Ancillary Relief Granted in Russian Bank Case

Recently, a U.S. bankruptcy court granted a permanent injunction and order pursuant to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&amp;vr=1.0&amp;cite=… U.S.C. §304</a>

that gave assistance to a Russian bank reorganization. The ruling represents the first time a bankruptcy court
in the United States has given its assistance to the reorganization of a Russian bank. Many international law
experts have hailed the ruling as an important event in the recognition of Russia's effort to reform its legal
and financial systems.

</p><p>The injunction, granted by Judge <b>Prudence Beatty</b> of the U.S. Bankruptcy Court for the Southern District
of New York, prohibits creditors of Rossiyskiy Kredit Bank (RKB) from initiating lawsuits or enforcing
judgments against RKB in the United States. In January 2000, the first meeting of the creditors' group, held
in Moscow, was attended by approximately 700 people. An eight-member creditors' committee of Russian
and foreign creditors, RKB depositors and the Russian government was created, as well as a six-member
arbitration committee. In early August 2000, Judge Beatty granted a temporary injunction prohibiting all
lawsuits in the United States against RKB. Later that month, the amicable settlement was approved by the
Moscow Commercial Court after 97 percent of voting creditors determined they would support the
restructuring.

</p><p>On Oct. 11, 2000, Judge Beatty issued a permanent injunction, ruling that the §304 case was necessary
in order to enjoin actions initiated in the New York state courts, because the New York state courts had no
power to force the dissenting bank creditors to participate in the amicable settlement. Judge Beatty granted
comity to the moratorium proceeding and held that the amicable settlement would be given full force and
effect in the United States and be binding upon and enforceable against all persons and entities in the
United States, including the European banks and the U.S. citizens who were the primary targets of the §304
relief. All persons or entities were permanently enjoined from taking any action in contravention of, or
inconsistent with, the amicable settlement.

</p><p>Judge Beatty also vacated all orders of attachment and injunctions entered in the New York state court
actions, and ruled that the vacatur would be deemed effective upon the European banks and the U.S.
citizens receiving the initial five percent cash payment and new promissory notes provided in the amicable
settlement. The §304 ancillary proceeding is case number 00-13504, <i>In re Rossiyskiy Kredit Bank.</i>

</p><p>Prior to the 1998 Russian financial crisis, Moscow-based RKB was the third largest bank in Russia. In
August 1998, financial difficulties caused the newly created Russian Agency for Reconstruction of Credit
Organizations (ARCO) to take control and obtain a moratorium, akin to a U.S. automatic stay, prohibiting
creditors from prosecuting suits or collecting judgments against RKB. Unfortunately, the Russian version
of the automatic stay purports to prohibit actions only in Russia.

</p><p>By April 2000, 71 percent of the bank's creditors approved an "amicable settlement" that was submitted
to the Russian Arbitrazhniy (commercial) Court for approval on May 16. Therefore, a resolution of RKB's
problems appeared to be progressing smoothly.

</p><p>However, a possible impediment to the Russian reorganization loomed in the form of an attachment
order obtained a year earlier by 13 European banks led by Credit Agricole Indosuez, which held a total of
about $46 million of $200 million of the bank's defaulted notes. The European banks had obtained an
attachment in the Supreme Court of New York County that covered cash on deposit at Chase Manhattan
Bank and the Bank of New York. Although the amount on deposit in each of the New York institutions
was relatively small (each under $20,000), the attachment presented a danger that the actions would be
honored by other foreign courts and thus become the vehicle for the European banks to claim almost $50
million in value of Eurobonds on deposit in the name of RKB in Luxembourg.

</p><p>In addition, a U.S. citizen had obtained a $50,000 judgment against the bank in the Russian courts, and
he had sued in U.S. court to domesticate the Russian judgment. Because the two U.S. actions could restrict
the ability of RKB to implement the restructuring plan, thus giving the European banks and U.S. citizens
a financial benefit at the expense of other creditors participating in the restructuring proceedings, ARCO
sought §304 relief in New York.

</p><p>William J. Rochelle III, a partner with Fulbright &amp; Jaworski L.L.P. in its New York office, represented
ARCO, obtaining a temporary restraining order and later a permanent injunction prohibiting actions in the
United States against RKB. He presented to the court expert testimony indicating that the recently
revamped ARCO reorganization procedure in Russia is similar in many ways to U.S. chapter 11 relief.

</p><p>At the outset, Judge Beatty ruled that a §304 ancillary proceeding is available for a non-U.S. banking
institution, even though a U.S. bank could not itself seek bankruptcy relief in the United States. She found
that the temporary restraining order and later the permanent injunction would prevent the possible preference
of the European banks and U.S. citizens and others over the creditors participating in the ARCO proceeding,
and thus the injunctive relief was in accord with U.S. law. She noted that the ancillary proceeding was needed
to prevent certain creditors from seizing property of the estate to the detriment of the entire reorganization.
Without injunctive relief, one or more creditors could continue or commence actions that might threaten the
success of the restructuring and the amicable settlement.

</p><p>Judge Beatty focused on the fact that it is necessary that a country have an efficient central bank and
regulatory system for liquidating and restructuring banks, and she noted that the recent changes in Russian
law appeared to be an attempt to correct the failures of earlier versions of Russian insolvency law. She also
pointed out that, in many respects, the ARCO proceeding was more open than a U.S. bank insolvency
proceeding handled by the Federal Deposit Insurance Corp. (FDIC) or the RTC. Although, even in the most
recent version, certain provisions of the Russian statute are not identical to the provisions of U.S.
bankruptcy law, the differences were not fatal to the success of the ancillary case, she reasoned, given the
entirety of the circumstance and the law. She also pointed out that, although Russian law does not allow
for court review or appeal of the arbitration committee's ruling on creditors' claims, there is a process for
review of claims through the arbitration panel, the review appeared to be done in an open fashion and there
was no allegation that the claims process was arbitrary in any way.<small>^{<a href="#2" name="2a">2</a>}</small>

</p><hr>
<h3>Footnotes</h3>

<p>^{<small><a name="1">1</a></small>} Head of the Bankruptcy, Reorganization and Creditors' Rights Section of Fulbright &amp; Jaworski L.L.P., which has offices in Houston,
Austin, San Antonio, Dallas, New York, Los Angeles, Washington, D.C., London and Hong Kong. <a href="#1a">Return to article</a>

</p><p>^{<small><a name="2">2</a></small>} As noted above, William J. Rochelle III of Fulbright &amp; Jaworski L.L.P. in New York served as lead counsel for ARCO. In
Moscow, the organization was led by CMS Cameron McKenna. KPMG served as financial advisors for the bank, and Ernst &amp; Young handled general
auditing assignments for the bank. For copies of the pleadings or other information, please contact Evelyn Biery at <a href="mailto:ebiery@fulbright.com">ebiery@fulbright.com</a&gt; or William Rochelle at <a href="mailto:wrochelle@fulbright.com">wrochelle@fulbright.com</a&gt;. <a href="#2a">Return to article</a>