Beleaguered Russian oil company Yukos lost its desperate bid for shelter in U.S. courts Thursday when a judge dismissed its bankruptcy case, saying the company didn’t have enough of a presence in the United States to establish U.S. jurisdiction over a Russian company.
Yukos’ presence in the United States consisted only of two bank accounts in Texas and its displaced finance chief, who conducted business from his Houston home.
U.S. Bankruptcy Judge Letitia Clark’s dismissal of the Chapter 11 case forces Yukos to rely on European arbitration proceedings and so-far unsuccessful appeals in Russian courts in its battle against a disputed multibillion-dollar back-tax levy.
It also squashes bankruptcy-related lawsuits stemming from the auction of a key subsidiary, Yuganskneftegaz, that essentially gutted the company. Those lawsuits include a $20 billion claim against four state companies for allegedly violating asset protection afforded under U.S. bankruptcy law by participating in the Dec. 19 sale. Those companies include state-owned natural gas giant Gazprom and state-owned oil company Rosneft.
“The debtor is not a United States company, but a Russian company, and its assets are massive relative to the Russian economy, and, since they are primarily oil and gas in the ground, are literally a part of the Russian land. While there is precedent for maintenance of a bankruptcy case in the United States by corporations domiciled outside the United States, none of those precedents cover a corporation which is a central part of the economy of the nation in which the corporation was created,” the judge’s 33-page opinion said.
The Russian government had ignored the U.S. proceedings, saying Clark had no authority on Russian soil.
But if Clark had accepted jurisdiction, ongoing bankruptcy and litigation proceedings could have stifled business dealings by Gazprom and Rosneft outside of Russia.
Clark’s decision to throw it out opens the door for the planned merger of Gazprom and Rosneft, which has been on hold because of questions over Yuganskneftegaz’s new ownership. The merger would lift restrictions on foreigners owning shares in Gazprom. The lifting of those restrictions is one of the most anticipated reforms of Russia’s post-Soviet marketplace.
Deutsche Bank led the charge to seek dismissal of the bankruptcy, noting that as long as Yuganskneftegaz was a litigious asset, it and other international banks could be hampered in efforts to provide loans or do business involving Russia because its connection to Yukos could land them back in court.
“She took her time and did a good job,” said Hugh Ray of Andrews Kurth, Deutsche Bank’s lead lawyer.
Yukos spokesman Mike Lake did not immediately respond to a call for comment.
Yukos filed the Chapter 11 case in Houston on Dec. 14 in an unsuccessful attempt to block the auction of Yuganskneftegaz to help pay $27.5 billion in back taxes and penalties. The subsidiary produced 60 percent of Yukos’s oil.
The company’s only U.S. operations are the business that finance chief Bruce Misamore conducts from his Houston home and two bank accounts — one to cover Misamore’s expenses, and the other to cover legal costs.
Yukos claimed the auction capped an 18-month Kremlin-driven crackdown to damage the company and punish its former CEO, Mikhail Khodorkovsky, now on trial on tax charges, for backing opposition parties. Yukos said the $27.5 billion tax bill grew exponentially with penalties after the Russian government froze the company’s bank accounts and prohibited asset sales.
Misamore said he came to Houston from London in early December upon getting a threat that he could be arrested should he step foot in Moscow.
Russian President Vladimir Putin has characterized the government’s actions as an effort to ferret out shady business practices and dubious accounting.
Clark issued an injunction Dec. 16 to block the auction, but the Russian government forged ahead three days later anyway. However, her order prompted Deutsche Bank and others to freeze up to $13 billion raised to fund a bid on Yuganskneftegaz by Gazpromneft, now a former unit of Gazprom.
The judge said “while it appears likely that agencies of the Russian government have acted in a manner that would be considered confiscatory under United States law,” the issue before her was one of whether a U.S. court was the proper forum for the Chapter 11 case, not whether wrongs had occurred.
Michael Goldberg of Baker Botts, which represents Gazpromneft, said he had been confident “from the beginning that once the judge was given the chance to see both sides, she would dismiss the case. This was a frivolous case that should have never been brought. I am very pleased to see that justice has been done.”
An unknown company, BaikalFinansGroup, bought the unit for $9.3 billion — less than half what Yukos’ says it’s worth. Days later Rosneft acquired BaikalFinansGroup. The merger of Rosneft and Gazprom would bring about what Yukos says Gazprom intended all along — ownership of Yuganskneftegaz.