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In re Application of WinNet R CJSC

United States District Court, S.D. New York

April 13, 2017

IN RE APPLICATION OF WINNET R CJSC, FOR AN PURSUANT TO 28 U.S.C. § 1782 TO CONDUCT DISCOVERY FOR USE IN A FOREIGN PROCEEDING

          For WinNet R CJSC: David J. Eiseman Matthew C. Daly Golenbock Eiseman Assor Bell & Peskoe LLP

          For Siguler Guff & Co., L.P. et al.: Thomas E.L. Dewey Keara A. Bergin Dewey, Pegno & Kramarsky.

          OPINION AND ORDER

          DENISE COTE United States District Judge.

         This dispute arises from a December 21, 2016 ex parte application by WinNet R CJSC (“WinNet”) pursuant to 28 U.S.C. § 1782 to take discovery for use in civil and criminal proceedings in Russia. The Russian proceedings arise out of WinNet's leases of real estate to Femida Ltd. (“Femida”) and the transfer of those leases to Femida Nedvizhimost Ltd. (“Femida Real Estate”). Through this § 1782 application, WinNet seeks discovery from Siguler Guff & Co., L.P. (“SG”), a New York private equity investment firm, and six individuals associated with SG or SG-affiliated entities. WinNet asserts that Femida is managed by SG. SG moved on January 30, 2017 to quash the § 1782 subpoenas. For the reasons that follow, SG's motion to quash is granted.

         Background

         WinNet, a Russian company, owns two office buildings in Moscow, Russia.[1] In August 2010, WinNet leased the buildings to Femida at a yearly rent of approximately $5 million per year, with an annual increase of approximately 3%, for a non-cancellable term of 25 years. WinNet alleges that the leases provided that the buildings could only be used as data centers, and that Femida assumed the costs of renovation of the buildings as data centers and of maintenance and repair. Femida allegedly began that work by demolishing the interior of the buildings, but then ceased all work.

         Femida struggled to pay the rent due under the leases. The Russian court in the “Reorganization Case, ” discussed further below, noted that 2013-2014 audits found that the net asset value of Femida “was less than the minimum amount of authorized capital established by law, ” that “Femida was incurring significant losses, ” and that “there is a significant doubt as to the ability of the Company to carry on its activity continuously, as well as to sell its assets and fulfill its obligations without financial support.”

         WinNet alleges that Femida and the group of entities with which it is affiliated decided to “‘cut its losses' by dumping the WinNet leases.” According to WinNet, in June 2015, Femida's parent company transferred Femida's obligations under the leases to Femida Real Estate, while Femida retained its only income-producing asset, a third building containing a functioning data center. WinNet further alleges that Femida and its sublessee[2]conspired to terminate the subleases, leaving Femida Real Estate without a rent-paying tenant for the WinNet buildings. WinNet alleges that these actions were an improper reorganization scheme designed to render Femida and Femida Real Estate judgment-proof and deprive WinNet of the payments due under the leases. WinNet alleges that Femida Real Estate made only one lease payment, on December 20, 2015, and it has not paid rent since that time, breaching the terms of the leases.

         Beginning on December 23, 2015, WinNet initiated a series of civil actions in Russia against Femida and Femida Real Estate seeking rent and reconstruction payments. WinNet also filed a criminal complaint.

         A. Civil Proceedings

         Beginning on December 23, 2015, WinNet initiated ten civil actions in Russia against Femida, Femida Real Estate, and others. The first and most significant for purposes of this § 1782 motion was a lawsuit in which WinNet attacked the transfer of the lease obligations from Femida to Femida Real Estate as an unlawful reorganization. WinNet lost that litigation and there is no ongoing civil proceeding in Russia in which Winnet is pursuing that theory. Most of the remaining lawsuits are actions to collect rent payments from Femida and/or Femida Real Estate. Each case is described below. Reorganization Case (A40-250765)

         WinNet initiated the Reorganization Case against Femida and Femida Real Estate on December 23, 2015, alleging that the reorganization was improper and done in bad faith and requesting accelerated lease payments of $128 million for the full term of the leases. Femida employed Baker Tilly Rus Consulting (“Baker Tilly”) as an expert to explain that the reorganization was undertaken lawfully, while WinNet presented evidence regarding the reorganization from its expert, Interexpertiza, LLC. In its April 22, 2016 Opinion, after reviewing documents and expert testimony submitted by both parties, the Russian court of first instance wrote that “in the process of consideration of the present case, the Defendants furnished sufficient amount of other evidence, which refute the claim of the Plaintiff regarding the bad-faith distribution of assets in the process of reorganization of [Femida].” The court thus found “no grounds for satisfying” WinNet's claims against Femida and Femida Real Estate. The court found that WinNet's claim for accelerated rent must fail for another reason. WinNet was required to file such a claim within thirty days of the last notice of reorganization, and it did not do so for over four months after that date.

         Regarding WinNet's purported evidence that the reorganization was undertaken in bad faith, that Femida retained the building and functioning data center while Femida Real Estate assumed the obligations under the leases, the Russian court found that WinNet and its expert did not take into account that the retained Femida building was “fully pledged as a security” under that building's loan agreement. It also noted that various losses and liabilities were transferred to Femida while certain profits were transferred to Femida Real Estate in the reorganization. The decision states that:

during the sitting the court confirmed the statement of the Defendants that the reorganization of [Femida] was aimed at the optimization of its activity and related to the decision of the sole shareholder to segregate its activity associated with the use of its own asset (the building owned by [Femida]) and its activity associated with the use of buildings leased from the Plaintiff, which activity de facto consists of subleasing such buildings.

         The trial court also stated that it “is of opinion that by raising the claim seeking to collect rent for the entire period of validity of the lease agreements concluded for the period 25 years the Plaintiff abuses its rights.” Because the amount sought by WinNet greatly exceeded the value of the assets of the defendants, the court “question[ed] whether in raising the claim the Plaintiff pursued any other goals except to deliberately bankrupt the Defendants and acquire the building” owned by Femida that contained the functioning data center.

         The court's decision was affirmed by the 9th Arbitration Court of Appeals on July 1, 2016, and the Federal Arbitration Court of Moscow Circuit on November 2, 2016. On February 20, 2017, the Russian Supreme Court declined to hear WinNet's appeal.

         WinNet asserts that it will move for reconsideration of the trial court's adverse ruling based on newly-discovered evidence it purports to have received through the criminal investigation. The new evidence on which WinNet relies is a presentation attached to a February 9, 2015 email from “Andrey, ” whose affiliation is unclear, to Ivan Sapronov (“Sapronov”), a Head of the M&A Department and Project Finance with Baker Tilly, in response to Sapronov's request to send the presentation. A copy of the presentation was obtained by WinNet in February 2017. The presentation describes an “Action Plan to Terminate the Lease Agreements between Femida LLC and WinNet R CJSC” through a reorganization by “spinning off a new legal entity.” Sapronov asserts that he does not recognize the document, that the document is not contained in his email account and may not be authentic, and states that in any case, obtaining and publishing such a document would be a violation of attorney/client privilege.[3]

         2nd Quarter 2016 Rent and Reconstruction Actions (A40-66237 & A40-66274)

         WinNet initiated a case to collect rent in the amount of $700, 000 and a case seeking specific performance of the duty to reconstruct or for the value of reconstruction, which it estimated at $38 million. The lawsuits were consolidated on March 28, 2016. In these actions, WinNet seeks to hold Femida and Femida Real Estate jointly liable both for rent for the 2ndquarter of 2016 and for the reconstruction payment. In a December 19, 2016 opinion, the Moscow City Commercial Court denied the claims against Femida, because Femida was not jointly liable with Femida Real Estate. The court held that Femida had already performed its “duty of proving the honesty of the reorganization” in the Reorganization Case. It partially granted the claim against Femida Real Estate. 3rd and 4th Quarters 2016 Action (A40-163024) and Invalid Transaction Suit (A40-192388)

         WinNet initiated the 3rd and 4th Quarters 2016 Action on August 2, 2016, seeking to hold Femida and Femida Real Estate jointly liable for $2.4 million in rent for those quarters based on a theory that there had been an unfair distribution of assets between the two entities. WinNet initiated a separate lawsuit, the Invalid Transaction Suit, against Femida and Femida Real Estate on September 19, 2016, arguing that Femida Real Estate had not been properly created and its registration should therefore be annulled, thus “restoring the status quo that existed prior to the legal violation.”

         The court stayed the 3rd and 4th Quarters 2016 Action pending the outcome of the Invalid Transaction Suit. WinNet then moved to withdraw the Invalid Transaction Suit, and that case was dismissed on December 5, 2016.

         Other Civil Actions

         WinNet has initiated several other lawsuits regarding the same underlying landlord-tenant dispute, which are summarized briefly here: (1) WinNet initiated case А40-107389 on May 11, 2016, to require Femida to replenish the security deposit. The case is currently on appeal under de novo review. (2) WinNet initiated case А40-162284 on August 1, 2016, asserting claims against Femida and Femida Real Estate for damage to the buildings as a result of lessors' termination of reconstruction. WinNet's claim was dismissed on February 9, 2017. (3) WinNet initiated case A40-159471 at some time in 2016 against Femida Real Estate, seeking rent under the land leases for the 3rd and 4th quarters of 2016. The court of first instance granted WinNet's claim on December 20, 2016. (4) WinNet initiated case A40-185513 on September 7, 2016, asserting claims against Femida and Femida Real Estate for $9, 000 in unpaid utilities. (5) WinNet has filed one new lawsuit, А40-16287, for recovery of the rent payment from Femida Real Estate for the 1st quarter of 2017.

         WinNet was also involved in case А40-168906, initiated on August 11, 2016, in which an entity called NextPay LLC (“NextPay”) seeks to collect arrears for consulting services rendered to Femida Real Estate. WinNet intervened and argued that the consulting fees are fabricated and intended to drain Femida Real Estate of assets ...


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