Russian Federation fails to enforce $65m tax violation claim in French courts

Recent developments in the Franz Sedelmayer saga and his enforcement attempts against the Russian Federation are likely to be of particular interest to those following the progress of enforcement efforts relating to the $50bn award granted to the former shareholders of Yukos.

4 March 2016

The Russian Federation has failed to enforce a $65m judgment against Franz Sedelmayer in The Tribunal de Grand Instance de Draguignan (Circuit Court in Draguignan, France). The court found that Russia violated public policy by depriving Sedelmayer of the opportunity of defending against the civil law claim which was originally based on public law tax violations and brought before the court in St. Petersburg.

Franz Sedelamyer is a German businessman and CEO of an asset recovery business which he has developed off the back of his battle with the Russian Federation over the course of twenty years to enforce the payment of compensation for assets expropriated in the 1990s.

Sedelmayer had entered into a joint venture with the Leningrad police department, which involved renovating a building, producing police equipment and training police and SWAT teams.  In 1994, a Russian court determined the joint venture’s registration was void, and ordered its assets to be seized.

Sedelmayer brought a claim before the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), under the German-Soviet Bilateral Investment Treaty, alleging expropriation of assets without compensation. 

The SCC ruled in Sedelmayer’s favour and on 7 July 1998 awarded him $2,350,000 compensation along with 10% interest per annum.  Sedelmayer proceeded to have his award recognised by the Superior Court of Justice in Berlin.

While the majority of Russia’s assets are held within the territory of the Russian Federation, chances of enforcement there are limited. Instead Sedelmayer tried to enforce against Russian owned property in foreign jurisdictions.  His first attempt was to claim Lufthansa Airlines payments to Russia for overflights of Russian airspace. This claim was denied as the fees were held to be of benefit for a public function and enjoyed sovereign immunity. 

Subsequently Sedelmayer made a variety of claims including against Russia’s VAT refunds in Germany and against a $30 million Tu-204 aircraft, which was almost commandeered. Instead the Russian delegation on the plane was rescheduled to leave before Sedelmayer was able to take possession.  All other actions failed predominantly due to successful claims by Russia to sovereign or diplomatic immunity. 

Sedelmayer was finally successful with regard to an ex-Soviet trade office in Cologne which was being used as an apartment complex. Following a lengthy legal battle it was sold to satisfy a portion of the arbitration award at auction in 2008.  Due to considerable interest that had accrued on the award there was still outstanding compensation.

Sedelmayer had further success enforcing against property in Sweden that had belonged to the USSR Trade Delegation. After many years of Russian appeals, the case was heard by the Swedish Supreme Court, which refused the sovereign immunity defence as the property had been being used for commercial purposes.  It was sold in February 2014, almost six years after the original award in Sedelmeyer’s favour, for $1.5m.  The combined proceeds of the Cologne and Stockholm sales amount to approximately $6.8m.

Russia has been a staunch opponent of Sedelmayer’s activities and following the sale of the property in Cologne Russia brought the $65m claim against him for allegedly unpaid taxes.

Sedelmayer’s award and success of enforcement will be of particular interest to those following the progress of enforcement efforts relating to the $50bn award granted to the former shareholders of Yukos.  If the Sedelmayer case is anything to go by the saga of the battle to enforce the Yukos award (due to its sheer size) will take many years.