Judge David J. Cowan, Case 21STCP03455 2022-10-20 Tentative Ruling

Please notify Dept. 1’s courtroom staff by email (SMCDept1@lacourt.org) or by telephone (213-633-0601) no later than 8:30 a.m. the day of the hearing if you wish to submit on the tentative ruling rather than argue the motion. If you submit on the tentative, you must immediately notify the other side that you will not appear at the hearing. If you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the motion. Please keep in mind that appearing at the hearing and simply repeating the arguments set forth in the papers is not a good use of the court’s time or the parties’ time.

Ruling: The Motion to Dismiss is DENIED. The Court orders the case STAYED pending efforts by Otkritie to obtain a specific license to seek recognition or enforcement of its judgment against Blyumkin. The Court sets a Status Conference Re: License for April 18, 2023. The Court CONTINUES Otkritie’s Motion for Summary Judgment to June 22, 2023.

On October 8, 2021, Bank Otkritie Financial Corporation (“Otkritie”) filed a Complaint for Recognition of Foreign-Country Judgment seeking judicial recognition of a November 13, 2020 judgment against Aleksandr Blyumkin (“Blyumkin”) from the Tagansky District Court of Moscow, Russia awarding Otkritie damages "in the amount of RUB 245,531,048.57" for breach of contract.

On September 6, 2022, Blyumkin filed a Motion to Dismiss for Lack of Jurisdiction.

Here, Blyumkin argues Executive Order No. 14024 has “deprive[d] a California court of the jurisdiction and power to hear or determine” claims brought by Otkritie, particularly its Complaint for Recognition of Foreign Judgment.

Initially, a "'tribunal has the duty, and therefore the authority or power (jurisdiction), to decide in the first instance whether it has jurisdiction of the subject matter and the parties, and whether it also has jurisdiction to act in a particular manner. This process may involve the determination of jurisdictional facts, or of jurisdictional questions of law.'" (Brown v. Desert Christian Center (2011) 193 Cal.App.4th 733, 740.) "‘Lack of jurisdiction in its most fundamental or strict sense means an entire absence of power to hear or determine the case, an absence of authority over the subject matter or the parties.” (Abelleira v. District Court of Appeal (1941) 17 Cal.2d 280, 288.)

Here, Blyumkin filed a motion to dismiss for lack of subject matter jurisdiction rather than a demurrer for lack of jurisdiction under CCP sec. 430.10(a). The Court finds this distinction immaterial where the facts relevant to the Court’s jurisdiction are not disputed. CCP sec. 430.10(a) authorizes demurrers for lack of jurisdiction, including subject matter. (Greener v. Workers' Comp. Appeals Bd. (1993) 6 Cal.4th 1028, 1036 ("A challenge to the subject matter jurisdiction of a court is properly brought by demurrer to the complaint.”)) But “a demurrer is not the only mechanism for raising a challenge to a court's subject matter jurisdiction." (Barry v. State Bar of California (2017) 2 Cal.5th 318, 328.) Such a challenge “may also be raised by a motion to strike [cite]; motion for judgment on the pleadings [cite]; motion for summary judgment [cite]; or in an answer.” (Greener, supra, at 1036; see Campo Band of Mission Indians v. Superior Court (2006) 137 Cal.App.4th 175, 181 ("the Tribe filed a motion to dismiss” for lack of jurisdiction “on the basis of tribal sovereign immunity"))

The Supreme Court has also held that a trial court is required to dismiss cases where subject matter jurisdiction is missing. (Goodwine v. Superior Court (1965) 63 Cal.2d 481, 484 (“A court need not have jurisdiction over the person . . . to dismiss for lack of subject-matter jurisdiction. Indeed, the court must dismiss on that ground on its own motion.”)) And “since the court must dismiss on its own motion, an appropriate challenge to subject-matter jurisdiction aids the court in performing its duty.” (Id.) Our courts have not been overly selective about the mechanism for dismissing such cases, even allowing the trial court to handle dismissal “on its own motion.” Therefore, the Court will consider jurisdictional arguments raised by a Motion to Dismiss rather than a Demurrer.

The Motion to Dismiss raises two legally distinct issues. The first is whether Otkritie is barred from seeking recognition of the judgment without a “specific license.” The second issue is whether counsel is barred from representing Otkritie without obtaining such a license. The Court considers these issues separately.

As to the first issue, Blyumkin argues recognition of the judgment would constitute a prohibited transfer (or attempted transfer) of blocked property. “Blocked property” refers to “any account or property . . . held in the name of a person whose property and interests in property are blocked pursuant to § 587.201, or in which such person has an interest, and with respect to which payments, transfers, exportations, withdrawals, or other dealings may not be made or effected except pursuant to a license or other authorization from OFAC expressly authorizing such action.” (31 C.F.R. sec. 587.301; 31 C.F.R. sec. 587.201 (“All transactions prohibited pursuant to Executive Order (E.O.) 14024 of April 15, 2021 are prohibited pursuant to this part.”))

As relevant here, the "terms property and property interest include . . . judgments." (31 C.F.R. 587.311.) The "enforcement of any lien, judgment, arbitral award, decree, or other order through execution, garnishment, or other judicial process purporting to transfer or otherwise alter or affect property or interests in property blocked . . . is prohibited unless licensed." (31 C.F.R. sec. 587.506(d).)

Otkritie argues the "Judgment at issue here does not constitute blocked property" because the judgment "was not issued by any U.S. Federal or State court," and argues enforcement of the judgment is permitted because it "does not involve any property owned by the Bank that is located within the United States Otkritie argues recognition of the judgment would not require "issuance of a California judgment or writ of execution." Otkritie also distinguishes between recognition and enforcement of judgment, arguing it is not required to obtain a special license because it is merely seeking recognition of the Russian judgment, not enforcement at this time.

Otkritie argues that the judgment is not blocked property because it “was not issued by any U.S. Federal or State court” and “does not involve any property owned by the Bank that is located within the United States.” (Opposition, p. 8.) Otkritie notes that Executive Order 14024 applies to “property and property interests that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person.” (Opposition, p. 7-8.) On that basis, Otkritie argues its property is not “blocked” as long as “it is not located in the United States or in the control of persons in the United States, or if [transactions involving the property are] authorized pursuant to a license(s).”

However, it does not appear to matter whether the judgment is considered blocked property, as enforcement of the judgment against assets in the United States is prohibited. Executive Order 14024 expressly prohibits “any contribution or provision of funds . . . by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order.” There is no dispute that Otkritie is a “Specially Designated National” (“SDN”), meaning that its “assets are blocked and United States persons are generally prohibited from dealing with [it], unless otherwise authorized.” (Opposition, p. 7.) To the extent Otkritie seeks to enforce its money judgment against Blyumkin, who resides in the United States and presumably maintains some assets here, enforcement would in all likelihood require a prohibited “provision of funds . . . to, or for the benefit of” SDN Otkritie.

Alternatively, to the extent Otkritie seeks to take other steps towards enforcement (such as recording liens against Blyumkin’s assets), these would constitute prohibited transfers. Executive Order 14024 prohibits transfers of blocked property, and 31 C.F.R. sec. 587.312 broadly defines transfer to include various methods of enforcement. (31 C.F.R. sec. 587.312. (transfer “means any actual or purported act or transaction . . . the purpose, intent, or effect of which is to . . . alter, directly or indirectly, any . . . interest with respect to any property,” including “the making of any payment,” “the creation or transfer of any lien,” “the acquisition of any interest of any nature whatsoever by reason of a judgment or decree of any foreign country,” and “the issuance, docketing, filing, or levy of or under any judgment . . . or other judicial or administrative process or order.”)) Property which would be transferred to a SDN is blocked property. (31 C.F.R. sec. 587.403(b) (absent license, “if property (including any property interest) is transferred or attempted to be transferred to a person whose property and interests in property are blocked . . . such property shall be deemed to be property in which such person has an interest and therefore blocked.”)) Hence, Otkritie’s anticipated attempts to enforce the judgment would entail transfers of blocked property, which are prohibited absent a license.

It is thus irrelevant whether enforcement would “involve any property owned by [Otkritie] within the United States,” as enforcement of the judgment would on its face entail a prohibited transfer of property interests or “contribution or provision of funds” to Otkritie. Executive Order 14024 operates to prevent any unlicensed transfers of property in the United States to SDNs. As discussed below, Otkritie has not shown that any general license applies permitting enforcement of the judgment, and does not claim it obtained any specific license. And while recognition is technically distinct from enforcement, recognition here appears to be merely a procedural step towards enforcement.

Next, Otkritie argues the Motion to Dismiss is premature because it is merely seeking to recognize the Russian judgment, not enforce it—yet. Otkritie is correct that “[e]nforcement is different than recognition,” and that a “foreign judgment may be recognized for various purposes without being enforced.” (Renoir v. Redstar Corp. (2004) 123 Cal.App.4th 1145, 1150; id. at fn. 1 (“for example where the defendant seeks to rely on a prior adjudication of a controversy (res judicata), or where either side in a litigation seeks to rely on prior determination of an issue of fact or law.”))

But Otkritie has not identified any reason for seeking recognition of the judgment other than enforcement. The issue of whether the judgment is enforceable under existing regulations cannot be avoided by merely deferring it to a later date. For the reasons discussed earlier, it is likely that efforts to enforce the judgment would entail prohibited transfers under Sections 1 and 2 of Executive Order 14024. The Court is also concerned whether recognition of the judgment would enable Otkritie to impermissibly establish interests in property located in the United States. (31 C.F.R. sec. 587.312; 31 C.F.R. sec. 587.403.) For example, recognition of the Russian judgment may enable Otkritie to file an abstract of the judgment with the County Recorder and thereby serve as a lien on any real property of Blyumkin. Entry of the judgment alone could also negatively affect Blyumkin’s credit, giving Otkritie further leverage in negotiations with Blyumkin despite not technically taking prohibited steps to “enforce” the judgment. It is not clear to the Court that this is an appropriate result. It is also substantially unclear to the Court that Otkritie can permissibly recover attorney’s fees and costs. (Complaint, para. 28 (demanding fees and costs).) It is not clear the Court can award fees and costs payable from assets in the United States if these funds would be paid to Otkritie as a SDN. (See E.O. 14024, sec. 2.)

Otkritie relies on a recent decision of the United States District Court of Delaware relating to the enforcement of a judgment against the Bolivarian Republic of Venezuela under the Venezuela Sanctions Regulations, 31 C.F.R. Part 591. (Crystallex Int’l Corp. v. Bolivarian Republic of Venezuela (D. Del. Mar. 2, 2022) No. Misc. 17-151-LPS, 2022 WL 611586.) The District Court determined that the regulations did not prevent it from taking “prefatory steps toward a sale” of U.S. securities owned by the Republic, as a specific license from OFAC would be required only to actually “close” the sale. (Id. at *15.) The District Court indicated this approach “balances, on one hand, the role of this Court to proceed so that it may, eventually, enforce its judgment and, on the other hand, the role of OFAC to evaluate policy considerations and bring them to bear on the timing of any enforcement involving the sale of blocked property.” (Id. at *15.)

However, the Crystallex case concerned steps by that court to prepare for a specific method of enforcing the judgment against the Republic. As a result, the District Court did not need to consider—and did not address—the risks of merely recognizing the judgment even before it is enforced (e.g., by selling shares owned by the debtor). The District Court only needed to address whether its proposed sale plan could be largely finalized for future approval by OFAC. Here, Otkritie has not given any indication what it will do if the judgment is recognized. (Opposition, p. 11 (“The Bank has not, at this time, sought to enforce the JUDGMENT and has taken no action to obtain access to Defendant’s property or any other blocked property.”)) Otkritie merely states that it “would comply with all relevant requirements” once it “initiate[s] the enforcement process,” without sufficiently explaining its view of either. (Opposition, p. 11.)

Further, the cases are factually distinct. The judgment debtor in Crystallex was a foreign entity (the Bolivarian Republic of Venezuela) sanctioned by the U.S. while the judgment creditor was a U.S. entity (Crystallex) seeking to enforce the judgment against blocked property. “After prevailing in an arbitration proceeding, Crystallex asked a federal district court to confirm the award and obtained a $1.4 billion judgment,” and “has since been trying to collect.” (Crystallex Int'l Corp. v. Bolivarian Republic of Venezuela (3d Cir. 2022) 24 F.4th 242, 246.) In other words, the District Court was considering whether to enforce a domestic judgment against blocked property—the judgment of a coequal “federal district court.” On these facts, the District Court specifically rejected OFAC’s advice that a specific license would be required to enforce a judgment by auctioning blocked property, finding that it limited the federal courts’ core “power to enforce their judgments.” (Crystallex, supra, 2022 WL 611586 at *13 (emphasis added) (District Court “disagrees with [OFAC’s] FAQ 809, and finds no basis to accord any deference to FAQ 809.”))

But here, the judgment creditor is a foreign entity (Otkritie) sanctioned by the U.S., and the judgment debtor is a person residing in the U.S. (Blyumkin). Unlike Crystallex, which involved enforcement of a U.S. court’s judgment against the Republic, judgment has not been entered in U.S. state or federal courts against Blyumkin in favor of Otkritie. (Opposition, p. 8.) Though the Crystallex District Court aptly expressed concerns that OFAC could not inhibit enforcement of its own judgments, this Court is not faced with obstacles to enforcement of its own judgments. (Id. at 17 (“The Court agrees with Crystallex: ‘Given the significant separation-of-powers implications of curbing the judiciary's ability to enforce its judgments, the President would at least need to speak clearly before his executive orders could have th[e] effect” of stopping this Court's sale process.’”))

The issue here, unlike in Crystallex, is recognition of a foreign judgment by a sanctioned judgment debtor. The separation-of-powers considerations invoked in Crystallex are far more compelling when applied to enforcement of U.S. judgments by U.S. entities. Moreover, the Crystallex court recognized OFAC’s role in deciding whether enforcement of judgments should be permitted if enforcement would apply to blocked property (or, as here, effectuate a prohibited transfer of funds to SDNs). (Id. at *15.) Though the Crystallex court rejected OFAC’s guidance as to enforcement of “its own judgments,” this Court is considering recognition of a foreign judgment and heeds OFAC’s warning to take “caution in proceeding with any step in furtherance of measures which might alter or affect blocked property or interests in blocked property,” or otherwise violate existing sanctions regulations. (Id. at 13.)

Initially, Otkritie argues the "general licenses OFAC has issued . . . permit[] actions related to blocked property." Specifically, Otkritie relies on 31 C.F.R. sec. 587.509, providing that any “transactions prohibited by this part that are for the conduct of the official business of the United States Government by employees, grantees, or contractors thereof are authorized.” Otkritie thus argues judicial proceedings generally constitute “the official business of the United States Government” because the judicial branch is part of the U.S. government. (Opposition, p. 11-12.)

But this is an incomplete and overbroad reading of the regulation. Section 587.509 licenses “transactions . . . for the conduct of the official business of the United States Government by employees, grantees, or contractors.” By its terms, it applies to “transactions” made “by employees, grantees, or contractors” for the business of the U.S. government. A judicial proceeding is not a “transaction,” and Otkritie has not explained why judges would be treated as “employees, grantees, or contractors” of the U.S. government. Nor are the parties and attorneys involved in this case “employees, grantees, or contractors” of, or involved in a transaction with, the U.S. government. Indeed, Otkritie’s broad interpretation of Section 587.509 as permitting any judicial proceeding would wholly swallow the general license for legal services in Section 587.506, which authorizes only specific legal services and expressly prohibits unlicensed services for the enforcement of a judgment—as discussed below. This argument is rejected.

Although Blyumkin argued it is “highly unlikely that [Otkritie] would even consider applying” for a specific license because this would subject it “to the investigative and subpoena powers of the U.S. Government,” Otkritie expressed willingness to apply for a specific license to pursue this action if necessary.[1] (Opposition, p. 16 (requesting continuance of the Motion “to allow the Bank to obtain a ‘Special License’ . . . if so required.”)) Significantly, Blyumkin does not identify any deadline for Otkritie obtain that license.

It would not make sense for the Court to dismiss this case by reasoning that Otkritie should not pursue a specific license; this decision is properly left to Otkritie itself, which can weigh the risks and benefits of applying for a license. Further, the Court and parties cannot now determine whether a specific license would be given to Otkritie, as generally “no regulation or statute governs OFAC's specific licensing decisions” under sanction regulations. (See, e.g., Empresa Cubana Exportadora de Alimentos y Productos Varios v. U.S. Dept. of Treasury (Dist. Ct. D.C. 2007) 516 F.Supp.2d 43, 58.)) As the Crystallex court observed, “the role of OFAC [is] to evaluate policy considerations and bring them to bear on the timing of any enforcement” of a judgment requiring transfers of blocked property. The Court finds this is an appropriate juncture for OFAC to weigh in on the timing of any recognition of this Russian judgment.

Accordingly, the Court orders the case STAYED pending Otkritie’s efforts to obtain a specific license for enforcement and recognition proceedings. The Court sets a Status Conference Re: Specific License or Stay for April 18, 2023 in Department 1. The Court CONTINUES Otkritie’s Motion for Summary Judgment of its Complaint for Recognition of Foreign Judgment to June 22, 2023.

As to the second issue, Blyumkin has also not demonstrated grounds for dismissal of Otkritie’s case. Assuming for sake of argument that Otkritie’s counsel is not permitted to represent Otkritie under any general license and failed to obtain a specific license for this representation, this would at most support disqualification of Otkritie’s counsel—which is not the relief sought by Blyumkin’s Motion to Dismiss. More realistically, the failure to obtain a license supports a stay pending efforts to obtain that license, particularly where counsel appears to have reasonably believed that no such license was required. Blyumkin offers no reason to think that counsel could not or would not obtain a specific license if required.

But regardless, Blyumkin has not demonstrated that counsel’s representation of Otkritie is prohibited. The D.C. Circuit addressed OFAC’s regulation of attorney-client relationships in an analogous context in American Airways Charters, Inc. v. Regan (D.C. Cir. 1984) 746 F.2d 865. The Circuit Court rejected OFAC’s argument that it can “impose a prior license requirement before the corporation can designate an attorney to represent it.” (Id. at 869.) Rather, “OFAC's power . . . extend[ed] only to the freezing or blocking of AAC's assets and the licensing of its transactions,” not to “seize the corporation itself, to vest its assets, or . . . to rearrange its internal affairs.” (Id. at 874.) The Circuit Court concluded OFAC could not require a specific license as a condition for legal representation of an entity with blocked property, but cautioned that “nothing in our disposition is properly read as authorizing payment to counsel without the approval of OFAC." (Id. at 875.)

Essentially, OFAC primarily regulates payment for legal services, not the bare provision of legal services. For example, in the context of Executive Order 14024, OFAC established a general license permitting U.S. persons to provide specified legal services “to or on behalf of persons whose property and interests in property are blocked . . . provided that any receipt of payment . . . must be authorized pursuant to § 587.507, which authorizes certain payments for legal services from funds originating outside the United States; via specific license; or otherwise pursuant to this part.” (31 C.F.R. sec. 587.506(a).)

OFAC generally licensed a broad range of legal services, including (among other things) defensive representation, legal advice concerning “compliance with the laws of the United States,”and the “[i]nitiation and conduct of legal, arbitration, or administrative proceedings before any U.S. federal, state, or local court or agency.” (31 C.F.R. sec. 587.506(a).) Services not covered by the general license are prohibited unless a specific license is obtained or the services are “ordinarily incident to the provision of services authorized,” such as “making filings” or retaining expert witnesses and private investigators. (31 C.F.R. sec. 587.506(a)-(c).)

Notably, the “[e]ntry into a settlement agreement or the enforcement of any lien, judgment, arbitral award, decree, or other order through execution, garnishment, or other judicial process purporting to transfer or otherwise alter or affect property or interests in property blocked . . . is prohibited unless licensed pursuant to this part.” (31 C.F.R. sec. 587.506(d).) As discussed, Otkritie is not now seeking to enforce the judgment, though it appears likely it will attempt to enforce it once recognized. Though counsel attempts to defer the issue of licensing for enforcement proceedings to a later date, again, the Court is not inclined to defer consideration of such substantive obstacles based on essentially technical distinctions.

While Section 587.506(a) authorizes U.S. persons to provide broad a range of legal services to persons with blocked property, Section 587.507 restricts receipt of payment for those services. Persons providing these services may be paid “from funds originating outside the United States, provided that the funds do not originate from: (i) A source within the United States; (ii) Any source, wherever located, within the possession or control of a U.S. person; or (iii) Any individual or entity, other than the person on whose behalf the legal services authorized pursuant to § 587.506(a) are to be provided, whose property and interests in property are blocked pursuant to any part of this chapter or any Executive order or statute.” (31 C.F.R. sec. 587.507(a).) In brief, payment may be received from “funds originating outside the United States” not controlled by or sourced from another entity with blocked assets, the United States, or a U.S. person. Further, Section 587.507(b) requires “U.S. persons who receive payments” per the above to “submit annual reports [to OFAC] no later than 30 days following the end of the calendar year during which the payments were received providing information on the funds received.”

Though Otkritie’s counsel argues its services were authorized under the general license of Section 587.506(a), it is unclear whether counsel has received any payment for these services and, if so, made a report to OFAC for any payments received in 2021. (31 C.F.R. sec. 587.507(b) (report required “no later than 30 days following the end of the calendar year during which the payments were received”); see Regan, supra, 746 F.2d at 875 ("[N]othing in our disposition is properly read as authorizing payment to counsel without the approval of OFAC.")) But, as noted at the outset, dismissal of this case simply is not the remedy for any unauthorized receipt of foreign funds for otherwise authorized legal services.[2]

Further, to the extent the Motion to Dismiss can be construed as a motion to disqualify Otkritie’s counsel, it would be denied for two reasons:

First, Blyumkin has not shown that counsel engaged in any prohibited conduct requiring a specific license. To date, counsel has initiated and conducted legal proceedings in state court, as permitted by 31 C.F.R. sec. 587.506. Counsel has not attempted to “enforce[] . . . any lien, judgment . . . or other order through execution, garnishment, or other judicial process purporting to transfer or otherwise alter or affect property or interests in property blocked”—only sought recognition of the judgment. (31 C.F.R. sec. 587.506(d).) As a license is required for enforcement measures, the Court has stayed the case pending Otkritie obtaining a specific license; counsel has not begun enforcement of the judgment, which has not been recognized yet.

Second, there is no contention that Otkritie’s counsel received prohibited payments under 31 C.F.R. sec. 587.507, and no argument that the remedy for receiving prohibited payments should be disqualification.

The Motion to Dismiss is DENIED. The Court orders the case stayed pending efforts by Otkritie to obtain a specific license to seek enforcement of its judgment against Blyumkin. The Court sets a Status Conference Re: License for April 18, 2023 in Department 1, and CONTINUES Otkritie’s Motion for Summary Judgment to June 22, 2023.

[1] The Court notes that the parties refer to “general licenses” and “special licenses” in their briefing. However, the relevant regulations here (and other OFAC sanction regulations) refer to “specific licenses” rather than “special licenses.” (See, e.g., 31 C.F.R. sec. 587.506(a) (“via specific license…”); see generally U.S. v. All Funds on Deposit with R.J. O'Brien & Associates (7th Cir. 2015) 783 F.3d 607, 632 (Circuit Judge Manion, conc. and diss. opinion) (discussing the critical “distinction between general and specific licenses” under a similar regulatory scheme) (“A general license, then, is not so much a license as a regulation preventing assets from being blocked in the first place. In contrast, a specific license is a license issued under the authority of the regulations that is necessary to unblock assets that the regulations have at first blocked.")) The Court therefore refers to “specific” licenses rather than “special” licenses.

[2] Blyumkin does not argue that Otkritie’s counsel received prohibited payments or failed to make its required report(s) to OFAC.