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Bear Stearns Judge Rejects Ban on Hedge Fund Suits

A federal judge refused to grant protection from U.S. lawsuits for Bear Stearns Cos.’ two bankrupt hedge funds, finding the Cayman Islands was not the proper jurisdiction for them to liquidate assets.

U.S. Bankruptcy Judge Burton Lifland today said the funds’ filings in the Caymans didn’t make them eligible for the protection under a provision of the federal bankruptcy law designed to assist foreign companies liquidating overseas. He continued a temporary ban on such suits, telling the funds they could liquidate or reorganize in the U.S., winning an automatic ban on such suits.

“The only adhesive connection with the Cayman Islands that the funds have is the fact that they are registered there,” Lifland wrote in a ruling in New York, noting that most fund assets were in the U.S.

Bear Stearns’ funds had requested protection from U.S. suits under Chapter 15 of the bankruptcy code, arguing in part that their Cayman Islands liquidation could meet the law’s standard as a “foreign main proceeding.”

Lifland rejected that idea and also denied a request by the funds to impose a suit ban by considering the Caymans as a “non- main” site of their planned liquidation. He found the funds failed satisfy the legal requirement that they had a “place of operations where the debtor carries out nontransitory economic activity.”

“There are no employees or managers in the Cayman Islands, the investment manager for the funds is located in New York, the administrator that runs the back-office operations of the funds is in the United States along with the funds’ books and records, and prior to the commencement of the foreign proceeding, all of the funds’ liquid assets were located in the United States,” Lifland wrote.
Hedge funds that are technically incorporated outside the U.S. but have their true operations or assets inside the country may be ineligible for Chapter 15, said Kurt Mayr, a lawyer in the financial-restructuring group at Bracewell & Giuliani in Hartford, Connecticut. Funds unable to pay debts may have to reorganize under Chapter 11 of the U.S. bankruptcy law or liquidate under Chapter 7, he said.
Fred Hodara, a lawyer for New York-based Bear Stearns, the fifth largest U.S. investment firm by market value, didn’t immediately return a call for comment.

The cases are Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., 07-12383, and Bear Stearns High- Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd., 07-12384, U.S. Bankruptcy Court, Southern District of New York (Manhattan).