In re Sabadash, No. 2:23-BK-15574-NB, 2024 WL 694154, at *1 (Bankr. C.D. Cal. Feb. 20, 2024)

The following is a case update written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, analyzing In re Sabadash, No. 2:23-BK-15574-NB, 2024 WL 694154, at *1 (Bankr. C.D. Cal. Feb. 20, 2024), adhered to in part on reconsideration sub nom. In re: Aleksandr Vitalievich Sabadash, Debtor., No. 2:23-BK-15574-NB, 2024 WL 2160823 (Bankr. C.D. Cal. May 14, 2024), a recent case of interest:

SUMMARY

In In re Sabadash, Judge Neil W. Bason in the bankruptcy court of the Central District of California granted the petition to recognize a Russian Bankruptcy Proceeding.

To read the decision, click here.

FACTS

Aleksandr Vitalievich Sabadash (“Debtor”) has a Russian Bankruptcy Proceeding (“Russian case”), which is related to other proceedings in both the United Kingdom and the United States. Debtor already had one case assigned to Judge Neil W. Bason. In re Golden Sphinx Limited (Bankr. C.D. Cal., Case No. 2:22-bk-14320-NB). In that case, Debtor has an asset ownership which links him to real estate in the Central District of California.

In the Russian case, Alexander Ivanovich Gavva (“Gavva”) is a foreign representative of the Russian insolvency proceeding involving Debtor. Gavva filed a petition with the bankruptcy court to recognize the foreign insolvency proceeding. Debtor objected. The bankruptcy court granted the petition.

REASONING

In granting the petition, Judge Bason first analyzed and dismissed Debtor’s claim that Gavva lacked standing. He then reviewed the statute of 11 U.S.C. §1517, in which Congress sets the standard for an Order recognizing a foreign case. There are three requirements where the bankruptcy court “shall” issue an order under § 1517: 

• the foreign proceeding is a “foreign main proceeding” or “foreign nonmain proceeding” per § 1502; 
• the foreign representative applying for recognition is a person or body; and
• the petition meets the requirements of § 1515.

Main or Nonmain

For the first prong of “main” or “nonmain,” the nexus between the debtor and the foreign country is different. For the former, § 1502 requires that it be the country where the debtor has the center of its main interests (“COMI”). For the latter, it only need be shown that that debtor has an “establishment” there.

Judge Bason first looked at whether it was a “foreign main proceeding.” To demonstrate a “foreign main proceeding,” a habitual residence (or domicile) is sufficient to show the required nexus of COMI. Id. At *4, citing In re Ran, 607 F. 3d 1017,1022 (5th Cir, 2010). As to residence, the evidence wasn’t clear as to where Debtor lived at the relevant time period, and both parties had taken inconsistent positions on the issue. As Gavva had convinced a California court that the domicile of Debtor at the relevant time is California, Gavva was judicially estopped from later asserting that the Debtor’s residence instead is in Russia.

Another way to prove a “foreign main proceeding” is to consider factors “…such as (1) the location of a debtor’s primary assets; (2) the location of the majority of the debtor’s creditors; and (3) the jurisdiction whose law would apply to most disputes…” Ran, 607 F.3d at 1024, citing In re Loy, 380 B.R. 154, 162 (Bankr. E.D. Va. 2007). Judge Bason concluded that the primary asset location favored Russia (location of a disputed factory); that the creditor location was neutral; and that the applicable law favored Russia. Analyzing the Ran and Loy factors, Judge Bason concluded Russia is the COMI for Debtor, and that the Russian Case was a “foreign main proceeding.”

There was then a review whether it was a “nonmain” proceeding. Recall that to demonstrate that, there needs to be a showing that the debtor has an “establishment” in the foreign country. Establishment is shown by proving that Debtor had a place of operations in Russia and been carrying on nontransitory economic activity in Russia at the time the petition for recognition was brought in the U.S. Ran, 607 F.3d at 1027. Judge Bason, referring to the disputed, indirect ownership of the factory above, concluded that this was enough to show an establishment in Russia.

As such, even if it were not a “foreign main proceeding,” the Russian Case was a “foreign nonmain proceeding” under § 1517 and satisfied the first prong for recognition.

No public policy exception

Judge Bason then turned to the limitation in § 1517 regarding public policy. The section starts with “Subject to section 1506…” Section 1506, called the “Public policy exception,” states:

Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.

The bankruptcy court then noted that the “public policy exception is ‘to be interpreted restrictively,’ and ‘should be invoked only under exceptional circumstances concerning matters of fundamental importance to the United States.’” Id. At *9, citing In re Foreign Econ. Indus. Bank Ltd., “Vneshprombank” Ltd., 607 B.R. 160, 169-70 (Bankr. S.D.N.Y. 2019). Considering the ongoing Russian war with Ukraine, Judge Bason observed that one objective of U.S. policy was to isolate Russia’s financial system from the rest of the world. He then noted that granting the petition would not allow Russia to seize assets here in the United States or elsewhere, but only those already located in Russia. As such, granting the petition would have no impact on the funding or (lack thereof) of the Russian war against Ukraine.

Judge Bason also made a point to take judicial notice of the “widespread suspicion about the legitimacy of some Russian Courts’ proceedings. For example, there has been considerable negative press about the incarceration and death of opposition leader Alexei Navalny.” Id. At *12. However, the bankruptcy court then noted that there was no evidence the Russian Case lacked legitimacy, and in the totality, it was not sufficient to be “manifestly contrary” to invoke the Public Policy Exception to § 1517.

Summing up, the elements of § 1517 were met. The Russian Case was a “foreign main proceeding,” and even if it weren’t, it’s a “foreign nonmain” one, sufficient to satisfy the first prong. The foreign representative is a person, and the petition met the requirements of § 1515. As such, the bankruptcy court concluded that it “shall” enter an order recognizing the proceeding.

AUTHOR’S COMMENTS

Bankruptcy can be odd. In fact, most of its chapters are indeed odd numbers, and they go up to the obscure netherworld of Chapter 15 bankruptcy. Chapter 15 is relatively new and adopts the Model Law on Cross-Border Insolvency based on an older United Nations Commission. It became law with BAPCPA in 2005. If you’re like most practitioners, you’ve never practiced it, let alone read a pleading from a Chapter 15 case.

It’s not every day one gets to read an Order filed in your local bankruptcy court in a Chapter 15 case involving Russia and citing the war in Ukraine and Alexei Navalny. However, this extraordinary order by Judge Bason provides just that opportunity.

The bankruptcy court’s Order and analysis was well-reasoned, as the Court was mindful of the claims by the parties (which often contradicted not only each other, but even their own prior assertions). Removing all the foreign attributes to this chapter and the subject-matter at hand, at its core, this was a simple application of law to facts. The bankruptcy court here carefully applied the clear requirements of § 1517 to the facts at hand, and the result appears to be the right one.

In the larger picture, while the typical day of an insolvency professional is narrowly focused on routine reaffirmation agreements and motions for relief of stay, the same Bankruptcy Code is wide-ranging and flexible enough to accommodate global requests to recognize a “Russian Bankruptcy Proceeding” involving assets in Vyborg, Russia, a town in Leningrad founded in 1293 as a medieval fortress in Finland under Swedish rule during the Third Swedish Crusade.

If you are like the author, this is likely all foreign to you. But Chapter 15 bankruptcy is a small and obscure – but significant – part of practicing in the odd but fascinating world of bankruptcy law. 

These materials were written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, representing consumer debtors in the Central District of California, and President of the Central District Consumer Bankruptcy Attorneys Association, with editorial contributions by Kathleen A. Cashman-Kramer, Esq., Director, Fennemore LLP, kcashman-kramer@fennemorelaw.com.

Thank you for your continued support of the Committee.