Vol 4 (2007) - Issue 5

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US Chapter 15 Application Refused

In a recent decision regarding two insolvent hedge funds created by Bear Stearns, The Honourable Burton Judge Lifland sitting in the United States Bankruptcy Court, Southern District of New York refused recognition to foreign proceedings commenced in the Cayman Islands. This decision has produced a bit of clucking by the legal establishment. Perhaps they have failed to read the decision with care.

The statement of facts in In re Bear Stearns High- Grade Structured Credit Strategies Master Fund, Ltd., No. 07-12383(BRL), one of the two filed cases, is not unusual. The hedge fund manages assets in New York and maintains its books and records in Delaware, but is registered in the Cayman Islands. The company has Little on the Caymans but a mailbox. The company faces financial trouble and ultimately seeks an order in the Cayman Islands that the company be wound up and a provisional liquidator appointed. The provisional liquidator wants to initiate an ancillary proceeding in the United States, and asks the US court to recognise the ongoing offshore proceedings.

In Bear Stearns, Judge Burton Lifland rejected the hedge funds’ attempts to recognise the offshore proceedings. The court reasoned that the offshore proceedings could neither be ‘foreign main proceedings’, because the Cayman Islands were not the debtors’ Centre of Main Interests (‘COMI’), nor ‘foreign non-main proceedings’, because the debtors’ Cayman Islands presence did not qualify as an ‘establishment’ under Chapter 15. As a result, the provisional liquidators could not maintain Chapter 15 proceedings in the US – despite the ongoing offshore process, and the parties’ seeming consensus that Chapter 15 was an appropriate vehicle. The court’s analysis was straight-forward. Chapter 15 permits recognition of two kinds of foreign proceedings: main and non-main. If the action in the foreign jurisdiction does not fall into either of those two categories, the US court cannot recognise the foreign proceedings and commence an ancillary proceeding under Chapter 15. The Bear Stearns court started by examining whether the Cayman Islands action qualified as a ‘foreign main proceeding’. Under 11 USC § 1502(4), a foreign main proceeding is ‘a foreign proceeding pending in the country where the debtor has the centre of its main interests’, or COMI. If the funds’ COMI were in the Cayman Islands, the foreign insolvency case would be the main proceeding, and the US court could open an ancillary proceeding under Chapter 15.
Judge Burton Lifland gave little weight to the presumption that the debtors’ registrations reflected their COMI. Under 11 USC § 1516(c), ‘[i]n the absence of evidence to the contrary, the debtor’s registered office … is presumed to be the’ COMI. The court interpreted this presumption as a weak one. Where there is evidence, the place of registration receives no particular weight.
Accordingly, the court noted the variety of factors that might justify COMI status:
‘the location of the debtor’s headquarters; the location of those who actually manage the debtor (which, conceivable could be the headquarters of a holding company); the location of the debtor’s primary assets; the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the case; and/or the jurisdiction whose law would apply to most disputes.’

In this case, while the place of registration may have pointed to a COMI in the Cayman Islands, the court found that all other factors pointed to a COMI elsewhere. No party in the proceedings had challenged the petitioners’ Chapter 15 petition, so the court extracted evidence from the petitioners’ filings:

‘… there are no employees or managers in the Cayman Islands, the investment manager for the Funds is located in New York, the Administrator that runs the back-office operations of the Funds is in the United States along with the Funds’ books and records and prior to the commencement of the Foreign Proceeding, all of the Funds’ liquid assets were located in United States.’

Because nothing pointed to the Cayman Islands other than the funds’ registration, the Caymans could not be the debtor’s COMI and the US court could not recognise those actions in the Cayman Islands as a foreign main proceeding.

The court then considered whether it could recognise the offshore proceedings as a ‘foreign nonmain proceeding’, which 11 USC § 1502(5) defines to include proceedings ‘pending in a country where the debtor has an establishment’. An ‘establishment’, in turn, is any ‘place of operations where the debtor carries out a nontransitory economic activity’ (11 USC § 1502(2)).