The Cayman Island Joint Provisional Liquidators (“JPLs”) of Basis Yield Alpha Fund (Master) (the “Fund”) failed again in their effort to have Judge Robert Gerber of the U.S. Bankruptcy Court for the Southern District of New York grant recognition of the Fund’s Cayman liquidation proceeding as a “foreign main proceeding” under Chapter 15 of the U.S. Bankruptcy Code. Judge Gerber’s decision is consistent both with his earlier ruling in the case denying the JPLs’ petition, and with a decision by Judge Burton Lifland in the Bear Stearns High-Grade Structured Credit Strategies Master Fund case, which is currently on appeal. This decision reinforces the notion, as discussed in an October 26th post on this site, that in cases involving hedge funds, bankruptcy court judges are going to be insistent on obtaining disclosures which they deem necessary to the relief being sought – regardless of how reluctant the hedge funds might be to have such information made public.
To recap – last August, in the Bear Stearns case, Judge Lifland denied the request of the Bear Stearns funds to have their Cayman Island liquidations recognized under the new Chapter 15 of the Bankruptcy Code, which essentially would have provided protection to the funds’ U.S. assets while the funds’ liquidation is overseen by the Cayman courts. Judge Lifland denied the relief even though no party had raised any objections, finding that the funds’ Cayman presence amounted to little more than a “letter box”, and making clear his view that the court was not going to “rubber stamp” the funds’ petitions in order to facilitate their winddown outside of the U.S.
Shortly afterwards, in late August, the Fund commenced its own Cayman proceeding, and the JPLs filed a petition for recognition under Chapter 15 in the Southern District of New York. Again, no objections to the requested relief were made. However, Judge Gerber followed Judge Lifland’s precedent in denying Chapter 15 relief to the Fund, in the absence of evidence sufficient to convince the court that the Fund’s “center of main interest” (“COMI”) was in fact in the Caymans. The JPLs were subsequently directed to show detailed information not only about the Fund’s assets, creditors and employees, but also the number and location of the Fund’s equity investors and the relative percentages of the applicable equity that investors in each locale hold.
Rather than accept this invitation, however, the JPLs filed a motion for summary judgment. In effect, the JPLs argued that, in the absence of any objection or contrary facts presented, as a matter of law the Fund was entitled to recognition in the Caymans, citing a provision of Chapter 15 that sets forth a presumption that a petitioning debtor’s COMI is based on the location of its registered office.
Judge Gerber didn’t bite. The court noted that the Fund’s organization as an “exempted” company under Cayman law, which prevented the Fund from conducting any business in the Cayman Islands “except in furtherance of [business] carried on outside the Islands[,]” was itself sufficient to counter the presumption regarding the Fund’s COMI and to require the submission of the type of evidence that the court had previously requested. “The silence is deafening. The JPLs’ conspicuous failure to try to establish, or even plead, facts supporting the existence of a main proceeding, even after . . . the Court’s own questions in this regard, makes any reasonable observer wonder why.” Just in case they missed the point, Judge Gerber included as an appendix to his opinion the same list of factual items he had requested from the JPLs over four months earlier, and expressly invited them to try again.
As it happens, a hearing on the appeal of Judge Lifland’s ruling regarding the Bear Stearns funds is being held this week. While the JPLs of Basis Yield Alpha Fund may decide that the time has come to present the evidence that Judge Gerber has requested, it is probably more likely that they will appeal the denial of summary judgment, and hope in the meanwhile for a favorable ruling in the Bear Stearns appeal.
The struggle between the secretive nature of hedge funds and the open, public process of bankruptcy in the U.S. continues.