Success in Appeals Bankruptcy Court Decision in Fairfield Litigation Ordering Disclosure of Banking Customer Information

On July 6, Cleary Gottlieb won an appeal from an order of the U.S. Bankruptcy Court to the U.S. District Court for the Southern District of New York in litigation brought by the liquidator of Fairfield Sentry Limited, the largest of the so-called Madoff feeder funds, and two affiliated funds.

The firm represents approximately 30 affiliates of HSBC, BNP Paribas, Credit Agricole, Citigroup and The Bank of New York Mellon Corporation that on behalf of their respective banking customers served as nominee registered shareholders of the Fairfield Funds. Beginning in April 2010, the liquidator of Fairfield brought suit against our clients and hundreds of other current and former registered shareholders of the funds seeking restitution of payments that shareholders received in consideration for tendering their shares for redemption pursuant to the funds’ articles of association.

On June 27, the Bankruptcy Court issued an order granting an application by the Fairfield liquidator seeking disclosure of the names and addresses of the banking customers who were the beneficial owners of the shares and on whose behalf the redemption payments at issue were received. The Bankruptcy Court interpreted a provision of the agreement signed when subscribing for the shares as a consent by defendants to provide such information and therefore did not address defendants’ objection that disclosure should not be ordered because it would violate the banking secrecy, confidentiality and privacy laws of at least 30 nations under whose laws defendants are organized. The Bankruptcy Court also ruled that it had authority to order the disclosure even without first resolving defendants’ objections that the court lacks subject matter and personal jurisdiction and in any event is required to abstain from the actions.

On June 28, Cleary Gottlieb filed on behalf of its clients an emergency motion for a stay of and leave to appeal the Bankruptcy Court’s order. Hundreds of other defendants represented by dozens of other firms joined in the motion.

On June 29, Chief Judge Preska of the District Court granted our motion for a stay and scheduled further briefing and oral argument on our motion for leave to appeal. On July 6, 2012, following a four-hour oral argument, the District Court granted our motion for appeal and issued a decision reversing the Bankruptcy Court’s order. The District Court held that the Bankruptcy Court had misinterpreted the subscription agreements and committed reversible error by failing to engage in a comity analysis before ordering disclosures in violation of the banking secrecy, confidentiality and privacy laws of other nations. In light of this ruling, the District Court avoided reaching the constitutional question of whether the Bankruptcy Court had authority to issue the order prior to resolving defendants’ jurisdictional challenges. The District Court remanded the actions to the Bankruptcy Court to address the comity and threshold jurisdictional issues in a manner that is “just, speedy and inexpensive.”