A US court has recognised the Brazilian bankruptcy of oil company Constellation, despite noting that the increasingly “detached” nature of the group’s operations raised questions over how to apply centre of main interests (COMI) rules.
Judge Martin Glenn granted the ailing group recognition on 9 May, around nine months since it filed for Chapter 15 relief in the US Bankruptcy Court for the Southern District of New York with US$1.5 billion in debt.
The company, with White & Case advising, won interim relief late last year, saying it had to protect its US assets while it pursued a pre-pack restructuring in Brazil.
Six Constellation companies have also filed proceedings in the British Virgin Islands (BVI) Commercial Court, with Kalo partners Eleanor Fisher and Paul Pretlove appointed soft-touch joint provisional liquidators (JPLs) in February.
In granting recognition of the Brazilian process, Judge Glenn noted two of the group’s 10 debtor companies had registered offices in Luxembourg, one was registered in the Cayman Islands, another one in Brazil, and six had registered offices in the British Virgin Islands.
“The ultimate issue presently before the court is how to apply the Chapter 15 COMI standards to each Chapter 15 Debtor in a highly interrelated enterprise group, whose management and operations are increasingly becoming detached from any specific locale as the business aims towards increased globalisation,” Judge Glenn said.
He said it was up to Constellation’s foreign representative Andrew Childe, a co-owner of Cayman-based Fund Fiduciary Partners, to show the group’s COMI was in Brazil.
The company had argued it was run from Brazil, where 99% of its money was made and where 93% of its employees lived. It said 20 of its 22 drilling rigs – its main indirect assets – were also located in Brazil.
Judge Glenn found the COMI of the group’s parent company was in Luxembourg, where it was incorporated, was a tax resident, had its registered office, and where its board of directors met. He found the group’s primary assets were in Brazil, but the location of its creditors was “indeterminate”.
The judge said “an array of international law could apply” to the parent company, since all its debt was written in English and governed by New York law. But he said the company depended on Luxembourg law for its existence, and this should be considered the law that would apply to “most” of its disputes.
Judge Glenn said although the parent company’s COMI was Luxembourg, all its subsidiaries had “substantial and ongoing business connections in Brazil”. These ties would be enough to recognise the case as a foreign non-main proceeding, he said, and Alperton did not argue otherwise.
Judge Glenn subsequently found the COMI of Constellation Overseas, the group’s holding and financing company, was in Brazil since it indirectly owned all the group’s Brazilian drilling rigs. He also noted the support of the JPLs, who said the BVI companies’ COMI was in Brazil and supported the group’s Brazilian restructuring.
With respect to the COMI of rig-owning companies Alpha Star, Lone Star, Gold Star, Star Int’l and Snover, the court said that was in Brazil too, where the day-to-day management of their assets took place. Subsidiary Petróleo Constellation was based in Rio and its COMI there was not in dispute, the judge added.
While he said it was “not clear” whether each of the debtors had its COMI or an establishment in Brazil, Judge Glenn assessed the factors of the individual companies on the “understanding that COMI is a flexible determination and not a rigid application of factors”.
He granted Petróleo Constellation, Constellation Overseas, Alpha Star, Gold Star, Lone Star, Star Int’l, and Snover recognition as main proceedings, and granted the parent company recognition as a non-main proceeding.
The court did not issue a recognition decision for subsidiary debtors Olinda Star and Arazi, which the Brazilian court dismissed from its own recuperação judicial (judicial recovery, RJ) proceedings, having found they were ineligible to file there.
One creditor, Brazilian family investment vehicle Alperton Capital, objected to the recognition applications on 29 January arguing the group’s COMI was in Luxembourg not Brazil. Alperton, advised by Sullivan & Cromwell, said it was up to the Brazilian courts to decide the debtors’ COMI.
In August 2018, Alperton brought an International Chamber of Commerce (ICC) arbitration against Constellation in New York over the disputed ownership of two joint-venture companies, Amaralina Star and Laguna Star, which are debtors in the Brazilian case, but not party to the US Chapter 15 proceedings.
In the arbitration, Constellation argues a “deadlock” occurred and it was allowed to buy out Alperton’s interest in the joint venture under shareholders’ agreements.
Alperton says there was no such deadlock and accuses Constellation of fraud, ignoring its shareholder rights and overcharging the disputed companies by “potentially hundreds of millions of dollars over a multi-year period”. It claims the Brazilian restructuring could hand its interest in the two disputed companies to Constellation’s other creditors, and has filed pending appeals to have the disputed companies dismissed from the Brazilian proceedings.
Childe, the foreign representative, told the US court he intended to seek clarification on the status of the debtors dismissed from the Brazilian case.
In the US Bankruptcy Court for the Southern District of New York
Serviços de Petróleo Constellation S.A., et al. Case No. 18-13952
Judge Martin Glenn
Foreign representative of Constellation
Fund Fiduciary Partners
Co-owner Andrew Childe in the Cayman Islands
Counsel to Constellation and the foreign representative
White & Case
Partners Thomas MacWright, John Cunningham and Philip Abelson in New York, with partner Richard Kebrdle and associate Laura Femino in Miami
Counsel to certain asset-backed loan lenders of Constellation
Cleary Gottlieb Steen & Hamilton
Partners Richard Cooper and Luke Barefoot, with senior attorneys Denise Filauro and Carina Wallance, as well as associates Christina Chinloy, Rita Sobral, Mary-Ann Awada, Stephanie Charles and John Veraja in New York, and partner Francisco Cestero in São Paulo
Counsel to Banco Bradesco, Grand Cayman Branch
Norton Rose Fulbright
Partners Andrew Rosenblatt and James Copeland in New York
Counsel to the 2024 bond noteholders
Milbank Tweed Hadley & McCloy
Partner Mary Doheny in New York
Counsel to Wilmington Trust as indenture trustee for 9.00%/0.50% PIK Senior Secured Notes Due 2024
Partners Andrew Richmond and Seth Lieberman in New York
Counsel to the Trustee to Deutsche Bank Trust Company Americas as Trustee for the 6.250% Senior Notes Due 2019
Holland & Knight
Partner Barbara Parlin in New York
Counsel to Alperton Capital
Sullivan & Cromwell
Partners Andrew Dietderich, Joseph Neuhaus and Brian Glueckstein in New York
Counsel to certain consenting A/L/B lenders
Cleary Gottlieb Steen & Hamilton
Partner Luke Barefoot in New York
In the 1st Business Court of Rio de Janeiro
Counsel to Constellation
Galdino & Coelho Advogados
Partner Flavio Antonio Esteves Galdino in Rio de Janeiro