Troubled offshore funds may have to become more creative in looking to protect their U.S. assets from creditors, if a controversial new bankruptcy court decision is upheld. A U.S. bankruptcy court in New York has declined to recognize

the Cayman Islands liquidation proceedings filed by two Bear Stearns hedge funds whose Cayman liquidators had sought to protect against seizure of U.S. assets by filing petitions for protection under Chapter 15 of the Bankruptcy Code. Chapter 15 is a comparatively new addition to U.S. law, and the meaning and effect of that law are still being tested.

Ruling that the funds were limited liability companies formed under the Cayman Islands “exempted

companies” laws and ran their businesses through New York, the U.S. bankruptcy court held that

the Cayman proceedings were not eligible to be recognized as “foreign main proceedings” entitled to

broad protections under Chapter 15. The court ruled that the Cayman proceedings were also not

eligible to be recognized as “foreign non-main proceedings” entitled to less broad or automatic

protections. Instead, the court said the Cayman court appointed liquidators of the funds could only

file involuntary Chapter 11 petitions for the funds.