Hulley Enters. Ltd. v. Russian Fed'n, Civil Action No. 14-1996 (BAH)

• Decision Date: 30 September 2016
• Docket Number: Civil Action No. 14-1996 (BAH)
• Citation: 211 F.Supp.3d 269
• Parties: HULLEY ENTERPRISES LTD. et al., Petitioners, v. The RUSSIAN FEDERATION, Respondent.
• Court: U.S. District Court — District of Columbia

211 F.Supp.3d 269

HULLEY ENTERPRISES LTD. et al., Petitioners,

v.The RUSSIAN FEDERATION, Respondent.

Civil Action No. 14-1996 (BAH)

United States District Court, District of Columbia.

September 30, 2016

Christopher M. Ryan, Shearman & Sterling LLP, Washington, DC, Henry Sabath Weisburg, Richard Franklin Schwed, Shearman & Sterling LLP, New York, NY, for Petitioners.

Carolyn Beth Lamm, Francis A. Vasquez, Jr., White & Case LLP, Washington, DC, for Respondent.

MEMORANDUM OPINION

BERYL A. HOWELL, Chief Judge

The Petitioners Hulley Enterprises, Ltd., Yukos Universal Ltd., and Veteran Petroleum Ltd. (collectively, the "Shareholders") seek a stay of these proceedings pending a decision by the Court of Appeal of The Hague. Pet'rs' Mot. Stay, ECF No. 105. That court has been asked to consider the validity of three arbitral awards (the "Awards"), totaling over $50,000,000,000 in United States Dollars, which the Shareholders won after nearly ten years of arbitration proceedings against the Respondent, the Russian Federation. Id. ; Petition to Confirm Arbitration Awards ("Pet.") ¶ 1, ECF No. 1. The Russian Federation opposes the stay, arguing that this Court may not issue a stay without first determining its subject matter jurisdiction over the action, and, in any event, that a stay is not warranted in this case. Resp't's Mem. P. & A. Opp'n Pet'rs' Mot. Stay ("Resp't's Opp'n Mot. Stay"), ECF No. 127. For the reasons set out below, the Shareholders' motion for a stay is granted.

I. BACKGROUND

The Shareholders were the majority shareholders of Yukos, a Russian oil company that became that nation's largest and first fully privatized oil company following the dissolution of the Soviet Union. Pet. ¶ 11. According to the Shareholders, in 2003, the Russian Federation "began a campaign devised to bankrupt Yukos, appropriate the company's assets, and silence the company's head, Mikhail Khodorkovsky," out of concern about Khodorkovsky's support for political parties not aligned with President Vladimir Putin and Yukos's plans to merge with Western oil interests. Id. "[A]lleging that Yukos had engaged in a series of tax-avoidance schemes," the Russian Federation aggressively investigated Yukos, conducting raids of its offices and the homes of Yukos employees. Id. ¶ 15. Ultimately, the Russian Federation arrested, charged, and tried two high-ranking Yukos officers, including Khodorkovsky, resulting in lengthy sentences of incarceration. Id. ¶ 16. Following Khodorkovsky's arrest in October 2003, numerous Yukos personnel left Russia fearing the possibility of continued harassment or prosecution; the Russian Federation's extradition requests to their countries of flight were "uniformly rejected." Id. ¶ 18.

While its investigation and charging of Yukos and its employees was ongoing, the Russian Federation also began "levying a series of tax reassessment judgments against [the company]." Id. ¶ 24. From December 2003 to December 2004, the Russian Federation ordered Yukos to pay a total of over $20,000,000,000 in United States Dollars for tax liabilities between the years 2000 and 2003, and then, to satisfy those alleged debts, auctioned off Yukos's "core asset," YNG, for a "fraction of [its] value." Id. ¶¶ 25–30. Shortly after the auction, the entity that acquired YNG was itself acquired by the state-owned oil company, Rosneft, id. ¶ 30, described as a "creature of President Putin's entourage," id. ¶ 59. "Gutt[ed] ... of its most profitable asset," and after a series of transactions also involving Rosneft, Yukos was placed under supervision for bankruptcy proceedings. Id. ¶¶ 31–32. In July 2006, its creditors voted to declare Yukos bankrupt. Id. ¶ 32.

Seeking to recoup the losses suffered as a result of these events, in November 2004, the Shareholders notified the Russian Federation of alleged violations of the Energy Charter Treaty (the "ECT"), to which the Russian Federation was a signatory. Pet., Ex. A to Decl. Emmanuel Gaillard, Hulley Final Award, ECF No. 2-1; Pet., Ex. B to Decl. Emmanuel Gaillard, Yukos Final Award, ECF No. 2-2; Pet., Ex. C to Decl. Emmanuel Gaillard, VPL Final Award, ECF No. 2-3 (collectively, "Final Awards") ¶ 9.¹ The ECT requires every "Contracting Party" to "accord ... fair and equitable treatment" to "Investors of other Contracting Parties," ECT, Art. 10(1), and prohibits "nationalization or expropriation" of "Investments of Investors," except where such nationalization is in the public interest, nondiscriminatory, carried out under due process of law, and accompanied by appropriate compensation, ECT Art. 13(1). After failing to settle the dispute amicably within the three-month period required by the ECT, the Shareholders initiated arbitration proceedings pursuant to Article 26 of the ECT. Final Awards ¶ 10.

In accordance with Article 26 of the ECT, a three-member arbitral tribunal (the "Tribunal") was assembled, composed of Judge Stephen M. Schwebel, appointed by the Russian Federation; Dr. Charles Poncet, appointed by the Shareholders; and The Honorable L. Yves Fortier, appointed by the Permanent Court of Arbitration. Id. ¶ 12. On August 1, 2005, the parties agreed that The Hague would be the seat of the arbitration. Id. ¶ 13. Near the outset of the arbitration proceedings, the Russian Federation challenged the Tribunal's jurisdiction over the matter on a number of grounds, which the Tribunal addressed first before turning to the merits of the Shareholders' claims. Id. ¶¶ 14–21. After hundreds of pages of filings and a ten-day hearing on the question of jurisdiction, in November 2009, the Tribunal rendered "Interim Awards" dismissing or deferring decision on each of the Russian Federation's jurisdictional challenges. Id. ¶ 21. Relevant here, the Tribunal unanimously rejected the Russian Federation's argument that it never accepted the ECT's arbitration provision and thus never agreed to the arbitration proceedings before the Tribunal. Pet. ¶ 40; see Final Awards ¶ 21.

Proceeding to the merits stage, the Tribunal then considered thousands of pages of filings, evidence and arguments presented at a twenty-one day hearing, and the parties' commentary on developments in other legal proceedings relating to Yukos. Final Awards ¶¶ 41–62. After nearly ten years of "mammoth" proceedings, id. ¶ 4, on July 18, 2014, the Tribunal unanimously rendered three substantially similar "Final Awards," consisting of over 600 pages each. Pet. ¶ 55. The Tribunal determined that while Yukos "was vulnerable on some aspects of its tax optimization scheme," the Russian Federation had "taken advantage of that vulnerability by launching a full assault on Yukos and its beneficial owners in order to bankrupt Yukos and appropriate its assets while, at the same time, removing Mr. Khodorkovsky from the political arena." Final Awards ¶ 515. Consequently, the Tribunal concluded that the Russian Federation had violated the ECT, id. ¶ 1580, and awarded the Shareholders a combined $50,020,867,798 in damages, plus interest, as well as $60,000,000 in attorneys' fees and € 4,240,000 in arbitration costs, plus interest. Pet. ¶¶ 62–63.

Following the issuance of the Awards, the Shareholders began efforts to collect by initiating confirmation and enforcement proceedings in Belgium, France, Germany, India, the United Kingdom, and the United States. See Resp't's Opp'n Mot. Stay, Ex. 2, Decl. Expert Op. Dr. Andrey Kondakov ¶ 26, ECF No. 127-2. The Shareholders initiated the instant proceeding on November 25, 2014, pursuant to the Federal Arbitration Act (the "FAA"), which provides for confirmation of arbitral awards falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (the "New York Convention"), see 9 U.S.C. § 201 –207.² See Pet. ¶ 3.

Meanwhile, the Russian Federation began efforts to set aside the Awards. On November 10, 2014—fifteen days before the initiation of the instant confirmation proceedings—the Russian Federation submitted a request to set aside the Awards to the District Court of The Hague. Resp't's Mot. Dismiss, Ex. R-328, Writ of Summons ("Writ of Summons") at 2, ECF No. 43-8. By the terms of the New York Convention, confirmation and enforcement of the Awards "may be refused" if the Awards have been set aside by courts at the seat of the arbitration. N.Y. Convention, art. V(1)(e). In support of its request, the Russian Federation advanced several arguments, including repeating its argument that the Tribunal did not have jurisdiction to issue the Awards because the Russian Federation had never agreed to arbitrate its dispute with the Shareholders. Writ of Summons at 46–93. Specifically, the Russian Federation contended that because it never ratified the ECT, only certain provisions of the ECT applied to the Russian Federation, and the ECT's arbitration provision, which constitutes a standing offer by parties to the ECT to arbitrate disputes arising under the treaty, was not among those that applied. Id.

While the set aside proceedings were pending, on October 20, 2015, the Russian Federation moved for this Court to deny the Shareholders' request for confirmation of the Awards, Resp't's Mot. Deny Pet., ECF No. 23, and to dismiss the Petition for lack of subject matter jurisdiction, invoking the Russian Federation's entitlement to sovereign immunity under the Foreign Sovereign Immunities Act (the "FSIA"), 28 U.S.C. §§ 1330, 1602 –1611, Resp't's Mot. Dismiss, ECF No. 24. In those filings, the Russian Federation characterizes the Shareholders as "shell companies that are owned, controlled and operated by ... criminal oligarchs," including Khodorkovsky. Resp't's Mem. Mot. Dismiss at 1, ECF. No. 24; see also Resp't's Mem. Mot. Deny Pet. at 2, ECF. No. 23. Suggesting that the Awards were rendered improperly on the merits, the Russian Federation avers that the Shareholders "were not candid with the arbitration tribunal," i.e., "did not disclose ... their participation in ... fraud" or "correct [certain] misim...