BULGARIA: 2009 REPORT ON INVESTMENT DISPUTES AND

UNCLAS SOFIA 000287

SIPDIS

E.O. 12958: N/A
TAGS: EINV KIDE CASC PGOV BU
SUBJECT: BULGARIA: 2009 REPORT ON INVESTMENT DISPUTES AND
EXPROPRIATION CLAIMS

REF: A) STATE 49477 B) 2008 SOFIA 406


1. The United States government is aware of two (2) claims of U.S.
persons that may be outstanding against the Government of Bulgaria
(GOB),and one (1) that has been closed in the past one year.


2. This report is keyed to reftel instructions.

CASE 1
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(A.) Claimant A (ongoing case)

(B.) 2000

(C.) In 1999, Claimant A, a U.S. fertilizer company, established a
subsidiary in Bulgaria. While Bulgaria was undergoing its
privatization process, the subsidiary of Claimant A purchased a
controlling interest in a Bulgarian fertilizer company and became a
primary holder of the fertilizer company's shares. Shortly
thereafter, a Ukrainian partner in Claimant A's subsidiary acquired
all the claimant's shares in the fertilizer company through a scheme
involving a bogus loan. The Ukrainian partner did this by utilizing
a separate holding company that it controlled and which was
registered in Cyprus. Acting on behalf of the subsidiary of
Claimant A, but without its consent or authority to act as power of
attorney, the Ukrainian partner signed a loan agreement between the
claimant's subsidiary (on behalf of the fertilizer company) and the
separate holding company for USD 4 million in order to purchase
pipes. When, as expected, the fertilizer company could not repay
the loan, the Ukrainian partner's holding company sued and gained
control over Claimant A's subsidiary and consequently acquired all
the subsidiary's shares of the fertilizer company.

On August 30, 2000, Bulgaria's Regional Court in Vratsa issued a
decision regulating the transfer of 86 percent of the shares
(9,683,000 total) of the fertilizer company from Claimant A's
subsidiary to the Ukrainian partner's holding company.

Shortly after the holding company took over the shares of the
fertilizer company, Bulgaria's Privatization Agency agreed to sell
the remaining 14 percent of the shares still held by the Government
of Bulgaria to the holding company.

Since that time, Claimant A has been ensnared in a legal battle
centered on questions of jurisdiction and reciprocity. Bulgarian
courts claimed that they did not have jurisdiction because the case
is between two companies that were registered abroad. When Claimant
A won its case before the New York Supreme Court in June 2001,
Bulgaria refused to recognize the New York court's decision because
the United States and Bulgaria did not have a reciprocity
agreement.

On July 14, 2003, Sofia's City Court issued a decision ordering the
Ukrainian partner's holding company to restore the shares it had
acquired through the unauthorized loan to Claimant A's subsidiary.
In response, the holding company submitted an appeal to the Sofia
Appellate Court, and on December 18, 2003, it overruled the decision
of Sofia's City Court.

Following the above decision, Claimant A submitted an appeal before
the Supreme Court of Cassation (SCC),which was heard by its
Commercial Division (case No. 144/2004) on June 16, 2004. This is
Bulgaria's highest court and its decision was considered final for
all parties concerned. On September 10, 2004, a three-judge panel
of the SCC upheld the decision of the Sofia Appellate Court in favor
of the holding company. On March 8, 2005, a five-judge panel of the
Supreme Court of Cassation issued its final decision and turned down
yet another appeal.

Meanwhile, a separate case went forward in the Vratsa District Court
based on a claim made by Bulgaria's state-owned natural gas company
and Bulgaria's state-owned electric company to find the fertilizer
company insolvent. The court declared the fertilizer company
insolvent on December 14, 2004.

Despite the District Court's ruling, Bulgaria's Post-Privatization
Agency (PPA) initiated legal proceedings against Claimant A for
failing to meet commitments under its privatization contract. In
addition, on April 11, 2005, the PPA sent a letter requesting that
Claimant A pay USD 7.4 million for non-performance under the
privatization contract. The U.S. Embassy asked the PPA to
reconsider this in light of the Bulgarian Court's determination that
Claimant A is not the owner of the plant. The director of the PPA
responded that it was her understanding that the privatization
agreement allowed for 100 percent of the company shares to be
transferred, while all liabilities for performance under the
privatization agreement stayed with the buyer. In June 2009 the
attorney for Claimant A confirmed the company is waiting to see
whether Bulgaria will seek to recover the aforementioned alleged
damages in U.S. courts, and if so, they will likely counterclaim.


CASE TWO
--------------

(A.) Claimant B (resolved)

(B.) 1999

(C.) In 2008 this case was settled to Claimant B's satisfaction when
it agreed to enter into a Public-Private Partnership (PPP) with the
Government of Bulgaria through which the state acquired 25 percent
of Claimant B's project. In return, Claimant B was able to carry on
with its investment.

CASE THREE
--------------

(A.) Claimant C.

(B.) 2008

(C.) On February 25, 2008, the largest Bulgarian law firms
complained before the Sofia Bar Council and Supreme Bar Council
about alleged breach of the Bar Act by eight international law firms
on grounds that these firms provided legal services (attorney
services, including litigation services) without registration as
attorney companies with the local Bar Council. Claimant C, a
U.S.-UK law firm, was providing its services through a branch of an
Austria-registered attorney company. To comply with local law,
Claimant C had registered the branch under the Commercial Act in the
Commercial Register.

In March 2008 the same Bulgarian law firms filed a complaint before
the local Competition Commission for alleged breach of competition
law by the eight international law firms, including Claimant C. The
local law firms argued that registering a local office with an
original name was against the local Bar Act. The local Bar Council
sided with the local complaints and barred the foreign companies
from registering a local office with their original names.

The position of Claimant C is that the current Bar Act is not in
compliance with EU law as it does not provide for the possibility
for international firms to establish partnerships, branches, or
agencies in Bulgaria. Claimant C has attempted to explain this
position in a letter to the Minister of Justice and a non-paper to
the President, the Speaker of Parliament, and the Prime-Minister
(PM). Despite these efforts, in July 2008, the Competition
Commission decided to impose fines on four of the foreign firms for
violating the Competition Law. In October 2008, Claimant C filed an
official compliant before the EU Commission arguing obstruction of
business by local law firms.

In August 2008, Claimant C appealed the Competition Commission's
decision before the Supreme Administrative Court (SAC). On December
1, 2008, the SAC had a public hearing during which Claimant C
requested the SAC refer it to the European Court of Justice (ECJ).
On January 19, 2009, the SAC ruled that it would not refer the case
to ECJ. During a second hearing in February 2009, the SAC decided
to consider the case within the term prescribed by the law, but a
final decision is still pending.

After another attempt to register a local branch with the Sofia Bar
in January 2009 failed, Claimant C appealed the decision before the
Supreme Bar Council. The case was heard on May 20, 2009, but it is
still pending in anticipation of the decision of the Supreme Court
of Cassation. During a public hearing on May 20, 2009, Claimant C
filed a request for referral to the European Court of Justice (ECJ)
for a preliminary ruling, but the Supreme Court of Cassation refused
to refer the case although as the court of final instance it is
obliged to refer the case to the European Court of Justice.

Embassy staff attended the public hearings at the Competition
Commission and the Ambassador, Deputy Chief of Mission and Economic
and Commercial Officers raised Claimant C's case with all levels of
the Bulgarian Government. In addition, Embassy Sofia included
Claimant C's ongoing dispute in its submission to the State
Department's 2009 National Trade Estimate.


3. Claimant reference list:

Claimant A: IBE Trade, U.S. Company
Claimant B: Dundee Precious Metals, Canadian-U.S. Company
Claimant C: DLA Pipers, Law firm

MCELDOWNEY