By: John Freeze
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff Member
Under Chapter 15 of title 11 of the United States Code (the “Bankruptcy Code”), a bankruptcy court may grant recognition to a foreign main proceeding or a foreign nonmain proceeding. Recognition of a foreign proceeding as a foreign main proceeding is significant because it automatically results in a stay of actions against the debtor.[1] In In Re Ascot Fund, Ltd., the Bankruptcy Court for the Southern District of New York held that Ascot Fund’s liquidation proceeding in the Cayman Islands was a foreign main proceeding.[2] Prior to December 2008 Ascot Fund, an investment fund formed under Cayman Islands law, served as a feeder fund to Ascot Partners, a Delaware limited partnership.[3] Ascot Partners invested nearly all of their assets in the now infamous Bernard L. Madoff Investment Securities, LLC (“BLMIS”).[4] After the extent of Madoff’s Ponzi scheme was revealed, Ascot Fund lost all of its investments through Ascot Partners investment in Madoff.[5] As a result of several recent settlements Ascot Partners gained a substantial amount of assets for distribution to its investors, including Ascot Fund.[6] Ascot Fund at that time was in the course of liquidation in the Cayman Islands (the “Cayman Liquidation Proceeding”).[7] The Petitioner, one of the two Joint Voluntary Liquidators appointed by the sole voting shareholder of Ascot Fund to manage the Cayman Liquidation Proceeding, filed a petition under Chapter 15 of the Bankruptcy Code in New York, seeking recognition of the Cayman Liquidation Proceeding as a foreign main proceeding.[8] An investor opposed the petition, motivated by a concern that the Cayman Liquidation Proceeding would result in a less favorable distribution methodology than what a New York court would adopt.[9]
A foreign main proceeding means “a foreign proceeding pending in the country where the debtor has the center of its main interests."[10] The center of main interests (“COMI”) is “where the debtor conducts its regular business, so that the place is ascertainable by third parties.” Additionally, there is a rebuttable presumption that a debtor’s registered office is its center of main interests.[11] Here, Ascot Fund was registered in the Cayman Islands, entitling it to the presumption that the Cayman Islands was its COMI.[12] However, in determining COMI a court may consider various factors including but not limited to the location of the debtor’s headquarters and the location of the debtor’s primary assets.[13]
The objecting investor argued that because following 2008 Ascot Fund’s activities were centered in New York, as it was involved in the settlement litigations following the collapse of BLMIS, that the Cayman Islands was not Ascot Fund’s COMI.[14] Additionally the investor argued that because Ascot Fund’s sole asset was its limited partnership interest in Ascot Partners, which was located in Delaware, that either Delaware or New York (the location of Ascot Partners’ Receiver) was the place where Ascot Fund was ascertainable by third parties.[15]
The court found that the investor failed to rebut the presumption that Ascot Fund’s COMI was in the Cayman Islands[16] . The court further held that even if the Objector had rebutted the presumption, that the Petitioner had proved by a preponderance of the evidence that the Ascot Fund’s COMI was the Cayman Islands.[17] Moreover, the Cayman Liquidation Proceeding satisfied a sufficient number of the factors courts consider in determining a debtor’s COMI, namely (1) that the Ascot Fund’s management and headquarters were located in the Cayman Islands; (2) that the Cayman law would apply to the distribution from Ascot Fund to its investors and (3) that the sole voting shareholder was an entity in the Cayman Islands.[18]
The court rejected the Objector’s argument that Ascot Fund was most ascertainable by third parties in Delaware or New York because those who invested in Ascot Fund prior to the collapse of BLMIS had no idea that Ascot Fund would become embroiled in litigation in New York.[19] The court also emphasized the fact that Ascot Fund had been located in the Cayman Islands since its founding in 1992.[20] The Court’s holding is therefore consistent with its prior recognition of Cayman liquidation proceedings as foreign main proceedings where the debtor’s headquarters and management were located in the Cayman Islands.[21]
[1] See 11 U.S.C. 1520.
[2] See In re Ascot Fund Ltd., 603 BR 271 (Bankr. S.D.N.Y. Aug. 12, 2019).
[3] Id. at 271.
[4] Id.
[5] Id.
[6] Id. at 272.
[7] Id.
[8] Id. at 276. (“Immediately upon assuming their duties, the JVLs wrote to the Ascot Fund shareholders. Their letter advised the shareholders of the dispute relating to the distribution methodology and explained that the dispute prompted the filing of the voluntary liquidation. The letter also stated that the dispute may require the JVLs to bring the liquidation proceeding under the supervision of the Grand Court of the Cayman Islands ("Cayman Court") and seek recognition under chapter 15 of the Bankruptcy Code.”).
[9] Id. at 275 (“Although the JOLs have not adopted and the Cayman Court has not approved a distribution methodology, the Objector, a shareholder of the Ascot Fund ... is concerned that a distribution methodology adopted by the Ascot Fund Board will be less favorable to it than any distribution methodology a New York court might adopt governing distributions from Ascot Partners to Ascot Fund or directly to Ascot Fund's shareholders.”).
[10] Id. at 278 (quoting 11 U.S.C. 1502).
[11] Id. at 278-279 (citing Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013)).
[12] See In re Ascot Fund Ltd., 603 BR at 279.
[13] Id. at 280 (citing In re Fairfield Sentry Ltd., 714 F.3d at 137 (explaining that “Various factors, singly or combined, could be relevant to such a determination: 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.”)).
[14] Id. at 281. (“The Objector's central argument in opposition is that Ascot Fund has been engaged in a "soft wind-down" since December 2008 and its only activities have occurred in New York where it has "piggybacked" on the Receiver's liquidation activities in New York...”).
[15] Id.
[16] Id. at 283.
[17] Id.
[18] Id. at 283-284. (“From the Ascot Fund investors' point of view, and as a matter of fact and law, they invested in a Cayman fund and their rights were to be determined under Cayman law.”).
[19] See In re Ascot Fund Ltd., 603 BR 271 (“[T]hose who invested pursuant to the 2006 Confidential Offering Memorandum had no idea that they would become embroiled in New York litigations involving a Ponzi scheme or depend on the SIPA liquidation of BLMIS with whom they never dealt. Rather, the only situs ascertainable as Ascot Fund's COMI, based on the fund documents described above, was the Cayman Islands.).
[20] Id. at 279.
[21] See generally In re Ocean Rig UDW Inc., 570 B.R. 687, 701-02 (Bankr. S.D.N.Y. 2017) (“The Court concludes that the Cayman Proceedings are foreign main proceedings based on the facts discussed at considerable length in Section F. of the Background section (I.) above. Those facts establish that, among other things, the Foreign Debtors (i) conduct their management and operations in the Cayman Islands, (ii) have offices in the Cayman Islands, (iii) hold their board meetings in the Cayman Islands, (iv) have officers with residences in the Cayman Islands, (v) have bank accounts in the Cayman Islands, (vi) maintain their books and records in the Cayman Islands...”).