(1) Irving H Picard (as Trustee for the Liquidation of the Business of Bernard L. Madoff Investment Securities LLC) (in Securities Investor Protector Act Liquidation) (2) Bernard L. Madoff Investment Securities LLC (in Securities Investor Protection Act Liquidation) Plaintiffs v Primeo Fund (in Official Liquidation) Defendant

JurisdictionCayman Islands
JudgeThe Hon. Mr. Justice Andrew Jones
Judgment Date14 January 2013
CourtGrand Court (Cayman Islands)
Docket NumberCAUSE NO: FSD 275 OF 2010-AJJ
Date14 January 2013
Between:
(1) Irving H Picard (As Trustee for the Liquidation of the Business of Bernard L. Madoff Investment Securities LLC) (In Securities Investor Protector Act Liquidation)
(2) Bernard L. Madoff Investment Securities LLC (In Securities Investor Protection Act Liquidation)
Plaintiffs
and
Primeo Fund (In Official Liquidation)
Defendant
[2013] CIGC J0114-1

The Hon. Mr. Justice Andrew Jones

CAUSE NO: FSD 275 OF 2010-AJJ
IN THE GRAND COURT OF THE CAYMAN ISLANDS
Appearances:

Mr. Robin Dicker QC and Mr. Stephen Robins instructed by Mr. John Harris of Higgs & Johnson for the Plaintiffs

Mr. Michael Crystal QC instructed by Mr. Peter Hayden and Mr. Nicholas Fox of Mourant Ozannes for the Defendant

RULING ON PRELIMINARY ISSUES
Introduction and Factual Background
1

This is the trial of certain preliminary issues of law based upon stated assumptions of fact. However, in order to understand the factual assumptions and put the legal argument into context, one does need to have a general understanding of the relevant factual background. My summary is drawn from the pleadings and counsels' written submissions, It is intended to reflect what is common ground between the parties and should not be read as constituting any findings of fact made by the Court.

2

Bernard L. Madoff Investment Securities LLC (‘BLMIS’) is a company incorporated under the laws of New York, whose principal place of business was in New York City. It was owned and controlled by Bernard L. Madoff (‘Madoff’). Throughout the whole of the period relevant to this proceeding, BLMIs' investment advisory business was being carried on fraudulently. Madoff was arrested on 11 December 2008. The Securities and Exchange Commission filed a complaint on the same day, and the United States District Court for the Southern District of New York appointed a receiver. On 15 December 2008, the Securities Investor Protection Corporation filed an application in the District Court for the commencement of liquidation proceedings in respect of BLMIS and Judge Stanton made an order which (i) appointed Mr. Irving H. Picard as trustee (‘the Trustee’), (ii) transferred the case to the United States Bankruptcy Court for the Southern District of New York (which I shall refer to as ‘the New York Court’), and (iii) removed the receiver from office. As a matter of United States law, the statutory avoidance claims which the Trustee seeks to assert against Primeo Fund (In Official Liquidation) (‘Primeo’) in these proceedings arose at that moment in time. Madoff admitted that he had operated a massive Ponzi scheme through BLMIS. On 12 March 2009 he pleaded guilty to 11 counts of fraud and was subsequently sentenced to 150 years in prison.

3

On 5 February 2010, I made a declaration under section 241(1)(a) of the Companies Law by which it is recognized that the Trustee is the only person entitled to act on behalf of BLMIS in this jurisdiction (‘the Recognition Order’). This declaration is binding on all persons and for all purposes in the Cayman Islands, whether or not such persons had actual notice of the Trustee's petition. My reasons for making the Recognition Order are reported at 2010 (1) CILR 231. BLMIs' only connection with the Cayman Islands is that Primeo (and at least two other Cayman domiciled investment funds) placed funds with it for investment. BLMIS was never licensed under the Securities Investment Business Law (2003 Revision) to carry on its business in this country and had no property located here. Prima facie, this Court therefore has no jurisdiction to make a winding up order in respect of BLMIS under section 91(d) of the Companies Law.

4

Primeo was incorporated under the Companies Law on 18 November 1993 and on 1 January 1994 commenced business as an open-ended investment fund subject to the regulatory requirements of the Mutual Funds Law (Law 13 of 1993). Its offering document, which was required to be filed with the Cayman Islands Monetary Authority, described it as ‘an open-ended investment fund designed for non-U. S. investors desiring to invest a portion of their assets in a fund emphasizing preservation of capital through diversification of investments’. Its participating shares were listed on the Luxembourg Stock Exchange. From the inception of its business, Primeo placed funds for investment with BLIMIS pursuant to three written agreements executed on or about 29 February 1996. These accounts were closed sometime in June 2007. Thereafter, Primeo's investment strategy was changed in that its assets were invested in the participating shares of two investment funds, namely Herald Fund SPC which is a segregated portfolio company incorporated under the Companies Law (‘Herald’) and Alpha Prime Equity Hedged Fund Limited, a company incorporated in Bermuda (‘Alpha Prime’). Herald and Alpha Prime placed funds for investment with BLIMIS. This new investment strategy is said by Primeo to have been disclosed to its investors in a revised offering document issued on 25 April 2007. Funds withdrawn from Primeo's account with BLMIS prior to June 2007 were paid directly to Primeo and are referred to in the pleadings as the ‘Direct Transfers’. Primeo was not the only investor in Herald and Alpha Prime, but at some point it did become the largest single investor in Herald. When Primeo redeemed shares in Herald or Alpha Prime, the assumption is that they in turn withdrew funds from their accounts with BLMIS. To the extent that redemption proceeds received by Primeo from Herald and/or Alpha Prime were funded by withdrawing funds from their BLMIS accounts, it is said by the Trustee that BLMIS indirectly paid money to Primeo. The expression Indirect Transfers is used in the Statement of Claim to describe transactions of this sort.

5

It follows that, even after changing its investment strategy in 2007, Primeo remained highly dependent upon BLMIs' integrity and investment performance. On 12 December 2008, the day after Madoff's arrest, Primeo's directors passed a resolution, inter alia, to suspend the calculation of its NAV and suspend subscriptions and redemptions of its participating shares. On 23 January 2009, the sole voting shareholder of Primeo passed a special resolution for the company to be wound up voluntarily and two qualified insolvency practitioners, Messrs James Cleaver and Richard Fogerty, were appointed as joint voluntary liquidators. On 8 April 2009, an order was made for Primeo's winding up to continue under the supervision of this Court, whereupon Messrs Cleaver and Fogerty were appointed as the joint official liquidators.

6

In these proceedings the Trustee asserts three different types of avoidance claim against Primeo in respect of both Direct and Indirect Transfers. First, in Section VI of the Statement of Claim he asserts claims under section 241 of the Companies Law and/or at common law based upon the application of the substantive United States law, including: (a) immediate transferee claims under section 548 of the US Bankruptcy Code (two year fraudulent transfers); (b) immediate transferee claims under the New York Debtor and Creditor Law (six-year fraudulent transfers); (c) subsequent transferee claims to recover payments avoided under section 547 of the U.S. Bankruptcy Code (90-day preference payments); and (d) subsequent transferee claims to recover payments avoided under section 548 of the U.S. Bankruptcy Code (two-year fraudulent transfers). The US law in this respect is materially different from the provisions contained in Part V of the Companies Law (2011 Revision), in particular section 145, although it may be said that the underlying policy objective of ensuring the fair and equal treatment of creditors is the same.

7

Secondly, in Section X of the Statement of Claim, the Trustee asserts claims under section 241 of the Companies Law and/or at common law in accordance with section 145 of the Companies Law (voidable preferences), as if the liquidation of BLMIS were occurring in the Cayman Islands rather than in the United States, for the purpose of recovering Indirect Transfers in the total sum of approximately US$588 million which were paid to Primeo within the period of six months immediately preceding the commencement of the foreign liquidation on 18 December 2008. These transfers are referred to as the ‘Six Month Payments’. Whether the applicable voidable preference provision is section 168 of the Companies Law (2007 Revision) which was in force at the time when the Six Month Payments were made or section 145 of the 2010 Revision which did not come into force until 1 March 2009 (being after commencement of the liquidation) is an issue which does not fall to be decided at this stage of the proceedings,

8

Thirdly, in Section XII of the Statement of Claim, the Trustee asserts claims under section 147 of the Companies Law (fraudulent trading), so as to require Primeo to make a contribution to the estate of BLMIS. However, it is now conceded by counsel for the Trustee that this claim must fail by reason of the fact that section 147 did not come into force until 1 March 2009. It follows that I am now only concerned with two broad issues — whether the Trustee is entitled, either pursuant to section 241 or at common law, to assert US law avoidance claims (as pleaded in Section VI of his Statement of Claim) and/or Cayman Island law preference claims (as pleaded in Section X of the Statement of Claim).

9

By the Order which I made on 19 January 2011, the Court will now determine the following preliminary issues of law:

These preliminary issues give rise to important questions about the nature and extent of this Court's statutory jurisdiction to make orders ancillary to a foreign insolvency proceeding and its common law jurisdiction to provide assistance in connection with foreign bankruptcy proceedings.

  • (1) Whether, on the assumption that the Plaintiffs have avoidance...

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