Chapter 15 of the Bankruptcy Code, enacted in 2005, permits a representative designated in a foreign insolvency proceeding to avail itself of the U.S. bankruptcy courts—and of various protections of the U.S. Bankruptcy Code—if the foreign proceeding is “recognized” as a “foreign main” or “foreign nonmain” proceeding. Over the years, there has been significant litigation regarding the application of this statute to hedge funds managed out of New York but incorporated in offshore jurisdictions. In particular, bankruptcy courts in the Southern District of New York have grappled with the question of whether liquidation proceedings filed by hedge funds in Caribbean “havens” should be recognized, despite the debtors’ U.S. origins and management.
The Second Circuit’s recent decision in Fairfield Sentry,1 which recognized the British Virgin Islands liquidation of a large Madoff feeder fund as a “foreign main proceeding,” substantially clarifies the standard for recognition under Chapter 15, providing comfort that New York courts are not closed to offshore funds that choose to liquidate in their places of incorporation. At the same time, the test endorsed by the Second Circuit, which turns on the debtor’s activities as of its Chapter 15 petition, leaves the door open for future litigation in situations where the debtor has not undergone the kind of broad “migration” from the United States experienced by Fairfield Sentry following Madoff’s historic collapse.
