A California bankruptcy court recognized[1] Mr. Sabadash's Russian bankruptcy proceeding[2] as a foreign main proceeding, finding that the debtor's center of its main interest (COMI) was in Russia.
The question was whether such recognition was (un)permissible because it was “manifestly contrary to the public policy of the United States”[3], as the majority creditor in the case is Tavrichesky Bank, a wholly owned subsidiary of the sanctioned organization. Thus, it was feared that recognition of the Russian proceeding might enable the Bank to seize the debtor's American assets, whereas “a key objective of the foreign policy of the United States has been to cut off funding for Russia's special military operation”.
However, the U.S. court concluded that recognition of Russian bankruptcy proceeding would only allow the adjudication of control of assets already in Russia, which would have “no apparent effect” on the financing of the special military operation or lack thereof.
The court ruled that the Russian bankruptcy proceedings should be recognized within the United States to facilitate the recovery of assets for the benefit of a large number of creditors of the debtor (who is also involved in other bankruptcy proceedings within the United States and the United Kingdom), but that any change of control over Mr. Sabadash's assets should not be for the benefit of Tavrichesky Bank in order to comply with the sanctions. The Court has given the parties the opportunity to draft a proposed order consistent with this restriction.
This decision resolves the issue of the impact of the sanctions on recognition of Russian bankruptcy abroad. In addition, acts of foreign insolvency courts are recognized in Russia on the basis of reciprocity[4], which is currently interpreted rather narrowly by Russian courts. So, in some cases[5] the Russian courts require evidence of recognition and enforcement of Russian judgments abroad after the start of a special military operation. In this case, the decision of the U.S. court to recognize the Russian bankruptcy of Mr. Sabadash may serve as evidence of reciprocity between the courts of the Russian Federation and the United States after February 2022.
[1] In re Sabadash, 2:23-bk-15574-NB (Bankr. C.D. Cal. May. 14, 2024)
[2] Case А41-100887/2019, URL: А41-100887/2019 (arbitr.ru)
[3] 11 U.S.C. § 1506 (2015)
[4] Decision of the Moscow District Arbitrage Court from 14.07.2022 in case No. A41-93214/2021
[5] Resolution of the Moscow District Arbitrage Court from 24.07.2023 in case No. A40-242631/2022; Resolution of the Moscow City Court from 23.06.2022 in case No. 3m-0464/2022.
The question was whether such recognition was (un)permissible because it was “manifestly contrary to the public policy of the United States”[3], as the majority creditor in the case is Tavrichesky Bank, a wholly owned subsidiary of the sanctioned organization. Thus, it was feared that recognition of the Russian proceeding might enable the Bank to seize the debtor's American assets, whereas “a key objective of the foreign policy of the United States has been to cut off funding for Russia's special military operation”.
However, the U.S. court concluded that recognition of Russian bankruptcy proceeding would only allow the adjudication of control of assets already in Russia, which would have “no apparent effect” on the financing of the special military operation or lack thereof.
The court ruled that the Russian bankruptcy proceedings should be recognized within the United States to facilitate the recovery of assets for the benefit of a large number of creditors of the debtor (who is also involved in other bankruptcy proceedings within the United States and the United Kingdom), but that any change of control over Mr. Sabadash's assets should not be for the benefit of Tavrichesky Bank in order to comply with the sanctions. The Court has given the parties the opportunity to draft a proposed order consistent with this restriction.
This decision resolves the issue of the impact of the sanctions on recognition of Russian bankruptcy abroad. In addition, acts of foreign insolvency courts are recognized in Russia on the basis of reciprocity[4], which is currently interpreted rather narrowly by Russian courts. So, in some cases[5] the Russian courts require evidence of recognition and enforcement of Russian judgments abroad after the start of a special military operation. In this case, the decision of the U.S. court to recognize the Russian bankruptcy of Mr. Sabadash may serve as evidence of reciprocity between the courts of the Russian Federation and the United States after February 2022.
[1] In re Sabadash, 2:23-bk-15574-NB (Bankr. C.D. Cal. May. 14, 2024)
[2] Case А41-100887/2019, URL: А41-100887/2019 (arbitr.ru)
[3] 11 U.S.C. § 1506 (2015)
[4] Decision of the Moscow District Arbitrage Court from 14.07.2022 in case No. A41-93214/2021
[5] Resolution of the Moscow District Arbitrage Court from 24.07.2023 in case No. A40-242631/2022; Resolution of the Moscow City Court from 23.06.2022 in case No. 3m-0464/2022.