On August 30, 2007, the Bankruptcy Court for the Southern District of New York issued its decision in the Chapter 15 cases of Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., Case No. 07-12383 (Bankr.S.D.N.Y. August 30, 2007)(Lifland, J.) and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd., Case No. 07-12384 (Bankr.S.D.N.Y. August 30, 2007)(Lifland, J.). In these cases, the joint provisional liquidators (the "JPLs") filed petitions pursuant to Section 1515 seeking recognition of the liquidation proceedings of the funds in the Grand Court of the Cayman Islands (the "Foreign Proceedings") as "foreign main proceedings" or in the alternative seeking recognition as "foreign nonmain proceeding". 11 U.S.C. Section 1517. The court declined to recognize the Foreign Proceedings as either main or nonmain proceedings.
As previously reviewed, the funds filed insolvency petitions in the Grand Court of the Cayman Islands on July 31, 2007 and pled that they were insolvent and unable to pay their debts as they fell due. They requested that they be "wound up" by the court under the provisions of the Cayman Island's Companies Law. The court appointed the JPLs with various powers, including to take control of the funds' assets and books and records. The funds are both Cayman Islands exempted limited liability companies with registered offices in the Cayman Islands.
In its opinion, the court offered an overview of various aspects of new Chapter 15 which was enacted as part of BAPCPA in 2005. The court noted that Chapter 15 implemented the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law. Section 1501(a) of Chapter 15 sets forth that its purpose is to, inter alia, incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for the cooperation between U.S. and foreign courts in dealing with cross-border insolvency cases.
The court reviewed that a case under Chapter 15 is commenced by a foreign representative filing a petition for recognition of a foreign proceeding as a foreign main or foreign nonmain proceeding under Section 1515. The petition for recognition must be accompanied by evidentiary documents. There are substantial eligibility distinctions and consequences between a main and nonmain proceedings. A foreign main proceeding is defined as a “foreign proceeding pending in the country where the debtor has the center of its main interests” (“COMI”). 11 U.S.C. Section 1502(4). A foreign nonmain proceeding means any other proceeding “pending in a country where the debtor has an establishment.” 11 U.S.C. Section 1502(5). “Establishment” is defined as “any place of operations where the debtor carries out a nontransitory economic activity.” 11 U.S.C. Section 1502(2). Section 1516(c) provides that “[i]n the absence of evidence to the contrary, the debtor's registered office ... is presumed to be the center of the debtor's main interests.” 11 U.S.C. Section 1516(c).
The court went on to explain that if the foreign proceeding is in the country of the registered office and if there is evidence that the COMI might be elsewhere, then the foreign representative must prove that the COMI is in the same country as the registered office. The Bankruptcy Code does not state the type of evidence required to rebut the presumption that the COMI is the debtor's place of registration or incorporation. Various factors could be relevant to this determination, including the location of the debtor's headquarters, the location of those who actually manage the debtor, the location of the debtor's primary assets, the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case, and the jurisdiction whose law would apply to most disputes. In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006), aff'd, 2007 WL 1965597 (S.D.N.Y. July 3, 2007). Chapter 15 also directs courts to obtain guidance from the application of similar statutes by foreign jurisdictions. 11 U.S.C. Section 1508. One of the sources that a United States court may look to as persuasive is the Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency (“Guide”) that was promulgated in connection with the approval of the Model Law. The House Judiciary Committee, in enacting Chapter 15, specifically indicated that the Guide "should be consulted for guidance as to the meaning and purpose of its provisions.” The Guide explains that the use of the COMI concept was modeled on the use of that concept in the European Union Convention on Insolvency Proceedings (“EU Convention”) that was already in the application of similar statutes adopted by foreign jurisdictions.” 11 U.S.C. Section 1508. In the regulation adopting the EU Convention, the COMI concept is elaborated upon as “the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.” This generally equates with the concept of a “principal place of business” in United States law. See In re Tri-Continental Exchange Ltd., 349 B.R. 627, 633 (Bankr. E.D. Cal. 2006). As noted by the European Court of Justice, the COMI presumption may be overcome particularly in the case of a "letterbox" company not carrying out any business in the territory of the Member State in which its registered office is situated.
The bankruptcy court denied recognition of the Bear Stearns funds' Foreign Proceedings as foreign main proceedings. The bankruptcy court found that the presumption that the COMI is the place of the funds' registered offices in the Cayman Islands was rebutted by evidence to the contrary. The court noted that the funds' own pleadings provide the evidence to establish that the funds' COMI is in the United States and not the Cayman Islands. The court found that the funds' real seat and COMI is the United States, specifically New York where their principal interests, assets, and management are located. The court rejected the funds' contentions that because no objections were filed and that because the funds' registered offices are in the Cayman Islands, that the court should recognize the Foreign Proceedings as main proceedings. The court found that the only substantial connection with the Cayman Islands is that the funds are registered there and found the connection to approximate that of a "letterbox". The court found that there are no employees or managers in the Cayman Islands, the investment manager for the funds is located in New York, the administrator that runs the backoffice operations of the funds is in the United States along with the funds’ books and records and prior to the commencement of the Foreign Proceedings, all of the Funds’ liquid assets were located in United States. The court found that although two of the three investors in one of the funds is registered Cayman Islands companies, both are Bear Stearns entities which appear to have the same minimum Cayman Islands profile as do the funds. The sole investor in the other fund is a U.K. entity. The investor registries are maintained and located in the Republic of Ireland, accounts receivables are located throughout Europe and the United States, counterparties to master repurchase and swap agreements are based both inside and outside the U.S. but none are claimed to be in the Cayman Islands. Furthermore, there apparently exists the possibility that prepetition transaction conducted in the U.S. may be avoidable under U.S. law.
The court furthermore declined to recognize the Foreign Proceedings as foreign nonmain proceeding. The court stated that to accord nonmain status, the requirements of Section 1502(5) must be met and specifically there must be in the Cayman Islands an "establishment", which is defined as "any place of operations where the debtor carries out a nontransitory economic activity." The court indicated that this sets a rather high bar especially in view of the Cayman Island's statutory prohibition against "exempted companies", such as the funds, from engaging in business in the Cayman Islands except in furtherance of their business otherwise carried on outside of the Cayman Islands. The court found no pertinent "nontransitory economic activity" conducted in the Cayman Islands by the funds.
The court also noted that the funds' reliance on the discretionary and flexibility of caselaw under pre-BAPCPA Section 304 was misplaced as the Section 304 jurisprudence is not of assistance in determining the issues relating to recognition under Chapter 15. The court stated that Section 304 gave the U.S. courts the authority to open ancillary proceedings and to grant various broad forms of relief to the foreign representative, but Chapter 15 imposes a rigid procedural structure for recognition of foreign proceedings as main or nonmain. While much of the jurisprudence developed under Section 304 is preserved in the context of new Section 1507 ("Additional Assistance"), Section 304 did not have a "recognition" requirement as a first step.
The court noted that nonrecognition of the Foreign Proceedings did not leave the funds without the ability to obtain relief from U.S. courts. The court noted that while Section 304 was repealed, Section 303 was not. Section 303(b)(4), which does not require that the foreign proceeding be recognized, provides that an involuntary case may be commenced under Chapter 7 or 11 by the foreign representative. The court also noted that Section 1509(f) provides that the failure to obtain recognition does not affect any right the foreign representative may have to sue in a U.S. court to recover on a claim.
The court ordered its previous preliminary injunction of August 9, 2007 to remain in effect for a period of time in order to give the parties an opportunity to file a petition under Chapters 7 or 11.