Court: District Court, S.D. Illinois; April 5, 2018; Federal District Court
The case involves the recognition of the Cayman Islands-based reorganization of Ocean Rig UDW Inc. under Chapter 15 of the Bankruptcy Code. The appellant, Tally M. Wiener, an attorney representing herself, appealed the bankruptcy court's August 24, 2017 Memorandum Opinion that recognized the debtors' Cayman Islands restructurings as foreign main proceedings and granted related relief. The debtors, which include UDW and its subsidiaries, have filed a motion to dismiss the appeal.
The court reviews the bankruptcy court’s factual findings for clear error and legal conclusions de novo, allowing it to affirm based on any record-supported grounds. The debtors operate as an offshore oil drilling contractor, owning a fleet of drilling rigs leased to oil and gas exploration companies, with a focus on ultra-deepwater and harsh environments.
The joint provisional liquidators (JPLs) sought recognition of the Cayman Provisional Liquidation Proceedings and related schemes of arrangement as foreign main proceedings. Wiener objected to this recognition, claiming shareholder status in UDW. However, the bankruptcy court found that she provided no evidence of her ownership and concluded she lacked standing. Despite this, the court considered her objection on its merits. Ultimately, the bankruptcy court granted the JPLs' petitions, leading to the current appeal and motion to dismiss.
Debtors operate drilling rigs on a day rate basis, charging a fixed price per day based on rig efficiency. As of the Recognition Order, they relied on five offshore rigs near Norway, Brazil, and Angola. Contract expiration dates varied: one rig's contract ends in September 2020, two in 2017, and two in the first half of 2018. Inactive rigs face deactivation costs of $5 million each, with "warm stacking" costing around $40,000 per day and "cold stacking" about $5,000 per day. The subsidiaries of UDW have accumulated significant debt—approximately $460 million for DRH, $1.83 billion for DFH, and $1.27 billion for DOV—as well as $131 million in unsecured notes for UDW.
The downturn in the oil and gas industry, marked by a decline in crude oil prices from $100 to $52 per barrel between 2014 and 2017, has exacerbated the debtors' financial difficulties. Declining day rates and anticipated reduced customer demand were expected to persist until at least 2019. By the time of the Recognition Order, UDW was insolvent, unable to meet an upcoming interest payment without borrowing, which it could not repay. Additionally, UDW lacked sufficient assets to cover its debts due later in 2017, risking cross-default provisions that would accelerate approximately $3.7 billion in debt.
Given that the Republic of the Marshall Islands (RMI) lacks reorganization procedures, the debtors sought to relocate their center of main interests (COMI) to the Cayman Islands, which has restructuring laws. The bankruptcy court found no administrative or executive presence of the debtors in the RMI, while confirming significant ties to the Cayman Islands, including residency of directors, regular board meetings, operational services, and maintenance of financial records and bank accounts. Consequently, the court established that the debtors' COMI was indeed the Cayman Islands.
The bankruptcy court found that the debtors did not manipulate their Center of Main Interests (COMI) in bad faith and met the requirements of sections 109(a) and 1517(a) of the Bankruptcy Code, allowing for the recognition of the Cayman Proceedings under Chapter 15. Consequently, the court granted the Joint Provisional Liquidators' (JPLs) petition, resulting in an automatic stay of all proceedings against the debtors in the U.S. The appellant subsequently filed a notice of appeal concerning both the Recognition Order and the Enforcement Order, arguing improper venue in the Southern District of New York, incorrect COMI designation, bad faith in altering COMI, and violation of U.S. public policy.
The debtors moved to dismiss the appeal on two primary grounds: first, the appellant lacks standing as she is not an "aggrieved person" with a pecuniary interest but is instead asserting third-party rights; second, the appeal is equitably moot due to the substantial implementation of the debtors' reorganization. The legal standards for standing to appeal in bankruptcy require that an appellant be directly affected in pecuniary interests and assert their own rights, not those of others. Since the appellant, a purported shareholder in UDW, does not qualify as an "aggrieved person," she lacks standing to pursue the appeal. Furthermore, UDW's prior insolvency and the restructuring plan's terms indicate that its creditors would receive the value of the company, leaving no value for pre-restructuring shareholders.
The appellant, claiming to be a shareholder, has no financial stake in UDW's restructuring due to the lack of a pecuniary interest. The Cayman Scheme allocates only 0.02% of new equity to pre-reorganization shareholders not as a right, but to avoid complications with NASDAQ re-registration, which could negatively impact the new shares. The appellant argues that this nominal equity implies a pecuniary interest; however, since UDW's creditors have not been fully compensated, the appellant is not entitled to any distribution from the restructuring. Unsecured creditors may challenge such allocations if their recovery is impacted, but no creditors in this case opposed the plan, and the appellant fails to cite relevant authority supporting her standing. The excerpt references In re DBSD N. Am., Inc., which establishes that a confirmable plan requires either full compensation for dissenting classes or prohibits distributions to junior classes. The appellant cites In re Fairfield Sentry Ltd. to argue for standing, but this case is distinguishable as it did not involve competing creditors and did not address the standing of shareholders in a scenario where creditor recoveries are incomplete. Consequently, the appellees' motion to dismiss the appeal based on the appellant's lack of standing is granted.
The appellant's appeal is dismissed as equitably moot due to the completion of the debtors' reorganization in the Cayman Proceedings, compounded by the appellant's failure to seek a stay of the bankruptcy court's Recognition Order. An appeal related to a Chapter 11 reorganization is typically moot if effective relief could be provided but would be inequitable to implement. Equitable mootness is applied to prevent disruption of an already implemented reorganization plan. This doctrine has been extended to Chapters 7, 9, and 13 of the Bankruptcy Code. The Second Circuit has dismissed appeals on these grounds, reinforcing a strong presumption of mootness when a reorganization is substantially consummated without a stay. Overcoming this presumption requires five specific conditions to be met: availability of effective relief, no impact on the debtor's revitalization, no unravelling of complex transactions, notification and participation opportunities for adversely affected parties, and the appellant's diligence in seeking a stay. The importance of seeking a stay is particularly emphasized in Chapter 11 cases, where failure to do so can lead to a moot appeal. Thus, without a stay request, the court must consider fairness in deciding whether to provide relief, even if it can be granted without disrupting the plan.
The Second Circuit Court of Appeals clarified that while seeking a stay is not a prerequisite for appealing, an appellant who fails to do so risks the appeal being considered moot. In this case, the appellant did not request a stay of the bankruptcy court's recognition of the Cayman Proceedings. The appellees contended that, following the completion of the Cayman restructuring on September 22, 2017, significant changes had occurred, including the issuance of new equity, cash distributions to creditors, and the establishment of a new secured debt facility. This led to a strong presumption that the appeal was moot due to the substantial completion of the debtors' reorganization.
The appellant argued that prior cases related to Chapter 11 reorganizations and former Bankruptcy Code section 304 were not applicable under Chapter 15, which replaced section 304, but did not provide supporting authority for this claim. The court found this argument unpersuasive, emphasizing that the principles against unraveling a substantially completed reorganization apply equally to foreign reorganizations as they do to domestic ones. The court cited the importance of comity in recognizing foreign reorganizations under Chapter 15, noting that similar statutory interpretations must be promoted internationally.
Congress's directive to consider the international origin of Chapter 15 and its objectives of fostering international cooperation also supported the decision. The court concluded that the principles of finality and fairness favored dismissing the appeal as moot, given the appellant's failure to seek a stay. Consequently, the appellees' motion to dismiss the appeal as equitably moot was granted.
Additionally, the appellant's motion to strike the appellees' reply brief, which exceeded the ten-page limit set by Federal Rule of Bankruptcy Procedure 8013(f)(3)(B), was denied as lacking merit.
The appellees' reply brief spans ten pages. The appellant argues that Rule 8013's ten-page limit includes non-substantive content such as the cover page, table of contents, table of authorities, and signature block, without providing a justification for counting these sections towards the page limit. This interpretation suggests that such non-substantive elements could be excluded to conserve space for substantive arguments, which is not mandated by the Rule. The Court indicates willingness to grant motions to include these elements retroactively under Rule 8013(f)(3). Consequently, the appellees' motion to dismiss the appeal is granted, leading to the closure of Docket No. 18 and the case itself. Additionally, UDW's subsidiaries—Drill Rigs Holdings Inc. (DRH), Drillships Financing Holding Inc. (DFH), and Drillships Ocean Ventures Inc. (DOV)—are noted to be registered as non-resident corporations in the Republic of the Marshall Islands and foreign companies under Cayman Islands law. In the context of Chapter 11, "substantial consummation" is defined by the Bankruptcy Code as the transfer of all or substantially all property proposed in the plan, assumption of business management by the debtor or successor, and initiation of plan distributions (11 U.S.C. 1101(2)).
