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In a ruling that experts called an important recognition of Russia’s efforts to reform its legal and financial systems, a federal bankruptcy judge in New York has honored a Russian bank restructuring order protecting the bank from international creditors. The Oct. 11 decision by U.S. Bankruptcy Judge Prudence Carter Beatty of the Southern District of New York granted a permanent injunction requested by representatives of Rossiyskiy Kredit Bank. It surprised international bankruptcy experts because of the Russian courts’ longstanding reputation for corruption. In re Rossiyskiy Kredit Bank, No. 00-13504. “This is a very big deal for Russia,” says William J. Rochelle III, a partner in the New York office of Fulbright & Jaworski, who filed the lawsuit on behalf of the Russia Agency for Restructuring of Credit Organizations (ARCO). “Having an effective bankruptcy law is the sine qua non for access to international credit markets.” ARCO, which is similar to the U.S. Resolution Trust Corp., was created in July 1999 to reorganize insolvent or financially troubled Russian banks and credit institutions in the economic turmoil following the collapse of the Soviet Union. U.S. Bankruptcy Judge Sid Brooks of the District of Colorado, an expert on Russian bankruptcy and financial reform who has regularly traveled to Russia to participate in seminars for Russian judges, acknowledges that Russia’s efforts at judicial and fiscal reform have thus far met with mixed success. With that background, Brooks says, “To have an American court recognize one of [ARCO's] orders — that’s making great progress.” ‘IT ALMOST SEEMS LIKE A JOKE’ Indeed, the reputations of ARCO and Rossiyskiy Kredit were so tarnished, says Bruce S. Marks — a Philadelphia lawyer whose firm, Egorov, Puginsky, Afanasiev & Marks, specializes in Russian litigation and has offices in St. Petersburg and Moscow — that “it almost seems like a joke that a U.S. court would recognize a Russian court order. In fact, the general consensus has been that U.S. courts should not be getting involved in recognizing Russian-controlled court orders.” Rochelle has no argument with the skeptics: “Going into that courtroom, we were not the least bit confident that a U.S. court would honor an [ARCO] order that these creditors must go back to Russia for relief. “The corruption throughout the entire Russian legal system is well known,” Rochelle adds. “But the facts of this matter convinced [Judge Beatty] that they conducted this particular reorganization in a very professional manner.” According to documents filed by Rochelle in the U.S. bankruptcy case, the Moscow-based Rossiyskiy Kredit fell on hard times during the Russian financial crisis of August 1998. ARCO officials decided that the bank, like many other Russian banks that came under its oversight, should be reorganized under a provision similar to Chapter 11 of the U.S. Bankruptcy Code. In April, the documents continue, 71 percent of Rossiyskiy Kredit’s creditors approved an “amicable settlement” that was submitted to the Russian Commercial Court for approval on May 16. OTHER PENDING CASES But before any settlement could be approved, ARCO had to contend with an attachment order obtained a year earlier by 13 European banks led by Credit Agricole Indosuez, which held a total of about $46 million of $200 million in the bank’s defaulted notes. The 13 European banks had obtained the attachment in the Supreme Court of New York County, the state’s trial-level court, to claim $19,975 in Rossiyskiy Kredit assets at Chase Manhattan Bank and another $4,454 at the Bank of New York. But the real value of the New York attachments, Rochelle explained, was that they would be honored by virtually every foreign court and thus become the vehicle for the European banks to try to claim almost $50 million worth of Eurobonds owned by Rossiyskiy Kredit and deposited in Luxembourg. Also pending in U.S. District Court for the Southern District of New York was a suit filed by Vadim Kemelman, a U.S. citizen who obtained a $50,000 judgment against Rossiyskiy Kredit in the Russian courts before ARCO took over and began restructuring the bank. With his Russian judgment frozen by ARCO, Kemelman sued in the U.S. court to “domesticate the Russian judgment.” Both U.S. actions, ARCO maintained, referring to Rossiyskiy Kredit, would “restrict RKB’s ability to implement the restructuring plan, thus giving [the European banks and Kemelman] a financial benefit at the expense of other creditors who are participating in the restructuring proceedings with ARCO.” SIMILARITIES TO CHAPTER 11 Rochelle said he believes that Judge Beatty was convinced by Russia’s use of a reorganization procedure with Rossiyskiy Kredit Bank that had been recast recently to make it more like the United States’ Chapter 11. For example, the U.S. bankruptcy injunction request filed by Rochelle says that ARCO hired the U.S.-based international accounting firms of Ernst & Young and KPMG. The former was retained to handle general auditing assignments in the RKB case. The latter analyzed the bank’s finances and helped with the international workout of the debts. ARCO also convened a creditors’ association and a panel to hear creditor disputes about the amount and priority of claims against RKB. The first meeting of the creditors’ group, held on Jan. 20 in Moscow, was attended by about 700 people, representing 47 percent of RKB’s creditors. That first creditors’ association meeting, the ARCO document continues, resulted in the creation of an eight-member creditors’ committee of Russian and foreign creditors, RKB depositors and the Russian government, and a six-member arbitration committee. After signing the tentative settlement agreement on April 7, ARCO conducted informational meetings with non-Russian creditors in Moscow; Frankfurt, Germany; and Vienna, Austria, before the creditors approved the settlement on April 19. Under the settlement agreement, each RKB creditor will receive a cash payment of 10 percent of their claim; dollar-denominated, non-interest-bearing notes for 20 percent of their claim, payable in three to six years; and ruble-denominated, non-interest-bearing notes for the remainder of the claim, payable in 10 years. WEIGHING THE HARDSHIPS In granting ARCO’s request for an injunction protecting its restructuring and settlement agreement, Judge Beatty wrote that “the balance of hardships in issuing this order and the relief requested in the motion and the petition tips decidedly in favor of the petitioner.” Beatty wrote that unless ARCO’s requested injunction was granted, “one or more creditors may continue or commence the prosecutions of actions against RKB and may threaten the success of the restructuring and the amicable settlement.” Beatty also scheduled status conferences on the injunction and related matters for Dec. 5, and for Jan. 10 and Feb. 8, 2001. PART OF A TREND While the Rossiyskiy Kredit Bank case is the first in which a U.S. court has recognized a Russian bankruptcy-related ruling, Toronto lawyer E. Bruce Leonard says the ruling is “clearly part of a trend of U.S. courts recognizing foreign proceedings.” As business and finance increasingly become international in outlook, Leonard says, a universal framework for dealing with the rights of creditors and debtors is inevitable. Leonard, a partner at Toronto’s Cassels Brock & Blackwell and co-chair of the international committee of the American Bankruptcy Institute, says U.S. courts decide whether to honor a foreign bankruptcy ruling depending on the equities involved in the individual case. Thus, U.S. judges sometimes uphold rulings from such countries as Canada and Australia and sometimes do not. The U.N. Commission on International Trade Law has promulgated a recommended model bankruptcy law, which Leonard says has been adopted by such countries as Mexico, South Africa, Canada, England and Australia. He says that provisions for recognizing foreign bankruptcy proceedings are included in legislation to amend the U.S. Bankruptcy Code, which has been pending before Congress since 1998.

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