In re Yukos Oil Co.

• Decision Date: 24 February 2005
• Docket Number: No. 04^7742-H3-ll.,04^7742-H3-ll.
• Citation: 321 B.R. 396
• Parties: In re YUKOS OIL COMPANY, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

321 B.R. 396

In re YUKOS OIL COMPANY, Debtor.

No. 04^7742-H3-ll.

United States Bankruptcy Court, S.D. Texas, Houston Division.

February 24, 2005.

COPYRIGHT MATERIAL OMITTED

Robert Andrew Black, Jason Lee Boland, Johnathan Christiaan Bolton, Paul M. Botros, Zack A. Clement, Mark Allan Worden, Fulbright & Jaworski LLP, Houston, TX, for Debtor.

Hugh M. Ray, Jeffrey E. Spiers, Andrews Kurth LLP, Houston, TX, J. Gregory St. Clair, Skadden, Arps, Slate, Meagher & Flora, LLP, New York, NY, Charles F. Smith, Skadden, Arps, Slate, Meagher & Flom, LLP, Chicago, IL, for Movant Duetsch Bank AG.

MEMORANDUM OPINION

LETITIA Z. CLARK, Bankruptcy Judge.

The court has held a hearing on "Deutsche Bank AG's Motion to Dismiss Chapter 11 Bankruptcy Case" (Docket No. 40). The following are the Findings of Fact and Conclusions of Law of the court. A separate Judgment will be entered dismissing the above captioned case. To the extent any of the Findings of Fact are considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law are considered Findings of Fact, they are adopted as such.

This is a very large case. On the assets identified in the schedules and other pleadings filed in the instant case, it is the largest bankruptcy case ever filed in the United States. However, 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.

Findings of Fact

The Bankruptcy Petition

Yukos Oil Company filed a voluntary petition under Chapter 11 of the Bankruptcy Code on December 14, 2004. The petition was signed by Zack A. Clement, as attorney for Yukos,¹ and by Bruce K. Misamore, as Chief Financial Officer of Yukos. Attached to the petition was a resolution of the Management Board of Yukos-Moscow Ltd., the management company of Yukos, authorizing the filing of the instant Chapter 11 case in the United States Bankruptcy Court for the Southern District of Texas. The resolution recites that six members of the Management Board met (with Misamore appearing by telephone), and five of the six listed members voted for, and signed, the resolution. The resolution is not signed by the sixth member, Mikhail Trushin.

The Pending Motion

In the instant motion, Deutsche Bank AG ("Movant")² seeks dismissal of the instant case. Movant asserts several grounds for dismissal. First, Movant asserts that Yukos is not eligible to be a debtor under Section 109(a) of the Bankruptcy Code. Second, Movant asserts that the instant case should be dismissed for cause, pursuant to Section 1112(b) of the Bankruptcy Code. Third, Movant asserts that the instant case should be dismissed under the doctrine of forum non conveniens. Fourth, Movant asserts that the case should be dismissed because Yukos will be unable to comply with the duties of a Chapter 11 debtor. Fifth, Movant asserts that the case should be dismissed on grounds of international comity. Sixth, Movant asserts that the case should be dismissed based on the act of state doctrine.

Each of these six asserted grounds for dismissal is addressed below. Movant has also sought "such other and further relief to which it is justly entitled." With regard to several of the asserted grounds, there is no United States precedent available among cases involving a voluntary bankruptcy. This case is dismissed for cause, using a "totality of circumstances" approach, which applies to all Chapter 11 cases, as discussed below.

Background

Prior to 1993, the Union of Soviet Socialist Republics operated a command economy, in which all major industries were owned and controlled by its government. After the dissolution of the U.S.S.R., the Russian Federation (which is the successor government in Russia) adopted a constitution which declares itself to have supremacy in the whole territory of the Russian Federation, and pursuant to that constitution, enacted laws directed toward encouraging the participation of non-Russian entities in the finance of entities organized under Russian law. These laws include remedies typically found in the commercial laws of nations with market economies, and they include international arbitration, available to a commercial organization with foreign investments. ("COFI")

Yukos is an open joint stock company organized under the laws of the Russian Federation. Yukos is a holding company, which is the parent of approximately 200 subsidiary legal entities, organized under the laws of, inter alia, the Russian Federation, Cyprus, and the United Kingdom. On the petition date, Yukos operated through several subsidiaries, including Russian subsidiaries Yukos-Moscow, Ltd.,

Yuganskneftegas, Tomskneft, and Samaraneftegas, British Virgin Islands subsidiaries Yukos International, B.V.I., Yukos Hydrocarbons, B.V.I., and Brittany Assets, Ltd.,³ and Texas corporation Yukos USA, Inc. (which was incorporated one day prepetition, and is wholly owned by Yukos International, B.V.I.). Additionally, Yukos has a small number of oil and gas licenses in Russia, which it holds in its own name.

Misamore testified that, under Russian law, an entity which is a "juridical person," which need not be an individual, may serve as the chief executive officer of a joint stock company. Yukos-Moscow, Ltd. is the chief executive officer of Yukos. Steven Theede is the individual who acts as the chief executive officer of Yukos, in his capacity as an employee of Yukos-Moscow, Ltd.

In an affidavit filed concurrently with the petition in the instant case, Misamore, who presently resides in Houston, Texas, states that Yukos became Russia's first fully privatized oil company during 1995 and 1996.

Misamore testified that substantially all of the affiliates and subsidiaries of Yukos are Russian companies, that substantially all of the assets of the affiliates and subsidiaries are in Russia, and that Yukos and its subsidiaries and affiliates have approximately 100,000 employees, nearly all of whom live and work in Russia.

Some of the funds used for Yukos' operations and acquisitions came from loans and/or equity contributions of investors from outside Russia, including individual and institutional investors in the United States. One group of shareholders, which states it is composed of American and Western European investors, filed an affidavit. davit (Docket No. 145) stating that the investors in the group hold at least 10 percent of the shares of Yukos. A second group of shareholders, which states it is composed of non-Russian investors, filed an affidavit (Docket No. 146) stating that the investors in the group hold approximately 51 percent of the shares of Yukos.⁴ Both groups filed responses (Docket Nos. 133, 140) supporting Yukos' position in opposition to the instant motion to dismiss.

Precipitating Events and Attempted Remedies

Yukos' disputes with agencies of the Russian government precipitated the filing of the instant Chapter 11 case. Steven Theede, Yukos' acting chief executive officer, testified that on October 25, 2003, approximately five weeks after Theede began working at Yukos as the chief operating officer, Mikhail Khodorkovsky, who was then Yukos' chief executive officer, was arrested. Theede testified that, beginning in December, 2003, the Russian government began to retroactively assess⁵ taxes for periods beginning during 2000. He testified that the aggregate of the retroactively-assessed taxes was $27.5 billion. Theede was a credible and competent witness.

Theede testified that, during the period after the taxes were assessed, Yukos appealed the tax assessment, and began negotiations with the Russian government. Misamore testified that the negotiations were necessary because the Russian government had frozen Yukos' assets and bank accounts, and half of Yukos' revenues

In addition, on April 23, 2004, Yukos filed an application, before the European Court of Human Rights, seeking relief. (Deutsche Bank Exhibit 8). Theede testified that among the issues Yukos was negotiating with the Russian government was the election of a new board of directors. He testified that, although he believed the Russian government was sincere in negotiating, he had heard rumors of a plan to divest Yukos of its largest subsidiary. He testified that the management board of Yukos met on November 2, 2004, and gave 45 days' notice of an extraordinary general meeting of shareholders, to be held on December 20, 2004. The management board additionally gave 75 days' notice of another extraordinary general meeting of shareholders, to be held on January 13, 2005, in order to consider election of a new board of directors.

Theede testified that three courses of action were placed on the agenda for the December 20, 2004 extraordinary general meeting of shareholders. First, the shareholders were to consider adoption of the restructuring Yukos was negotiating with the Russian government. Second, the shareholders were to consider an orderly liquidation of Yukos' assets. Third, the shareholders were to consider bankruptcy under Russian law.

On November 19, 2004, the Russian government announced that it would conduct a sale of Yukos' shares of its largest subsidiary, Yuganskneftegas ("YNG"), at an auction, to be conducted on Sunday, December 19, 2004, one day prior to the first extraordinary general meeting of Yukos' shareholders in which the shareholders were to consider their options. YNG was responsible for approximately 60 percent of Yukos' revenue. Misamore testified that he was unaware of any other auction sales by agencies of the Russian government that were scheduled on a...