On June 22, 2023, the U.S. Supreme Court held in a pair of related cases, Yegiazaryan v. Smagin and CMB Monaco v. Smagin, that foreign holders of international arbitral awards may rely on the Racketeer Influenced and Corrupt Organizations (RICO) Act to enforce U.S. judgments confirming these awards. Yegiazaryan v. Smagin, No. 22-381, 2023 WL 4110234 (U.S. June 22, 2023). The Court’s decision can provide creditors with a powerful new tool against recalcitrant debtors and their abettors, allowing them to seek treble damages and legal costs (including attorney fees) under the RICO Act.
Key Takeaways
The Court has opened a new avenue for holders of arbitral awards who state a cognizable RICO claim to enforce their awards in the United States. A RICO claim may be available to holders of international arbitral awards and foreign judgments, but only if the award or judgment is first confirmed in a U.S. court.
The Court declined to issue a bright-line rule for determining whether a creditor may bring a RICO claim to enforce an international arbitral award in the United States, endorsing instead a context-specific approach that takes into account “the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.” It remains to be seen how lower courts will apply these factors.
This new enforcement mechanism stands as a warning to award and judgment debtors, as well as third parties, such as banks, that might assist debtors in efforts to avoid enforcement in the United States.
Background
In 2014, an arbitral tribunal constituted under the rules of the London Court of International Arbitration (LCIA) issued an $84 million arbitration award to Vitaly Smagin, a Russian national, against Ashot Yegiazaryan and others stemming from a dispute over shares in a Russian real estate venture. Around that same time, Yegiazaryan, also a Russian national, relocated to California. Smagin then confirmed his LCIA award against Yegiazaryan in the U.S. District Court for the Central District of California (District Court) under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
With his award confirmed as a U.S. federal court judgment, Smagin successfully sought a temporary protective order (TPO) freezing Yegiazaryan’s assets in California. The TPO specifically referenced funds that Yegiazaryan expected to receive in an unrelated arbitration with a third party. Shortly thereafter, Yegiazaryan settled his dispute with the third party, and received $198 million in settlement proceeds. Smagin sought to enforce his judgment against the settlement proceeds.
RICO as an Avenue to Enforcement
After many years of unsuccessful attempts to collect on his award, in 2020 Smagin turned to the RICO Act. He filed a claim in the District Court alleging that Yegiazaryan had evaded payment of the District Court’s judgment by engaging in a complex criminal enterprise that, among other things, funneled the settlement money through a web of offshore entities in Lichtenstein and the Caribbean, and ultimately to a bank account in Monaco with CMB Monaco.
RICO was originally passed in 1970 to combat organized crime. RICO provides a private right of action to “[a]ny person injured in his business or property” by a violation of the statute, which, among other things, prohibits defendants from conducting or participating in an enterprise through a pattern of racketeering activity. In RJR Nabisco, Inc., v. European Community, 579 U.S. 325 (2016), the Supreme Court held that a plaintiff must have suffered a “domestic injury” to be able to bring a RICO claim in the United States, but the Court did not explain how to distinguish between domestic and foreign injuries.
Smagin’s claim raised the question of whether the damages he suffered from his inability to enforce the District Court’s judgment on his foreign arbitral award constituted a “domestic injury” under RICO. Prior to the Court’s decision in Yegiazaryan v. Smagin, the United States Courts of Appeals applied different tests to determine where a plaintiff suffers injury to intangible property rights, such as rights arising from a U.S. court judgment. The Second and Third Circuits applied a multifactor approach that considered the circumstances surrounding the dispute. See Bascunan v. Elsaca, 874 F. 3d 806, 809 (2d Cir. 2017); Humphrey v. GlaxoSmithKline PLC, 905 F.3d 694, 707 (3d Cir. 2018). The Seventh Circuit applied a bright-line rule: a plaintiff suffers an injury to intangible property rights at the place of its residence. See Armada (Singapore) PTE Ltd. v. Amcol Int’l Corp., 885 F.3d 1090, 1094 (7th Cir. 2018).
In Smagin’s case, the District Court adopted the Seventh Circuit’s approach. Because Smagin was a resident of the Russian Federation, his injury was deemed to have been suffered in Russia, and thus he did not suffer “domestic injury” as required by RICO. The District Court therefore dismissed Smagin’s RICO claims. See Smagin v. Compagnie Monegasque De Banque, 2021 WL 2124254, at *1 (C.D. Cal. May 5, 2021). By contrast, the Ninth Circuit reversed the District Court’s decision by applying its own context-specific, multifactor test, and ruled that Smagin suffered injury in the United States because his injury arose from the evasion of the District Court’s judgment that confirmed the LCIA award and because much of the conduct underlying Smagin’s RICO claim occurred in the United States. See Smagin v. Yegiazaryan, 37 F.4th 562, 567, 570 (9th Cir. 2022).
The Supreme Court’s Decision
The Supreme Court affirmed the Ninth Circuit’s ruling, holding that Smagin, despite being a Russian resident, had suffered a domestic injury within the meaning of the RICO Act. Yegiazaryan v. Smagin, No. 22-381, 2023 WL 4110234, at *8 (U.S. June 22, 2023). In doing so, the Court rejected the bright-line rule that a RICO injury occurs at a plaintiff’s domicile and instead adopted a context-specific approach.
The Court stated that its approach “turns largely on the particular facts alleged in a complaint” and that “in assessing whether there is a domestic injury, courts should engage in a case-specific analysis that looks to the circumstances surrounding the injury.” Id. at *7. The Court, however, declined to enumerate specific factors that “can capture the relevant considerations for relevant for all cases” because “RICO covers a wide range of predicate acts and is notoriously ‘expansive’ in scope.” The Court underscored that “depending on the allegations, what is relevant in one case to assessing where the injury arose may not be pertinent in another.” Id. at *7.
The Court rejected the domicile-of-the-creditor test for domestic injury, noting that it could lead to absurd outcomes, citing the example of a business owner who owns a brick-and-mortar shop in the United States but resides abroad. If the business owner’s shop were to suffer harm as a result of a racketeering scheme, the business owner would not (under the domicile test) have recourse under RICO because the owner resides abroad, which the Court reasoned is not an outcome Congress could have intended.
In the case at hand, the Court found that “the circumstances surrounding Smagin’s injury make clear it arose in the United States” for two main reasons. First, much of the alleged racketeering activity took place in the United States, including the creation of U.S. shell companies to hide U.S. assets, the submission of a forged doctor’s note in the District Court, and the intimidation of U.S.-based witnesses. While the Court acknowledged that some acts of the alleged scheme occurred outside the United States, it ultimately found that these acts were done with the intent of frustrating the District Court’s judgment.
Second, the Court found that “the injurious effects of the racketeering activity largely manifested in California” because that is where Mr. Yegiazaryan lives and where the intangible rights arising from Smagin’s judgment exist. Given the locus of those intangible rights, the Court found that Smagin’s injury is felt in California despite the fact that he resides in Russia.
Implications for Holders of Foreign Arbitral Awards and Foreign Judgments
The Supreme Court’s decision creates a potential new avenue for enforcement of foreign arbitral awards. We may therefore see more foreign award creditors seek enforcement of awards in the United States and subsequently file RICO claims against recalcitrant award debtors and their enablers. RICO claims are attractive to creditors because the RICO Act allows creditors to seek treble damages and recover legal costs. It is, however, important to keep the following caveats in mind:
- This new enforcement avenue will likely be available to holders of foreign arbitral awards and foreign judgments, but only if they confirm their awards and judgments in U.S. courts, thereby converting their foreign awards and judgments into U.S. court judgments.
- To pursue this new route, it is not enough for an award creditor to show that an award debtor is resisting payment of a judgment on an arbitral award or foreign court judgment. Plaintiffs will need to allege a cognizable RICO claim showing, among other things, that the award debtor engaged in long-term organized misconduct amounting to a pattern of racketeering.
- The absence of a bright-line rule or exhaustive list of factors guiding the “domestic injury” analysis may mean that the contours of the doctrine will remain unclear in the international award and judgment context until further guidance is provided by the lower courts.
The Supreme Court’s decision has increased the risks for award debtors who attempt to evade the enforcement of a U.S. court judgment. These risks extend to third parties, including banks assisting debtors in asset protection transactions after a judgment is issued. While third parties may ultimately succeed in dismissing a RICO claim on personal jurisdiction grounds, the Court has made clear that a plaintiff’s foreign domicile alone will not be grounds for doing so.
