The Supreme Court held that a defendant’s acts to prevent a foreign plaintiff from collecting on an overseas arbitration award in the U.S. may give rise to a civil RICO claim.

TAKEAWAYS

• The Court held that whether there is a U.S. “domestic injury” that states a RICO claim depends on a “contextual approach” based on the facts of the case, which here included setting up shell companies in the U.S. and submitting a false document to a U.S. court.
• The Supreme Court’s opinion suggests an additional tool for a party seeking to enforce an overseas arbitral award or court judgment in the U.S. in appropriate circumstances.

On June 22, 2023, in a 6-3 opinion, the U.S. Supreme Court held in Ashot Yegiazaryan v. Vitaly Ivanovich Smagin and CMB Monaco v. Vitaly Ivanovich Smagin that a civil Racketeer Influenced and Corrupt Organizations (RICO) lawsuit may be based on a defendant’s acts to prevent a plaintiff, a prevailing party in a foreign arbitration, from collecting on the award. In doing so, the Court resolved a Circuit split and rejected the proposition that a foreign plaintiff’s economic loss necessarily occurs at the plaintiff’s foreign residence. The opinion suggests an additional tool for foreign plaintiffs seeking the enforcement of overseas awards and judgments to obtain enforcement in the United States.

Background
In 2014, Vitaly Smagin, a resident of Russia, obtained an overseas arbitration award in London against Ashot Yegiazaryan, a resident of California. Smagin sought to confirm and enforce the arbitral award in federal district court in California pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and obtained injunctive relief to freeze Yegiazaryan’s California assets. While the injunction was in place, Yegiazaryan and others allegedly took steps, including the creation of shell companies in the U.S., to conceal his assets. The district court granted Smagin’s motion for confirmation of the award and summary judgment for the amount due. The court later found Yegiazaryan in contempt based on his attempts to prevent collection of the judgment, including the submission of a forged doctor’s note to the court in support of his claim of illness and then the intimidation of the doctor to avoid service of Smagin’s subpoena to depose the doctor.

Smagin then brought a civil RICO action against Yegiazaryan and others for conspiring to frustrate Smagin’s collection of the judgment through wire fraud, witness tampering, obstruction of justice, and other predicate acts under RICO, 18 U.S.C. §§ 1961–1968. RICO addresses “racketeering activity,” which is defined as violations of various federal and state statutes, including federal fraud and money laundering statutes. RICO can be enforced in a criminal or civil action. A civil action is enforceable by a person “injured in his business or property” by reason of the violation. 18 U.S.C. §1964(c). A RICO plaintiff may recover three times the damages suffered, as well as attorney’s fees.

Smagin asserted that he was injured in his ability to enforce the judgment. The district court dismissed the RICO action for failure to plead a domestic injury, because Smagin was a Russian resident and thus suffered the alleged loss in Russia. The Ninth Circuit reversed and held that Smagin had alleged a domestic injury, based on the acts alleged, a large portion of which occurred in or were targeted at California. This decision was in conflict with the rule of the Seventh Circuit, which deemed injury to intangible property to be at the plaintiff’s residence.

Decision
The Supreme Court majority held that Smagin’s allegations satisfied its requirement to allege a “domestic injury” for a civil RICO claim, as articulated in RJR Nabisco, Inc. v. European Community. In doing so, the majority adopted a “contextual approach,” which considered the facts of the case, as opposed to a per se rule that injury is suffered at the plaintiff’s residence (overseas, in this case). Those facts would include “the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.” In this case, the majority noted that a focus on Smagin suffering economic injury in Russia would neglect “central features” of the injury, including Yegiazaryan’s creating U.S. shell companies to hide his U.S. assets, submitting the forged doctor’s note to the district court, and intimidating a U.S. witness. Even though other acts occurred overseas, the “central purpose” of those acts was to frustrate the California judgment. Finally, the effects were largely manifested in California, given that the judgment existed in California by virtue of the orders of the district court there. It is also important to note that the alleged injury was Smagin’s inability to collect his judgment in the U.S.

Comment
This opinion is significant for parties and practitioners who deal with the enforcement of foreign arbitral awards and court judgments in the U.S. Given the connection of many commercial transactions and parties to those transactions to the U.S., it is not uncommon for overseas parties to seek to enforce these awards and judgments in the U.S. While the parties’ immediate focus may be on the confirmation of the resulting arbitral award or court judgment in the U.S., at the outset of U.S. litigation to confirm a foreign award or judgment, careful consideration should also be given to the subsequent enforcement and collection of the award or judgment, once confirmed. The Yegiazaryan opinion demonstrates that when parties attempt to conceal assets or otherwise evade the enforcement of foreign awards and judgments, tools are available to assist with enforcement and collection, including a RICO action, which is available not only federally but also in a number of state jurisdictions.

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