Columns

Daniel Klein’s Legal Line

Each month Daniel Klein fields corporate legal questions posed by Passport’s readers. Do you have a Russia-related legal question you’d like Daniel to address? Tell him about it at dklein@passportmagazine.ru.

Dear Daniel:

Early last year, our Western-based real estate investment fund gave a loan to a small local commercial real estate development company for construction of an office building in Moscow. To date, the company has not fulfilled its quarterly payment obligations to our fund, and it now appears that the project will not be completed nor the loan repaid. Is opening a lawsuit in Russia a viable option?

Dear Investor:

The first step is to file the loan agreement with the Russian property authority, if that has not already been done and provided that the loan agreement is the type that can be filed. This establishes a lien on the land where the office building is to be built and is a method of securing your company’s rights. However, as local real estate prices have fallen in recent months, the value of the land may not cover the loan. As far as recovering your money, it is always advisable to contact the developer and try to negotiate a repayment arrangement. Should this prove fruitless, then litigation is an option, but before deciding to pursue this path, here are some questions to consider: Who would be the defendant, and is there a security concern with the owners of the potential defendant company? A background check is helpful in determining this.

While Russian courts have a reputation for corruption, a salary raise for judges (from a few hundred dollars several years ago to over $4000 per month today) has gone a long way toward addressing this problem. As a result, corruption is less common and bribery more difficult to accomplish. For example, since some of the upper courts have multi-judge panels, it would be theoretically necessary for your potential opponent to bribe more than 10 members of the judiciary in the event that you were to lose the case and decide to appeal. In the West appeals courts are used to oversee incorrect decisions and in Russia they are often used as a type of corruption-control mechanism.

Assuming the contracts and other documents are in good order, this sounds like a fairly straightforward case, and the chances of a judgment in your company’s favor are good. Litigation costs should not be astronomical – it may be possible to bring this type of action for as little as $30,000 (depending on the complexity of the case details and the firm you choose), including the cost of appealing (which is a likelihood). Recent legislation has made it easier to use the assets of the real estate project to satisfy the judgment.

Of course, winning the case is only half the battle – then there’s the issue of execution. However, there are a number of levers available to help enforce the judgment. The borrowing company’s managing director may be criminally liable if he fails to fulfill the payment obligations specified in the judgment. Similarly, proof of misuse of funds (say, loan money earmarked for purchase of building materials that ended up in the developer’s Swiss bank account) or false claims (for example, if the developer fraudulently represented the building site as zoned for commercial use) may expose the developer to criminal liabilities, which may provide you some leverage in the negotiation process.