US judge declines to deprive Cayman Islands hedge funds of payments
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| Published on Friday, November 2, 2007 |
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By Tiffany Kary
NEW YORK, USA (Bloomberg): A judge has refused a Bank of America Corp. request to deprive two bankrupt Cayman Islands hedge funds of payments from a security the bank controls, saying he needed more time to study the matter.
US Bankruptcy Judge Burton Lifland said on Thursday in Manhattan federal court that he would postpone a decision on the bank's request to change an indenture on a CDO, or collateralised debt obligation. The change would prevent the Bear Stearns funds from getting any payment from the CDO before all its notes, bonds and other debt is repaid in full.
Bank of America asked Lifland to rule that the permanent injunction that protects bankrupt companies wouldn't bar it from using its voting power over the CDO to change the indenture.
"I'm too much in the dark to grant the relief without further information," Lifland said, citing the extent to which the change could affect cash flow to creditors and investors, as well as the extent to which the CDO is "locked up with subprime mortgages."
A CDO is a structured debt security backed by a portfolio consisting of secured or unsecured senior or junior bonds issued by corporate or sovereign obligors, or secured or unsecured loans made to corporate commercial and industrial loan customers of one or more lending banks.
Bear Stearns's hedge funds filed for liquidation in the Cayman Islands July 31 while simultaneously seeking protection under Chapter 15 of the U.S. bankruptcy code, which shields insolvent foreign companies from creditors in US courts. Lifland declined to grant the funds that protection. New York- based Bear Stearns is currently appealing his ruling.
Charlotte, North Carolina-based Bank of America said in court documents that, under an agreement made July 20, Bear Stearns gave up the voting rights on the shares it owns in the CDO. As a result, Bank of America now has sole voting power over the security.
The July 20 agreement came between Bear Stearns' July 18 announcement that there was no value left for investors in its funds and its July 31 bankruptcy filing.
Bear Stearns, the fifth-largest US securities firm, had granted one of the funds $1.6 billion in emergency financing in June, in what was the biggest hedge-fund bailout since the collapse of Long-Term Capital Management LP in 1998. Margin calls sparked by volatility in the subprime lending market eventually led it to seek court protection.
According to a declaration filed in support of Bank of America's request by Aristotelis Alexandros Galatopoulos, a Cayman Islands lawyer with Maples & Calder, Bank of America could exercise its voting rights over the CDO, High Grade Structured Credit CDO 2007-1, without contravening the protective injunction.
According to documents filed by Galatopoulos and Bank of America, on July 20, directors of the CDO, incorporated in the Cayman Islands, resolved that holders of voting shares have the right to vote on matters related to a May 24 indenture with LaSalle Bank National Association, a trustee.
Details about that indenture weren't available in court documents. Bear Stearns lawyer Abid Qureshi didn't immediately return a call for comment.
A supplemental indenture July 27 directed that all voting rights which had been attached to preference shares were "exercisable solely by the holder of the voting shares." Because of that supplemental agreement, Bear Stearns, which held the preference shares, lost any voting power.
The agreement had also called for the preference shares to get "certain distributions" according to court documents.
Bank of America now wants to use the voting power it gained days before Bear Stearns entered bankruptcy to revoke any distributions to the Bear Stearns funds.
Lifland said he also didn't want to rule on an issue of "governance" for the CDO, particularly because the issue of whether Bear Stearns can win US protection is currently on appeal.
Bank of America lawyer Jantra Van Roy said under questioning from Lifland that she couldn't guarantee that the changes Bank of America had asked for wouldn't affect lawsuits against Bear Stearns related to the collapse of its hedge funds.
Lifland has ordered Bank of America to "come back and explain more completely" what it is asking for. |
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