In a March 19, 2019 summary order, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s dismissal of a purported shareholder’s appeal challenging the chapter 15 recognition of a Cayman Islands restructuring of an offshore drilling contractor. See In re Ocean Rig UDW Inc., No. 18-1374, 2019 WL 1276205 (2d Cir. Mar. 19, 2019). The Court of Appeals affirmed the district court’s dismissal of that appeal for lack of appellate standing. An Orrick team handled the chapter 15 proceedings in the bankruptcy court, as well as the appellate proceedings in the district court and Court of Appeals.
The appeal was brought by a self-described shareholder of debtor Ocean Rig UDW Inc. (“UDW”). The appellant sought review of an order issued by U.S. Bankruptcy Judge Martin Glenn granting recognition of provisional liquidation and scheme of arrangement proceedings in the Cayman Islands of UDW and three of its subsidiaries as “foreign main proceedings” under section 1517 of the Bankruptcy Code. That recognition order gave rise to various forms of relief, including an automatic stay with respect to the Debtors and their property within the territorial jurisdiction of the United States.
In the ancillary proceedings in the bankruptcy court, the appellant had opposed the Debtors’ petition for recognition on numerous grounds, including on the basis that venue was improper in the Southern District of New York, that the Debtors failed to meet their burden of proving that their center of main interests (“COMI”) was in the Cayman Islands, that the Debtors improperly manipulated their COMI, and that granting recognition would violate the public policy objectives of chapter 15. The bankruptcy court overruled those objections and granted recognition and other related relief under sections 1520 and 1521 of the Bankruptcy Code. See In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017).
Appellant timely noticed an appeal to the district court, but did not seek a stay of the recognition order. Thus, the Debtors moved forward with their restructuring via four interrelated schemes of arrangement under Cayman Islands law (the “Schemes”). The Schemes involved the exchange of more than $3.7 billion of existing financial indebtedness for $450 million in new secured debt, approximately $288 million in cash, and new equity in UDW. Under the Schemes, existing shareholders of UDW retained a nominal amount of equity in the reorganized UDW (0.02%), but this token amount was provided solely to facilitate UDW’s ability to maintain its NASDAQ listing and was not an indication of UDW’s solvency. In fact, the indicative value of the consideration distributed to the creditors under the Schemes was significantly less than the face amount of their claims.
Appellant did not object to the provisional liquidation proceedings or the Schemes, which were later sanctioned (i.e., approved) by the Grand Court of the Cayman Islands. Similarly, appellant did not object to a motion in the chapter 15 proceedings for entry of an order granting comity and giving full force and effect to the Schemes and Cayman court’s ruling in the United States, which the bankruptcy court subsequently granted. Promptly upon the bankruptcy court’s issuance of this “enforcement order,” the Debtors consummated the restructuring in accordance with the Schemes.
Thereafter, in the district court, before U.S. District Judge John G. Koeltl, the Debtors and their authorized foreign representative moved to dismiss the appeal, arguing that the appellant’s purported shareholder status was insufficient to give her appellate standing, and that in any event, her appeal had been rendered equitably moot by the consummation of the restructuring. The district court granted the motion on both alternative grounds. See In re Ocean Rig UDW Inc., 585 B.R. 31 (S.D.N.Y. 2018).
Appellant then sought review of the district court’s dismissal in the Second Circuit. While that appeal was pending, a third-party company (Transocean Ltd.) acquired UDW in a cash and stock transaction valued at approximately $2.7 billion.
The Second Circuit’s Ruling
The Second Circuit affirmed the district court’s dismissal of the appeal for lack of standing. The Court of Appeals began its analysis by reiterating the settled legal standard for bankruptcy appellate standing: “To have standing to appeal from a bankruptcy court ruling in this Circuit, an appellant must be an ‘aggrieved person,’ a person directly and adversely affected pecuniarily by the challenged order of the bankruptcy court.” 2019 WL 1276205 at *1 (quoting In re Gucci, 126 F.3d 380, 388 (2d Cir. 1997)). “The stringency of our rule,” the Court explained, “is rooted in a concern that freely granting open‐ended appeals to those persons affected by bankruptcy court orders will sound the death knell of the orderly disposition of bankruptcy matters.” Id.
Applying that standard, the Second Circuit readily concluded that the appellant was not an “aggrieved person.” Although the appellant was subject to injunctions set forth in the bankruptcy court’s recognition order, she had not “pursued any action against UDW that has been stayed because of the injunctive relief, and her brief [did] not identify any action that she plans to pursue.” Id. Relatedly, the Second Circuit noted that the district court had found UDW was significantly insolvent at the time the Debtors initiated the Cayman proceedings, a finding which appellant had not challenged. Because Cayman Islands law provides that creditors must be made whole before shareholders can recover in a “winding up” proceeding, the Second Circuit concluded that shareholders, including appellant, lacked any pecuniary interest in those proceedings and the U.S. order recognizing those proceedings. Id. (citing Cayman Islands Companies Law § 140(1)).
The Second Circuit also treated as inapposite a prior chapter 15 decision invoked by appellant, Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013). That decision arose from an appeal brought by shareholders of a feeder fund that invested in the Madoff fraud. The shareholders there challenged the bankruptcy court’s chapter 15 recognition of liquidation proceedings that were ongoing in the British Virgin Islands. But as the Second Circuit’s summary order here explained, standing was not at issue in that case, and the facts were distinguishable. The shareholders in Fairfield Sentry had filed a New York shareholder derivative suit that was stayed as a result of chapter 15 recognition, whereas here, the appellant could not identify any way that recognition caused her to be aggrieved.
The Second Circuit did not explicitly address the district court’s alternative basis for dismissal: i.e., that the consummation of the Debtors’ restructuring, combined with the appellant’s failure to seek a stay, rendered the appeal equitably moot. In re Ocean Rig UDW Inc., 585 B.R. at 39-41. Noting simply that it had considered the appellant’s remaining arguments and concluded that they were without merit, the Court of Appeals did not discuss the appellant’s contention that the equitable mootness doctrine is inapplicable to chapter 15 proceedings. The district court had previously rejected appellant’s arguments that equitable mootness did not apply under chapter 15, concluding that the same “principles of finality and fairness” that pertain to “domestic reorganizations” and the same “concerns of comity” that animated former section 304 of the Bankruptcy Code apply in the chapter 15 context. Id. at 41.