A Manhattan bankruptcy judge on Thursday gave two bankrupt Bear Stearns hedge funds 30 days of additional protection from creditors looking to seize their assets, but refused to permanently shield them from U.S. lawsuits.
Judge Burton Lifland rejected the funds' attempt to seek protection from creditors under Chapter 15 of the U.S. Bankruptcy Code, which covers cross-border insolvencies, saying the funds' main business operations were in the United States.
He said the funds could not insulate themselves by filing to liquidate assets in the Cayman Islands. "The only adhesive connection with the Cayman Islands that the funds have is the fact that they are registered there," he wrote.
The 30-day extension relates to a temporary ban on U.S. lawsuits that was imposed on Aug. 9. Lifland said the funds might file an involuntary Chapter 7 or Chapter 11 bankruptcy petition in the United States.
The Bear Stearns funds, the High-Grade Structured Credit Strategies Fund and the High-Grade Structured Credit Strategies Enhanced Leverage Fund, invested heavily in collateralized debt obligations that were backed by subprime mortgages.
The CDOs sank in value as homeowner defaults rose and investors stopped buying securities they considered too risky.