In re Bear Stearns High-Grade Structured Credit

• Decision Date: 27 May 2008
• Docket Number: Civil Case No. 07-8730.,Bankruptcy No. 07-12383.
• Citation: 389 B.R. 325
• Parties: In re BEAR STEARNS HIGH-GRADE STRUCTURED CREDIT STRATEGIES MASTER FUND, LTD. (In Provisional Liquidation), Debtor in a Foreign Proceeding and Appellant. In re Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (In Provisional Liquidation), Debtor in a Foreign Proceeding and Appellant.
• Court: U.S. District Court — Southern District of New York

389 B.R. 325

In re BEAR STEARNS HIGH-GRADE STRUCTURED CREDIT STRATEGIES MASTER FUND, LTD. (In Provisional Liquidation), Debtor in a Foreign Proceeding and Appellant In re Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (In Provisional Liquidation), Debtor in a Foreign Proceeding and Appellant.

Bankruptcy No. 07-12383.

Civil Case No. 07-8730.

United States District Court, S.D. New York.

May 27, 2008.

COPYRIGHT MATERIAL OMITTED

Akin Gump Strauss Hauer & Feld LLP, by: Fred S. Hodara, Esq., New York, NY, for Joint Official Liquidators.

Goodwin Procter LLP, by: Daniel Martin Glosband, Esq., Boston, MA, University of Texas, by: Professor Jay L. Westbrook, Austin, TX, for Amici Curiae.

OPINION

SWEET, District Judge.

Simon Lovell Clayton Whicker and Kristen Beighton, the joint official liquidators and duly authorized foreign representatives (the "Foreign Representatives" or "Appellants") of Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. (in Official Liquidation) ("High-Grade Fund") and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (in Official Liquidation) ("Enhanced Fund"; collectively, the "Funds"), have appealed the September 5, 2007 order (the "Decision")¹ of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") denying their petitions (the "Petitions") for recognition of winding-up proceedings pending in the Cayman Court (the "Foreign Proceedings"), either as "foreign main proceedings" or as "foreign nonmain proceedings" pursuant to Chapter 15 of title 11 of the Bankruptcy Code.² Their appeal is unopposed by any party but by Amici Curiae. For the reasons set forth below, the Decision is affirmed.

This appeal involves failed overseas hedge funds, liquidation proceedings in the Cayman Islands, the standard for recognition by the Bankruptcy Court of those proceedings, and in the felicitous phrase of the Appellants' Reply Brief to Briefs of the Amici ("ARB") a number of select dogs as described in Sir Arthur Conan Doyle's The Hound of the Baskervilles. ARB 16. The field on which the issues raised play out is the recently enacted Chapter 15 of title 11 of the Bankruptcy Code. While the temptation to simply affirm on the Decision, excellently crafted by the Honorable Burton R. Lifland, United States Bankruptcy Judge, is most powerful, some additional issues have been raised subsequent to the Decision. It is hoped that resolution of these issues may provide some aid to navigation in these uncharted waters. The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large.

Prior Proceedings

This Court has jurisdiction over appeals from final judgments, orders, and decrees of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). On September 10, 2007, the Foreign Representatives timely filed their Notice of Appeal from the Decision pursuant to Rule 8002 of the Federal Rules of Bankruptcy Procedure. The appeal was heard and marked fully submitted on January 16, 2008.

The Issue

Did the Bankruptcy Court err in determining that the Cayman Island proceedings were neither main nor nonmain proceedings under Chapter 15?

For the reasons stated in the Decision and described below, it is concluded that it did not.

The Appellants

The Appellants are the Foreign Representatives of open-ended investment companies incorporated in the Cayman Islands as limited liability companies subject to Cayman Islands tax law. Both of the Funds are registered as "exempted" companies under Cayman Islands law, which allows qualifying companies to trade in the Cayman Islands provided that they seek to further business outside of the Cayman Islands and not to compete with local businesses.

The Funds were established to attract sophisticated investors who understood and were willing to accept the risk of loss attendant to high income and capital appreciation investments and invested, inter alia, in: (i) investment-grade structured finance securities; (ii) asset-backed securities ("ABSs"); (iii) synthetic ABSs; (iv) mortgage-backed securities; (v) global structured asset securitizations; (vi) derivatives; (vii) options; (viii) swaps; (ix) swaptions; (x) futures; (xi) forward contracts; (xii) equity securities; and (xiii) currencies. With respect to the High-Grade Fund, such investors were "feeder funds."³ Feeder funds were the only investors in the High-Grade Fund which, like the Enhanced Fund, was a master fund. There were three investors in High-Grade Fund, two of which were registered in the Cayman Islands. The third investor was a U.S. entity. There was only one investor in the Enhanced Fund, a large financial institution based in the United Kingdom. The creditor constituency of the Funds consists of less than twenty large international financial institutions.

The Respondents

No creditor or investor has appeared in the proceeding to support or challenge the Decision. The record contains no explanation for the silence of these interests, though both the Appellants and the Amici speculate as to why these interests have not barked.

The Amici

The initial amici are Professor Jay L. Westbrook of the University of Texas School of Law, Daniel M. Glosband of Goodwin Procter LLP and Professor Kenneth N. Klee of the University of California at Los Angeles School of Law. Professor Westbrook and Mr. Glosband were part of the "small drafting group" that drafted the Model Law on Cross-Border Insolvency (the "Model Law") promulgated by the United Nations Commission on International Trade Law ("UNCITRAL"). Professor Westbrook was the co-head of the United States delegation to the UNCITRAL conference and Mr. Glosband was the principal representative of the International Bar Association at those meetings. They then served as the primary draftsmen assisting the Department of State and Congress in drafting Chapter 15 of the Bankruptcy Code. Professor Klee, one of the draftsmen of the 1978 Code, assisted with the drafting of Chapter 15 and its presentation to Congress.

Subsequent amici are Bart Schwartz, former Chief of the Criminal Division of the U.S. Attorney's Office for the Southern District of New York, and FTI Capital Advisors, LLC, a FINRA-registered broker/dealer and a wholly-owned subsidiary of the forensic accounting and financial investigations firm FTI Consulting, Inc. (collectively, the "Elected Representatives"). The Elected Representatives are the recently elected sole directors of the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) Ltd. (the "Overseas Feeder Fund"), a feeder fund that had a contractual relationship with the Enhanced Fund's sole investor. The Elected Representatives seek to examine the affairs of the Overseas Feeder Fund and its counterparties, including the Enhanced Fund, in order to maximize any potential recovery for the shareholders of the Overseas Feeder Fund for their lost investments. The Elected Representatives support affirmance of the Decision, arguing that recognition of the Enhanced Fund's Cayman liquidation proceedings would harm the shareholders of the Overseas Feeder Fund.

Prior Proceedings

In May 2007, due to the sub-prime mortgage crisis in the United States, the Funds suffered a significant devaluation of their asset portfolios. Many of the Funds' trading counterparties made margin calls that the Funds were unable to meet. Most of the Funds' secured creditors then accelerated repurchase rights or sold off assets that were the subject of repurchase agreements or in which the counterparties held security interests.

The Funds' boards of directors (the "Boards of Directors") filed winding-up petitions in the Cayman Islands (i) seeking orders that they be wound up under the provisions of the Companies Law (2007 Revision) of the Cayman Islands (the "Companies Law"), and (ii) applying for the appointment of the Foreign Representatives, subject to the supervision of the Cayman Court.

On July 31, 2007, the Cayman Court entered Orders (the "JPL Orders") appointing the Foreign Representatives as the joint provisional liquidators (the "JPLs") of the Funds. The JPL Orders authorized the JPLs "to do any acts or things considered by them to be necessary or desirable" for the protection of the assets and property of the Funds in connection with the liquidation of the Funds and the winding up of their affairs.

On September 14, 2007, the Cayman Court entered orders converting the Foreign Proceedings from provisional to official liquidations and directing that the Funds be wound up under the Companies Law. Pursuant to these orders, the JPLs became the joint official liquidators (the "JOLs").

On the day they initiated the Foreign Proceedings in the Cayman Islands, the Foreign Representatives filed petitions in the Bankruptcy Court seeking recognition of the Foreign Proceedings as foreign main proceedings, or, in the alternative, as foreign nonmain proceedings, under Chapter 15. The petitions were unopposed by any party to the bankruptcy. However, Merrill Lynch, Pierce, Fenner & Smith, Inc., Merrill Lynch International and Merrill Lynch Capital Services, Inc. did file a statement requesting that no choice of law determination be made regarding potential U.S. actions in conjunction with a conclusion as to the Funds' center of main interests.

Pursuant to section 1519 of the Bankruptcy Code, the Funds requested entry of an order (i) staying execution against the Funds' assets, (ii) prohibiting all persons from commencing or continuing any litigation or any other proceeding, including, without limitation, appeals, mediation or any judicial, quasi judicial, administrative or regulatory action, proceeding or process whatsoever, or taking any other actions against or involving the Foreign Representatives (with...