On June 22, 2023, the U.S. Supreme Court decided Yegiazaryan v. Smagin and reaffirmed the principle that foreign plaintiffs are not barred from bringing lawsuits under the Racketeer Influenced and Corrupt Organizations (RICO) Act 1 in the US to file a successful RICO claim. a foreign plaintiff must allege “domestic injury” arising from the RICO violation. When evaluating whether an injury arose within the U.S., the Supreme Court ruled in favor of a context-specific approach, which requires courts to examine all of the circumstances surrounding an injury to determine whether it arose or occurred within the U.S. In doing so, the Court rejected the residency test, which prevents a foreign plaintiff from bringing a RICO claim based solely on his or her foreign residency.
The Yegiazaryan decision paves the way for creditors of foreign awards to enforce foreign arbitration awards in U.S. courts against debtors who use fraudulent tactics to avoid paying the awards.
Factual Background
In 2014, Russia-based Vitaly Smagin obtained a multimillion-dollar foreign arbitration award against Ashot Yegiazaryan, a Russian national who fled to Beverly Hills in California to avoid prosecution in Russia, for allegedly misappropriating Smagin’s investments in a real joint company. real estate project in Moscow (London Prize).
Smagin subsequently filed an enforcement action against Yegiazaryan under the New York Convention in the United States District Court for the Central District of California to enforce the London Award. In response, the district court ordered the freezing of Yegiazaryan’s assets in California.
In 2015, Yegiazaryan had won an unrelated foreign arbitration award (the Kerimov Award) against Russian businessman Suleiman Kerimov, and subsequently attempted to conceal a $198 million settlement in satisfaction of the Kerimov Award from Smagin’s collection. In violation of the district court’s preliminary injunction, Yegiazaryan received the funds through the London office of an American law firm before eventually transferring the money to a bank account at CMB Monaco through a network of offshore companies. . Yegiazaryan also directed an inner circle of friends to file fraudulent lawsuits against him in foreign jurisdictions to obtain false judgments against the Kerimov Award settlement. Additionally, he created a complex system of shell companies through members of his family within the US to protect his domestic assets from Smagin’s coercive actions.
Based on this “pattern of extortion activity,” in 2020, Smagin filed a civil lawsuit against Yegiazaryan, seeking more than $130 million in damages and arguing that Yegiazaryan’s attempts to protect assets from collection and commit wire fraud and obstruction of justice constituted a violation of RICO. . 2 The district court dismissed the case based on the Supreme Court’s decision in RJR Nabisco, Inc. v. European Community, ruling that Smagin failed to prove that he had suffered “internal injury.” On appeal, the Ninth Circuit reversed, after adopting a different interpretation of the “internal harm” test.
Before Yegiazaryan, there was a circuit split over a “domestic injury” test involving RICO claims.
In 2016, the Supreme Court held in RJR Nabisco, Inc. v. European Community that foreign plaintiffs bringing RICO claims must allege and prove an “internal damage”. 3 In other words, the Court held that the statute only permitted claims for domestic RICO-related damages, not for damages suffered extraterritorially.
The Court, however, did not define “internal harm,” which subsequently resulted in a circuit split. The Seventh Circuit adopted a clear residence-based test, establishing that the place of injury is the plaintiff’s residence. The Second, Third, and Ninth Circuits adopted a context-specific approach to determining the presence of internal harm, which “considers all the specific facts of the case related to where the harm ‘arises’, not just where it is ‘felt’” . 4
In the California proceedings involving Smagin and Yegiazaryan, the California district court initially dismissed Smagin’s RICO claim after applying the residency-based test and found that Smagin failed to sufficiently allege domestic injury because, among other things , his Russian citizenship and residence led him to suffer the detriment (i.e., his inability to collect the London Prize) in Russia and not in the US.
On the other hand, the Ninth Circuit rejected the residency-based test in favor of the context-specific approach, which requires courts to evaluate the circumstances as a whole to determine whether harm arose or occurred domestically within the U.S. Specifically, the Ninth Circuit concluded that the location of injury was California because Yegiazaryan’s alleged racketeering actions to prevent Smagin’s collection of a California judgment to enforce the London Award occurred largely within California. As such, the Ninth Circuit determined that Smagin sufficiently alleged that internal harm occurred.
The Supreme Court decision took the context-specific approach to determining “internal damage”
In Yegiazaryan , the Supreme Court resolved the circuit split and clarified the definition of “internal damage” regarding intangible property, including a ruling of a U.S. court to enforce a foreign arbitration award in a RICO lawsuit brought by a foreign plaintiff. The Court agreed with the Ninth Circuit and adopted the context-specific approach that examines the totality of the circumstances surrounding an injury to determine whether it arose or occurred domestically.
In doing so, the Court determined that the Russian plaintiff had sufficiently alleged RICO-related domestic injury by adequately alleging that racketeering activity that, for the most part, took place in California frustrated its efforts to collect a California judgment for enforcement. of a foreign arbitration award against a California resident.
The Court also rejected concerns about the fact-intensive nature of this approach, explaining that while it may be easier to implement as a clear rule under the residency-based test, it contradicted its 2016 RJR Nabisco decision by effectively prohibiting Foreign plaintiffs file RICO claims.
What are RICO claims and why are they important to foreigners?
RICO is an American federal statute that was enacted as part of the Organized Crime Control Act of 1970 to allow the prosecution of organized crime, particularly the mafia. Today, the application of RICO is much broader and has been used by prosecutors to criminally punish acts committed in support of organized crime.
The statute also creates a civil cause of action. According to RICO, “any harmed person” can recover based on a wide range of acts, defined as “extortion or illegal debt collection activity,” 5 such as drug trafficking, human trafficking, money laundering, money and identity fraud. Plaintiffs in civil RICO lawsuits can recover both tangible damages, such as property damage, and intangible injuries, such as financial losses.
RICO has served to incentivize reporting the activities of criminal organizations by allowing individuals to hold them liable for civil damages.
RICO, by its very nature, has an international impact. Many of the activities covered by the statute have a global reach because the conduct covered by “extortion activities” tends to involve cross-border activities. This is beneficial to non-US residents harmed by criminal organizations operating from the US, as non-US residents could potentially recover certain losses and damages from actors in the US under RICO.
Key Findings
The Supreme Court did not elaborate on other factors that may be relevant to the context-specific analysis or how to weigh the various factors. This decision, however, has a significant impact on the enforcement of foreign arbitration awards in the US:
Creditors of foreign awards now have an expanded path to collect foreign arbitration awards in the U.S. where the award debtor may have intentionally attempted to place assets beyond the reach of creditors through various fraudulent or deceptive activities.
While the Court reiterated that there must be domestic damages to recover under the RICO statute, it also noted that there is no evidence that Congress intended to exclude U.S. companies owned by persons living abroad from bringing a RICO suit. As the Court stated, “doing so runs the risk of generating international discord.”
For more information contact:
Jeffrey Lehman | Partner Miller & Chevalier | jlehtman@milchev.com
