Vol 6 (2009) - Issue 1

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The Bear Stearns Appeal

Since September 2007, the ability to secure recognition for foreign proceedings in US bankruptcy courts has been the subject of some uncertainty. Between Judge Lifland’s decision in the Bear Stearns case and Judge Gerber’s decision in In re Basis Yield, both in the Bankruptcy Court for the Southern District of New York, the recognition process that was almost routine in bankruptcy cases under section 304 was no longer so. While those judges were clear in their refusal to apply a rubber stamp to requests of foreign representatives seeking recognition in their courtrooms, some litigants and commentators were unsure whether the decisions were anomalous or signaled a new direction in the law.

Since September 2007, the ability to secure recognition for foreign proceedings in US bankruptcy courts has been the subject of some uncertainty. Between Judge Lifland’s decision in the Bear Stearns case and Judge Gerber’s decision in In re Basis Yield, both in the Bankruptcy Court for the Southern District of New York, the recognition process that was almost routine in bankruptcy cases under section 304 was no longer so. While those judges were clear in their refusal to apply a rubber stamp to requests of foreign representatives seeking recognition in their courtrooms, some litigants and commentators were unsure whether the decisions were anomalous or signaled a new direction in the law.

The prospect for change first became apparent in September 2007, when Judge Lifland refused to recognise an offshore proceeding, even when no party objected; the foreign representative had failed to prove that the debtor’s presence in the Cayman Islands constituted either a Centre of Main Interests (‘COMI’) or an ‘establishment’ under the US law that incorporated the UNCITRAL Model Law on Insolvency’s foreign recognition rules. In January 2008, Judge Gerber found that there were questions of fact that prevented him from finding a COMI or establishment in the Caymans for a similarly situated debtor. The Bear Stearns appeal in the District Court gives these rulings added force, signaling to other bankruptcy courts that Judges Lifland and Gerber were on the right path.

The prospect for change first became apparent in September 2007, when Judge Lifland refused to recognise an offshore proceeding, even when no party objected; the foreign representative had failed to prove that the debtor’s presence in the Cayman Islands constituted either a Centre of Main Interests (‘COMI’) or an ‘establishment’ under the US law that incorporated the UNCITRAL Model Law on Insolvency’s foreign recognition rules. In January 2008, Judge Gerber found that there were questions of fact that prevented him from finding a COMI or establishment in the Caymans for a similarly situated debtor. The Bear Stearns appeal in the District Court gives these rulings added force, signaling to other bankruptcy courts that Judges Lifland and Gerber were on the right path.

After financial trouble hit and Joint Provisional Liquidators (‘JPLs’) were appointed in the Cayman Islands, the JPLs sought to have the foreign proceeding recognised under the US Bankruptcy Code’s Chapter 15, which provides for recognition of either ‘main’ or ‘nonmain’ foreign proceedings. For a proceeding to be recognised as ‘main’, the foreign proceeding must be in the country of the debtor’s COMI; for it to be recognised as ‘nonmain’, it must be in a country where the debtor has an ‘establishment’ under the bankruptcy law. The JPLs sought to have their Cayman Islands proceeding recognised as either a main or nonmain proceeding. Judge Lifland rejected both of these arguments.

In their appeal in the District Court, the Bear Stearns JPLs argued that basic principles of comity weighed in favor of recognising the Cayman Islands proceeding. They argued that Chapter 15 ‘was enacted to foster comity’, and courts should apply it ‘pragmatically, based on their understanding that recognition should be withheld only in very limited circumstances’. Judge Sweet noted that under Chapter 15’s predecessor statute, that argument might have been successful, as ‘all relief under section 304 was discretionary and based on subjective, comity-influenced factors’. He also pointed out that under Chapter 15 and the UNCITRAL Model Law on Insolvency, comity was given little weight. The new analysis was more mechanical, looking at a single criterion. This approach sought to eliminate ‘the risk of competing claims from foreign proceedings for recognition as the main proceeding’ and thus ensure greater predictability and reliability than a comitybased approach could achieve. Judge Sweet rejected the JPLs’ attempt to rely on comity.