Case of the Day: Baldiga v. Joint Stock Co. (In re Cyphermint, Inc.)

The case of the day, Baldiga v. Joint Stock Co. (In re Cyphermint, Inc.) (Bankr. D. Mass. 2011), is from my home base in Boston. It involves the difficulties in serving process in Russia under the Hague Service Convention.

The case was a preference avoidance action by the Chapter 7 Trustee against the St. Petersburg Investments Co. and Tavrichesky Commercial Bank of St. Petersburg, both of which had sought to perfect security interests in the debtor’s property just prior to the bankruptcy. The Trustee also sought to avoid more than $7 million in transfers from the debtor to SPIC and Tavrichesky as either preferential or fraudulent. SPIC and Tavrichesky moved to dismiss on the grounds that they had not been properly served.

The Trustee had attempted to make service on the two defendants in Russia via the Russian Central Authority, but the summonses had been returned unexecuted. This was not unexpected. The State Department’s website explains:

In July 2003, Russia unilaterally suspended all judicial cooperation with the United States in civil and commercial matters. The Russian Federation refuses to serve letters of request from the United States for service of process presented under the terms of the 1965 Hague Service Convention or to execute letters rogatory requesting service of process transmitted via the diplomatic channel.  The Russian Federation also declines to give consideration to U.S. requests to obtain evidence.  While the Department of State is prepared to transmit letters rogatory for service or evidence to Russian authorities via the diplomatic channel, in the Department’s experience, all such requests are returned unexecuted.  Likewise requests sent directly by litigants to the Russian Central Authority under the Hague Service Convention are returned unexecuted.

Russia’s policy in these matters is assertedly based on objections to a fee, imposed by the United States on June 1, 2003, for all requests for service from any foreign country whether submitted under the Hague Service Convention or via the diplomatic channel.  This fee is designed to cover the costs incurred by a private contractor hired by the U.S. Department of Justice to administer the service functions of the U.S. Central Authority for the Hague Service Convention.  Such fees are permitted under the Hague Service Convention and routinely charged by many States party to the Convention.

Between October 28 – November 4, 2003, a Special Commission on the Practical Operation of the Hague Service, Evidence and Legalization Conventions convened at The Hague.  The Special Commission’s Conclusions and Recommendations of November 4, 2003, page 10, paragraph 53, provide:

“The Special Commission reaffirmed that according to Article 12(1), a State party shall not charge for its services rendered under the Convention.  Nevertheless, under Article 12(2), an applicant shall pay or reimburse the costs occasioned by the employment of a judicial officer or other competent person.  The Special Commission urged States to ensure that any such costs reflect actual expenses and be kept at a reasonable level.”

The Russian Federation did not support this recommendation and reserved its position.

On December 3, 2004, the Russian Federation deposited a declaration with the Government of the Netherlands, the treaty depository, naming a Central Authority and taking a reservation regarding certain aspects of the treaty.  The declaration provides:

“The Russian Federation assumes that in accordance with Article 12 of the Convention the service of judicial documents coming from a Contracting State shall not give rise to any payment or reimbursement of taxes or costs for the services rendered by the State addressed.  Collection of such costs (with the exception of those provided for by subparagraphs a) and b) of the second paragraph of Article 12) by any Contracting State shall be viewed by the Russian Federation as refusal to uphold the Convention in relation to the Russian Federation, and, consequently, the Russian Federation shall not apply the Convention in relation to this Contracting State.”

The Department of State and the Russian Foreign Ministry have exchanged several diplomatic notes setting out our respective positions on the matter, and met twice in Moscow to explore ways to provide normal judicial cooperation. A subsequent Special Commission convened at the Hague in 2009 recalled the conclusions of the 2003 Special Commission concerning costs and Russia again reserved its position. No future bilateral meetings on this subject are currently scheduled.

The Trustee sought and received the court’s permission to make service by alternate means, and his Russian counsel sent the documents to the defendants via registered mail, with an apostille and with a certified translation into Russian. Postal receipts indicated that both letters were delivered, but the registered letter to SPIC was later returned to the Trustee’s Russian counsel with a note indicating that “the storage of documents at the post office has expired.” The Trustee’s Russian counsel’s affidavit indicated that he also personally served the document on the chairman of the board of Tavrichesky (Tavrichesky’s affidavits denied this), but that he was unable to make personal service on the general director of SPIC.  The Trustee submitted an affidavit from Russian counsel stating that the service by registered mail was proper under Russian law. I don’t know anything about Russia’s domestic law of civil procedure, but according to my Google translation of Art. 113 of the Russian Code of Civil Procedure:

Persons involved in the case, as well as witnesses, experts, and translators are notified or called to court by registered mail with return receipt requested, subpoena with return receipt requested, phone call or a telegram, facsimile or other means of communication and delivery ensuring the fixing of judicial notice, or call and its delivery to the addressee.

The judge had little patience for what he took to be the Russian government’s intransigence or the defendants’ attempts to duck service:

It is obvious but worth noting that both defendants are aware of the pending adversary proceedings as they have retained local counsel to appear in the adversary proceedings to represent their interests. The defendants’ argument that they were not properly served is based purely on a technicality arising from the Russian Federation Central Authority’s refusal to serve summonses issued by courts in the United States. This refusal, however, cannot be used by the defendants as a shield to deflect otherwise legitimate service of process. Furthermore I will not countenance the defendants’ efforts to evade service by refusing to sign an acknowledgement of receipt of hand-delivered documents or to open properly addressed registered mail, especially where they have actual knowledge of the proceedings, have engaged local counsel, and will have ample opportunity to defend themselves.

In short, he held that the service by registered mail was proper and denied the motion to dismiss.

To the extent the Trustee is seeking to avoid security interests in property in the U.S. that the defendants attempted to perfect before the bankruptcy, he should be able to get relief in the Bankruptcy Court. But assuming the Trustee wins the case, whether he will be able to reach the defendants’ assets on Russia is probably in pretty serious doubt, given the evident hostility of the Russian authorities to providing judicial assistance to U.S. litigants.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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