Deposit Ins. Agency v. Leontiev, No. 17-MC-00414 (S.D.N.Y. July 23, 2018) [click for opinion]

Plaintiff Deposit Insurance Agency ("DIA") is a Russian governmental bankruptcy receiver, which controls in receivership Probusinessbank, a failed Russian commercial bank. Pursuant to 28 U.S.C. § 1782, DIA issued a subpoena for documents and testimony from Sergey Leontiev, the founder and former president of Probusinessbank.

Leontiev sought to quash the subpoena on two grounds. First, he argued that compliance with the subpoena would be a violation of US sanctions imposed under the Magnitsky Act, which prohibits the transfer of property to anyone involved with the tax fraud that led to the death of Sergei Magnitsky. Second, Leontiev argued that the subpoena should not be enforced under Section 1782 because it represents a bad faith attempt to harass Mr. Leontiev and to obtain documents and information his antagonists in the Russian government would use to prosecute him criminally in Russia.

The court disagreed with Leontiev's arguments. As a threshold matter, the court found that DIA satisfied the statutory elements of Section 1782 "[b]ecause Leontiev is located in the Southern District of New York, the requested discovery is 'for use' in the bankruptcy proceeding, and the DIA is [an] interested person …."

The court next noted that "The Supreme Court has identified four factors to guide the district court's discretion" in evaluating discovery requests under Section 1782:

(1) whether the person from whom discovery is sought is a participant in the foreign proceeding, in which case the need for § 1782(a) aid generally is not as apparent; (2) the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to US federal-court judicial assistance; (3) whether the § 1782(a) request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States; and (4) whether the request is unduly intrusive or burdensome.

Some background is required in order to understand the court's analysis of these discretionary factors. According to Leontiev, who maintains ties to prominent Russian dissidents and the US government, the forced bankruptcy of Probusinessbank was politically motivated, as both the Russian Central Bank and Probusinessbank's independent auditor had recently declared it to be financially viable. Nonetheless, the bankruptcy proceeded, with DIA hiring the Russian law firm Quorum to represent it in the proceedings. The chairman of Quorum is an individual named Andrei Pavlov, who was directly involved in the so-called Magnitsky affair.

The Magnitsky affair was a well-publicized tax fraud scheme relating to the American-run investment firm, the Heritage Fund. Sergei Magnitsky uncovered the fraud and exposed those responsible. He was thereafter jailed, tortured, and ultimately killed by agents of the Russian government. In response, in 2012, the United States Congress passed the Magnitsky Act, which named and sanctioned individuals responsible for Mr. Magnitsky's death. In late 2017, Pavlov was included on a list of names to be added to the sanction list under the Magnitsky Act.

In relevant part, the Magnitsky Act prohibits the transfer of property to people who were involved with the tax fraud and cover-up that led to Magnitsky's death. 31 C.F.R. § 584.201(a). Leontiev argued that the production of documents to DIA and its attorney (who is named on the Magnitsky Act sanction list) would violate this provision of the Act. The court disagreed, finding that only United States persons are prohibited from transacting with sanctioned individuals, and the DIA is not a United States person. Accordingly, the court reasoned that DIA's relationship with Pavlov did not bring DIA within the Act's ambit.

The court also rejected Leontiev's arguments that transferring documents to an entity affiliated with an individual sanctioned under the Act represents the transferring of a "property interest" to Pavlov. In support of this decision, the court cited cases that stand for the proposition that production of materials in discovery does not confer a concomitant property interest in those materials.

The court found the issue of whether Pavlov could gain indirectly due to granting the application for discovery to be much "thornier" because Pavlov and his law firm were entitled to 15% recovery as a contingency relating to his firm's work in the underlying bankruptcy proceedings in Russia. The court dismissed this concern, however, because it reasoned that any such transaction would be between DIA (acting on behalf of Probusinessbank as its receiver) and Quorum. Accordingly, the court reasoned that allowing discovery under section 1782 did not violate the Magnitsky Act and was thus not against "American policy."

As to other American policies, the court, in its discretion, reached a similar result. For example, the court explained that production of the documents did not implicate Leontiev's right (under either American or Russian law) against self-incrimination, finding that Leontiev could invoke that right during any deposition. The court further found that any concern that the use of this discovery to seize Mr. Leontiev's assets was unfounded, remarking "while the Court finds certain aspects of the DIA's account of Leontiev's purported wrongdoing dubious, it finds no evidence—apart from his lawyers' say-so—that the DIA will use this discovery to seize his assets."

Ultimately, the court concluded that it was "not blind to Leontiev's claims that the discovery sought here is intended for other proceedings or impermissible purposes." Indeed, the court remarked that "Leontiev has marshalled substantial evidence to support this view, which is rebutted by the DIA largely with inconsistent statements or hearsay declarations." However, the court did not quash the subpoena, instead ordering the parties to meet and confer to modify the scope of the subpoena to reduce the burden on Leontiev and to narrow its focus to only those topics relevant to the Probusinessbank bankruptcy proceeding.