In re Sphinx, Ltd, 06-11760 (RDD).

• Decision Date: 05 July 2007
• Docket Number: No. 06 Civ. 13215(RWS).,No. 06-11760 (RDD).,06-11760 (RDD).,06 Civ. 13215(RWS).
• Citation: 371 B.R. 10
• Parties: In re SPHINX, LTD., et al., Debtors in Foreign Proceedings. Kenneth M. Krys and Christopher Stride, as Joint Official Liquidators of SPhinX, Ltd., et al., Appellants, v. Official Committee of Unsecured Creditors of Refco Inc., et al. and Marc S. Kirschner, as Chapter 11 Trustee of Refco Capital Markets, Ltd., Appellees.
• Court: U.S. District Court — Southern District of New York

371 B.R. 10

In re SPHINX, LTD., et al., Debtors in Foreign Proceedings Kenneth M. Krys and Christopher Stride, as Joint Official Liquidators of SPhinX, Ltd., et al., Appellants, v. Official Committee of Unsecured Creditors of Refco Inc., et al. and Marc S. Kirschner, as Chapter 11 Trustee of Refco Capital Markets, Ltd., Appellees.

No. 06-11760 (RDD).

No. 06 Civ. 13215(RWS).

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

July 5, 2007.

COPYRIGHT MATERIAL OMITTED

Kaye Scholer LLP, by Madlyn Gleich Primoff, Michael Lynn, Lovells, by Gary S. Lee, Karen Ostad, New York, NY, for Kenneth M. Krys and Christopher Stride, as the Foreign Representatives of the SPhinX Debtors.

Milbank, Tweed, Hadley & McCloy LLP, by Luc A. Despies, Susheel Kirpalani, Dennis C. O'Donnell, Andrew M. Leblanc, New York, NY, for Joint Subcommittee of Official and Additional Committees of Unsecured Creditors of Refco., et al.

Bingham McCutchen LLP, by Timothy B. Desieno, Tina L. Brozman, Jared R: Clark, New York, NY, for Marc S. Kirschner, Chapter 11 Trustee for Refco Capital Markets, Ltd.

OPINION

SWEET, District Judge.

Kenneth M. Krys and Christopher Stride, the duly authorized foreign representatives (the "Foreign Representatives") of SPhinX, Ltd. and its affiliated debtors (collectively, the "SPhinX Debtors"),¹ have appealed the order granting recognition and relief in aid of foreign proceedings pursuant to 11 U.S.C. §§ 1515, 1517 and 1521(a)(4), dated September 6, 2006 (the "Recognition Order"), entered by the United States Bankruptcy Court for the Southern District of New York (Drain, J.) (the "Bankruptcy Court") and the Bankruptcy Court's related Memorandum of Decision dated September 6, 2006 (the "Recognition Decision"), denying the petition (the "Petition") of the Foreign Representatives for recognition of the winding up proceedings pending with respect to the SPhinX Debtors before the Grand Court of the Cayman Islands (the "Cayman Proceedings") as "foreign main proceedings" under 11 U.S.C. §§ 1515 and 1517. The Petition was opposed by the appellees here, the Joint Subcommittee of the Official and Additional Committees of Unsecured Creditors (the "Refco Committee") of Refco Inc. and Refco's affiliated debtors and debtors in possession (collectively, "Refco") in the jointly administered Chapter 11 cases entitled In re Refco Inc. et al., Chapter 11 Case No. 05-60006(RDD) (the "Refco Chapter 11 Cases"), and Marc S. Kirschner, the Chapter 11 Trustee (the "RCM Trustee") for Refco Capital Markets, Ltd. ("RCM").

For the reasons set forth below, the Recognition Order is affirmed, and certain other relief sought by the Foreign Representatives is denied.

Chapter 15 of title 11 of the United States Code (the "Bankruptcy Code"), which took effect on October 17, 2005, authorized the Foreign Representatives to commence U.S. bankruptcy cases under Chapter 15 to obtain assistance from the Bankruptcy Court in aid of the Cayman Proceedings. The Recognition Order and the Recognition Decision determined the Cayman Proceedings to be "foreign nonmain proceedings" under Chapter 15.

The Recognition Decision was part of a complicated matrix of proceedings in the Bankruptcy court and a pragmatic solution to the application of Chapter 15 in absence of reported cases dealing with the determinative issue presented here.

Prior Proceedings

The SPhirX Debtors are a group of investment vehicles that were organized and incorporated under the laws of the Cayman Islands to track certain Standard & Poor's hedge fund indices. (See Record on Appeal ("ROA") Vat. 1, Tab 3, §§ 6-7.)

1. The Refco Proceedings

Since 2002, the SPhinX Debtors have had an investment relationship with Refco, a broker of commodities and futures contracts. (See id. Vol. 1, Tab 3, ¶ 12.) In October 2001. Refco announced that its chief executive officer and chairman had committed a massive fraud by hiding $430 million in bad debts from the company's auditors and investors. (Id.) On October 17, 2005, certain Refco entities (the "Refco Debtors") commenced the Refco Chapter 11 Cases in the Bankruptcy Court. (Id.) The Refco C ices were assigned to Judge Drain.

On December 16, 2005, the Refco Committee commenced an action (the "Preference Action") against certain of the SPhinX Debtors to recover, as a preference, $312 million transferred from RCM to SPhinX Managed Futures Fund SPC ("SMFF") on or about October 12, 2005. (Id. Vol. 1, Tab 3, ¶¶ 14-15.) On April 20, 2005, the Refco Committee and those SPhinX Debtors that were defendants in the Preference Action entered into a settlement resolving the Preference Action (the "SPhinX Settlement"). (Id. ¶ 17.) As part of that settlement, the SPhinX Debtors agreed to relinquish approximately $263 million of the $312 million that had been transferred from RCM and further agreed to release claims against the Refco bankruptcy estate with respect to those funds. (Id. Vol. 4, Tab 18, ¶ 12.)

On April 27, 2006, the Refco Committee filed a motion seeking approval of the SPhinX Settlement pursuant to Federal Rule of Bankruptcy Procedure 9019 (the "SPhinX Settlement Approval Motion") as being in the best interests of RCM, its estate, and its creditors.

Immediately prior to the hearing on the SPhinX Settlement Approval Motion, at the instigation of certain of the investors, involuntary winding-up proceedings were commenced in the Cayman Court against SMFF and SPhinX Strategy Fund Ltd. ("Strategy"). In re SPhinX, Ltd., 351 B.R. 103, 109 (Bankr.S.D.N.Y.2006). On June 5, 2006, joint provisional liquidators (the "JPLs") were appointed for each of SMFF and Strategy, pursuant to orders which, among other things, purported to impose a stay on proceedings against SMFF and Strategy. On the morning of the SPhinX Settlement Approval Hearing, the JPLs notified the Bankruptcy Court of the existence of the Cayman proceedings (the "First Cayman Proceedings"), as well as the fact that they had commenced Chapter 15 cases in the Bankruptcy Court with respect to SMFF and Strategy, and sought an adjournment of the hearing to permit them to evaluate the SPhinX Settlement. Id.

The Bankruptcy Court denied the request, however: (1) finding that the SPhinX Settlement Approval Hearing was not for the purpose of approving any action of the Foreign Debtors, but, rather, for the purpose of considering whether to approve the decision of the Refco parties to enter into the SPhinX Settlement; and (2) declining to weigh the merits of the settlement from the perspective of nondebtor parties such as the SPhinX funds. Id. at 109-10.

On June 9, 2006, the Bankruptcy Court approved the SPhinX Settlement, holding that the Refco Committee had satisfied its burden in showing that that settlement was in the best interests of RCM, its estate, and its creditors. Id. at 110. Certain of the investors filed an appeal in district court. Id. On November 16, 2006, the district court (Berman, J.) issued an order and opinion affirming the SPhinX Settlement Approval Order in its entirety. See generally Masonic Hall & Asylum Fund v. Official Comm., Nos. 05-60006, 06 Civ. 5435(RMB), 06 Civ. 5596(R1VIB), 06 Civ. 5597(RMB), 06 Civ. 5598(R1VIB), 06 Civ. 5634(RMB), 06 Civ. 5635(RMB), 06 Civ. 5662(RMB), 06 Civ. 5976(RMB), 2006 WL 3409088 (S.D.N.Y. Nov. 16, 2006). On December 19 and 20, 2006, the investors and the Foreign Representatives filed an appeal to seek further review of the SPhinX Settlement in the United States Court of Appeals for the Second Circuit.

2. The SPhinX Proceedings

On June 30, 2006, the SPhinX companies' boards of directors (collectively, the "SPhinX Board") recommended and the holder of the Founder Shares (the "Founder Shareholder") resolved that the SPhinX companies be placed in voluntary liquidation in the Cayman Islands and that the Foreign Representatives be appointed as the Joint Voluntary Liquidators ("JVLs") for the SPhinX companies. (ROA Vol. 1, Tab 3, ¶ 3 & Ex. A.)

On July 4, 2006, consistent with the resolutions of the SPhinX Board and the Founder Shareholder, the JVLs determined in the exercise of their fiduciary duties that it was appropriate to file, and therefore did file, winding up petitions in the Cayman Court on behalf of each of the SPhinX Debtors (other than SMFF), which was already the subject of a pending winding up petition. (Id. Vol. 1, Tab 3, ¶ 4; id. Vol. 3, Tab 13, 9:13-19.)

On July 28, 2006, the Cayman Court entered orders providing for the winding up of the SPhinX Debtors (other than SMFF) and the appointment of the Foreign Representatives as the Joint Official Liquidators ("JOLs") of the SPhinX Debtors under the supervision of the Cayman Court. (Id. Vol. 1, Tab 3, ¶ 4 & Ex. B.)² Pursuant to these orders (collectively, the "Winding Up Orders"), the SPhinX Debtors are in winding up proceedings before the Cayman Court, and the Foreign Representatives are the JOLs for the SPhinX Debtors. (Id. Vol. 1, Tab 3, Ex. B.) As the JOLs, the Foreign Representatives are responsible for the winding up of the SPhinX Debtors and are obligated under Cayman Islands law, among other things, to maximize the SPhinX Debtors' assets, identify the companies' creditors and the amounts of their claims; and distribute the proceeds of the companies' assets to creditors and, thereafter, to investors. (Id. Vol. 2, Tab 10, ¶¶ 6-7.)

On July 31, 2006, the Foreign Representatives filed the Chapter 15 Petition in the Bankruptcy Court and, on that same date, sought a temporary restraining order from the Bankruptcy Court under section 1519(a) of the Bankruptcy Code pending the hearing on the Chapter 15 Petition. (Id. Vol. 1, Tab 1; id. Vol. 2, Tab 8, 5:13-15.) The Bankruptcy Court (Bernstein, C.J. (acting in Judge Drain's absence)) denied that request. (Id. Vol. 2, Tab 8, 33:14.)

On September 6, 2006, the Bankruptcy Court issued the Recognition Order and Recognition Decision in which it recognized these Cayman proceedings (the "Second Cayman Proceedings") as foreign nonmain proceedings pursuant to...