Thursday, June 23, 2022

NY Southern District Upholds Judge Lifland's Bear Stearns Decision Denying Main and Nonmain Recognition

On May 27, 2008, the District Court of the Southern District of New York issued its opinion upholding Judge Lifland’s decision in the Bankruptcy Court denying recognition of certain Bear Stearns hedge funds' Cayman Island foreign liquidation proceedings either as “foreign main proceedings” or as “foreign nonmain proceedings” under Chapter 15. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 2008 WL 2198272 (S.D.N.Y. May 27, 2008)(Sweet, J.). The appeal was opposed only by the Amici Curiae. The court noted the issue involved appeared to be of “transcendent importance to the investment community and perhaps to society at large.”

The Bear Stearns hedge funds’ winding–up petitions in the Cayman Islands were precipitated by the funds’ losses in May, 2007 due to the U.S. sub-prime mortgage crisis. The Cayman Court appointed provisional liquidators who acted as the ”foreign representatives.“ The foreign representatives filed petitions in the Bankruptcy Court of the Southern District of New York under Chapter 15 of the Bankruptcy Code seeking recognition of the Cayman Island proceedings as “foreign main proceedings” or as “foreign nonmain proceedings.” Pursuant to section 1519 of the Bankruptcy Code, the foreign representatives sought to a of stay execution and litigation against the funds’ assets as well to the authority to adminster the funds’ assets. In September, 2007, the Bankruptcy Court issued its decision denying the foreign representatives’ petition for recognition as “foreign main proceedings” finding that the funds’ center of main interests (“COMI”) as defined in Chapter 15 was actually in the United States as the funds’ investment manager, back-offices, and book and records were located in the United States. The Bankruptcy Court also denied recognition as “foreign nonmain proceedings” as the funds did not establish that they had an “establishment” in the Cayman Islands as defined in Chapter 15.

The foreign representatives argued on appeal that the Bankruptcy Court failed to “accede to the principals of comity and cooperation.” They also argued that the lower court erroneously interpreted the COMI presumption and that the facts failed to support the court’s denial of main and nonmain recognition. The District Court affirmed the Bankruptcy Court's decision. The District Court held that the Bankruptcy Court correctly held that principles of comity do not figure in the recognition analysis. The Court stated that arguments based on comity and cooperation cannot overcome the plain language of Chapter 15. The Court noted that the legislative intent of Congress was to deny the recognition of foreign proceedings unless the debtor has a COMI or at least an establishment in the country of the foreign proceedings. The District Court also upheld the lower court’s interpretation of the COMI presumption and its findings of fact denying main and nonmain recognition.