Avilon Auto. Grp. v. Leontiev

• Decision Date: 03 January 2019
• Docket Number: 6631,Index 656007/16,6632
• Citation: 168 A.D.3d 78,91 N.Y.S.3d 379
• Parties: AVILON AUTOMOTIVE GROUP, et al., Plaintiffs–Appellants, v. Sergey LEONTIEV, et al., Defendants–Respondents, Leonid Leontiev, et al., Defendants.
• Court: New York Supreme Court — Appellate Division

168 A.D.3d 78

91 N.Y.S.3d 379

AVILON AUTOMOTIVE GROUP, et al., Plaintiffs–Appellants,

v.Sergey LEONTIEV, et al., Defendants–Respondents, Leonid Leontiev, et al., Defendants.

6631

6632

Index 656007/16

Supreme Court, Appellate Division, First Department, New York.

ENTERED: JANUARY 3, 2019

Debevoise & Plimpton LLP, New York (Sean Hecker, William H. Taft V, Nathan S. Richards and Megan Corrarino of counsel), for appellants.

Gibson, Dunn & Crutcher LLP, New York (Robert L. Weigel, Alison L. Wollin and Marshall R. King of counsel), for Sergey Leontiev, respondent.

Kobre & Kim LLP, New York (Andrew C. Lourie, Lindsey Weiss Harris and Carrie A. Tendler of counsel), for Wonderworks Investments Limited, respondent.MOULTON, J.

John W. Sweeny, Jr., J.P., Troy K. Webber, Ellen Gesmer, Anil C. Singh, Peter H. Moulton, JJ.

MOULTON, J.

Plaintiffs Avilon Automotive Group (Avilon), a Russian Corporation, and Karen Avagumyan (Avagumyan), a Russian national and the son of one of Avilon's principals, bring this action to recover loans to companies allegedly controlled, and looted, by defendant Sergey Leontiev (Leontiev). The remaining defendants are alleged to have assisted Leontiev in a scheme to fraudulently convey the loan proceeds to accounts controlled by Leontiev in the Cook Islands.

Supreme Court dismissed the action based on res judicata, finding that a federal action brought by Leontiev in the Southern District of New York (Leontiev v. Varshavsky, U.S. Dist Ct, SD NY, 16 Civ 03595, Rakoff, J., 2016) (the federal action) precludes the claims brought herein. We now reverse and remand for the reasons stated below.

Background

The amended complaint herein avers that in 2008 Avilon lent approximately $19.9 million to nonparty Ambika Investments Limited (Ambika), a Cyprus entity with a registered address in that country. In 2011 Avilon made another loan to Ambika of approximately $6.625 million.

Avagumyan is the son of Kamo Avagumyan, a 45% owner of Avilon. The amended complaint alleges that between August 2014 and March 2015, nonparty ZAO Financial Group Life (FG Life), a Russian entity with a registered address in Moscow, issued approximately $21.2 worth of promissory notes to Avagumyan. In 2015 nonparty Venop Trading Limited (Venop), a Cyprus entity with a registered address in that country, issued approximately $4.75 million in promissory notes to Avagumyan. There was some discovery in the federal action that indicated that Avagyuman was merely the nominal owner of the notes from FG Life and Venop, and that his father actually put up the money and received the interest associated with the notes.

Plaintiffs allege that Ambika, FG Life and Venop are shell companies that are owned and controlled by Leontiev and nonparty Alexander Zheleznyak. Leontiev did not sign any of the loan documents discussed above, and is not a named party in them, but plaintiffs herein assert he is responsible for the loans because he misappropriated and currently controls the loan proceeds.

In August 2015 Probusiness Bank, a Russian commercial bank and allegedly the pillar of Leontiev and Zheleznyak's financial empire, came under the scrutiny of the Russian Central Bank, and eventually was placed in receivership. These developments caused Avilon's president, nonparty Alexander Varshavsky, to seek assurances from Leontiev on behalf of the creditors that the notes would be repaid. At meetings in Moscow and London in August 2015 Leontiev allegedly promised to repay the loans. In September 2015 Leontiev did pay back approximately $17 million of the money allegedly owed Avilon, but plaintiffs allege that as of August 2016 there remained outstanding balances owed to Avilon of approximately $29.6 million and owed to Avagumyan of approximately $28 million.

Plaintiffs allege that instead of repaying these outstanding balances, Leontiev, with the assistance of the other defendants, transferred assets to defendant Legion Trust, a Cook Islands Trust, allegedly to place these assets out of the reach of plaintiffs and other creditors. To date Leontiev has not made any further repayments to plaintiffs. In the federal action, and herein, Leontiev has maintained that he is not personally responsible on the notes.

In May 2016 Leontiev sued Varshavsky, and only Varshavsky, in the Southern District of New York. A summary of the federal action is necessary in order to determine its preclusive effect on the instant litigation.

Leontiev contends that he brought the federal action in response to Varshavsky's relentless demands that he personally repay the loans. To that end, in his amended complaint in the federal action Leontiev sought a declaration that "he owes no debt to Mr. Varshavsky, or to anyone acting in concert with him, relating to the Alleged Loans." Leontiev also sought an injunction preventing Varshavsky "or anyone acting in concert or participation with [him], from taking any further steps to enforce these debts against Mr. Leontiev in his personal capacity, including, but not limited to, ... pursuing litigation." While the sole named defendant was Varshavsky, Leontiev's complaint in the federal action attached appendices listing the actual creditors to various notes, including Avilon and Avagumyan. As the amended complaint acknowledged, the loans listed in the appendices allegedly concerned "obligations owed by various non-parties—none of whom are Mr. Leontiev—to various other non-parties—none of whom are Mr. Varshavsky." Federal jurisdiction was based on the parties' diversity. Leontiev and Varshavsky agreed that the former is a Russian national who resides in New York¹ and that the latter is a naturalized U.S. citizen who resides in New Jersey.

In his answer in the federal action, Varshavsky averred that his status as Avilon's president gave him authority to negotiate "on behalf of" Avilon for payment of the loans. It is clear that Varshavsky was not himself a party to the notes and loan documents. However, during the course of the federal litigation Varshavsky did assert, or at least did not deny, that he somehow had, or could obtain, standing to enforce the notes. For example, his answer denied Leontiev's allegation that "Leontiev owns Mr. Varshavsky nothing." Additionally, while he did not assert any counterclaims against Leontiev, Varshavsky asked, as a request for relief in his answer, that the Court determine "on the merits that [Leontiev] is personally liable for the debts in question and on that basis deny his claim for declaratory judgment."

Judge Rakoff, who presided over the federal action, noted at several junctures that Varshavsky appeared to argue that he had standing to collect on the notes. Judge Rakoff denied Leontiev's motion on the pleadings, noting that "the pleadings do not foreclose the possibility that Varshavsky can enforce the loans in his personal capacity, such as through assignments" (Leontiev v. Varshavsky, U.S. Dist Ct, SD NY, 16 Civ 03595, at 18, Rakoff, J., Dec. 4, 2016). Accordingly, Judge Rakoff allowed Varshavsky extensive discovery concerning Leontiev's alleged alter ego liability for the debts of Ambika, FG Life and Venop, and Leontiev's alleged use of various shell companies to safely funnel the loan proceeds to the Cook Islands. Defendants herein argue that this discovery was wholly unnecessary as Leontiev, at oral argument on his motion for judgment on the pleadings, limited his prayer for declaratory relief to a declaration that he was not indebted to Varshavsky in the latter's personal capacity.²

Leontiev sought discovery concerning Varshavsky's authority to collect on the loans. Kamo Avagumyan (as noted, Avagumyan's father) was deposed by Leontiev's lawyers and testified that he verbally authorized Varshavsky to collect on the promissory notes nominally owned by his son. However, at his own deposition, Varshavsky admitted that he had no assignments from the actual creditors on the notes, and that he personally was not owed any money by Leontiev. Leontiev thereupon moved for summary judgment, citing Varshavsky's admission at his deposition. In his motion papers Leontiev also argued that he had no personal obligation under the relevant loan documents to anyone. "Even if Mr. Varshavsky had rights with regard to the Alleged Loans—he does not—Mr. Leontiev is entitled to a declaratory judgment for a second, independent reason: Mr. Leontiev is not personally liable for those debts."

In his opposition papers Varshavsky admitted that Leontiev did not owe him any money in his personal capacity. At oral argument on the motion, Judge Rakoff noted that the parties could have agreed "weeks or months ago" that Leontiev in his personal capacity owed nothing to Varshavsky. In a final judgment dated March 1, 2017, the court granted summary judgment in Leontiev's favor on the parties' consent and declared that "Sergey Leontiev owes no debt or obligation to Alexander Varshavsky in [Varshavsky's] personal capacity with respect to the loans and other debt instruments described in paragraph 32 of the complaint in this case."

The Clerk of the Southern District levied costs in the amount of $19,975.85 against Varshavsky, who thereupon sought relief from Judge Rakoff. In denying Varshavsky's application, Judge Rakoff noted that "Varshavsky's current protests to the contrary, throughout most of the case Varshavsky suggested to the Court that he might be owed money from Leontiev in his (Varshavsky's) personal capacity" (Leontiev v. Varshavsky, U.S. Dist Ct, SD NY, 16 Civ 03595, at 3, Rakoff, J., May 1, 2017). Therefore the court found that Leontiev was the prevailing party, as the declaration in his favor "stymies any efforts by Varshavsky to collect on the loans in his own name, and makes plain that any further debt collection efforts must be in a purely representative capacity" (id. ).

Plaintiffs brought the instant action in Supreme Court, New York County in November 2016, before the federal action was dismissed. Plaintiffs are represented by the same firm...