Lynch v. Lapidem Ltd. (In re Kirwan Offices S.À.R.L.)

592 B.R. 489

IN RE KIRWAN OFFICES S.À.R.L., Reorganized Debtor.

Stephen P. Lynch, Appellant,

v.Lapidem Limited and Mascini Holdings Limited, Appellees.

17 Civ. 4339 (CM), 17 Civ. 4340 (CM)

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

Signed October 10, 2018

Stephen P. Lynch, pro se.

Jay Michael Goffman, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Appellees.

DECISION AND ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

COLLEEN McMAHON, Chief Judge

Appellant Stephen P. Lynch ("Appellant" or "Lynch"), pro se , brings this appeal from the order of the United States Bankruptcy Court for the Southern District of New York Approving and Confirming the Combined First Amended Plan of Reorganization of Debtor Kirwan Offices S.à.r.l. ("Debtor" or "Kirwan"). The reorganization plan was proposed by Appellees Lapidem Ltd. ("Lapidem") and Mascini Holdings Limited ("Mascini," and together with Lapidem, the "Appellees"), unsecured creditors of Kirwan.

For the reasons set forth below, the Bankruptcy Court's order is AFFIRMED.

I. Factual Background

a. Overview of the Parties

Lynch brings this appeal against his co-investors in an investment scheme, Lapidem, a Cayman Islands company, and Mascini, a Cyprus Company.¹ (16-22321 Dkt. No. 62 ¶¶ 3–6.) Lynch is a U.S. citizen who has lived in Russia since 2001. (Id. ¶ 3.) Through intermediate companies, Lapidem and Mascini are currently majority-owned and effectively controlled by VR Global Partners, LP, an investment fund domiciled in the Cayman Islands, and VR Capital Group Ltd., a Cayman Islands asset management company. (Id. ¶ 4–6.)

Appellant and Appellees constitute the exclusive shareholders in Kirwan, a Luxembourg entity that was established as a special investment vehicle in February 2007 for the purpose of participating in the auction, and ultimate acquisition, of Yukos Finance B.V. ("Yukos Finance"). (Id. ¶¶ 1–2, 7.) Yukos Finance was a subsidiary of Yukos Oil Company ("Yukos Oil"), which was the subject of an involuntary bankruptcy petition in Russia. (Id. ¶¶ 11–12.) In connection with that bankruptcy, a Russian court-appointed bankruptcy receiver noticed an auction for 100% of the shares in Yukos Finance for August 15, 2007. (Id. )

Seeking to win that auction, Lapidem and Mascini agreed to fund the acquisition in the form of debt financing so as to avoid a 1% Luxembourg capital tax. (16-22321 Dkt. No. 25 ¶¶ 8–9.) They structured their investment as 85% interest bearing debt, 14% interest free debt, and 1% equity. (16-22321 Dkt. No. 62 Ex. 25.1 at 15.) Lynch, in turn, supplied the mechanism for effecting the acquisition – OOO Monte-Valle ("Monte-Valle"), a company that he controlled, acquired 000 Promneftstroy ("PNS"), a Russian investment vehicle that had registered for the auction of Yukos Finance prior to the registration deadline and paid the required $60 million deposit.² (Id. ¶¶ 9, 17.)

On August 15, 2007, PNS won the auction for 100% of the shares of Yukos Finance. (Id. ¶ 21.) The winning bid was approximately $309 million. (Id. )

On August 30, 2007, Lynch, Kirwan, Lapidem, and Mascini formally established their legal relationship by entering into a Shareholders Agreement (the "SHA"). (Id. ¶ 25; Id. Ex. 25.1.) Pursuant to the SHA, Lapidem and Mascini capitalized Kirwan with $2.5 million as share capital and $247.5 million as loans, in consideration for approximately 2.5 million newly issued Class A and B shares in Kirwan, which, together, accounted for 99.99% of Kirwan's outstanding share capital. (Id. ¶ 2; Id. Ex. 25.1 at 8, 45.) Lynch received a single Class C share, constituting the entire share class. (Id. ¶ 3; Id. Ex. 25.1 at 8, 45.)

Lynch's Class C share carried with it certain rights. Specifically, the SHA provided that certain matters required unanimous shareholder approval, including decisions about liquidation, receivership, administration, or "any capital reorganization or other corporate action the effect of which would be to alter the rights attaching to the C share" – thereby giving Lynch tremendous influence over certain corporate actions. (Id. Ex. 25.1 at 43).

The SHA further provided that Appellee's loans had to be paid in full before they or Lynch could receive any recovery on account of their equity shares. (Id. Ex. 25.1 at 17–18, 44.) Upon full repayment of the loans, Appellees were entitled to 90% of any profits in excess of their loans; Lynch was entitled to the remaining 10%. (Id. )

b. Yukos Finance Litigation and Events Leading to the Chapter 11 Filing

Shortly after PNS acquired the shares of Yukos Finance, PNS became embroiled in litigation in the Netherlands with certain members of Yukos Oil's former management over control of Yukos Finance. (16-22321 Dkt. No. 13 ¶¶ 15–23.) This litigation involved, inter alia , the validity of certain claims and asserted attachments over the Yukos Finance shares that, if recognized, would render PNS' claims to the shares worthless. (Id. ¶ 23–25.) Because of the protracted Yukos litigation, Kirwan has not obtained clear title to the assets acquired in the auction, preventing it from generating a return on its investment and paying a return to its shareholders. (Id. )

Lapidem and Mascini – as the sole sources of capital since Kirwan's inception – have financed the Yukos Finance litigation exclusively, loaning Kirwan an additional $32 million to cover litigation costs (on top of the $309 million they provided in acquisition loans). (16-22321 Dkt. No. 62 ¶ 36.) In light of these costs and litigation setbacks, Lapidem and Mascini sought to settle the case. (16-22321 Dkt. No. 13 ¶ 25.) Lynch, however, resisted the proposed settlement terms offered by Appellees, and stated that he would only agree to a settlement that netted him $35 million in his capacity as a Class C shareholder. (Id. ¶¶ 25–28.)

Over the ensuing two years, as the parties disagreed over settlement, they further disagreed over the scope of Lynch's rights as a Class C shareholder. Lynch maintained that, under the SHA, no settlement in the Yukos Finance litigation could be achieved without his approval – a position that Appellees flatly reject. (Id. ¶ 30–35.) Exercising that purported right, Lynch conveyed directly to his adversary in the Yukos Finance Litigation that his adversary could not explore settlement without Lynch's consent. (16-22321 Dkt. No. 21 ¶ 97.)

Lynch alleges that, after repeated failed efforts by Appellees to wrest control of PNS' corporate governance in an attempt to void his rights as a Class C shareholder, Lapidem and Mascini contrived a bankruptcy "scheme" and "manufactured US jurisdiction" for the purpose of bringing about a corporate reorganization of Kirwan. (Dkt. No. 12 at 17.) Specifically, Lynch argues that Mascini and Lapidem engaged two U.S. law firms, Akin Gump Strauss Hauer & Feld LLP ("Akin Gump") and Mandel Bhandari LLP ("Mandel Bhandari"), pursuant to which Kirwan paid retainers of $150,000 and $100,000, respectively, for the sole purpose of draining Kirwan's funds. (Id. at 18–19 (citing 16-22321 Dkt. No. 62 ¶¶ 65, 77).) Lapidem and Mascini counter that these were legitimate and proper expenditures in connection with their continued efforts to assert legal title to the shares in Yukos Finance. (16-22321 Dkt. No. 13 ¶¶ 37–38.)

By March 15, 2016, Kirwan owed Akin Gump $174,530.26 in legal fees. (Id. ¶ 52.) Mascini and Lapidem determined that this constituted an insolvency event and, in accordance with the parties' loan agreements, called their loans. (Id. ¶ 56.) Kirwan (naturally) could not pay off those loans, prompting Lapidem and Mascini to file that same day an involuntary bankruptcy petition, pursuant to Chapter 11 of the Bankruptcy Code, in Bankruptcy Court for the Southern District of New York. (Id. )

c. Chapter 11 Proceedings

On April 6, 2016, Lynch – then represented by counsel – filed a motion for intervention and dismissal of the involuntary petition, arguing, inter alia , that Appellees filed the case in bad faith. (16-22321 Dkt. No. 8.) In the alternative, he asked the court to stay or abstain so the parties could arbitrate underlying claims of breach of the SHA, pursuant to an arbitration clause in that agreement, which provided for arbitration in London under the Rules of the London Court of International Arbitration. (Id. ) The gravamen of Lynch's filing was that Lapidem and Mascini breached the SHA in calling their loans due, filing the involuntary petition, and pursuing a Chapter 11 plan that would restructure Kirwan's governance structure and settle the Yukos Finance litigation. (Id. )

The Bankruptcy Court presided over two separate hearings to consider the various issues posed by Lynch. Following a June 17, 2016 hearing, the Bankruptcy Court denied Lynch's request to abstain or stay the case so as to permit him to pursue arbitration in London, concluding that doing so would improperly interfere with the resolution of matters that were subject to the Court's core, subject matter jurisdiction, pursuant to 28 U.S.C. § 157(a) - (b).³ (16-22321 Dkt. No. 43.) Lynch appealed this determination, but voluntarily dismissed his appeal shortly thereafter. (16 Civ. 6300 Dkt. No. 18–20).

At a second hearing on January 27, 2017, the Bankruptcy Court denied all remaining aspects of Lynch's motion, concluding that (i ) the Appellees did not file the case in bad faith, (ii ) Lynch failed to establish that Appellees breached the SHA, and (iii ) the SHA did not prevent the Appellees from pursuing a corporate reorganization of Kirwan in their capacity as creditors. (16-22321 Dkt. No. 174 at 98:17-101:2.) Lynch did not appeal this ruling.

On February 15, 2017, Appellees filed a proposed plan of reorganization for Kirwan that provided for reorganized capital and governance structures and termination of the SHA, pursuant to 11 U.S.C. § 1123(a)(5)(l). (16-22321 Dkt. No. 97.) They also filed a motion to establish streamlined plan confirmation procedures. (16-22321 Dkt. No. 98.) Appellees served that motion on Appellant's counsel. The...