US Judge Rejects Bear Stearns Hedge Funds' Bankruptcy Plea

by Glen Shapiro, LawAndTax-News.com, New York

31 August 2007

An US federal judge has denied a bankruptcy request from investment bank Bear Stearns in relation to two failed Cayman Island domiciled hedge funds, both victims of the sub-prime mortgage crisis.

Judge Burton R. Lifland, of the United States Bankruptcy Court in Manhattan, denied Bear Stearns’s Chapter 15 request, which covers cross-border liquidations, and would allow the hedge funds to liquidate in the Cayman Islands while seeking bankruptcy protection in the United States. However, Judge Lifland granted Bear Stearns 30 days to refile its request before investors are entitled to seize assets.

The decision leaves the bank with the option of petitioning under either Chapter 7 or Chapter 11 of the bankruptcy code for protection from investors in the United States.

The two hedge funds in question, the Bear Stearns High-Grade Structured Credit Strategies Master Fund and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, invested in sub-prime securities. Most of the funds' assets are in the US. Most of the assets of the two shuttered funds had been repossessed by secured creditors, including Merrill Lynch and Bear Sterns itself, during the period before their bankruptcy. Bear Sterns has also suspended redemptions in a third fund, the $900 million Bear Stearns Asset-Backed Securities Fund, although Bear Sterns stated that the fund had only a tiny exposure to the sub-prime mortgage market. However, some investors in the two bankrupt funds have begun legal action against the bank, claiming that investors were misled over the funds' exposure to sub-prime securities.

Meanwhile, the co-author of the Chapter 15 bankruptcy code has said that in such cases, where hedge funds are registered offshore, they should not be entitled to Chapter 15 protection because their main centre of interest is in the US.

"For a foreign non-main proceeding to be recognized under Chapter 15, the foreign proceeding must be pending in a country where the debtor has an establishment," Daniel Glosband, partner with Goodwin Procter in Boston and co-author of Chapter 15, was quoted as observing by the International Financial Law Review.

"This type of case, where the debtor has neither its centre of main interest (Comi) or an establishment in the country of the foreign proceeding, should not be eligible for Chapter 15 recognition and the whole case should be heard in the US. This is the policy behind the statute," Glosbard added.

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