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. Last Updated: 07/27/2016

Lawyers Spar in Yukos Bankruptcy Hearings

APTheede and Misamore leaving the Houston court after closing arguments Thursday.
HOUSTON -- Russian authorities have no obligation to abide by any decisions taken by the U.S. courts, an expert in Russian law on Thursday told a U.S. court that is mulling whether to allow embattled oil company Yukos to proceed with its U.S. case.

In the second day of hearings in U.S. bankruptcy court, legal expert William Butler testified that the absence of a treaty between the United States and Russia calling for each state to recognize the other's legal rulings meant Moscow would not adhere to any rulings made in the Yukos case.

"Russian law is categorical" on the issue, said Butler, under questioning from lawyers for Deutsche Bank, which has challenged Yukos' U.S. bankruptcy case.

Unfriendly Russian courts and a European court that offers no protection drove Yukos to seek help to regain solvency in the U.S. court, its lead lawyer said.

"This is the last place that this company has to have the opportunity to survive as an ongoing concern," Yukos lawyer Zack Clement told bankruptcy judge Letitia Clark on Thursday, at the close of a two-day hearing on Deutsche Bank's effort to convince her to throw out the case for lack of jurisdiction over a Russian company subject to Russian law.

"Not a single bankruptcy case can be found that has ever done this, not a single bankruptcy court has ever done this," Hugh Ray, the bank's lead lawyer, said of handling a foreign company's Chapter 11 proceedings on U.S. soil.

Yukos has asked to appeal to the European Court of Human Rights. But the company's first witness in the hearing, London barrister David Anderson, said that body rarely accepts tax disputes. He also said that court, which most often addresses cases involving torture, would not be able to protect Yukos assets in the interim if it does accept the case.

Yukos has claimed it sought help in the United States because other forums -- Russian courts and the European Court of Human Rights -- were either unfriendly or offered less protection.

Anderson said the European court awards judgments, but Yukos' prospects of getting billions of dollars to compensate for the Russian government-ordered auction of its key production asset in December or any other losses is "almost vanishingly remote."

Clark said she would not rule before Tuesday.

Yukos made its surprise Chapter 11 bankruptcy filing in Houston in December in an unsuccessful attempt to halt the auction of its main oil producing unit by the state. Yukos has claimed the sale and a $27.5 billion tax bill imposed by authorities were part of a Kremlin-orchestrated campaign to destroy it and former owner Mikhail Khodorkovsky, who is facing a 10-year prison term for fraud and tax evasion.

Authorities sold Yukos' Yuganskneftegaz at auction in December despite restrictions imposed by Judge Clark. The unit was bought by a previously unknown group for $9.4 billion, which itself was subsequently bought by state-controlled oil company Rosneft.

The U.S. court's jurisdiction has been challenged by Deutsche Bank and Gazpromneft, a former unit of Russian gas monopoly Gazprom, which is slated to merge with Rosneft.

Yukos has based its claim for jurisdiction in U.S. courts on the fact that chief financial officer Bruce Misamore arrived in Houston in early December. Misamore told the court under questioning by Deutsche Bank that Yukos had moved funds from subsidiaries to the United States to bolster its claims.

Misamore, who owns a house in Houston, set up a subsidiary, Yukos U.S.A., and established two Texas bank accounts holding about $27 million to cover business costs and legal fees.

Wednesday, Deutsche Bank accused Yukos of lying to the U.S. courts by back-dating documents regarding money transfers into the United States in order to bolster its chances for keeping its case in Houston.

Yukos CEO Steven Theede testified Wednesday that Yukos came to the Houston court because he believed the company would not be allowed to file for bankruptcy in Moscow, where he said the company had been harshly treated by the courts.

The U.S. courts could also provide some recourse for Yukos creditors, shareholders and employees if Moscow moves to sell off Yukos' other operating units, Samaraneftegaz and Tomskneft.

Yukos' parent company, Group Menatep, has sued Russia for $28.3 billion in financial damages, and the company is also seeking $20 billion in a separate U.S. lawsuit against Rosneft and Gazprom for their role in the sale of Yugansk.

In Washington, Tim Osborne, managing director of Menatep, said after testifying at a Senate hearing that he was optimistic Judge Clark would decide to keep the case here.

"I believe she will take jurisdiction in the case because she will understand that Yukos' only chance of justice now is for U.S. courts to retain that jurisdiction," he said.

 A lawyer for Khodorkovsky said Friday that President George W. Bush could end "this shameful business" and win freedom for the jailed Yukos founder with "a single word" when he meets the Kremlin leader at a summit this week.

"His case is absolutely hopeless in the Russian judicial system, which is not independent. They are going to find him guilty, although he didn't commit any crime at all," said Karina Moskalenko, one of Khodorkovsky's lawyers, in New York.

Yury Schmidt, another Khodorkovsky lawyer, said an initiative from Bush at the summit with Putin could end the case.

"A single word from Bush would be enough to put an end to this shameful business, but I doubt he will raise the subject," Schmidt said at the forum sponsored by the New York University School of Law and the Foundation for the Defense of Democracies, a conservative think tank.

 The money the government got from selling Yugansk was paid into a Finance Ministry account, bringing to 270.9 billion rubles ($9.7 billion) the amount paid on Yukos' back taxes since December, the ministry said Friday.

The government sold the unit for about $9.3 billion to recover part of more than $27 billion in back taxes and penalties.

Neither the Federal Property Fund, which oversaw the sale, nor the tax authorities have notified Yukos that the amount has been wiped off the tax bill, the company's senior vice president, Alexander Temerko, said in a telephone interview from London late Thursday. "We also want to see how this money was paid," Temerko said. "How and by whom?"

(Reuters, AP, Bloomberg)