In a post earlier this month, I reported on the August 30, 2007 decision by Judge Burton R. Lifland of the U.S. Bankruptcy Court for the Southern District of New York denying Chapter 15 recognition to foreign proceedings pending in the Cayman Islands for two Bear Stearns hedge funds. In the August decision (available here), the Bankruptcy Court held that although the two hedge funds were organized under the laws of the Cayman Islands, their business operations were in New York and not in the Cayman Islands, which essentially served as a "letter box."

The Involuntary Bankruptcy Option. After denying recognition, the Bankruptcy Court indicated that an alternative path would be for the foreign representatives to file an involuntary bankruptcy petition. The Bankruptcy Court noted that Section 303(b)(4) of the Bankruptcy Code, permitting a foreign representative to file an involuntary bankruptcy petition, had not been repealed when Chapter 15 was enacted. The foreign representatives were given time to pursue that option.

An Amended Opinion To Note An Inconsistency. A few days later, on September 5, 2007, Judge Lifland issued an amended opinion (available here) adding an interesting footnote on that very issue. In it, he suggested that the failure to repeal the involuntary bankruptcy provision may have been a mistake. Here’s the new footnote 15 to the amended opinion:

It would appear that the failure to repeal section 303(b)(4) along with section 304 may be a drafting error in view of the newly enacted section 1511(b) which likewise addresses the commencement of a case under sections 301 and 303. The inconsistencies of the two statutes have not been conformed.

The footnote did not change the decision but it raises a question whether the filing of an involuntary case after denial of Chapter 15 recognition is consistent with the intent of Chapter 15’s changes to the Bankruptcy Code. If the failure to repeal that section was truly a mistake, fixing it would mean that without Chapter 15 recognition, a foreign representative couldn’t obtain any bankruptcy protection in the United States.

The Foreign Representatives File A Motion For Stay Pending Appeal. On September 21, 2007, the foreign representatives for the two hedge funds filed an appeal from the decision and also a motion for stay pending appeal (click on link for a copy). The motion sought to have the order dissolving the stay of litigation against the two funds itself stayed until the appeal is resolved. In addition to arguing that the Bankruptcy Court’s decision was in error, the motion stated that the involuntary bankruptcy option was too expensive and could subject the hedge funds to competing main proceedings, one in the United States and one in the Cayman Islands, each with their own legal obligations.

Conditional Stay Granted Pending Appeal. According to media reports, at a hearing held on September 24, 2007, the Bankruptcy Court granted the motion to stay subject to the return to the United States of funds that had been transferred to the Cayman Islands in connection with the foreign proceedings. Stay tuned.