On June 22, 2023, the Supreme Court issued a 6–3 opinion in
Yegiazaryan v. Smagin, holding that a foreign award creditor may bring claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) related to the enforcement of an arbitral award rendered in the United States by adopting a “context-specific” test. In issuing this decision, the Court resolved a split in the Circuits concerning how to determine the location of an injury associated with a judgment enforcing an arbitration award for purposes of a RICO claim. Previously, the Seventh Circuit had applied a residency test concluding that the injury occurred where a plaintiff resided, whereas the Ninth Circuit found that injury occurred where the Court entering an award was located.
In applying this approach to the Smagin case, the Supreme Court found that the facts supported a finding that the injury suffered by the foreign plaintiff related to where the interference with the enforcement of the foreign arbitral award occurred, which was in the United States, and that a RICO claim could be asserted in the United States.
Smagin and Yegiazaryan were parties to an arbitration proceeding in London that ended with the entry of a multimillion-dollar arbitral award in favor of Smagin. Both of these individuals were Russian nationals, and the real estate joint venture underlying the arbitral dispute concerned property located in Russia; however, the defendant Yegiazaryan lived in California. Smagin sought to enforce his award in a California federal court, which entered the award. Thereafter, in an effort to evade enforcement of the judgment, Yegiazaryan created multiple shell companies and set up complex transactions to conceal his assets. Smagin ultimately filed a civil RICO suit alleging that the defendant had conspired with a number of entities, including law firms and banks, to commit inter alia wire fraud as part of a RICO scheme. In opposition, Yegiazaryan argued that the claimant could not establish that he had suffered a “domestic injury” but rather the injury occurred in Russia because he was a Russian citizen. While the district court dismissed the case, the Ninth Circuit reversed, finding that Smagin’s harm had been suffered in California because his right to enforce a California judgment was impeded and the conspiracy occurred within California.
The Supreme Court adopted the context-specific test and found that courts should assess “the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity” in order to determine if the injury arose in the United States. The Court found that in utilizing this approach, Smagin had clearly established a domestic injury because the racketeering took place in California and the harm was suffered in California.
The decision expands the avenues for foreign award creditors to enforce arbitral awards in the United States where the obligor has taken steps to evade its obligations. The Supreme Court’s ruling should also be seen as a warning to professionals and lending institutions who could be viewed as assisting clients in evading arbitral awards and judgments.
Originally posted on ABA Business Law Today
