Source: Bankrupcy Decisions, January 18, 2005

If Russian oil giant Yukos' Chapter 11 filing in the U.S. Bankruptcy Court, Southern District of Texas has you scratching your head, you're not alone.

Yukos is, after all, a Russian company. In the United States, it has very few assets, save a Houston bank account set up specifically to pay attorneys' fees, and only one employee - an employee who moved here in December after threats prevented him from returning to Moscow.

And yet, Yukos filed for Chapter 11 bankruptcy protection in Houston.

And Houston Bankruptcy Judge Letitia Z. Clark issued a Temporary Restraining Order intended to halt a Dec. 16 auction in Russia. And next month, in Houston, Deutsche Bank will try to convince Judge Clark that Yukos has no business being in Houston.

But you don't have to be dead-set on buying up bits of the Yukos empire at bargain basement prices to agree with Deutsche Bank. Many attorneys are having trouble with Yukos' take on jurisdiction, be it related to the Bankruptcy Code, international law, or simply as a practical matter.

"The whole assertion of 'I'm properly before the U.S. bankruptcy court' is very thin in Yukos, giving consideration to traditional interpretations of applicable federal law," says retired Bankruptcy Judge William T. Bodoh, counsel at Frost Brown Todd LLC. "I question the issue of jurisdiction and I question the propriety of the venue."

While Judge Bodoh accepts that Judge Clark very well may maintain that the court has jurisdiction and that venue is proper, he questions how the court plans to enforce its views.

"There are some inherent absurdities in the court's enforcing its jurisdiction over property which is located in a foreign jurisdiction and controlled by officials of that foreign jurisdiction who are not subject to service of process in the bankruptcy court," he says.

Think about how courts traditionally enforce their jurisdiction, Bodoh said. If the orders are not complied with, the judge calls the non-complying parties before the court to have those parties show cause why they shouldn't be found in contempt. If they don't show up, you send the marshal. "In this case, who does the marshal go out and get? Does he go to Washington and grab the Russian Ambassador? Do we send him to Moscow to get the Russian Minister of the Interior and bring him or her back to Texas?" Bodoh wonders.

In a textbook illustration of the court's lack of enforcement powers, the auction went on as planned, in violation of the automatic stay. "The Russian Federation today chose to ignore the rule of law, both in Russia and internationally, by facilitating Rosneft's illegal seizure of Yuganskneftegas," a Yukos press release stated. "Yukos has obtained a United States Bankruptcy Court Order making clear that the sale of the Yuganskneftegas stock is a violation of the automatic stay in its Chapter 11 Bankruptcy case. This is another step in the illegal conduct of the Russian authorities."

Big surprise, most say.

But Dan Harris, international law attorney with Harris Moure PLLC in Seattle thinks that Yukos officials couldn't possibly have intended for its filing to make any difference whatsoever in Russia - the idea was to make other foreign banks nervous about getting involved with assets. "Let's say that you're a company that's buying $50 million worth of oil at $40 a barrel. Are you going to buy it at $40 a barrel from Exxon, at no risk of your investment getting tied up, or are you going to buy it from this former Yukos company for the same price with a risk?"

That may be the only teeth the bankruptcy court has in Russia.