In re Serviços de Petróleo Constellation S.A.

• Decision Date: 09 May 2019
• Docket Number: Case No. 18-13952 (MG)
• Citation: 600 B.R. 237
• Parties: IN RE: SERVIÇOS DE PETRÓLEO CONSTELLATION S.A., et al., Foreign Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

600 B.R. 237

IN RE: SERVIÇOS DE PETRÓLEO CONSTELLATION S.A., et al.,¹ Foreign Debtors.

Case No. 18-13952 (MG)

United States Bankruptcy Court, S.D. New York.

Signed May 9, 2019

WHITE & CASE LLP, Attorneys for Andrew Childe, as Petitioner and Foreign Representative, 1221 Avenue of the Americas, New York, NY 10020, By: John K. Cunningham, Esq., Thomas E. MacWright, Esq., Gregory Starner, Esq.

WHITE & CASE LLP, Attorneys for Andrew Childe, as Petitioner and Foreign Representative, Southeast Financial Center, 200 South Biscayne Blvd., Suite 4900, Miami, FL 33131, By: Richard S. Kebrdle, Esq. (admitted pro hac vice), Laura L. Femino, Esq. (admitted pro hac vice)

MILBANK, TWEED, HADLEY & MCCLOY LLP, Attorneys for the 2024 Bond Noteholders, 28 Liberty Street, New York, NY 10005, By: Mary Doheny, Esq.

PRYOR CASHMAN LLP, Attorneys for Wilmington Trust, National Association as Indenture Trustee for the 9.00%/0.50% PIK Senior Secured Notes Due 2024, 7 Times Square, New York, NY 10036, By: Andrew S. Richmond, Esq., Seth H. Lieberman, Esq.

HOLLAND & KNIGHT, Attorneys for the Trustee to Deutsche Bank Trust Company Americas as Trustee for the 6.250% Senior Notes Due 2019, 31 West 52^nd Street, New York, NY 10019, By: Barbara R. Parlin, Esq.

SULLIVAN & CROMWELL LLP, Attorneys for Alperton Capital Ltd., 125 Broad Street, New York, NY 10004, By: Andrew G. Dietderich, Esq., Joseph E. Neuhaus, Esq., Brian D. Glueckstein, Esq.

CLEARLY GOTTLIEB STEEN & HAMILTON LLP, Attorneys for Certain Consenting A/L/B Lenders, One Liberty Plaza, New York, NY 10006, By: Luke A. Barefoot, Esq.

MEMORANDUM OPINION RECOGNIZING FOREIGN DEBTORS' FOREIGN MAIN AND FOREIGN NONMAIN PROCEEDING

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

I. INTRODUCTION

On December 7, 2018, Andrew Childe (the "Foreign Representative" or "Petitioner") commenced the jointly administered Chapter 15 Cases and sought this Court's recognition of the joint judicial reorganization (recuperação judicial or "RJ") of each of the Chapter 15 Debtors in the jointly administered judicial organization proceeding (the "Brazilian RJ Proceeding") pending in the 1^st Business Court of Rio de Janeiro (the "Brazilian RJ Court") pursuant to Federal Law No. 11.101 of February 9, 2005 (the "Brazilian Bankruptcy Law") of the laws of the Federative Republic of Brazil ("Brazil").² (Verified Petition at 7.) The Foreign Representative seeks recognition of the Brazilian RJ Proceeding for each of the Chapter 15 Debtors as either a foreign main proceeding or, in the alternative, as a foreign nonmain proceeding, pursuant to chapter 15 of title 11 of the United States Code, 11 U.S.C. §§ 101 - 1532 (the "Bankruptcy Code"). The Court must therefore determine the center of main interests (the "COMI") for each Chapter 15 Debtor in the enterprise group to determine whether—and to what extent—it should grant recognition of the Brazilian RJ Proceeding with respect to each.

When deciding whether to grant recognition of a foreign proceeding, whether as a foreign main or foreign nonmain proceeding, the Court begins with the statutorily prescribed presumption that the COMI of each foreign debtor entity is the place where that entity has its registered office. Of these Chapter 15 Debtors, two have registered offices in Luxembourg, one has a registered office in the Cayman Islands, one has a registered office in Brazil, and six have registered offices in the British Virgin Islands. Because the Foreign Representative seeks recognition of the Brazilian RJ Proceeding as main (or nonmain in the alternative), the Foreign Representative bears the burden of providing sufficient evidence to rebut the registered office presumption for each of the Chapter 15 Debtors that is incorporated outside of Brazil.³

As a broad overview, the Chapter 15 Debtors are members of an integrated enterprise group known as the Constellation Group.⁴ While the Constellation Group is discussed as a group entity at times throughout this opinion's opening sections for context, it is important to bear in mind that the Court's recognition is granted on an individual debtor by debtor basis. The Constellation Group's tripartite business enterprise consists of (i) offshore drilling, (ii) onshore drilling, and (iii) investments in several joint ventures and associated entities related to the operation of floating production storage and offloading units ("FPSOs"). The Chapter 15 Debtors are a subset of the Constellation Group. The ten Chapter 15 Debtors along with their direct and indirect affiliates comprise the Constellation Group ("Constellation Group"), and the Chapter 15 Debtors along with their affiliates that are debtors in the RJ Proceeding are referred to as the RJ Debtors ("RJ Debtors").

The Constellation Group's current financial distress is attributable, in large part, to the cyclical nature of the deepwater drilling market, which entered a sustained down cycle and created a number of major bankruptcies in the sector.⁵ By the time of filing, seven of the Constellation Group's eight offshore drilling rigs were either no longer contracted or soon to come off contracts. As of November 30, 2018, the Constellation Group was liable for approximately US$ 1.5 billion in aggregate outstanding third-party financial indebtedness (including accrued interest) under four credit facilities and two bond issuances.

On January 29, 2019, Alperton Capital Ltd. ("Alperton"), a contingent creditor of one of the ten Chapter 15 Debtors (Constellation Overseas), filed its Limited Objection of Alperton to the Petition for Recognition of the Brazilian RJ Proceeding . ("Alperton Objection," ECF Doc. # 35.) Alperton's limited objection contends that the Chapter 15 Debtors "have not satisfied their burden of proof that the location of the Debtors' [COMI] is in Brazil and Alperton objects to recognition of the RJ Proceeding as a foreign main proceeding." (See id. ¶ 8.) In support of the Alperton Objection, Alperton submits and incorporates by reference the Declaration of Andrew G. Dietderich, which was filed concurrently therewith. ("Dietderich Decl.," ECF Doc. # 36.) On February 4, 2019, counsel for Alperton filed the Second Declaration of Andrew G. Dietderich. ("Second Dietderich Decl.," ECF Doc. # 44.) Additionally, the Chapter 15 Debtors and Alperton agreed to a Joint Stipulation of Undisputed Facts , dated February 5, 2019, in lieu of cross-examination of the Debtors' declarants. ("Stipulation," ECF Doc. # 46.)

On February 5, 2019, the Court held the hearing on the Chapter 15 Debtors' Petition (the "Recognition Hearing"). (See "Hr'g Tr.," ECF Doc. # 59.) At the Recognition Hearing, the Court received evidence and heard oral argument regarding the Verified Petition.⁶ The Court reserved judgment on recognition of the Verified Petition and directed the parties to submit proposed findings of fact and conclusions of law regarding recognition of the Brazilian RJ Proceeding.⁷ (See id. at 74:2-7, 156:11-25.)

Alperton does not object to recognition of the Brazilian RJ Proceeding as a foreign nonmain proceeding. (Id. at 15:7-11 ("[W]e have no objection to the recognition of the Brazilian RJ as a foreign non-main.").) Rather, Alperton argues that the COMI for the entire Constellation Group is not in Brazil. (Id. at 15:24–25 ("[W]e believe COMI is not in Brazil for the group.").) It argues that the "COMI for all ten foreign debtors in the international group is Luxembourg." (Id. at 96:3-4.) Additionally, Alperton asks that "the Court allow the Brazilian court in the RJ Proceedings the opportunity to decide the question of COMI, and recognize the RJ Proceeding in these Chapter 15 Cases for the time being as either a foreign non-main proceeding or a foreign main proceeding ...." (Alperton Objection ¶ 9.)⁸

The Brazilian Court of Appeals recently announced a decision to dismiss the RJ Proceeding with respect to two of the Chapter 15 Debtors—Arazi and Olinda Star—and an additional RJ Debtor—Lancaster Projects Corp. The Foreign Representative informed the Court that it intends to seek a clarification of this judgment, implying that the Brazilian Court of Appeals' dismissal is not final. However, until the Brazilian Courts determine whether the Chapter 15 Debtors Arazi and Olinda Star are proper parties in the Brazilian RJ Proceeding, this Court will not decide whether the proceedings are main or nonmain with respect to them. If any other Chapter 15 Debtors are subsequently dismissed from the Brazilian RJ Proceedings, the Court may modify its present decision regarding recognition respecting those entities pursuant to section 1519(d).

At the Recognition Hearing the Court also questioned Alperton's standing to object to recognition of any of the Chapter 15 Debtors other than Constellation Overseas, an entity with which it is a contingent creditor based on a pending arbitration claim. (Hr'g Tr. 22:16-19, 23:8-10.) Alperton requested the opportunity to brief the issue, but ultimately conceded that based upon the facts in the record, it did not have standing with respect to any Chapter 15 Debtor other than Constellation Overseas. The Court nonetheless analyzes the evidence and objections to recognition raised by Alperton. This requires the Court to analyze whether a proceeding should be recognized as main, nonmain, or not recognized at all, regardless of whether objections have been raised . See In re Ocean Rig UDW Inc. , 570 B.R. at 692 (considering an objecting party's arguments to deny recognition on the merits, even though the Court found the objecting party had failed to establish standing because the Court had an independent obligation to establish that recognition was proper).

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 globalization.⁹ For the reasons further...