Agrofinans Case: Crop Insurance Fraud

In spring 2015, one of the heads of Altai Krai Association of Rural and Farm Enterprises and Agricultural Cooperatives sought professional legal advice from our law firm as their problem might drive a number of regional rural and farm enterprises into bankruptcy.

The problem was stated as follows:

In 2012, OOO Russky Strakhovoi Alyans-Rusinshur Insurance Company (hereafter "OOO Rusinshur"), a company located in Krasnoyarsk, offered agricultural enterprises in Altai Krai state-supported insurance agreements.

OOO Rusinshur representatives found agricultural companies willing to insure their crops and suggested the following conditions for concluding a contract:

A company named OOO Agrofinans would provide the agricultural enterprise with necessary funds to cover the first part of the insurance premium. OOO Agrofinans would subsequently get a subsidy (to cover the second part of the insurance premium).

All in all, 158 Altai agricultural companies entered into loan agreements with OOO Agrofinans and insurance contracts with OOO Rusinshur.

The police took an interest in these insurance contracts. They detained the executives of the Barnaul branch of OOO Rusinshur when they submitted their documents for a subsidy and brought criminal charges over four of them under Part 3 of Article 30 and Part 4 of Article 159 of the Criminal Code of the Russian Federation (“fraud committed by an organized group or on an especially large scale").

The investigation found out that the insurance company was not going to fulfil their contractual obligations towards the Altai agricultural enterprises. More than that, the loans received by the farmers under the terms and conditions of their loan agreements with Agrofinans were the money got by the latter from the insurance company under the promissory note purchase agreements.

Thus, the insurance company provided funds to Agrofinans first. Second, the latter made them available to agricultural companies. Finally, Rusinshur received the same y funds as an insurance premium. The fraud scheme has been used a few times. The investigation has revealed that OOO Agrofinans carried out no business operations and was entirely controlled by OOO Rusinshur, though they were not affiliated de jure.

In March 2015, the Tsentralny District Court of Barnaul received a case file from the Federal Security Service for Altai Krai.

However, Agrofinans submitted repayment claims - under the loan agreements signed in 2012 - against the regional agricultural companies to the Altai Krai Arbitration Court as early as May 2015. In May-July 2015, they filed claims against 116 companies, with the total amount claimed to reach RUB 118,582,868.

Altai Krai Association of Rural and Farm Enterprises and Agricultural Cooperatives (hereafter "Rural and Farm Enterprises Association”) was alarmed at the prospect of several its members going into bankruptcy.

Our task put was clear: to prevent a judgement in favour of OOO Agrofinans against this factual background.

In the beginning, the situation seemed unfavourable – how could the case be defended if the money had been transferred into the bank account, and the farmers had already used this money to cover the insurance premium?

We have built our defence strategy based on the argument that OOO Agrofinans and OOO Rusinshur were two entities controlled by a single individual and used merely as a cover for an organized crime group activity.

As a first step, we were to face the challenge of consolidating 158 farming enterprises into a "united front." This was necessary to avoid any discrepancies between the documents presented at court and to raise the status of the case from an insignificant to a regional one.

To counter the challenge, we required assistance from Rural and Farm Enterprises Association in organizing meetings with the representatives of farm enterprises. Before the first meeting, we had already gathered as much data as possible as to the current situation, opponents, and criminal proceedings. This allowed us to come up with a general strategy for conducting the case that we could present to the affected enterprises.

As a result, we had travelled 2,000 kilometres over several days to meet representatives of farm enterprises, although on a few occasions we have come across a cold reception as the cheated farmers regarded us as yet another group of "helpers" looking to empty their pockets. Nevertheless, every meeting ended either in conclusion of a legal support contract or agreement to conduct coordinated action and information exchange (the enterprises with in-house or contract lawyers refused legal support).

It is worth mentioning that the agreement on information exchange helped thwart the attempts of OOO Agrofinans to get their money back while circumventing arbitration court's ruling on several occasions.

This way, we created a team of farmers ready to work together right before the first court proceedings.

Our next step was to prepare a response to the claims put forward by OOO Agrofinans. The response was based on the following arguments:

- Agrofinans and Rusinshur are affiliated entities controlled by a single individual;

- Signing the loan agreement was a preliminary condition for signing the insurance contract;

- Loan capital could only be used to cover the insurance premium;

- The funds were in constant circulation: Agrofinans – farmer – the insurance company – Agrofinans – farmer (more than RUB 100 mln worth of loans was issued in Altai Krai only, with an actual circulation of RUB 40 mln).

This allowed us to put forward a thesis that considering the plaintiff's affiliation with OOO Rusinshur, the defendant's refund towards the insurance company should be considered the proper discharge of contractual obligations.

As proof for the cited arguments, at the beginning of the procedure, we had to refer to the information collected via the insurance company investigation. To get access to this information, we subpoenaed a copy of the indictment act against Rusinshur.

We decided to refer to the so-called "piercing the corporate veil" phenomenon for legal justification. The idea we wished to put before the court was that both Agrofinans and Rusinshur were controlled by a single individual who used these two legally independent entities to cover their criminal intent – monetary gain on the one hand and obtaining power over the farmers on the other.

Alongside working on litigation procedures, our experts prepared a letter on behalf of Rural and Farm Enterprises Association to the governor and members of the Legislative Assembly of Altai Krai. The letter provided general information on the current state of affairs, possible implications for the agricultural sector in the region, and requested to ensure a most objective and thorough investigation of legal proceedings against OOO Agrofinans.

Meanwhile, in Moscow, the head of our law firm managed to secure the support from several officials from the Russian Ministry of Agriculture.

Through sending appeals and conducting meetings, we were trying to draw the attention of the authorities to the case.

Despite initial success, the first court proceedings saw the Arbitration Court of Altai Krai raise the issue of subject-matter jurisdiction, although eventually we managed to resolve the issue in favour of our principals.

The loan agreements between Agrofinans and the farmers contained a clause on subject-matter jurisdiction to the Arbitration Court of Krasnoyarsk Krai. The lawsuits, however, were filed at the location of the defendants since all copies of loan agreements were seized from Agrofinans during the investigation, and therefore the plaintiff had no chance of proving there was an agreed jurisdiction.

With that in mind, we initially agreed against referring the cases to Krasnoyarsk in our meetings with farmers. Referring the case according to the jurisdiction meant the dispute would quickly be settled in favour of Agrofinans. Apart from Altai Krai, OOO Rusinshur was conducting activities in Novosibirsk Oblast and Krasnoyarsk Krai. As far as we were concerned, the modus operandi over there was the same, since arbitration courts of both Novosibirsk Oblast and Krasnoyarsk Krai passed judgements of recovering the funds from farming enterprises under their loan agreements with Agrofinans.

Taking the court proceedings to Altai Krai did not guarantee judgement in favour of the farmers. However the Soviet principle and battle cry of "defeating the foe with small losses on someone else's territory" would not work in the given situation either. We were aware that filing the lawsuits at the defendants' location would give rise to the possibility of an objective court proceeding without any regards to the settlements for Agrofinans in neighbouring regions.

The issue of jurisdiction arose on the grounds of several farmers deciding to go to court independently and providing all the necessary documents, loan agreements with a clause on subject-matter jurisdiction included. Notably, these cases were referred to Krasnoyarsk, where the claims of OOO Agrofinans were fully satisfied.

The Arbitration Court of Altai Krai, therefore, became aware of the existence of this clause, and the question of a general possibility of entertaining the suits filed by Agrofinans arose.

At this point, we decided to use the issue to our advantage: if we were not able to have the court proceedings in Altai Krai, we would have to keep the loan agreements away from the Arbitration Court of Altai Krai for as long as possible. This way, each day's delay would bring the settlement of Rusinshur executives case closer since the judgement of conviction increased the odds of a positive settlement for our principals even outside Altai Krai.

During the court proceedings, we have convinced the court that the parties did not possess any loan agreements and that subpoenaing them from the criminal case file was necessary. We understood that the arbitration court would not be able to get the loan agreements before these documents were examined in the course of investigating the criminal case and before the actual judgement was delivered.

The appropriate subpoena was filed to the Tsentralny District Court of Barnaul. The response stated that the loan agreements would become available right after they had been examined under the criminal case. We had, therefore, received a chance to wait for criminal trial at the Tsentralny District Court of Barnaul.

The wait lasted for almost a year. Our opponents were far from being idle; however: during that period, the farmers received letters on behalf of some private individual offering to resolve the loan issue with OOO Agrofinans on an out-of-court basis.

We approached this individual to find out they were ready to provide the farmers with documents of full loan repayment upon receiving 50% of the loan sum. We have refused the offer.

As for the individual farmers whose claims were not taken to arbitration court but who also entered into loan agreements with OOO Agrofinans, their claims were filed separately to district courts on behalf of private individuals to whom Agrofinans allegedly assigned the sum owed. We pointed out that the limitation period for this type of cases had expired.

During the forced downtime not only did we have to repel attacks from our opponents but also prepare statements for the police regarding OOO Agrofinans executives who used OOO Rusinshur's fraudulent scheme to get money from the farmers.

As a result, our principals and other independent farmers who entered into loan agreements with Agrofinans started filing crime reports to the Central Internal Affairs Directorate for Altai Krai. In this instance, we placed our stakes on the number of reports since one or two can be easily misplaced, as it often happens, but more than 50 reports against the same individual are impossible to ignore.

The police eventually have opened a criminal case based on the facts listed in the statements. The investigation of OOO Argofinans' involvement in OOO Rusinshur's fraudulent scheme began. We shall say in advance that the criminal case was put on hold on account of no suspects. However, the fact of initiation made a positive impact.

Right after the criminal case was initiated, the Arbitration Court of Krasnoyarsk Krai saw the emergence of legal controversies surrounding share ownership of OOO Agrofinans. We believe that initiation of the criminal case created a schism between the nominal and actual proprietors and directors of Agrofinans since the former was unwilling to join their Rusinshur colleagues and tried to seize control of the company.

The internal dissent among our opponents had a positive impact on the hearings in the Arbitration Court of Altai Krai as Agrofinans did not take any steps to speed up the court proceedings.

On December 22, 2016, a judgement of conviction was delivered for four Rusinshur executives. After the judgement entered into legal force, the Arbitration Court of Altai Krai received the loan agreements, and the cases began their transfer to the Arbitration Court of Krasnoyarsk Krai to cure want of jurisdiction.

Considering the factual background established in the judgement, transferring the case to another region did not make much of a difference for the case of our principals because the standard practice for such cases had yielded negative results.

The judgement confirmed our initial set of motions: Agrofinans and Rusinshur being controlled by a single individual, funds circulating through the "Agrofinans - farmer - insurance company - Agrofinans" chain (several inspections conducted during the investigation confirmed this), and Rusinshur lacking intention to fulfill their insurance agreements (the investigation revealed the insurance company lacked the sufficient funds to discharge financial liabilities).

As for the Arbitration Court of Krasnoyarsk Krai, we supplied our counter-plea with references to the factual background stated in the judgement while deliberately pointing out the illegality and immorality of loan agreements as well as their ostensible nature.

As a result, after examining the cases of our principals, the Arbitration Court of Krasnoyarsk Krai denied lawsuit claims put forwards by Agrofinans. The court considered our arguments as well as factual background established by the judgement under criminal proceedings.

In conclusion, we would like to emphasize the peculiar nature of this case, since its resolution required a successful consolidation of many entities to raise the status of the loan agreement case from isolated to a regional one.

Interestingly, OOO Agrofinans filed for bankruptcy not long before the settlement. If farmers were to stand in court separately, the cases would be settled as early as 2015, and the funds would be recovered before the judgment of conviction had been delivered.

Even after revising the Altai farmers arbitration case while considering the factual background of the judgement, the best they could expect is to be put on the endless list of creditors of OOO Agrofinans.