CMS Nomeco appeals to Congress after court loss

July 24, 2006
A producer that had its Congo (Brazzaville) production garnished by a US court to pay some of that nation’s creditors is taking its case to the US Congress and the administration of President George W. Bush (OGJ, Apr. 24, 2006, p. 26).

A producer that had its Congo (Brazzaville) production garnished by a US court to pay some of that nation’s creditors is taking its case to the US Congress and the administration of President George W. Bush (OGJ, Apr. 24, 2006, p. 26).

CMS Nomeco and Nuevo Congo, US affiliates of London-based Perenco Holdings, have hired former US Rep. Geraldine A. Ferraro (D-NY) and lobbying firm Global Consulting Group, where she heads the public interest practice, to intercede in the case.

Ferraro and Andrew B. Derman, a partner in Dallas firm Thompson & Knight LLC, which represented CMS Nomeco in the case, said July 12 that a federal court’s decision in Texas in favor of three hedge funds and an insurance company could make it harder for US oil and gas companies to win overseas production concessions.

US companies also could be forced to become guarantors of defaulted sovereign debt in foreign countries where they do business and to violate court orders and contracts in those countries if the decision stands, they said in a briefing for congressional staff members and the press.

“Risk is being increased as a result of this judicial process,” observed economist Noel Perryman, president of the Waco, Tex.-based Perryman Group, who also participated in the briefing.

He noted that the International Monetary Fund and the World Bank are trying to restructure $2.5 trillion of developing countries’ debt. “A lot of this involves the production of natural resources,” he said.

Ferraro said that it might be appropriate for Congress to revisit the Foreign Sovereign Immunity Act, which was passed in 1978, and examine how it affects a foreign country’s natural resources.

“There is very little sympathy for a government that doesn’t pay its debt. At the same time, when a country is trying to restructure its debt, it should have access to revenues from its natural resources,” she said.

Derman added, “It might help the World Bank and the IMF restructure debt because vulture or hedge funds wouldn’t be able to grab foreign governments’ revenues or assets in this country.”

Opposing view

But a lawyer representing Af-Cap, one of three hedge funds that sued CMS Nomeco, said trying to overturn the court’s decision through legislature would be a mistake.

“This is cookie-cutter litigation made incredibly complex by CMS Nomeco and the Congo’s refusal to pay. If they win, there will be no further way for private banks to lend money to the Third World,” Ronald W. Kleinman, a managing shareholder of Greenberg Traurig LLP in Washington, told OGJ July 12.

He explained that since 1952, the US State Department has considered any commercial activity by a foreign government, including receiving oil royalty payments, is not sovereign if it’s used commercially in the US.

Congo’s government did exactly that for 15 years to pay an earlier obligation to National Union Fire Insurance Co. of Pittsburgh, the lawsuit’s fourth plaintiff, under a federal court order in the northern district of Illinois, said Kleinman.

National Union came back into the picture after it provided insurance to C. Itoh & Co. of Japan for machinery it sold to Congo. When the government defaulted, Itoh collected on the policy, National Union went to Congo for the money, and it was rebuffed, according to the insurance company’s attorney, Mark Rosenberg, a partner at Sullivan & Cromwell LLP in New York.

Derman said that the obligation originally acquired by Af-Cap and the two other hedge funds came from a $35 million highway construction loan to Congo in 1982 on which the country defaulted 5 years later. The hedge funds took it on as distressed loans years later for pennies on the dollar, he said.

“CMS Nomeco had nothing to do with this loan. It simply was trying to do business in Congo’s oil and gas sector,” he said. Most of the company’s production there is delivered to US refineries, Derman noted.

‘Fully assignable’

Kleinman said that Congo agreed to commit its natural resources as collateral for the obligations.

“The loans are fully assignable. Our clients are the assignee, like any secondary financial market. They’re part of the process for making a market for defaulted debt,” he said.

“These loans probably wouldn’t have been made if sovereign immunity hadn’t been waived and they hadn’t been assignable,” Kleinman added.

He said that Af-Cap sued to attach Congo assets in Britain and won. Attachment proceedings also are under way in Monaco, and there have been attachments in the Cayman Islands, he said.

Derman said that the plaintiffs also sued Murphy Oil Corp. and lost, and Chevron Corp., where the case has been appealed to the Ninth Circuit. “Canada is in a similar situation where one of its oil companies has been sued,” he said.

When the court in Texas served CMS Nomeco with a garnishment writ ordering it not to deliver oil to Congo, the African nation’s government responded that the company had a legal and contractual obligation there to continue deliveries, Derman said. Satisfying both requirements means CMS Nomeco effectively would pay for the oil twice, he said.

“The government in Brazzaville has no intention of paying this money,” said Ferraro. She warned that if the situation is not resolved, other oil producing nations in Africa might not want to do business with US companies.

“If we become nonplayers, we open Africa up for China and other competitors,” she said.