As creditors pick through the scraps of bankrupt Austin-based sandwich shop franchisor Schlotzsky’s (previous posts here), attorneys for those creditors teed off on former company owners and chief executives — brothers John and Jeff Wooley — in a San Antonio federal court in a lawsuit that alleges that the brothers ruined the company through a series of reckless transactions that drained cash at critical junctures.
As is typical in most reorganizations of retail businesses, the sale of the assets typically does not generate enough cash to pay any dividend on unsecured creditors’ claims. Thus, those creditors are often left with no prospect for any recovery on their claims unless they can extract some funds through a lawsuit against the company’s former owners or third parties that took advantage of the company’s financial difficulties. Normally, the success or failure of such a strategy is more directly related to the net worth of the targets of such a lawsuit than the validity of the claims asserted in the lawsuit.

The hearing on whether Russian oil company and American debtor-in-possession OAO Yukos‘ chapter 11 case should be dismissed began on Wednesday in U.S. Bankruptcy Judge Letitia Clark’s Houston courtroom as Hugh Ray, Deutsche Bank AG‘s lawyer, urged Judge Clark to dismiss the case because U.S. courts lack a jurisdictional basis to reorganize the crippled Russian oil giant. Here are the previous posts on the Yukos saga over the past year.
Mr. Ray contended that Yukos changed the dates of documents related to a $2 million bank account in an effort to create a bogus basis for jurisdiction in U.S. courts. Yukos filed its chapter 11 case in December in an effort to seek relief from the Russian government’s decision to auction Yukos’ main asset — the huge production unit Yuganskneftegaz (“Yugansk”) — to collect on $28 billion in alleged back-tax claims. Deutsche Bank had led a financing group that intended to fund a bid for Yugansk that Russian natural gas giant OAO Gazprom was going to make, but Judge Clark’s temporary restraining order at the outset of the Yukos case chilled Western Banks from financing an auction bid. Russian authorities eventually sold the Yugansk unit to a shell Russian company named Baikal Finance Group, which Russian state oil company OAO Rosneft then quickly acquired. As a result, the effect of the Yugansk auction is that Yukos’ main production unit has been nationalized by the Russian government.
Meanwhile, Stephen Theede, Yukos’ CEO, testified that seeking reorganization relief for Yukos under Russian law would have been a futile effort because the Russian government would not allow Yukos to commence a reorganization case in Russia. Inasmuch as the Russian government has frozen Yukos’ assets and frozen its bank accounts, Mr. Theede testified that only protections of U.S. bankruptcy law provide the potential legal relief necessary for Yukos to fight the Russian government’s efforts to liquidate the company. Mr. Theede has been operating Yukos out of London while Bruce Misamore, Yukos’ chief financial officer, is operating out of Houston. Mikhail Khodorkovsky, the former Yukos chief executive and at one point the largest owner of the company, continues to be imprisoned in Russia.
Inasmuch as the result of the Yugansk auction effectively nationalized one of Russia’s main oil assets, the Russian government’s blunt methods have created increased uncertainty in Western capital markets regarding the security of investment in Russian companies. So, the result of the Yukos chapter 11 case in Houston is being watched carefully by Western investing markets. Stay tuned.