On September 3, 2014, the United States Court of Appeals for the Fifth Circuit entered an opinion vacating various orders of the United States Bankruptcy Court and District Court for the Southern District of Texas (the “Bankruptcy Court” and the “District Court”) in the bankruptcy cases of TMT Procurement Corporation and its affiliated debtors (the “Debtors”), including a final order approving the Debtors’ post-petition debtor in possession financing (the “DIP Order”) with Macquarie Bank Limited (the “DIP Lender”), notwithstanding that these orders contained findings that the DIP Lender had acted in good faith and was entitled to the protections of Sections 363(m) and 364(e) of the Bankruptcy Code.

Concern has been expressed that this opinion will put a chill on the willingness of lenders to enter into debtor in possession financing facilities in cases filed within the jurisdiction of the Fifth Circuit – Texas, Louisiana and Mississippi. We believe these concerns to be unfounded in the context of usual and customary debtor in possession financing.

The facts of TMT Procurement are complex and unusual. Vantage Drilling Company (“Vantage”), an offshore drilling company, entered into a business arrangement with a Taiwanese national, Hsin-Chi Su (“Su”) in consideration for which Vantage issued approximately 100 million shares of Vantage stock to F3 Capital (“F3”), an entity solely owned and controlled by Su, and granted Su three Vantage board seats. Relations soured and in 2012, Vantage brought litigation against Su in Texas state court¹ alleging breach of fiduciary duty, fraud, fraud in the inducement, and other similar causes of action (the “Vantage Litigation”). As part of the relief requested in the Vantage Litigation, Vantage sought a constructive trust on all profits or benefits obtained by Su, including on the stock issued to F3.

Meanwhile, in 2013, the Debtors, twenty-three foreign marine shipping companies owned directly or indirectly by Su, filed for Chapter 11 relief in the Bankruptcy Court. Certain creditors of the Debtors moved to dismiss the cases, alleging the cases had been filed in bad faith, jurisdiction in the Southern District of Texas had been manufactured, and that the Debtors had no reasonable likelihood of reorganizing. It appeared that the Debtors, who were part of a larger international shipping company conglomerate, were attempting to thwart collection efforts by their foreign lenders. The Debtors had no connections or business operations with or in the U.S., no U.S. creditors and no assets in the U.S., other than certain legal retainers. A U.S. shell company had been set up on the eve of bankruptcy to lease office space in Houston.

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