Even though the primary asset of an offshore feeder fund is located in the U.S., the Cayman Islands are still the fund’s center of main interests, according to Bankruptcy Judge Stuart M. Bernstein of New York.
Judge Bernstein therefore recognized the fund’s liquidation in the Cayman Islands as the chapter 15 foreign main proceeding under Section 1517(b)(1).
The controversy involved the Ascot feeder fund, which was incorporated in the Caymans. The feeder fund transferred money taken in from its investors around the world to an affiliate that was a Delaware limited partnership. The Delaware entity, in turn, invested everything in the Bernard Madoff Ponzi scheme.
After Madoff went into liquidation in New York under the Securities Investor Protection Act, a receiver in New York took over the Delaware limited partnership. In the New York bankruptcy court, the Madoff trustee sued the feeder fund, the Delaware limited partnership, and Ezra Merkin, who controlled both. The Madoff trustee alleged that Merkin was in cahoots with Madoff and knew about the fraud all along.
The suit ended in a complex settlement where the Madoff trustee received $280 million and will distribute about $40 million to the Delaware limited partnership, now in the hands of the receiver. Eventually, some of the $40 million will flow downstream to the feeder fund for ultimate distribution to the fund’s investors.
Fearing that Cayman law and a court in the Cayman Islands would determine the methodology for the distribution to the feeder fund’s investors, one of the investors filed a lawsuit in a New York state court against the feeder fund, seeking appointment of a receiver to oversee the distribution.
The feeder fund was already in the hands of voluntary liquidators in the Caymans. The liquidators in turn commenced liquidation proceedings in the Grand Court of the Cayman Islands, where they became the joint official liquidators, or JOLs. Having been authorized by the court in the Caymans, the JOLs filed a chapter 15 petition in New York, where they sought recognition of the Caymans liquidation as the foreign main proceeding.
Under Section 1517, the New York bankruptcy court would recognize the proceedings in the Caymans as the foreign main proceeding if it were to find that the feeder fund’s center of main interests, or COMI, was in the Cayman Islands.
The investor who was seeking a receiver in New York objected to foreign main recognition. The investor reasoned, among other things, that the feeder fund’s COMI was not in the Cayman Islands because the $40 million is currently located either with the limited partnership’s receiver in New York or in Delaware, where the limited partnership was organized.
In his 27-page opinion on August 12, Judge Bernstein overruled the objection, determined that the Caymans are the feeder fund’s COMI, and recognized the proceedings in the Caymans as the foreign main proceeding.
Section 1516(c) provides that the debtor’s registered office (in this case, the Cayman Islands) is presumed to be the COMI absent “evidence to the contrary.” In Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013), the Second Circuit laid down other guiding principles to determine a company’s COMI.
As Judge Bernstein said, Fairfield Sentry requires assessment of COMI on the chapter 15 filing date, with an ability to look back in time if it appears that the debtor attempted to manipulate COMI.
Unlike other cases where the COMI was not offshore even though the debtor was incorporated abroad, Judge Bernstein found that the JOLs were both residents of the Caymans. Before the JOLs took over, the feeder fund’s two board members both resided in the Caymans. He said that the JOLs and their staff of accountants “have directed and conducted [the feeder fund’s] liquidation in the Cayman Islands.”
Admittedly, the feeder fund had been in a largely inactive wind-down since 2008. The most intense activity had been litigation in New York in connection with the Madoff liquidation and the limited partnership’s receivership.
“This does not mean that the New York litigations define [the feeder fund’s] COMI,” Judge Bernstein said. He went on to find that the objector had not overcome the presumption of COMI in the Cayman Islands. Even if the presumption were surmounted, Judge Bernstein said that the JOLs had “shown by a preponderance of the evidence that the location of the [feeder fund’s] headquarters and those who managed it were situated in the Cayman Islands on the Petition Date.”
Although the location of the assets in the U.S. “weighs against recognition,” Judge Bernstein said “it does not follow” that the situs of the assets is the “key piece of evidence.”
As icing on the cake, Judge Bernstein said that investors always knew that their rights would be governed by Cayman law and had submitted to jurisdiction in the islands in the event of disputes.
Finally, Judge Bernstein said that “COMI has not been manipulated as . . . [the] principal place of business has always been in the Cayman Islands.”
Even though the primary asset of an offshore feeder fund is located in the U.S., the Cayman Islands are still the fund’s center of main interests, according to Bankruptcy Judge Stuart M. Bernstein of New York.
Judge Bernstein therefore recognized the fund’s liquidation in the Cayman Islands as the chapter 15 foreign main proceeding under Section 1517(b)(1).
The controversy involved the Ascot feeder fund, which was incorporated in the Caymans. The feeder fund transferred money taken in from its investors around the world to an affiliate that was a Delaware limited partnership. The Delaware entity, in turn, invested everything in the Bernard Madoff Ponzi scheme.
After Madoff went into liquidation in New York under the Securities Investor Protection Act, a receiver in New York took over the Delaware limited partnership. In the New York bankruptcy court, the Madoff trustee sued the feeder fund, the Delaware limited partnership, and Ezra Merkin, who controlled both. The Madoff trustee alleged that Merkin was in cahoots with Madoff and knew about the fraud all along.
The suit ended in a complex settlement where the Madoff trustee received $280 million and will distribute about $40 million to the Delaware limited partnership, now in the hands of the receiver. Eventually, some of the $40 million will flow downstream to the feeder fund for ultimate distribution to the fund’s investors.