Supreme Court affirms RICO liability where award debtor seeks to avoid enforcement of award in United States
The United States Supreme Court just handed non-US award and judgment creditors a new enforcement tool for dealing with truly recalcitrant debtors seeking to hide their US assets from execution. On June 22, 2023, the Supreme Court issued a 6-3 opinion in Yegiazaryan v. Smagin, 599 U.S., 2023 WL 4110234 (June 22, 2023), finding that the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, may be used to impose liability on award debtors engaging in racketeering activity to avoid enforcement of a foreign arbitral award against assets in the United States.
Yegiazaryan resolves a circuit split between the Second, Third, and Ninth Circuits, on the one hand, and the Seventh Circuit on the other, concerning the test for determining whether the plaintiff has proved a domestic injury, a requirement set forth in Court’s prior decision in RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016). The Supreme Court rejected the Seventh Circuit’s “bright line rule” that foreign plaintiffs may only experience injuries involving intangible property at their place of residence, opting instead for a “context-specific” approach taken by the Second, Third, and Ninth Circuits.
The Yegiazaryan case emerged from a dispute between Vitaly Smagin (a Russian national) and Ashot Yegiazaryan (a California resident). In 2014, Smagin obtained a US$84 million arbitration award against Yegiazaryan stemming from Yegiazaryan’s misappropriation of investment funds in a joint real estate venture in Moscow. Yegiazaryan refused to pay the award, and Smagin sought to have the award recognized under the New York Convention in the Central District of California, where Smagin also obtained a temporary restraining order and preliminary injunction freezing Yegiazaryan’s California assets.
Smagin’s request for prejudgment measures was well founded: in 2015, Yegiazaryan came into approximately US$198 million and promptly took steps to secrete those assets from the United States by “creat[ing] a complex web of offshore entities to conceal the funds” and avoid the District Court’s injunction. Yegiazaryan, 2023 WL 4110234, at *4. Yegiazaryan also began hiding his assets in the United States through shell companies owned by his family members. Smagin did not learn of these facts until February 2016, when he was permitted to intervene in Yegiazaryan’s California divorce proceedings.
The District Court recognized Smagin’s award in March 2016, but by then Smagin was unable to locate or attach any California-based assets belonging to Yegiazaryan. As a result, in 2020, Smagin brought a RICO action against Yegiazaryan and others purportedly acting on his behalf, alleging they had collectively engaged in concerted activities to hide Yegiazaryan’s assets that could have been used to satisfy Smagin’s California judgment.
In 2021, the Central District of California dismissed Smagin’s complaint on the basis that Smagin “fail[ed] to adequately plead a domestic injury in support of his two RICO claims.” Id. at *5. The Ninth Circuit reversed, reasoning that Smagin’s allegation that his efforts to execute on a California judgment in California against a California resident were foiled by a pattern of racketeering activity largely occurring in, or targeted at, California was sufficient to plead a domestic injury under RICO. The Supreme Court agreed with the Ninth Circuit, holding that U.S courts assessing whether a plaintiff has pled a domestic injury in the RICO context must engage in a circumstantial inquiry which “considers all case-specific facts bearing on where the injury ‘arises,’ not just where it is ‘felt.’” Id. at *6 (emphasis supplied). The Supreme Court further emphasized that applying a bright-line rule making a foreign plaintiff’s residence determinative for purposes of assessing whether a domestic injury was suffered would undermine the Court’s language in RJR Nabisco that the domestic-injury requirement “does not mean that foreign plaintiffs may not sue under RICO.” Id. at *7.
Although the availability of a RICO action as an enforcement tool will be contingent on the facts and circumstances of each case, the Court’s decision in Yegiazaryan is notable in that it imposes the threat of treble damages (available under the RICO statute) in instances where racketeering activity is employed in service of a scheme to avoid enforcement of an arbitral award in the United States, providing creditors with a powerful stick in dealing with truly vexatious debtors.