Mere allegations of corruption cannot defeat a petition for recognition of Russian bankruptcy proceedings under Chapter 15, according to an opinion by Bankruptcy Judge Mary Kay Vyskocil of New York.
In 2011, a Russian court put two companies into involuntary bankruptcy. Both companies were owned by the same Russian individual. In 2015, a creditor filed an involuntary bankruptcy petition against the owner. In 2016, the Russian court ruled that the petition satisfied statutory requirements for insolvency proceedings against the owner and appointed a financial administrator for his assets. Later the Russian court decided that the owner’s assets should be liquidated.
The owner apparently contended that the bankruptcies against him and his two companies were part of a corporate raiding scheme to steal his assets. The owner alleged that he assigned the raiding claims to a newly formed U.S. company that filed suit in late 2016 on those claims in federal district court in New York against 22 defendants, including the petitioning creditors and the Russian financial administrator.
In March, the financial administrator filed a petition seeking recognition of the owner’s bankruptcy as a foreign main proceeding under Chapter 15. Judge Vyskocil granted recognition in her July 31 opinion and imposed the automatic stay.
Judge Vyskocil concluded that the administrator established the basic requisites for chapter 15 recognition. The retainer held by the administrator’s U.S. counsel was property in the U.S., and the administrator met the definition of a “foreign representative” under Section 101(24). The Russian bankruptcy likewise satisfied the requirements for a “foreign proceeding” under Section 101(23).
Along the way, Judge Vyskocil held that there is no requirement for a foreign representative to “satisfy the disinterested test.” She said that Section 101(24) only requires that the person “be appointed and authorized in a foreign proceeding to administer the reorganization.”
Judge Vyskocil also said “there is no requirement that a foreign representative be free of any conflict of interest, however speculative or remote.” There was only a “mere allegation” and no evidence of conflict of interest, she said.
The plaintiff in the district court suit contended that granting recognition would be “manifestly contrary to the public policy of the U.S.,” under Section 1506, in part because the Russian bankruptcy was allegedly part of a corporate raiding scheme. The plaintiff also argued that the administrator had not employed proper procedures under Russian law to retain counsel in the U.S. and to pay the retainer.
Rejecting the “manifestly contrary” argument, Judge Vyskocil said the plaintiff presented no evidence that the Russian bankruptcy was “part of a corporate raiding scheme.” Likewise, she said that nothing about the retention of counsel or payment of the retainer offended any U.S. policy.
Judge Vyskocil ended her opinion explaining why it was proper to invoke the automatic stay under Section 362(a).
To begin with, the assignment of the raiding claims may not have occurred until after initiation of the owner’s Russian bankruptcy, making the transfers void ab initio under Russian law.
The Russian administrator had already filed proceedings in the Russian bankruptcy court to declare that the claim assignments were void under Russian law. Judge Vyskocil said it “would not be appropriate” for her “to issue a ruling construing Russian Bankruptcy Law in advance of the Russian Court’s ruling on the same issue.”
Judge Vyskocil therefore held that the Russian proceedings qualified as a foreign main proceeding and that the automatic stay under Section 362 applied to the suit in district court to “the extent to which the SDNY Claims are property” of the bankrupt estate. If the plaintiff nonetheless proceeds with the district court suit prior to resolution of the proceedings in Russia, she warned that the plaintiff “does so at its peril” because the administrator has recourse under Section 362(k) for a willful violation of the automatic stay.