Bear Stearns Judge Delays Ruling Banning U.S. Suits

Date: Tuesday, August 28, 2007
Author: Tiffany Kary, Bloomberg

Aug. 27 (Bloomberg) -- A federal judge refused to grant permanent protection from U.S. lawsuits for Bear Stearns Cos.' two bankrupt hedge funds, questioning whether the Cayman Islands should be the principal site of their liquidation.

U.S. Bankruptcy Judge Burton Lifland in New York today said he ``will issue a decision in the next week to 10 days'' on whether Bear Stearns picked the proper jurisdiction for the funds, whose assets are mostly located in New York. He banned any suits against the funds while he deliberates.

``If the judge determines the Cayman Islands aren't the main proceeding, it would set the first major precedent for how failed hedge funds incorporated in the Caymans -- and there are a lot of them -- would be liquidated,'' said Kurt Mayr, a lawyer in the financial-restructuring group at Bracewell & Giuliani in Hartford, Connecticut.

Bear Stearns, the fifth-largest U.S. investment firm by market value, sought bankruptcy protection for the funds July 31 in Cayman Islands Grand Court. The funds, managed in New York and incorporated in the Cayman Islands, invested in home-mortgage securities. The funds collapsed amid rising subprime defaults.

The investment firm closed the funds after granting $1.6 billion in emergency financing in June. The attempted bailout was the biggest since the collapse of Long-Term Capital Management LP in 1998.

Chapter 15

Bear Stearns asked for the protection under Chapter 15 of the U.S. bankruptcy law, which bars creditors from suing in U.S. courts while foreign bankruptcies proceed. The funds are Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.

Under Chapter 15, a bankrupt company must show a foreign liquidation is a ``center of main interest'' to qualify in some cases for a ban on lawsuits in the U.S. Bear Stearns failed to prove that in today's hearing, Lifland said.

``If the center of main interest is anywhere, it would be in the Southern District of New York,'' Lifland said.

Mayr said if Lifland rules the main proceeding isn't the one in the Cayman Islands, it will be at his discretion as to how much U.S. protection to offer the funds. Bear Stearns could choose to file a Chapter 7 liquidation or Chapter 11 reorganization in the U.S., depending on how much protection the judge's ruling affords the funds, he added.

`Non-Main'

``If he determines them to be non-main, that would encourage future funds to seriously think about seeking protection under U.S. insolvency law rather than under Chapter 15,'' Mayr said.

Lifland said today that while Bear Stearns didn't receive any official objections to its motion for Chapter 15 protection, comments from creditor Merrill Lynch & Co. ``could be considered a quasi objection.''

He added that many creditors, including large U.S.-based funds with offshore operations, could have an interest in not objecting to Bear Stearns's use of a Cayman Islands liquidation.

``It may be there is a reticence to appear here based on their own meriting from offshore entities,'' Lifland said.

He said offshore entities give their parent company ``a parochial interest in lying low.''

Merrill Lynch argued in court documents filed Aug. 24 that a finding that the funds' center of main interest is in the Cayman Islands shouldn't prevent their liquidators from making claims related to money transferred out of them just prior to the bankruptcy filings.

Sphinx Ltd.

Fred Hodara, a lawyer for the bankrupt funds, noted that a recent decision involving Sphinx Ltd. could be a precedent. In Sphinx, also a Cayman Island-based fund, a U.S. judge found that though the Cayman liquidation wasn't a foreign main proceeding, Sphinx was able to keep U.S. Chapter 15 protection with the Caymans designated as non-main proceedings.

Simon Whicker, a liquidator for Bear Stearns's Cayman Islands-based proceedings testified today that based on preliminary estimates, the enhanced fund could recover as much as $50 million for creditors, and the other fund could recover as much as $25 million. He also said that the enhanced fund held $7.5 million, while the other fund ``has no available cash balance.''

``We're trying to assess the implications of what the judge said and wait for the judge's decision to come,'' Whicker said in an interview.

Shares Fell

Bear Stearns shares fell $4.90, or 4.2 percent, to $112.20 at 4:17 p.m. in New York Stock Exchange composite trading.

Madlyn Gleich Primoff, a lawyer for Merrill Lynch, didn't immediately return a call for comment. Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent company of Bloomberg News.

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).

To contact the reporter on this story: Tiffany Kary in New York bankruptcy court at tkary@bloomberg.net .