Yehuda Sarao 

St. John’s University School of Law 

American Bankruptcy Institute Law Review Staff 

In considering the situs of a debtor’s COMI, a court is required to take a holistic review of the debtor’s activity, which includes considering an individual’s indirect ownership interests.^[7] The Debtor’s assertion that the COMI should be California was rejected by the Court because it had previously ruled on this issue and no new relevant facts were asserted.^[8]

Under section 1506 of the Bankruptcy Code, a court may deny recognition of a foreign insolvency proceeding if it would be manifestly contrary to public policy.^[9]

First, the Court considered whether the Debtor had standing to raise the public policy exception under section 1506 or, alternatively, is only the United States vested with such authority.^[10] Based on the clear language of section 1506, the Court found that there is no express limit on the parties entitled to invoke its provisions.^[11]Moreover, in interpreting Congress’ intent, it would be impracticable for the United States to monitor every chapter 15 petition to determine whether section 1506 is implicated.^[12] Thus, the Debtor had standing to raise the public policy exception.^[13]

Second, the Court found some merit in the assertion that recognizing the foreign proceeding could allow actions that would be “manifestly contrary to the public policy of the United States.”^[14] The Court held that it could avoid violating public policy by “prohibit[ing] Mr. Gaava from taking any action within the United States to enforce judgements entered against [the] Debtor by the Russian courts, absent further order of this court.”^[15] The Court stated that a balance between recognizing the Russian bankruptcy proceeding, facilitating a recovery of assets from several other countries, and limiting potential transfers to the sanctioned Tavrichesky Bank was necessary.^[16] Mr. Gaava argued that because the federal sanction rules only prohibit a transaction by a non-sanctioned entity—that has a fifty percent or more interest in a sanctioned entity—the same should apply to a public policy exception under section 1506.^[17] The Russian proceeding was less than “fifty percent (50%) for the benefit of Tavrichesky Bank.”^[18] Rejecting this argument, the Court explained that they interpreted section 1506 of the Bankruptcy Code to provide more flexibility than a rigid all-or-nothing analysis.^[19] The Court hypothesized that “it might be possible to structure any transfer of control of AFB in a way that would not run afoul of this public policy.”^[20] The burden was placed on Mr. Gaava to establish that the Court’s hypothesis was correct.^[21] Mr. Gaava was directed not to enforce any judgments against the Debtor before returning to court or applying to “an authority that administers the sanctions” to ensure that United States public policy was not violated.^[22]

In re Sabadash’s holding is consistent with other bankruptcy decisions, including In re Markus, and thus is not a novel recognition of a Russian bankruptcy proceeding.^[23] The Court noted that “[t]he Markus court ‘suspended the Markus [Foreign Representative's] ability to make any transfers outside the United States in light of newly imposed sanctions against Russia.’” However, only after further proceedings will it become clear whether Mr. Gaava can restrict the transfer of non-Russian assets to Russia, thereby safeguarding United States sanctions against Russian entities.^[24]