Editor's Comment: Garnishment threat looms for industry

Don Stowers, Editor - OGFJ

So-called “vulture funds” are threatening the US oil and gas industry, says Andrew Derman, a Dallas attorney with the firm of Thompson & Knight LLP. Derman represents a US oil company, CMS Nomeco, that has been sued in federal court by one of the funds, Af-Cap Inc., in order to collect third-party debt from the Republic of Congo, an impoverished African nation of about 4 million people.

CMS Nomeco has had a contract with the Congo government to produce oil offshore since 1979. The Congo takes its royalty payments in the form of crude oil, so the “payments” never actually leave the country.

In this case, Af-Cap has filed suit in Texas against both the Republic of Congo and CMS Nomeco, a Delaware-based corporation that has since been purchased by a London-based private oil company. Court rulings to date, including a decision by the US Court of Appeals for the Fifth Circuit, based in New Orleans, have favored the funds.

At issue is whether or not the courts can order a US company to pay outstanding defaulted debt owed by the African nation to a vulture fund that paid pennies on the dollar for the note and is trying to collect through litigation. To date, judges in the US, France, and the UK have ordered oil companies to pay off some of the Congo’s debts with funds they would otherwise pay as royalties to the Congo government.

Since the Congolese courts have ruled that the company must continue to pay royalties regardless of decisions by US courts, this would mean that the company would have to pay twice - once to the Congo and once to Af-Cap, which bought the 22-year-old debt from Connecticut Bank of Commerce. The bank previously won decisions against the Congo but was unable to collect because of the principle of sovereign immunity, which protects a government’s overseas assets. Attorneys for the vulture funds were able to convince the courts that royalty payments are commercial property and are not protected by the principle.

An appeal by CMS Nomeco’s owners will be heard June 5 by the Fifth Circuit Court of Appeals in New Orleans. Derman contends that a victory for the funds would have serious implications for the domestic oil and gas industry.

“More than 70 countries throughout Africa, Latin America, Eastern Europe, and Asia have been or are in default of their sovereign debt,” he says, adding that many are oil-producing nations where US companies are operating.

“Having their royalties garnished and paying double would put US oil companies at a competitive disadvantage,” Derman adds. “Courts in some of the nations we’re competing against, such as China, aren’t likely to order such seizures.”

Derman claims that vulture funds are currently “gobbling up” notes for delinquent debt from countries such as Angola, Nigeria, and even Russia. If the courts rule against them, the American oil companies will have to decide if it is worth their while to stay and pay double or to cut their losses and exit the country. OGFJ