A Peek into Business and Bankruptcy in Russia

By Donald L. Swanson

It’s not very often that we get to see what’s going on with businesses and bankruptcies in Russia.

But we now get a peek. It comes from a lawsuit and a bankruptcy filed in the Southern District of New York involving a granite production business in Russia.

Business Developments in Russia

Sergei Petrovich Poymanov lives in Russia and is a Russian citizen. Back in early 2008 Poymanov owns a majority interest in a granite production company, which is, at that time, “one of the largest granite producers in Europe.”  It’s “a successful business,” the “largest employer in Pavlovsk, Russia,” and “a major taxpayer and corporate contributor to the local economy.”

In August 2008, Poymanov and his holding company obtain financing from Sberbank of Russia for RUB 5.1 billion (about U.S. $215 million) to buy out all but 1% of the other owners of the granite production company. And in 2009 his granite production company borrows another RUB 1.39 from Sberbank (about U.S. $43.5 million). Poymanov guarantees these obligations and pledges his ownership interests in both the granite production company and the holding company as security.

Defaults, Lawsuits and Bankruptcies in Russia

In 2010, Poymanov and his companies default on their Sberbank obligations. Whereupon, Sberbank declars a default, accelerates the loans, and assigns the loans to Sberbank Capital LLC (a wholly owned subsidiary that deals with problem and workout loans). Sberbank then sues Poymanov in the Odintsovsky City Court of Moscow Region on the RUB 5.1 billion obligation and obtains judgment for the full amount. Sberbank also prevails on appeal.

In September of 2011, Sberbank initiates cases, (i) “against the granite production company in the Commercial (Arbitrazh) Court of the Voronezh Region,” and (ii) “against Poymanov’s holding company in the Commercial (Arbitrazh) Court of the City of Moscow.” Each case results in a finding of insolvency, with an “insolvency proceeding” ensuing for each company.

Four years later (on October 1, 2015), a Sberbank successor files an application in a Russian Court to declare Poymanov insolvent under Russian Bankruptcy Law. On February 8, 2016, the Russian Court grants the application and finds:

–Poymanov “meets the criteria for insolvency pursuant to the statutory requirements of the Federal Law ‘On Insolvency (Bankruptcy)’”; and

–“[i]n the court’s opinion, debt restructuring should be applied to the debtor.”

At the same time, the Russian Court appoints Aleksey Vladimirovich Bazarnov “as the financial administrator” in Poymanov’s “Russian Insolvency Proceeding” and instructs the administrator to:

–analyze the “financial condition of Poymanov and any evidence of intentional or fraudulent bankruptcy”; and

–“submit an individual’s debt restructuring plan.”

Five months later, the Russian Court rules:

–because a restructuring plan for Poymanov is not received when required, “a bankruptcy procedure – the sale of the individual’s assets – should be introduced.”

Poymanov fights hard against the bankruptcy and liquidation efforts in Russia, “initiating more than 50 legal actions” in local courts. But Russian courts are unsympathetic and reject his claims. Poymanov contends such rejections are predictable because a “key component to Russian corporate raiding” is “undue influence” in the “captured Russian Courts.”

“Reiderstvo”

Poymanov alleges that he and his companies are the target of well-known corporate raiding “techniques” involving, (i) “fraud, bribery, forgery, corruption, intimidation, manufactured bankruptcy and, ultimately, expropriation of the targeted company,” and (ii) conspiracies between “private and public sector white collar criminals.” Such techniques are “internationally known as ‘Reiderstvo.'”

Poymanov cites a paper in his Complaint: L. Shelley & J. Dean, The Rise of Reiderstvo: Implications for Russia and the West (2016). This paper offers a summary of “reiderstvo” as follows:

• Russian corporate raiding is not new. Over time it has evolved into a systematic taking of assets from legitimate businesses for personal profit following a four-stage process: preparation, negotiation, execution, and legalization.
• Illegal raiders capitalize on the weakness of Russian institutions, endemic corruption and abuse rule of law, media, and government under the tacit acquiescence of Russian leaders in order to strip companies of assets and generate these personal profits.
• This practice is known as “reiderstvo.” It gains its distinction from Western practice of corporate raiding specifically through the use of destructive, corrupt, and violent means to make massive and rapid profits by selling assets and laundering the proceeds.
• Raiding is contributing to Russia’s current unfriendly business climate and to declining investor confidence in the country.

Poymanov’s Legal Battles in U.S.

Poymanov decides to seek help from courts in the United States of Amerca.

–U.S. Lawsuit

So, Poymanov and his companies create a U.S. company in Delaware (PPF Management, LLC) and assign their reiderstvo claims to it. PPF Management then files a lawsuit in the U.S. District Court for the Southern District of New York against the parties it alleges are conspiring to take Poymanov’s companies.  Named parties defendant include:

–Receivers in the Russian bankruptcies who, allegedly, are “members of an association of receivers” with a “well-established history of engaging in Reiderstvo.”

–A U.S. citizen residing in Moscow who allegedly “participated in and furthered the conspiracy”; and

–Sberbank CIB USA, Inc. — a “registered broker-dealer” under “the U.S. Securities and Exchange Act,” incorporated in Delaware, with its principal place of business in New York, that allegedly served to “launder the instrumentalities and proceeds of the wrongs” committed by other defendants.

Poymanov files the U.S. lawsuit to seek redress in “a competent and independent judicial authority.” The U.S. lawsuit seeks damages based on “common law” claims of “fraud and misrepresentation, conspiracy to commit fraud, breach of fiduciary duty, negligent supervision, abuse of process and unjust enrichment.”

–U.S. Bankruptcy

The “financial administrator” in Poymanov’s Russia bankruptcy counters the U.S. lawsuit by initiating a proceeding against Poymanov in the U.S. Bankruptcy Court for the Southern District of New York. The bankruptcy filing seeks, (i) “recognition” of the Russian bankruptcy “as a foreign main proceeding” under Chapter 15 of the U.S. Bankruptcy Code, and (ii) “a declaration” that the U.S. automatic bankruptcy stay prevents Poymanov’s U.S. lawsuit from moving forward.

The S.D.N.Y. bankruptcy Judge holds a two-day trial and reaches these conclusions:

–the Russian bankruptcy is recognized as “a foreign main proceeding” under Chapter 15 of the U.S. Bankruptcy Code; and

–accordingly, the U.S. automatic bankruptcy stay applies to Poymanov’s property within the U.S.; but

–whether the claims asserted by PPF Management in the District Court lawsuit are “property of Poymanov (or property of PPF)” must first be decided under Russian Bankruptcy Law; and

–“it would not be appropriate for this Court” to address such an issue before the Russian Courts have a chance to do so.

The Bankruptcy Judge’s ruling is on appeal.

QUESTIONS

This peek into the details of a Russian business and various Russian lawsuits and bankruptcy proceedings is fascinating! It raises many questions for those of us with limited knowledge of Russia and its business and legal practices. For example:

–How does a lone individual, in Russia, amass a 99% ownership interest in a major business like this?

–Do Poymanov’s allegations about reiderstvo have any validity? Or are such allegations merely the grumblings of a disappointed entrepreneur?

–What type of bankruptcy laws exist in Russia? And how are they utilized?

–What role can a U.S. Court play in disputes arising out of business dealings in Russia?

–What role can U.S. “common law” claims have among Russian businesses, Russian individuals, Russian disputes and Russian courts?

Can anyone provide any answers?

Footnote:  The foregoing information and quotations are from (unless otherwise noted): (i) U.S. Bankruptcy Court opinion in In re Poymanov, Case No. 17-10516 (Bkry. S.D.N.Y., decided July 31, 2017), and (ii) Complaint filed in PPF Management LLC v. OJSC Sberbank of Russia, et al, Case No. 16-09139 (D. S.D.N.Y, filed January 6, 2017).

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