Update on Unavailability of U.S. Bankruptcy Relief for Some Offshore Hedge Funds

On January 16, 2008, two developments took place regarding the recognition of foreign insolvency proceedings in U.S. Bankruptcy Courts under Chapter 15. First, Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York heard oral argument in the appeal of Judge Burton R. Lifland’s Amended Decision and Order Denying Recognition of Foreign Proceeding in In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., et al., Bankr. Case Nos. 07-12383 and 07-12384, Dist. Case Nos. 1:07-cv-08730 and 1:07-cv-08746.

The principal issue on appeal is whether a company whose operations and assets are located primarily in the U.S. can undergo bankruptcy reorganization or liquidation primarily in a foreign court. During oral argument, the attorney for the hedge funds agreed with Judge Sweet that Judge Lifland is a “whiz” when it comes to cross-border bankruptcies. (As we indicated in an earlier alert [U.S. Bankruptcy Relief Blocked For Some Offshore Hedge Funds], Judge Lifland was a co-author of both the Model Law on Cross-Border Insolvency and Chapter 15 of the Bankruptcy Code.) Judge Sweet gave no indication as to how he will rule or when he will render a decision. However, an attorney for the hedge funds said after the hearing that he does not expect a decision before July.

Second, Judge Robert E. Gerber of the U.S. Bankruptcy Court for the Southern District of New York denied a motion for summary judgment by the liquidators of a Cayman Islands hedge fund. See In re Basis Yield Alpha Fund (Master), Case No. 07-12762, Decision and Order on Motion for Summary Judgment Seeking Recognition as Foreign Main Proceeding, dated January 16, 2008, ECF 37, www.nysb.uscourts.gov. The liquidators sought summary judgment on their Chapter 15 petition seeking recognition in the U.S. of the hedge fund’s liquidation in the Cayman Islands as a foreign main proceeding.

Earlier in the case, and shortly after Judge Lifland issued his ruling in the Bear Stearns cases, Judge Gerber issued an Order requiring the liquidators to submit all evidence relevant to the determination of the location of Basis Yield’s COMI. See In re Basis Yield Alpha Fund (Master), Case No. 07-12762, Order Re Upcoming Hearing on Motion for Recognition, dated September 12, 2007, ECF 16, www.nysb.uscourts.gov. The attorneys for the liquidators opted instead to seek summary judgment, arguing that because no parties in interest had objected to recognition, the Court must accept the presumption in Section 1516(c) that the location of Basis Yield’s center of main interests (COMI) was the same as the location of its registration. Relying heavily on Judge Lifland’s analysis in Bear Stearns, Judge Gerber rejected this contention, finding that an independent determination by the Court was required by Section 1517. The Court found summary judgment inappropriate because the hedge fund was an “exempted company” under Section 193 of the Caymans Companies Law, which requires that the company’s principal place of business be outside the Cayman Islands. As a result, the Court declined to use the presumption of Section 1516(c) because the Chapter 15 petition contradicted the presumption and the liquidators failed to introduce any other evidence. The Court reinstated its earlier order requiring the liquidators to submit relevant evidence in advance of an evidentiary hearing on their petition for recognition.

We will continue to monitor these cases and provide updates as future decisions are rendered.