On July 31, 2017, the Bankruptcy Court for the Southern District of New York recognized a Russian insolvency proceeding as a foreign main proceeding under chapter 15 of the U.S. Bankruptcy Code (“Code”), concluding that (i) a retainer deposited with the debtor’s attorneys in the U.S. was sufficient property within the United States to establish jurisdiction over a debtor under section 109(a) of the Code and (ii) the Russian insolvency proceeding was not “manifestly contrary to public policy of the United States.”
The debtor, Sergey Poymanov, was a former owner of one of the largest Russian granite producers. In re Sergey Petrovich Poymanov, 2017 WL 3268144, No. 17-10516 (MKV) (Bankr. S.D.N.Y. 2017) (available here). The facts are worthy of a Dostoyevsky plot. Poymanov claimed to be the victim of an alleged reiderstvo, i.e. a corporate raiding, by lenders who forced Poymanov into involuntary insolvency proceedings where, without a restructuring plan, the Russian court ordered the liquidation of Poymanov’s estate. Poymanov assigned his legal reiderstvo claims to a U.S. fund, PPF Management LLC (“PPF”), which in turn filed a complaint for approximately $750 million against more than twenty defendants, including Poymanov’s lenders and the administrator of the Poymanov estate under Russian insolvency proceeding. (PPF Mgmt. LLC v. OJSC Sberbank of Russia, No. 16 CV 9139 (S.D.N.Y. 2016), available here. PPF’s complaint alleges a conspiracy among lenders and the administrator of the estate to engage in a reiderstvo against Poymanov, his ex-wife, and his granite company in order to dissolve the company and seize its assets. To avoid the effects of the automatic stay on the litigation of its assigned claims, PPF contested recognition under chapter 15 on the basis that (i) Poymanov was not an eligible debtor under section 109(a) of the Code because he had no property in the United States and (ii) recognition would be manifestly contrary to U.S. public policy.
Property in the United States
Poymanov had two possible claims to property in the United States: the reiderstvo claims filed in the Southern District of New York and a retainer deposited with Poymanov’s U.S. lawyers—albeit with funds received by the estate as partial payment of a distressed credit. PPF argued that the retainer funds could not constitute property of Poymanov’s estate due to procedural imperfections in the chain of custody, but to no avail. The Bankruptcy Court held that funds in the retainer account sufficed, per se, to confer jurisdiction over Poymanov as debtor, reinforcing the expansive interpretation of “property” under section 109(a) of the Code. And the reiderstvo claims? Having already established jurisdiction, the question of Russian law could wait, but recognition triggered the automatic stay applicable to all property of Poymanov’s estate within the territorial jurisdiction of the United States. To the extent that the assigned reiderstvo claims remain Poymanov’s property under applicable Russian law, PPF would likely have to obtain relief from the stay before it could continue to litigate the assigned claims.
U.S. Public Policy
The Court also found that recognition of the Russian proceedings was not manifestly contrary to U.S. public policy. Under chapter 15, the bankruptcy courts must recognize a foreign proceeding that satisfies certain administrative prerequisites, unless the court concludes that recognition would be “manifestly contrary to public policy of the United States.” PPF intervened in an attempt to frame U.S. recognition as contrary to public policy by alleging that the administrator of the estate, a named defendant in the reiderstvo action, had acted contrary to Russian law in furtherance of the reiderstvo against Poymanov. PPF argued that what appeared to be a collective proceeding was in fact a sham—merely a means for the defendants in the reiderstvo action to effect their scheme—and that recognizing it would vitiate public policy. However, the Court found that PPF failed to provide any evidence that the proceeding was a sham, of the estate administrator’s criminal activity or bad faith dealing, or impropriety or corruption attributable to the Russian court, and absent such evidence, concluded that the foreign proceeding was certainly not manifestly contrary to U.S. public policy.
In re Poymanov demonstrates the expansive definition of property under section 109(a) as applicable to foreign debtors seeking bankruptcy protection under chapter 11 as well with respect to foreign representatives seeking recognition of foreign proceedings under chapter 15 to protect property within the United States during the pendency of the foreign proceeding. Moreover, during a period of increased political fissures between various nations, it affirms the universalist approach of chapter 15 of the Code—and the UNCITRAL Model Law on Cross-Border Insolvency on which it is based.