recover such property transferred in connection therewith.25

  • Fairfield Sentry III (2020) – Safe Harbor Bars BVI Avoidance Claims But Not Constructive Trust Claims

In Fairfield Sentry III, the court considered the Defendants’ renewed motion to dismiss the Liquidators’ remaining claims on the basis that, among other things, the BVI Avoidance Claims and the Constructive Trust Claims were barred by the Safe Harbor.26  The court concluded that the BVI Avoidance Claims sought to avoid covered transactions made by covered entities and were therefore barred by the Safe Harbor, but declined to dismiss the Constructive Trust Claims even though they sought the same relief.27

With respect to the BVI Avoidance Claims, the parties did not dispute that the redemption payments were settlement payments made in connection with securities contracts and, thus, were covered transactions under the Safe Harbor.28  The only open issue was whether the redemption payments “were made by, to, or for the benefit of” a covered entity.29  The court found that (i) Citco, which made all of the redemption payments and was where the Funds maintained accounts, was a financial institution under section 101(22)(A)30 of the Bankruptcy Code and a covered entity because it was a bank regulated by the central bank of the Netherlands since 1985, and (ii) the Funds were financial institutions and covered entities because they were customers of Citco — a financial institution — where Citco was acting as the Funds’ “agent . . . in connection with a securities contract.”31  Accordingly, the Safe Harbor applied pursuant to section 561(d) to bar the BVI Avoidance Claims.32

In reaching this conclusion, the court rejected the Liquidators’ argument that the Safe Harbor was inapplicable because the BVI Avoidance Claims sought to avoid intentional fraudulent transfers under BVI law, which, the Liquidators alleged, are sufficiently analogous to intentional fraudulent transfer claims under section 548(a)(1)(A)33 of the Bankruptcy Code and, thus, are carved out of the Safe Harbor’s protections.34  The court was not persuaded because, among other things, (i) the Liquidators did not articulate any basis for equating the BVI Avoidance Claims to intentional fraudulent transfer claims under section 548(a)(1)(A) instead of a state law fraudulent transfer claim which is barred by the Safe Harbor, (ii) section 1521(a)(7) bars a chapter 15 foreign representative from bringing a section 548(a)(1)(A) claim absent commencement of a case under chapter 7 or 11, (iii) the Liquidators failed to identify the source of such an intentional fraudulent transfer claim under BVI law and the court could not locate any avoidance claim under the BVI Insolvency Act requiring proof of the intent to “hinder, delay or defraud” — the critical element of a claim under section 548(a)(1)(A), and (iv) because the Liquidators alleged that the Funds were duped by the BLMIS fictitious account statements, as the transferors, the Funds could not have intended to “hinder, delay or defraud” other creditors by redeeming investments at prices they thought were accurate.35

With respect to the Constructive Trust Claims, the Defendants asserted that such claims should also be barred by the Safe Harbor because they sought the same relief as the BVI Avoidance Claims.36  In response, the Liquidators argued, among other things, that the Safe Harbor’s plain language does not bar the claims and the precedent extending the Safe Harbor to state common law claims relied on the Supremacy Clause which does not apply to foreign law claims.37  The court agreed and explained that the “Supremacy Clause applies to states and is inapplicable to considerations of federal law versus foreign law [and] [c]ourts do not assume that otherwise applicable foreign law is preempted absent express statutory language.”38  As the Constructive Trust Claims were based on BVI law and the Defendants did not identify any such express language, the court denied the Defendants’ motion to dismiss the same.39

In Fairfield Sentry IV, the Defendants advanced three arguments in support of their motion for reconsideration of the court’s ruling that the Safe Harbor did not bar the Constructive Trust Claims.40  First, irrespective of their label, the Constructive Trust Claims were actually avoidance claims and thus barred by the Safe Harbor.41  Second, “the Liquidators stand in the ‘same shoes’ as a U.S. case trustee whose constructive trust claims would be barred.”42  Third, the Safe Harbor’s purpose would be defeated if the provision did not bar the Constructive Trust Claims.43

The court did not agree with the Defendants’ first argument, finding that the BVI Avoidance Claims and the Constructive Trust Claims required proof of different elements.44  For example, the Liquidators would have to establish a breach of fiduciary duty to prevail on the Constructive Trust Claims, but not the BVI Avoidance Claims.45  Thus, “while the two sets of claims may ultimately lead to the same result … the Constructive Trust Claims and BVI Avoidance Claims proceed on different theories and different proof.”46

The court found that the Defendants’ second and third arguments — “same shoes” and “frustration of purpose” — were variations of arguments it had rejected in Fairfield Sentry III.47  The court recognized that the concept of “frustration of purpose” is characteristic of conflict preemption under the Supremacy Clause.48  Similarly, because U.S. preemption law does not apply to, and sections 546(e) and 561(d) do not expressly preempt, foreign law claims, the court reasoned that the Liquidators did not stand in the “same shoes.”49  In essence, both the frustration of the Safe Harbor’s purpose and the “same shoes” arguments depended on the applicability of the Supremacy Clause, which the court reiterated was inapplicable in the foreign versus federal law context.50  Accordingly, the court denied the Defendants’ motion for reconsideration in its entirety.51


The Fairfield Sentry cases illustrate the interplay between the Safe Harbor and chapter 15.  The court’s extension of the Safe Harbor to foreign transactions and foreign law claims in chapter 15 proceedings in Fairfield Sentry II and subsequent application of the same to bar the BVI Avoidance Claims in Fairfield Sentry III demonstrates the provision’s broad scope outside chapters 7 and 11 and U.S. borders.  However, the court in Fairfield Sentry III (and, later, in Fairfield Sentry IV) also highlighted the provision’s limitations.  First, the intentional fraud exception is only available to carve out claims under section 548(a)(1)(A) — which a foreign representative cannot bring in a chapter 15 case under section 1521(a)(7).  Second, while an avoidance claim under foreign law may be barred by the Safe Harbor in a chapter 15 proceeding when it resembles a preference or constructive fraudulent transfer claim under U.S. law, a foreign law claim that would ultimately lead to the same result may not similarly be barred if it proceeds on a different theory and different proof than those protected by the Safe Harbor.