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The Bankruptcy StrategistLJN NewslettersNewsSections

Recognition Under Chapter 15

By Ken Coleman and Daniel Guyder
November 27, 2007

The U.S. Bankruptcy Court for the Southern District of New York recently held in two related cases under Chapter 15 of the U.S. Bankruptcy Code involving failed hedge funds ' Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. (Case No. 07-12383) and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (Case No. 07-12384) ' that the mere presence of a registered office in the Cayman Islands, without 'pertinent' nontransitory economic activity in the Cayman Islands, was insufficient to recognize Cayman liquidation proceedings as 'main' or 'nonmain' and therefore the court denied relief under Chapter 15. In so holding, Bankruptcy Judge Burton Lifland parted with the more flexible approach to recognition, as noted in dicta in In re Sphinx, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006), providing that if no party objects, the bankruptcy court ' as a pragmatic matter ' could recognize a foreign proceeding as a nonmain proceeding despite the absence of any adhesive connection with the Cayman Islands beyond a registered office. The Bear Stearns decision highlights the rigid barriers to relief under Chapter 15. It is supported by the wording of the statute, but is the statute furthering the right policy? Should a statute intended to foster international cooperation in insolvency cases deny relief in support of well-established, common law foreign insolvency regimes?

The Bear Stearns decision is on appeal, but in the interim potential debtors (and their advisors) might be advised to undertake pre-bankruptcy planning to increase the likelihood the debtor will satisfy the formulaic determination of eligibility for relief under Chapter 15. In effect, the repealed ' 304 of the US Bankruptcy Code, Chapter 15 was added to the Code with the 2005 amendments to adopt the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (the 'Model Law').

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