Highland’s Ocean Rig Bet: Fail in Caymans? Try Marshall Islands

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November 16, 2017

File photo credit: Ocean Rig

By Tiffany Kary (Bloomberg) — A battle of so-called bankruptcy tourists is erupting in New York court.

On Thursday, New York bankruptcy Judge Martin Glenn holds a hearing in the long fight over Ocean Rig UDW Inc.’s $3.7 billion restructuring, which has blown around like the trade winds from the Pacific to the Caribbean.

In September, about six months into a legal battle in Cayman Island and New York courts, Highland Capital Management seemed to lose out in the fight to Elliott Management Corp., which had backed the offshore drilling service company’s bankruptcy plan. A large chunk of Ocean Rig’s stock ended up with Elliott, and almost 10 percent went to Ocean Rig Chairman George Economou under the plan approved in the Caymans, the British territory in the western Caribbean Sea. Highland got almost nothing, it said in court papers.

But Highland had another card up its sleeve: a claim in the Marshall Islands, the sovereign nation in the Pacific Ocean. There, in a lawsuit filed in August, but not part of the New York court records until October, it revived its central argument.

Highland alleged that Economou, a shipping magnate who runs Ocean Rig as well as its non-bankrupt parent, DryShips, bilked bondholders out of around $370 million to benefit himself and other companies. Under a bankruptcy code provision for fraudulent transfers that applies in the Marshall Islands, but not in the Caymans, Highland said, it should be able to get the money back.

‘Next Phase’

Any decision in the case could have wider implications for what restructuring experts call “bankruptcy tourism,” where companies and creditors fight in far-flung locales in an effort to gain an advantage. Whereas in the past, bankruptcy insiders debated the merits of Delaware versus New York courts with aspersions of “forum shopping” sometimes raised, now companies and creditors are engaged in international battles over where they can best win their debt wars.

“This is the next phase of the restructuring business, the coming way of the world — we’ll work in various jurisdictions,” said William Brandt Jr., chief of a New York-based restructuring advisory firm Development Specialists, speaking at an Association of Insolvency and Restructuring Advisors meeting in New York on Monday.

Brandt didn’t mention the Ocean Rig case, but cited his own work as a trustee in the international case of China Fishery Group Ltd., for which he says he regularly travels from Lima to Hong Kong. Another example, he said, is the case of Oi SA, a Brazilian telecom company, in which Aurelius Capital Management is fighting a battle that involves jurisdiction of Dutch, U.S. and Brazilian law.

“Bankruptcy tourism will come into the fore,” Brandt said, predicting that the trend won’t be limited to an increase in U.S. Chapter 15 cases, which help shield U.S. creditors while a main reorganization goes on in a foreign court, but include “hybrid” cases in various jurisdictions.

An ‘Attack’

Economou couldn’t be reached for comment, and hasn’t addressed the allegations in New York court. Marshall Islands courts didn’t reply to a request for court filings there. A lawyer for Ocean Rig said he wasn’t aware of any response to the allegations in U.S. courts.

Ocean Rig in court papers called Highland’s strategy an “attack” that violates the Cayman order, and asks the New York judge to find Highland in civil contempt — something that could cost the fund manager a fine. The company said that stopping claims like Highland’s against Economou is “fundamental” to its restructuring.

Highland, which had senior Ocean Rig notes with a face value of $74 million, said in court papers that any allegations that it is “forum shopping” for a venue that will recognize its fraudulent transfer claims are “absurd” given the company and Economou went on a shopping trip themselves.

At the time Highland bought the company’s debt, Ocean Rig was based in the Marshall Islands, and the company later moved to the Caymans “after shopping various jurisdictions to find the most favorable one.” Highland also said it never agreed to give up its claims against Economou as part of the restructuring.

Singer Agitates

Meanwhile, billionaire Paul Singer’s hedge fund, Elliott Management, which holds about a fifth of Ocean Rig UDW Inc. shares, is agitating for a sale and has said the stock, trading around $25, should be worth almost $40 a share.

Elliott was part of a group including Avenue Capital Management II, BlueMountain Capital Management LLC and Lion Point Capital LP that helped shape the restructuring for a year, according to court filings. Elliott held the company’s 6.5 percent senior secured notes due 2017; Highland held 7.25 percent senior notes due 2019.

Glenn, the Manhattan Bankruptcy Courts judge, already ruled in favor of Cayman jurisdiction in an August opinion. He said the company didn’t manipulate where it was based in “bad faith,” but rather had a legitimate purpose to shift its center away from the Marshall Islands, where local law would mean a liquidation was more likely. The company was motivated to “maximize value for their creditors and preserve their assets,” Glenn said.

Just after his opinion, Highland filed its Marshall Islands lawsuit, saying that under the republic’s law, any transfer of domicile won’t affect creditor rights that existed prior to the move.

The case is; In re Ocean Rig UDW Inc., 17-10736, U.S. Bankruptcy Court, Southern District of New York (Manhattan.)

© 2017 Bloomberg L.P

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