US judge allows time for hedge funds' bankruptcy in Cayman Islands
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| Published on Tuesday, September 25, 2007 |
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By Tiffany Kary
NEW YORK, USA (Bloomberg): Two bankrupt Bear Stearns Cos. hedge funds were granted continued protection from US lawsuits while they liquidate in the Cayman Islands, as long as they return $8 million to the US, a judge has ruled.
Bear Stearns, the fifth-largest US securities firm by market value, must return the funds, which were transferred to the Cayman Islands, or post an equal amount as bond, US Bankruptcy Judge Burton Lifland said at a hearing on Monday in Manhattan federal court. Lifland reprimanded the New York-based firm for allowing the US accounts to end up in the Cayman Islands.
"If they are forced to bring that money back, then it might leave them with no money to pay for attorneys fees and costs in the Caymans," said Jay Westbrook, a professor at the University of Texas Law School in Austin who helped write a 2005 law related to Chapter 15 bankruptcy.
Bear Stearns shares fell 3.7 percent. The firm placed the funds in bankruptcy July 31, citing volatility in the subprime-lending market and subsequent margin calls. They sought court protection after the firm granted one of the funds $1.6 billion in emergency financing, the biggest hedge-fund bailout since the collapse of Long-Term Capital Management LP in 1998.
In an August 30 decision, Lifland gave the funds until September 29 to file for reorganisation or liquidation in a US court. If they didn't submit a petition by then, they'd lose protection from US lawsuits. On Monday, he stayed that order while Bear Stearns appeals.
Bear Stearns's hedge funds filed for liquidation in the Cayman Islands while simultaneously seeking protection under Chapter 15 of the US bankruptcy code, which shields insolvent foreign companies from creditors in US courts.
Lifland asked Bear Stearns lawyer Abid Qureshi several times how much money from US accounts had been transferred to Cayman Islands accounts, saying he was "not impressed" with prior answers. Qureshi said he didn't know the total that had been transferred. Once a total is known, Bear Stearns will have to post a bond for that amount, Lifland ruled.
Fred Hodara, US counsel for the funds, said in an interview that he is pleased the judge "has seen fit to keep the stay in place" while Bear Stearns appeals his prior ruling.
Hodara declined to comment on the $8 million transfer. He said Bear Stearns hasn't decided whether it will file a petition for bankruptcy in the US.
"We have not seen facts to date that justify the expense of a chapter 11 filing," he added.
Kurt Mayr, a lawyer with the financial restructuring group at Bracewell & Giuliani, noted that Bear Stearns only has $50 million in one fund and $25 million in the other, making the expense of a US bankruptcy filing a substantial burden.
Bear Stearns said in court papers that it will challenge Lifland's finding that the hedge funds' main business interests aren't in the Cayman Islands. The judge said that because the funds had no employees, operations or assets in the Caribbean, they couldn't meet the main-interest requirement under Chapter 15 of the US bankruptcy code.
To qualify for protection, the chapter requires that a US judge determine that a foreign bankruptcy is the main proceeding.
Bear Stearns also presented new information about its business in the Cayman Islands in court documents filed September 21. The funds said two independent directors hired in 2006 lived in the Cayman Islands where they gave written approval for its transactions.
Lifland said Bear Stearns submitted "a pile of papers that suggest there are new facts," giving him only "a few hours to react" before today's hearing. | | | | Reads : 4398 |
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