Bankrupt Cayman Islands hedge funds lose bid to shield their assets
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| Published on Wednesday, May 28, 2008 |
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By Tiffany Kary
NEW YORK, USA (Bloomberg): Bear Stearns Cos.' bankrupt hedge funds can't shield their US assets from lawsuits while they liquidate in the Cayman Islands, a federal judge has ruled, upholding a bankruptcy court decision.
US District Judge Robert Sweet in Manhattan found on Tuesday that the lower court was correct to deny protection from creditors under Chapter 15 of the US Bankruptcy Code because the Cayman Islands weren't their "center of main interest.'' The funds are winding down under the supervision of liquidators there, where the Bear Stearns units are based.
"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large,'' Sweet wrote in an order. The decision may be used as precedent in future rulings on whether hedge funds based abroad that have US operations can claim similar protections.
Under Chapter 15, a company must have a "center of main interest'' outside the US to qualify for protection. Alternately, it can have a "nonmain'' center of interest, or one that has substantial, though not primary, operations. Lawyers for New York-based Bear Stearns, which is being acquired by JPMorgan Chase & Co., argued the funds had assets and two directors in the Cayman Islands.
Sweet cited the bankruptcy court's findings that Bear Stearns Asset Management, the fund's investment manager, is located in New York, as is its administrator, which runs back-office operations and manages its books and records. All of the funds' assets were also in New York prior to a transfer made after its bankruptcy filing.
The two directors who were based in the Cayman Islands "have not been shown to have had any substantial involvement in the business,'' Sweet wrote.
Jay Westbrook, a professor at the University of Texas, and other authors of Chapter 15 filed a brief with the court saying the funds had no true operations in the Cayman Islands, and that, because the funds invested in securities related to subprime mortgages, their bankruptcies should be handled in the US.
Westbrook said today that the ruling is likely to stop companies based in "haven countries'' for tax or secrecy reasons from attempting to seek protection under Chapter 15.
Basis Yield, a bankrupt Cayman fund owned by Australia-based Basis Capital Funds Management Ltd., withdrew its request for Chapter 15 bankruptcy in April. There are currently no Chapter 15 petitions for Cayman-based funds pending in federal court in Manhattan.
Bear Stearns' lawyers argued that, because the funds were registered in the Cayman Islands, they should automatically be considered to have their center of main interest there. They called denial of Chapter 15 protection a breach of "comity,'' the principle of cooperation with foreign courts.
"The bankruptcy court correctly held that principles of comity do not figure in the recognition analysis,'' Sweet ruled.
The funds filed for bankruptcy in July, citing volatility in the mortgage market. US Bankruptcy Judge Burton Lifland in Manhattan, denied them Chapter 15 protection. Lifland said the funds had a mere "letterbox'' in the Caymans, while operations, documents and creditors were all in New York. Lifland helped write the Chapter 15 statute.
Bear Stearns lawyer Abid Qureshi didn't immediately return a call for comment. | | | | Reads : 820 | | | |
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