Cayman hedge fund liquidators welcome

in Delaware, if not New York

Endnotes 

Forum shopping, or to put it more diplomatically, careful
forum selection, is absolutely essential to the effective pursuit of remedies
in US Bankruptcy Courts.

Another recent decision regarding a Cayman hedge fund
seeking – and this time receiving – cooperation from a US Bankruptcy Court
illustrates just how powerfully the choice of seeking relief in one court over
another can impact the resolution of a case.

I wrote at the end of last year [1 ] about a pair of cases
from the Southern District of New York in which the Bankruptcy Court for that
district had gone out of its way to deny recognition to the Cayman liquidation
proceedings of the Bear Stearns and Basis Yield hedge funds.[2 ]  In both of those cases, the court had
rejected the Cayman liquidators’ requests for cooperation because the
requirements for Cayman “exempted companies” suggested that the funds’ “centre
of main interests” could not be in the Cayman Islands.

A few weeks after publication of this discussion, the
liquidators of another Cayman hedge fund, Saad Investments Finance Company (No.
5) Limited (“SIFCO”)[3 ] , tried again for US recognition, this time in another
district – a district famous (or infamous [4 ]) for its willingness to apply the
rules flexibly to support debtors and their representatives. The name of this
particular hedge fund (saad) ironically means, in Arabic, “good luck” or “good
fortune”. While the collapse of the fund was not particularly lucky, it turned
out that the liquidators’ choice of the District of Delaware to lodge their
request for US cooperation was fortunate.

SIFCO’s collapse was the result of a much larger dispute
that had erupted between SIFCO’s ultimate parent, the Saudi-based Saad Group,
owned by Maan al Sanea, and another Saudi company called Ahmad Hamad al Gosaibi
and Brothers. Al Gosaibi had accused as-Sanea of financial fraud and was
pursuing lawsuits in various jurisdictions around the world. A Cayman court
ultimately froze over US$9 billion of al-Sanea’s assets, and Barclay’s Bank PLC
petitioned SIFCO into liquidation proceedings in the Cayman Islands in
September 2009 [5]  .

In early November, the joint liquidators asked the
Bankruptcy Court for the District of Delaware to recognise the Cayman
liquidation as a “foreign main proceeding” entitled to full cooperation under
US bankruptcy law. Quite unlike its counterpart in the Southern District of New
York, the court in Delaware readily granted this request.

While the New York court seemed to have made a special
effort to dig up evidence on which to deny recognition, the Delaware court
almost glibly concluded that SIFCO’s “centre of main interests” was in the
Cayman Islands, citing neither the governing law nor any facts to support such
a crucial finding.

The court noted, however, that “recognition of the Cayman
Proceedings . . . is necessary and appropriate, in the interest of public and
international comity, consistent with the public policy of the United States
and the objectives of [the US Bankruptcy Code], and will not cause hardship to
. . . any other parties-in-interest that is not outweighed by the benefits of
granting the relief.”

With that, the Delaware court ceded full and exclusive
authority to the Cayman liquidators over the “administration and/or
realisation” of SIFCO’s US assets. The stark contrast in attitude between the
New York and Delaware holdings is unmistakable. Given the similarity of the
facts of these three Cayman hedge fund cases, it seems most likely that this
latest decision arises not so much from uniform application of law to different
facts, but simply from a more welcoming attitude in the Delaware bankruptcy
court.

The alternative rationalisations of these cases expressed
in recent commentary are not particularly persuasive. First, section 1516(c) of
the US Bankruptcy Code contains a presumption that the jurisdiction of the
debtor’s registered office is its centre of main interests (COMI). The New York
court looked beyond the presumption and took judicial notice of circumstantial
evidence of a lack of connection by the hedge funds to the Cayman Islands,
while the Delaware court might simply have accepted the presumption in SIFCO’s
case.

The problem with this view is that the Delaware court’s
order makes no mention at all of the location of SIFCO’s registered office, let
alone of the legal presumption. It appears to have based its decision solely on
comity and a desire to cooperate. Second, while the funds in Bear Stearns and
Basis Yield had no pre-petition [6]  administrative presence in the Cayman
Islands, SIFCO had been managed by one of its two equity holders, Saad
Investments Company Limited (SICL), another Cayman Islands company (the other
equity holder was Barclays Bank, a British PLC). Here again, though, this fact
does not seem to have been mentioned at all during the Delaware proceedings,
and SICL was, itself, owned by and likely managed from entities outside the
Cayman Islands (the Saudi Saad Group).

Finally, SIFCO’s assets consisted of 58 investment funds
valued at about US$145 million, only about 28 per cent of this value was
located in the United States, and more of this total value was located in the
Cayman Islands than in any other jurisdiction. SIFCO had only a small
connection to the United States (in contrast to the Bear Stearns funds), and
even if SIFCO would be hard-pressed to establish that its COMI was clearly in
the Cayman Islands, one would be even harder-pressed to conclude that a company
with such a widely scattered footprint might have a single COMI anywhere else.

Still, no mention of any of this appears in the SIFCO
order, and given the reasoning in Bear Stearns and Basis Yield, it seems highly
unlikely that the New York court would have held differently in SIFCO than it
had in the earlier cases without clear evidence of a prevailing connection to
the Cayman Islandss.

The SIFCO case unsurprisingly reflects the longstanding
“no harm, no foul” Delaware approach of supporting unopposed requests from
debtor representatives, while the earlier New York cases portend a developing
formalism and rigidity undermining cooperation in that district. Cayman hedge
fund liquidators may well be unwelcome in New York, but take heart! The
Delaware court is every bit as sophisticated and, it now appears, more
inviting.

Endnotes:

[1] Jason Kilborn, Cayman hedge fund liquidators not
welcome in US?, Cayman Fin. Rev. issue 17, 4th Quarter 2009, at 56.

[2] In re Bear Stearns High-Grade Structured Credit
Strategies Master Fund, Ltd., 374 B.R. 122 (Bankr. S.D.N.Y. 2007); In re Basis
Yield Alpha Fund (Master), 381 B.R. 37 (Bankr. S.D.N.Y. 2008).

[3] In re Saad Investments Finance Co. (No. 5) Ltd., Case
No. 09-13985 (Bankr. D. Del. 2009). The court’s recognition order and other
documents associated with SIFCO’s case are available on the liquidators’
  website: http://www.kinetic-partners.com/public/kyfunds/saad.html

[4] See, eg, Lynn M. LoPucki, Courting Failure: How
Competition for Big Cases Is Corrupting the Bankruptcy Courts (2005).

[5] See Michael Klein, SAAD companies wound up, Caymanian
Compass, 22 Sept. 2009,
    online at http://www.caycompass.com/cgi-bin/CFPnews.cgi?ID=10385698

[6] While some commentators have noted that SIFCO’s
post-petition liquidation management was centered in the Cayman Islands, the
New York decisions make clear that it is the situation before liquidation that
matters here.

 

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Jason Kilborn

Professor Jason Kilborn teaches business and commercial law at John Marshall Law School in Chicago.  His primary focus is on the comparative analysis of insolvency systems for individuals, though his interest extends to international bankruptcy as well. He recently co-authored a book on international co-operation in cross-border insolvency cases, published by Oxford University Press.

Jason Kilborn
Professor of Law
John Marshall Law School, Chicago
315 S. Plymouth Court
Chicago, IL 60604
USA

T: +1 (312) 386 2860+1 (312) 386 2860
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