Bankruptcy Update Blog

Chapter 15 Petition Granted Over Allegations of Wrongdoing

Bankruptcy Judge Mary Kay Vyskocil recently granted chapter 15 recognition to a Russian insolvency case over objections that the foreign representative had engaged in wrongdoing.  In re Poymanov, 2017 Bankr. LEXIS 2130 (S.D.N.Y. Bankr. July 31, 2017).  Judge Vyskocil held that the evidence did not support the allegations of impropriety and that recognition of the Russian case as a foreign main proceeding would not violate US public policy.

Background

Serge Petrovich Poymanov (“Poymanov”) is a Russian citizen and was majority owner of Pavlovskgranit (“P-Granite”), a producer of granite.  A wholly owned subsidiary, Pavlovskgranit-Invest (“P-Invest”), signed a credit agreement with Sberbank of Russia to borrow up to RUB 5.1 billion.  Poymanov used the funds to buy the remaining shares of P-Granite.  P-Granite also borrowed RUB 1.39 billion from Sberbank.

P-Granite and P-Invest later defaulted.  Sberbank Capital accelerated the debt, sought full payment, and filed insolvency cases against both P-Granite and P-Invest in Moscow.   Suintex Limited, a creditor, filed an action to have Poymanov recognized as insolvent under Russian bankruptcy law (the “Russian Insolvency Proceeding”). 

Last November, another company, PPF Management LLC (“PPF”), filed a lawsuit in the Southern District of New York (the “New York Action”) against 22 defendants, including Sberbank, Suintex, the petitioner, and a receiver appointed to oversee the estate of P-Invest.  PPF asserted that it had been assigned the claims by Poymanov and his wife.  The suit alleged that the defendants had conspired to eliminate P-Granite and seize its assets, which is known in Russia as a “reiderstvo.”

In March, the bankruptcy administrator in the Russian Insolvency Proceeding, Alekseyev Vladimirovich Bazarnov (the “Foreign Representative” or “Petitioner”), filed the chapter 15 case to seek recognition of the Russian Insolvency Proceeding as a foreign main proceeding.  The Petitioner also sought a stay of the New York Action, asserting that the claims belonged to Poymanov and should be pursued by the Petitioner.  PPF Management opposed the relief sought.

The Decision

Judge Vyskocil held a two-day evidentiary hearing and recently issued an opinion granting recognition.  Her decision first analyzed if she had jurisdiction over the chapter 15 case.  Bankruptcy Code section 109 provides that only an entity that has a residence, domicile, or property in the United States, or a municipality, can be a debtor.  Judge Vyskocil ruled that section 109 was satisfied because the Petitioner had transferred funds to an attorneys’ trust account in New York.  Those funds, Judge Vyskocil found, were property that belonged to Poymanov. 

Judge Vyskocil also ruled that the Russian Insolvency Proceeding merited recognition as foreign main proceeding under Bankruptcy Code section 1517.  First, Russia was the debtor’s “center of its main interests.”  Second, the Foreign Representative was a person or body duly appointed and recognized by the Russian court to administrator and reorganize or liquidate the debtor’s assets.  Finally, the Petitioner submitted sufficient documentary evidence to support the chapter 15 petition.

But PPF argued that recognition should be denied because doing so would violate public policy, citing Bankruptcy Code section 1506.  The public policy exception applies only if the relief sought is “manifestly” contrary to US public policy.  This test is narrowly construed and applies only under circumstances that conflict with fundamental policies of the United States.  In re Poymanov, 2017 Bankr. LEXIS 2130 at *33-34.

PPF asserted that the Petitioner concealed certain agreements, failed to conduct proper due diligence on the source of certain payments, the Petitioner’s wire transfer of the  retainer payment constituted circumstantial evidence of illegal activity, the Petitioner had conflicts of interest, and the Russian bankruptcy was part of a corporate raiding scheme.  After considering the evidence, however, Judge Vyskocil held that the allegations lacked merit and that the public policy exception would not be applied.

Finally, the Petitioner asked Judge Vyskocil to stay the New York Action.  Upon recognition of a foreign proceeding in a chapter 15 case, the automatic stay in Bankruptcy Code section 362 applies to the debtor and property of the debtor located in the United States.  See U.S.C. § 1520.  The Petitioner argued that the assignment of the claims was not valid and that at least a portion of the claims brought in the New York Action belonged to Poymanov.

At issue in the Russian Insolvency Proceeding was whether the assignment of the claims in the New York Action was proper under Russian law.  Judge Vyskocil said she would decide if the stay applies to the New York Action after the Russian court issues its decision concerning the assignment.   In the meantime, Judge Vyskocil said, if PPF proceeds with the New York Action, it would do so “at its peril.”  In re Poymanov, 2017 Bankr. LEXIS 2130 at *43.