Chapter 15 and Bear Stearns

My recent blog, “Chapter 15 Bankruptcy. CHAPTER 15???” talked about some of the more esoteric chapters of the Bankruptcy Code. Newly adopted Chapter 15, which applies to international bankruptcies, has received a fair amount of attention recently, in light of Bear Stearns’ attempts to protect its failed subprime mortgage investment hedge funds from seizure by its creditors.

On August 30, 2007, U.S. Bankruptcy Judge Burton Lifland in Manhattan refused to grant protection from U.S. lawsuits for Bear Stearns’ two bankrupt hedge funds, finding the Cayman Islands wasn’t the proper location for them to liquidate assets. Bear Stearns had sought Chapter 15 protection arguing that the Cayman Islands was its “main jurisdiction” for the funds. Getting that protection would prevent lawsuits under U.S. law, while allowing it to liquidate the funds under the more protective Cayman Islands law. Judge Lifland noted that Bear’s Cayman presence was only a “letterbox,” since it had no employees in the Islands. “The only adhesive connection with the Cayman Islands that the funds have is the fact that they are registered there.” The automatic stay (link) remains in effect only until September 9, when the funds must file in the U.S. for Chapter 7 or Chapter 11 protection.

This ruling is the second time offshore hedge funds have unsuccessfully tried to file for Chapter 15. Last year, U.S. Bankruptcy Judge Robert Drain denied a similar attempt by Sphinx Funds, which ran into problems when Refco collapsed.