United States: U.S. Bankruptcy Court Declines to Recognize Bear Stearns’ Cayman Liquidation

Troubled offshore funds may have to become more creative in looking to protect their U.S. assets from creditors, if a controversial new bankruptcy court decision is upheld. A U.S. bankruptcy court in New York has declined to recognize the Cayman Islands liquidation proceedings filed by two Bear Stearns hedge funds whose Cayman liquidators had sought to protect against seizure of U.S. assets by filing petitions for protection under Chapter 15 of the Bankruptcy Code. Chapter 15 is a comparatively new addition to U.S. law, and the meaning and effect of that law are still being tested.

Ruling that the funds were limited liability companies formed under the Cayman Islands "exempted companies" laws and ran their businesses through New York, the U.S. bankruptcy court held that the Cayman proceedings were not eligible to be recognized as "foreign main proceedings" entitled to broad protections under Chapter 15. The court ruled that the Cayman proceedings were also not eligible to be recognized as "foreign non-main proceedings" entitled to less broad or automatic protections. Instead, the court said the Cayman court appointed liquidators of the funds could only file involuntary Chapter 11 petitions for the funds.

Bear Stearns High-Grade Structured Credit Strategies Master Fund, LTD. and Bear-Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, LTD. filed highly publicized liquidation proceedings in the Cayman Islands on July 31, 2007, following severe devaluation of their sub-prime mortgage-based asset portfolios and High-Grade’s inability to meet margin calls from many of its trade counterparties. The funds filed petitions for recognition of the foreign proceedings in the U.S. under Chapter 15 of the Bankruptcy Code at the time that they initiated the Cayman liquidation proceedings. The funds sought recognition from the U.S. bankruptcy court that the Cayman proceedings were the "foreign main proceedings" which are entitled to broad protections for their U.S.-based assets, including application of the automatic stay. In the alternative, the funds sought recognition for the Cayman liquidation as "foreign non-main proceedings," which are also entitled to broad protections at the discretion of the court.

In a controversial Opinion issued on August 30, 2007 by Bankruptcy Judge Burton R. Lifland, the court declined to recognize the funds’ Cayman liquidation proceedings, whether as "foreign main" or "foreign non-main." Instead, Judge Lifland invited the funds’ foreign representatives to commence an involuntary Chapter 11 proceeding, if protection for U.S. assets was desired. Judge Lifland held that a Cayman exempted company could not, under Cayman Law, have the requisite "center of main interest," or COMI, in the Caymans, as exempted companies must inherently transact business abroad. As for the Bear Stearns funds, Judge Lifland opined that the funds’ COMI was likely in New York, despite registration in the Cayman Islands, as the funds’ day-to-day operations and assets were New York-based. Without a COMI in the Cayman Islands, Judge Lifland declined to deem the Cayman liquidation proceedings as the funds’ main proceeding.

Even more controversial and in a departure from a recent ruling of another bankruptcy judge, Judge Lifland also declined to extend "foreign non-main" status to the Cayman proceedings, finding that not only was there no COMI in the Cayman Islands, but that there was not even a legal "establishment" in the Caymans — a technical requirement for "foreign non-main" treatment. Judge Lifland did offer some temporary relief to the funds by extending the preliminary injunction staying litigation against the funds and issuing other protections for their U.S.-based assets, for a period of 30 days. This relief affords the funds time to file an involuntary Chapter 11 petition, if desired, and to consider an appeal. Parties-in-interest have ten days to appeal the decision.

Judge Lifland’s decision is likely to be viewed with some deference by other courts, given that Judge Lifland was a member of the United Nations Commission on International Trade Law ("UNCITRAL") committee which drafted the UNCITRAL Model Law on Cross-Border Insolvency, which Chapter 15 adopts. Judge Lifland noted that his decision is a departure from prior decisions, including In re SPhinX, in which "foreign main" status was denied, but "foreign non-main" status was granted to another group of Cayman-based funds which had filed for Chapter 15 relief.

The ruling states that denial of the Chapter 15 relief does not leave the funds without a U.S. remedy. The liquidators, as "foreign representatives" are eligible to file involuntary Chapter 11 petitions under Section 303(b)(4) of the Bankruptcy Code, which the court held preceded the adoption of Chapter 15 and operates separately from it. An involuntary Chapter 11 filing triggers an automatic stay and, if the filing is recognized, an order for relief is entered which treats the filing like a voluntary Chapter 11.

In addition, the court noted that the liquidators are free to commence other actions in U.S. courts which are not based on Chapter 15. One such action might be to seek comity from a U.S. court with respect to the Cayman liquidation proceedings and to seek an injunction of actions in the U.S. based on the argument that the Cayman proceedings (including the stay of suits against the fund) should be honored in the U.S. This is likely also to be controversial and, if successful, would be a more limited form of relief than what is available under Chapter 15. In any event, the decision reinforces the notion that offshore entities need to consider all of their options in structuring appropriate relief requested in the U.S.

A pdf copy of Judge Lifland’s decision is attached.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions