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Courts Issue Bearish Chapter 15 Rulings in Bear Stearns Cases

By Kurt Mayr and Evan Flaschen

The subprime mortgage crisis and the high-profile meltdown of two Bear Stearns investment funds have generated the highest profile Chapter 15 rulings since its enactment in 2005. The rulings were issued in the cases commenced by funds (the 'Bear Funds') that were organized under Cayman law, commenced Cayman insolvency proceedings and then sought Chapter 15 assistance from the U.S. Bankruptcy Court for the Southern District of New York. The Bankruptcy Court, and recently the District Court on appeal, held that the Bear Funds were not eligible for any Chapter 15 relief because they did not have a sufficient Cayman presence to qualify for that relief.

Finding the Bear Funds entirely ineligible under Chapter 15 was a surprising result with potentially profound implications for other troubled hedge funds in need of insolvency law protection. As discussed further below, the rulings seriously undermine Chapter 15 as a viable option for hedge funds organized outside of the United States but whose primary operations and assets are located in the United States.

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