Chapter 15 of the Bankruptcy Code Presents Litigation Risks and Liability for Creditors, Counterparties, Service Providers and Others Doing Business with Bankrupt Offshore Hedge Funds

Chapter 15 of the United States Bankruptcy Code (Bankruptcy Code) provides certain protections and tools to offshore hedge funds in liquidation and opens up parties that do business with such funds to possible litigation risk.  That chapter was created to preserve, protect and maximize the recovery of a foreign debtor’s assets located in the United States so that all creditors of that debtor may share in their value.  It is available to foreign liquidators and trustees in foreign bankruptcies, such as those filed in the Cayman Islands, British Virgin Islands and Bermuda, three popular countries in which offshore hedge funds organize.  It allows these foreign liquidators to come to the United States and use its courts and laws to seek, through discovery and lawsuits, the return of assets purportedly belonging to the foreign estates.  It is not a well-known bankruptcy proceeding, and it can create uncertain and substantial legal costs and liability for uninformed persons and entities who have dealt with offshore funds.  To best protect information and assets when dealing with an offshore hedge fund, it is critical for parties dealing with such funds to understand the possible discovery and recovery rights that a foreign liquidator of a bankrupt hedge fund may have under Chapter 15.  In a guest article, Marc D. Powers and Natacha Carbajal, senior partner and associate, respectively, at BakerHostetler, describe Chapter 15 proceedings, including highlighting how such proceedings work and what types of relief are available to the petitioner.  Powers and Carbajal also provide practice tips to help those dealing with offshore hedge funds mitigate the risks associated with Chapter 15 proceedings.  For additional coverage of Chapter 15 proceedings, see “Cayman Islands Liquidations of Failed Bear Stearns Hedge Funds Denied Access to US Bankruptcy Court,” Hedge Fund Law Report, Vol. 1, No. 13 (May 30, 2008).

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