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Russian Courts Battling For Authority Over Consumer Bankruptcy

posted by Jason Kilborn

Polar_bear_brawlIn Russia, a debate is raging over which courts should administer consumer bankruptcy cases, the specialized commercial courts or the courts of general jurisdiction. The Russian commercial courts (Arbitrage courts) currently exercise jurisdiction over bankruptcies of individual small business people, as well as over cases involving artificial legal entities like corporations. Logically, then, in the current bill that would finally expand the Russian bankruptcy system to provide relief to consumers, the Arbitrage courts would handle such cases.

Oddly, President Putin in March issued an edict strongly suggesting that the bill be amended to assign jurisdiction to the general courts. The Supreme Court had already come down solidly on the side of the generalist courts, and in April, it threw its support behind Putin’s edict by introducing a bill into the legislature to amend the Code of Civil Procedure to preemptively assign consumer bankruptcy jurisdiction to the general courts, if and when a consumer bankruptcy bill ever becomes law. The explanatory notes to this bill make what seems to be a rather superficial and formalistic argument about consumer contracts “not bearing an economic character,” since they relate only to personal consumption, and noting that consumer cases will raise all manner of non-economic issues, such as family, housing, and labor, which the Arbitrage courts are ill-situated (if not constitutionally forbidden) to address. The next thing you know, they’ll introduce a distinction between “core” and “non-core” matters—that will really fire things up!

One Arbitrage judge has argued that these courts already deal with lots of “non-economic” issues relating to natural individuals, since they handle cases involving small business debtors. Moreover, the chief Arbitrage judge has expressed his doubt that the generalist courts will treat these cases with the requisite level of specific, specialized knowledge and from a proper, non-judgmental economic perspective. The Arbitrage judges have been intimately involved in the development of the new consumer bankruptcy system, they are as prepared as they can be for its proper administration, and they are already experts in the knowledge base and the attitudes necessary for the proper administration of both business and consumer insolvency.

The big sticking point seems to be money. The Arbitrage system is not generously funded, and it has courts only in the regional capital cities, while the courts of general jurisdiction are much more widespread and accessible to citizens. The Supreme Court’s strongest argument is presented in terms of access to justice, since struggling consumers are not going to want to travel hours to the nearest Arbitrage court.

Arbitrage judges have proposed an extremely creative solution: using post office employees in far-flung places as bankruptcy assistants, using the Arbitrage court’s easy-to-follow internet site for forms and instructions. If the system were simplified to eliminate needless formalism, and if it were streamlined with simple, generic forms, at least one Arbitrage judge has argued, the great bulk of cases, involving honest debtors, would raise few if any disputes requiring court attention. Even more creative is a proposal for mobile offices housed in buses that could move from town to town, like early English and American itinerant judges. Indeed, the proposal goes so far as to suggest that these buses could be staffed by court assistants, who could handle the great bulk of administrative issues, and controversies and hearings could be conducted via video conference link with the competent Arbitrage court.

My bet is that the generalist courts will win this battle, much like in most other European systems. The Supreme Court’s proposal points out that the German consumer insolvency system is run by generalist courts, though the reference to Germany is a bit ironic. Germany delayed implementation of its new consumer insolvency system for 5 years to prepare the courts for the onslaught of new cases governed by a new law. So, too, the existing Russian system will probably need more funding, despite the Supreme Court’s assurance that its proposal “will not require any additional expenditures of federal budgetary funds.” A projected 200,000 to 2 million filings in the first years of the new system would crush the already busy court system.

The strangest thing is that business cases, including those of sole proprietors, will remain within the jurisdiction of the Arbitrage courts. This can only increase the burden on the courts if debtors and/or creditors argue about the proper venue for such cases. The Russian system is poised to represent another example of the mischief that an overly complicated administrative system can cause, and it reminds us again of the irony of how expensive it can be to use courts to administer a system of providing relief to people who don’t have enough money to administer their own affairs. There must be a better way.

Fighting polar bears image courtesy of Shutterstock.


The fightin' p-bears are awesome.

Why do the generalist courts want the consumer bankruptcy cases? Is it just that they want jurisdiction over everything? These don't seem like especially glamorous cases, and the increased caseload doesn't seem appealing, unless they're paid by the verdict (convictions are billed at twice the rate of acquittals). I think of the Federal Circuit judges threatening to resign if they had to handle all of the Social Security appeals.

Good question, Adam. I can't imagine why an already overburdened general court system would want MORE cases, especially the kind of rancorous, messy, and sometimes complex files these brand new consumer bankruptcy cases are likely to be in Russia. I suspect the political economy is that Putin said these cases should be heard by general courts, so the Supreme Court is simply falling into line, again for reasons that I don't know enough yet to understand. It seems to be partly formalism (how can you have any pudding if you don't eat your meat??!!) and partly a genuine issue of protecting consumers' access to justice. The idea of justice-by-bus is creative, but I'm not sure who far it would get them. I also suspect that more cases means more foundation to request more state funding ... We shall see!

Maybe the Russians see the corruption in the US bankruptcy courts and prefer to keep it all under one system. America's bankruptcy system needs a serious overhaul. When trustees are allowed to hire their friends for attorneys and when those attorneys (and trustees) fee crank the system - it becomes apparent that no one in government is watching the store.

Why do we allow trustee's attorneys to bill over $1 million in less than a year from just one case stripping funds away from creditors? Why are there not staff attorneys hired on flat salaries to handle these cases? Let's not forget the bankruptcy judges that approve these attorneys and their fees.

The FBI knows the US bankruptcy system is seriously flawed and "fresh start" for the debtor has become a joke. Maybe the Russians are wiser than we think or maybe their general judiciary is just more astute.

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