A Broader Path to Collect Foreign Arbitral Awards in the United States After U.S. Supreme Court's Ruling Allowing Racketeering Claims by Foreign Plaintiffs
Global Disputes | Cases to Watch
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 claims under the Racketeer Influenced and Corrupt Organizations Act (RICO)1 in the U.S. To bring a successful RICO claim, a foreign plaintiff must allege a "domestic injury" stemming from the RICO violation. In 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 circumstances surrounding an injury to determine whether it arose or occurred within the U.S. In so doing, the Court rejected the residency-based test, which precludes a foreign plaintiff from bringing a RICO claim based solely on their foreign residency.
The Yegiazaryan decision paves the way for foreign awards creditors to enforce foreign arbitral awards in U.S. courts against debtors who use fraudulent tactics to avoid paying the awards.
In 2014, Vitaly Smagin, a Russian resident, obtained a multi-million-dollar foreign arbitral award against Ashot Yegiazaryan, a Russian national who fled to Beverly Hills in California to avoid an indictment in Russia, for allegedly misappropriating Smagin's investments in a joint real estate project in Moscow (the London Award).
Smagin subsequently brought an enforcement action against Yegiazaryan under the New York Convention in the U.S. 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 arbitral award (the Kerimov Award) against Russian businessman Suleiman Kerimov, and subsequently sought to hide a $198 million settlement in satisfaction of the Kerimov Award from collection by Smagin. In violation of the district court's preliminary injunction, Yegiazaryan received the funds through the London office of a U.S. law firm before ultimately transferring the money to a bank account at CMB Monaco through a network of offshore companies. Yegiazaryan also instructed an inner circle of friends to file fraudulent claims against him in foreign jurisdictions to obtain sham judgments to encumber the Kerimov Award settlement. In addition, he created a complex system of shell companies through family members within the U.S. to shield his domestic assets from Smagin's enforcement action.
Based on this "pattern of racketeering activity," in 2020, Smagin filed a civil lawsuit against Yegiazaryan, seeking more than $130 million in damages and arguing Yegiazaryan's attempts to shield assets from collection and committing wire fraud and obstruction of justice, constituted a RICO violation.2 The district court dismissed the case on the basis of the Supreme Court's decision in RJR Nabisco, Inc. v. European Community, ruling that Smagin failed to demonstrate that he had suffered a "domestic injury." On appeal, the Ninth Circuit reversed it, after adopting a different interpretation to the "the domestic injury" test.
Prior to Yegiazaryan, Circuit Split Existed Over "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 demonstrate a "domestic injury."3 In other words, the Court held that the statute allowed only claims for domestic RICO-related injuries, not injuries suffered extraterritorially.
The Court, however, did not define "domestic injury," which subsequently resulted in a circuit split. The Seventh Circuit adopted a bright-line residency-based test, which provides that the place of the injury is the plaintiff's residence. The Second, Third, and Ninth Circuits adopted a context-specific approach to determine the presence of a domestic injury, which "considers all case-specific facts bearing on where the injury '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 complaint after applying the residency-based test and found that Smagin failed to sufficiently plead a domestic injury because, among other things, his Russian citizenship and residency caused him to suffer the injury (i.e., his inability to collect on the London Award) in Russia and not in the U.S.
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 on the whole to determine if the injury arose or occurred domestically within the U.S. Specifically, the Ninth Circuit found that the location of the injury was California because Yegiazaryan's alleged racketeering actions to prevent Smagin's collection on a California judgment to enforce the London Award largely occurred within California. As such, the Ninth Circuit determined that Smagin sufficiently pleaded a domestic injury occurred.
The Supreme Court's Decision Adopted the Context-Specific Approach to Determine "Domestic Injury"
In Yegiazaryan, the Supreme Court resolved the circuit split and clarified the definition of "domestic injury" as to intangible property, which includes a judgment from a U.S. court to enforce a foreign arbitral award in a RICO claim filed 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 so doing, the Court determined that the Russian plaintiff had sufficiently pleaded a RICO-related domestic injury by adequately alleging that racketeering activity that, for the most part, took place in California frustrated his efforts to collect on a California judgment for enforcement of a foreign arbitral award against a California resident.
The Court also rejected concerns over the fact-intensive nature of this approach, explaining that while it may be easier to implement as a bright-line rule under the residency-based test, it contradicted its 2016 RJR Nabisco holding by effectively barring foreign plaintiffs from bringing RICO claims.
What are RICO Claims and Why Do They Matter to Foreigners?
RICO is a U.S. federal statute that was enacted as part of the Organized Crime Control Act of 1970 to enable prosecution of organized crime, particularly the mafia. Today, RICO's application is much broader and has been used by prosecutors to criminally penalize acts committed in furtherance of organized crime.
The statute also creates a civil cause of action. Under the RICO, "any person injured" can recover on the basis of a wide range of acts, defined as "racketeering activity or collection of an unlawful debt,"5 such as drug dealing, human trafficking, money laundering, and identity fraud. Plaintiffs in civil RICO suits can recover for both tangible harms, such as property damage, and intangible injuries, such as financial loss.
RICO has served to incentivize reporting the activities of criminal organizations by allowing individuals to hold them accountable 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 conduct covered by "racketeering activities" tends to involve cross-border activity. This is beneficial for non-U.S. residents harmed by criminal organizations operating from the U.S. as the non-U.S. residents could potentially recover certain losses and damages from actors in the U.S. under the RICO.
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 arbitral awards in the U.S.:
- Foreign-award creditors have now a broader path to collect foreign arbitral awards in the U.S. where the award debtor may have intentionally attempted to place assets beyond the reach of creditors via various fraudulent or deceitful activities.
- While the Court reiterated that there must be domestic damage to recover under the RICO statute, it also noted that there is no evidence that Congress intended to exclude U.S. businesses owned by people living overseas to bring a RICO suit. As the Court stated, "doing so runs the risk of generating international discord."6
Contact us for further details on how we are helping companies in bringing and defending RICO claims, enforcing foreign arbitral awards in the U.S., and resolving their U.S. or international disputes through litigation and arbitration.
Summer associates Katie Cantone-Hardy and Katherine Lewis assisted with this alert.
118 U.S.C. §§ 1961–68.
2The Court's opinion summarily refers to Yegiazaryan's actions as racketeering without evaluating the actions under the substantive RICO provisions.
3RJR Nabisco, Inc. v. European Community, 579 U.S. 325, 346 (2016).
4Yegiazaryan v. Smagin, No. 22–381 at 8 (U.S. June 22, 2023).
518 U.S.C. §§ 1962.
6Yegiazaryan, slip op. at 4
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