In re AJW Offshore, Ltd.

• Decision Date: 19 March 2013
• Docket Number: Nos. 13–70078–ast, 13–70082–ast, 13–70085–ast, 13–70087–ast.,s. 13–70078–ast, 13–70082–ast, 13–70085–ast, 13–70087–ast.
• Citation: 488 B.R. 551
• Parties: In re AJW OFFSHORE, LTD., et al., Debtors in Foreign Proceedings.
• Court: U.S. Bankruptcy Court — Eastern District of New York

488 B.R. 551

In re AJW OFFSHORE, LTD., et al., Debtors in Foreign Proceedings.

Nos. 13–70078–ast, 13–70082–ast, 13–70085–ast, 13–70087–ast.

United States Bankruptcy Court,

E.D. New York.

March 19, 2013.

Angela J. Somers, William T. Reid, IV, Reid Collins & Tsai LLP, New York, NY, R. Adam Swick, Reid Collins & Tsai LLP, Austin, TX, for Debtors.

MEMORANDUM OPINION AUTHORIZING ADDITIONAL RELIEF PURSUANT TO 11 U.S.C. § 1521

ALAN S. TRUST, Bankruptcy Judge.

Pending before this Court is the general request of the duly appointed foreign representatives in these four Chapter 15 cases for additional relief pursuant to 11 U.S.C. § 1521(a)¹, including the right to seek turnover of estate assets and records under §§ 542 and 543, authority to conduct discovery, and entrustment with the administration and realization of estate assets. For the reasons stated below, this Court will grant the additional relief sought, conditioned in accordance with § 1522 on the requirement that the foreign representatives file a motion on notice to seek specific turnover or specific discovery.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(a) and 157(b)(2)(A), (O) and (P), and the Standing Orders of Reference in effect in the Eastern District of New York dated August 28, 1986, and as amended on December 5, 2012, but made effective nunc pro tunc as of June 23, 2011.

Background

The Offshore Entities

The four foreign entities at issue are AJW Offshore, Ltd. (“Offshore I”), AJW Master Fund, Ltd. (“Master I”), AJW Offshore II, Ltd. (“Offshore II”), and AJW Master Fund II, Ltd. (“Master Fund II”) (collectively the “Offshore Funds”). The Offshore Funds are Cayman Islands exempted liability companies which are in liquidation proceedings pending before the Grand Court of the Cayman Islands, Financial Services Division (the “Cayman Islands Proceedings” before the “Cayman Court”). The petitioners in these Chapter 15 cases are Ian Stokoe and David Walker, both of PwC Corporate Finance & Recovery (Cayman) Limited (“Petitioners”), who were appointed as joint official liquidators of the Offshore Funds by the Cayman Court.

According to Petitioners ², the investment manager of the Offshore Funds was a New York limited liability company called First Street Manager II, LLC (“First Street”), which was responsible for identifying and executing investments. First Street is solely owned and managed by the N.I.R. Group, LLC (“NIR”), an unregistered investment advisor located in Roslyn, New York. Corey Ribotsky (“Ribotsky”) is the manager and principal owner of NIR, through which he controlled the operations of First Street.³ Acting through NIR and First Street, Ribotsky employed an investment strategy of seeking private investments in public equities, referred to as “PIPE”, under which the Offshore Funds provided financing to micro-cap ⁴ distressed, emerging growth, and start-up companies in exchange for convertible debentures of these entities. This investment strategy ultimately proved unsuccessful, resulting in the liquidation proceedings before the Cayman Court.

Petitioners assert that Offshore I had 44 investors, that Offshore II had 156 investors, and that Master Fund I and Master Fund II each had two investors, their feederfunds. Petitioners further assert that the last audited accounts for any of the Offshore Funds were for the year ended December 31, 2007, and show that Master Fund I had $694.4 million in net assets and Offshore I had $454.9 million in net assets; this audit was conducted prior to the creation of Offshore II and Master Fund II. Subsequently, the Offshore Funds' auditor prepared U.S. tax returns for the year ended December 31, 2010, utilizing information and valuations supplied by NIR. Based on information from these tax returns, which Petitioners assert are the most recent, the net assets of the Offshore Funds appeared to be stated to be as follows: Master Fund I—$141.5 million, Offshore I—$122.4 million, Master Fund II—$556.1 million, and Offshore II—$376 million; however, Petitioners question the reliability of these valuations, and believe they were improperly inflated. The assets of the Offshore Funds consist primarily of convertible debentures issued by the micro-cap entities, as well as various promissory notes.

On September 28, 2011, the Securities and Exchange Commission commenced a civil action against Ribotsky and NIR before the United States District Court for the Eastern District of New York ⁵, alleging various securities laws violations in connection with their roles managing the investments of the Offshore Funds and related on-shore funds (the “SEC Action”).⁶ These allegations of wrongdoing include, inter alia, fraud and self-dealing by Ribotsky through NIR, the artificial inflation of the Offshore Funds' financial performance data, and the impermissible transfer of money between the Offshore Funds and Ribotsky's various entities. The SEC Action against Ribotsky and NIR remains pending.

The Chapter 15 Recognition Proceedings

On January 7, 2013, Petitioners filed petitions for recognition under Chapter 15. Following a recognition hearing held on February 4, 2013 (the “Recognition Hearing”) ⁷, this Court determined, inter alia, that Petitioners are the duly appointed foreign representatives of the Offshore Funds under § 101(24), and that the Cayman Islands Proceedings are foreign main proceedings within the meaning of § 101(23) and are entitled to recognition by this Court pursuant to § 1517(a). The Court further determined that the Cayman Islands is the location of the Offshore Funds' “center of main interests” and, as such, the Cayman Islands Proceedings are entitled to recognition as foreign main proceedings pursuant to §§ 1502(4) and 1517(b)(1). Thus, Orders of recognition for each of the Offshore Funds were entered on February 5, 2013, under which Petitioners were granted all relief provided pursuant to § 1520, without limitation (the “Recognition Orders”). [dkt item 31].

As part of the Verified Petition, Petitioners also sought additional relief under each subsection of § 1521(a), other than (a)(3), and not under (b). ⁸ Significantly, Petitionersrequested authority to seek turnover under both §§ 542 and 543⁹ pursuant to § 1521(a)(7). Petitioners' moving papers indicate they have been unsuccessful in recovering books and records from professionals retained by the Offshore Funds, and now seek this Court's authority to grant turnover of them.

Following recognition, this Court set a hearing for February 20 to consider Petitioners' request for additional relief (the “Additional Relief Hearing”). Due notice of the Recognition Hearing was given. One objection to Petitioners' request for additional relief was filed by the law firm of Bingham McCutchen LLP (“Bingham” and the “Bingham Objection”), which did not challenge this Court entrusting the foreign representatives with the administration and realization of the Offshore Funds' assets under § 1521(a)(5) or their general right to seek discovery. [dkt item 40].

At the Additional Relief Hearing, Petitioners withdrew without prejudice their request for additional relief under § 1521(a)(1) and (2)¹⁰ and asserted that they may access turnover powers via § 1521(a)(7). [dkt item 7]. Also at the Additional Relief Hearing, Bingham's Objection, which was broadly drawn, was narrowed to: (1) objecting to Petitioners' request for authority to seek turnover under either § 542 or § 543; and (2) objecting to any order directing Bingham to turn over records under § 542(e).¹¹Bingham essentially argued that allowing Petitioners to utilize these turnover powers was not authorized by the statute and was not necessary, as entrusting Petitioners with the administration and realization of all of the Offshore Funds' assets that are located within the territorial jurisdiction of the United States pursuant to § 1521(a)(5), to which no party objected, would subsume the powers of turnover. Bingham further argued that § 103's failure to expressly incorporate §§ 542 and 543 into Chapter 15 further supports their position. This Court disagrees, and for the following reasons overrules Bingham's Objection.

Discussion

“Chapter 15 implements the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross—Border Insolvency;” courts interpreting Chapter 15 are required under § 1508 to “consider its international origin, and the need to promote an application of th[e] chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions in interpreting its provisions”. In re Condor, 601 F.3d 319, 321 (5th Cir.2010) (quoting 11 U.S.C. § 1508). Chapter 15 both expressly authorizes certain relief to be accorded and explicitly limits other relief which may be provided. For example, § 103(a) provides that Chapter 1, “sections 307, 362( o), 555 through 557, and 559 through 562” automatically apply in a case under Chapter 15, and § 1523(a) immediately upon recognition provides a foreign representative with standing in cases regarding the debtor pending under another chapter of the Bankruptcy Code “to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a)”. 11 U.S.C. §§ 103(a); 1523(a). However, while § 1521(a)(7) authorizes a Court to grant “any additional relief that may be available to a trustee,” such relief may not include “relief available under sections 522, 544, 545, 547, 548, 550, and 724(a).” 11 U.S.C. § 1521(a)(7). In other words, a foreign representative may not utilize these avoidance powers in a Chapter 15 case, and may only do so in a case pending or filed under another chapter.¹²

Chapter 15 is silent as to the applicability or inapplicability of other sections of the Bankruptcy Code, specifically including §§ 542 and 543. Thus, determining whether Petitioners are entitled to utilize §§ 542 and 543 requires an analysis of the relevant provisions of Chapter 15 and...