United States: Bear Stearns Funds Chapter 15

Last Updated: August 14 2007
Article by Evan D. Flaschen, Robert T. Carey and Kurt A. Mayr

The latest chapter in the unfolding drama related to the collapse of two Bear Stearns hedge funds has taken the form of provisional liquidation proceedings in the Cayman Islands, followed by Chapter 15 ancillary filings in New York by the Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. (the "Bear Funds'). The Chapter 15 filings seek injunctions to prevent US investors/creditors from attaching the Bear Funds' assets in the United States. This update is intended to provide some basic background regarding Chapter 15 in the hedge fund context and some of the considerations presented by the Cayman and US filings.

Chapter 15 Overview

In 2005, Congress added Chapter 15 to the Bankruptcy Code to replace the procedure formerly embodied under § 304 of the Bankruptcy Code. Chapter 15 is a specialized cross-border insolvency procedure based on a model law promulgated by the United Nations Commission on International Trade Law. Chapter 15 is designed, among other things, to promote cooperation by US courts with insolvency proceedings commenced in other countries. The typical reason for filing a Chapter 15 petition is to protect the US-based assets of a foreign debtor.

Like a Chapter 11 case, a Chapter 15 case is commenced by the filing of a petition in a US bankruptcy court. Unlike a Chapter 11 case, however, the filing of the Chapter 15 petition does not commence a full-blown US bankruptcy case and does not immediately trigger an automatic stay (though interim relief can be requested in the form of a temporary restraining order). Instead, it is an "ancillary proceeding" in aid of the relevant foreign insolvency proceeding. Procedurally, it is the "foreign representative" of the foreign debtor that files the Chapter 15 petition and controls the Chapter 15 proceedings. In most countries (including the Cayman Islands), this typically (although not always) means an independent administrator or liquidator is in charge, rather than existing management, as would be the case under Chapter 11.

The effect of a Chapter 15 proceeding is largely driven by whether the foreign proceeding is a "foreign main proceeding" or a "foreign nonmain proceeding," which, in turn, is driven by whether the debtor's "center of main interests" ("COMI") is in the jurisdiction where the foreign proceeding was commenced. There is a presumption that a debtor's COMI is its place of incorporation, but this presumption can be overcome, as was the case in the SPhinX matter discussed below.

If the US bankruptcy court finds that a foreign debtor's COMI is in the jurisdiction where its foreign proceeding was commenced, then the foreign proceeding constitutes a "foreign main proceeding" and a number of statutory protections are automatically triggered, including the automatic stay under § 362 of the Bankruptcy Code with respect to property in the US. In addition, the provisions of § 363 of the Bankruptcy Code require court approval of all non-ordinary course transactions regarding the debtor's business in the US, such as the sale of US assets.

Conversely, if the US bankruptcy court concludes that a foreign debtor's COMI is not in the jurisdiction where the foreign proceeding was commenced, then the proceeding is a "foreign nonmain proceeding" and there are no automatic statutory protections. Instead, the foreign representative in the foreign nonmain proceeding must prove, among other things, that the relief requested is "necessary to effectuate the purposes of [Chapter 15] and to protect the assets of the debtor or the interests of creditors." The scope of discretionary relief available is broad, but it is not unlimited.

Cayman Islands Insolvency Law in a Nutshell

Cayman insolvency law presumes jurisdiction over any entity that is registered (i.e., incorporated) in the Cayman Islands. Cayman law does not have reorganization provisions per se, only liquidations, but the practice has developed of appointing "provisional liquidators" when greater flexibility is desired rather than a strict liquidation. "Provisional liquidation" is also common when a Cayman company has assets in another country and coordination between the two countries would be helpful in maximizing value. Recent examples of successful Cayman provisional liquidations involving US assets include ICO Global Communications and Fruit of the Loom.

The "provisional liquidators" are typically two or three "insolvency practitioners" from the Cayman office of an accounting firm. Where US assets are involved, the provisional liquidators will then seek relief in the US bankruptcy court by filing a Chapter 15 petition. After filing the Chapter 15 petition and subject to recognition by the US bankruptcy court, the foreign representative can then file a voluntary Chapter 11 petition if the foreign proceeding is a main proceeding, or an involuntary Chapter 11 petition if the foreign proceeding is a nonmain proceeding. Typically, however, the foreign representative is content with the relief generally available under Chapter 15 and will not take the further step of commencing a full-blown Chapter 11 case.

Cayman Hedge Funds and COMI/Chapter 15

The significance of the difference between main and nonmain foreign proceedings was recently illustrated in In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006). SPhinX, like a great many other hedge funds (including the Bear Funds), was registered in the Cayman Islands but its main operations were located in the US. As part of SPhinX's litigation strategy to challenge a settlement relating to its interests in the Refco bankruptcy case, the SPhinX fund's provisional liquidators in the Cayman Islands filed a Chapter 15 petition in New York. The provisional liquidators argued that the Cayman proceeding was a foreign main proceeding, and therefore, Chapter 15 required the imposition of an automatic stay that would, among other things, disrupt the Refco settlement.

In one of the first US decisions interpreting the phrase "center of main interests," the bankruptcy court stated that a COMI analysis should consider:

  • the location of the debtor's headquarters;
  • the location of those who actually manage the debtor (which conceivably could be the headquarters of a holding company);
  • the location of the debtor's primary assets;
  • the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case; and/or
  • the jurisdiction whose law would apply to most disputes.

Id. at 117. The court noted that the hedge fund’s business was conducted in the US, the operations in the Cayman Islands were mostly back-office operations, few (if any) assets were located in the Cayman Islands, and most creditors were located outside the Cayman Islands. The court determined that these facts, together with the fact that SPhinX's provisional liquidators clearly sought to use Chapter 15 to obtain strategic leverage regarding the Refco settlement, rebutted the statutory presumption in favor of finding the Cayman liquidation to be the foreign main proceeding. Because the foreign proceeding was nonmain, the automatic stay was not triggered and the court determined not to grant a discretionary injunction against the Refco settlement.

Application of SPhinX to the Bear Funds

There is no immediately apparent material distinction between the day-to-day operations of the SPhinX fund and the Bear Funds. All are registered in the Cayman Islands, but all cater primarily to US investors and operate principally within the US. Thus, if the SPhinX decision is followed, the Cayman provisional liquidations for the Bear Funds will be construed as foreign nonmain proceedings (even though the provisional liquidators are seeking foreign main proceeding status) and, therefore, the Chapter 15 proceedings should not automatically trigger a stay against creditor actions in the US. However, as is customary, the bankruptcy court has entered a temporary restraining order pending a formal hearing on the merits.

In the SPhinX case, the "nonmain" determination proved to be fatal to the relief that the provisional liquidators were hoping to obtain. However, that does not mean that the same will hold true for the Bear Funds, even assuming a "nonmain" determination. The fact that a foreign proceeding is nonmain only means that it is not entitled to automatic relief in the US. Nevertheless, Chapter 15 still permits the US bankruptcy court to grant discretionary relief, such as an injunction, that essentially provides for the equivalent of an automatic stay. Indeed, the Bear Funds' provisional liquidators have expressly requested such discretionary relief in the event the court determines that the Cayman proceedings are nonmain.

The SPhinX liquidators also requested discretionary relief in the alternative, but they were rebuffed. There, the court concluded that the Chapter 15 petition was filed for the improper purpose of seeking to disrupt a settlement reached in the Refco Chapter 11 case. In the situation of the Bear Funds, on the other hand, the initial Chapter 15 pleadings do not appear to seek controversial relief. Instead, the pleadings request the typical broad injunctive relief to prevent piecemeal attacks against the US assets. Of course, "controversial" is in the eye of the beholder, and it may be that other facts and circumstances come to light that turn the "typical injunctive relief" into anything but. For example, creditors holding security interests in US-based Bear Funds' assets may argue that broad injunctive relief harms their interests given the volatile nature of the assets (e.g., subprime mortgages). Accordingly, they may seek to avoid injunctive relief altogether, or at least seek relief from any automatic or discretionary stay so that they can promptly liquidate their collateral before values potentially deteriorate further. This will unfold shortly because responsive pleadings to the Chapter 15 petition are due to be filed before the end of the month.

It is worth noting that one important distinction between automatic and discretionary stay relief is that discretionary relief remains subject to periodic review. Thus, in theory at least, the US bankruptcy court could terminate discretionary stay relief if there has been a change of circumstances such that injunctive relief is no longer appropriate. When Parmalat commenced its Section 304 case (the predecessor to Chapter 15) in 2004, the US bankruptcy court's discretionary injunctive relief remained subject to periodic review. While the injunction was never lifted, the ability to seek periodic review provided US creditors with the opportunity to appear in court every few months to express their concerns as to various aspects of Parmalat's Italian insolvency proceedings. Periodic review will likely be important for the Bear Funds' cases, as well. If secured creditors are to be enjoined from liquidating their collateral, the creditors ought to have regular access to the US bankruptcy court in order to ensure that their collateral is being properly dealt with or, if necessary, in order to obtain relief from the stay/injunction so that they can deal with their collateral themselves if they are not being adequately protected.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.