Yegiazaryan v. Smagin: RICO Becomes a Tool for Foreign Plaintiffs to Collect on Arbitration Awards in the U.S.

By Shearman & Sterling LLP

Aug 4, 2023

The Supreme Court’s recent decision in Yegiazaryan v. Smagin opens the door for foreign plaintiffs to use the Racketeer Influenced and Corrupt Organizations Act (“RICO”) as an additional tool for collecting on international arbitration awards in the United States. In Smagin, the Court resolved a Circuit split over what qualifies as a “domestic injury” for purposes of filing a private civil suit under RICO, holding a plaintiff has alleged a “domestic injury” when the circumstances surrounding the injury indicate it arose in the United States. The Court found plaintiff was injured in the United States “because his ability to enforce a California judgment, confirming an international arbitration award, was impaired by racketeering activity that largely occurred in or was direct from and targeted at California.”^[1]

This note examines the Supreme Court’s decision and highlights its relevance to foreign individuals and entities looking to collect on arbitration awards in the United States. Shearman & Sterling regularly advises clients on how best to enforce and execute on international arbitration awards in the United States and other jurisdictions.

Yegiazaryan v. Smagin

Factual Background

In 2014, Vitaly Smagin won an arbitration award of approximately $84 million against Ashot Yegiazaryan related to a real estate joint venture. At the time of the award, Smagin lived in Russia and Yegiazaryan resided in California. When Yegiazaryan refused to pay, Smagin petitioned the District Court for the Central District of California to confirm and enforce the arbitral award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). The District Court froze Yegiazaryan’s California assets and issued a temporary protective order.^[2] Yegiazaryan’s other assets in the United States were concealed in various shell companies.^[3]

Several months later, Yegiazaryan received $198 million from an unrelated arbitration. Attempting to avoid the California asset freeze and conceal the funds, Yegiazaryan used a law firm to accept the funds and then moved them to a bank in Monaco. He subsequently instructed several associates to file unfounded claims against him in various jurisdictions. Yegiazaryan did not oppose these spurious claims, hoping that the judgments against him would encumber his assets and bar Smagin’s recovery.

Smagin learned of the $198 million in 2016. Soon after, the District Court for the Central District of California confirmed Smagin’s award against Yegiazaryan, including interest, at $92 million (the “California Judgment”) and issued orders aimed at ensuring Smagin’s ability to collect. Yegiazaryan continued his efforts to avoid payment, including through a feigned illness, threats, and intimidation.

In 2020, Smagin brought claims against Yegiazaryan and eleven other defendants under the RICO private right of action.^[4] Smagin alleged a substantive RICO violation^[5] and a RICO conspiracy claim,^[6] arguing defendants committed RICO predicate racketeering acts to prevent Smagin from collecting on his $92 million award. Smagin requested actual damages of $130 million, attorney’s fees, and treble damages.

Circuit Split and Procedural History

To bring a RICO private action, a plaintiff must suffer harm to their business or property due to a substantive violation of RICO.^[7] The Supreme Court held in RJR Nabisco that a private plaintiff’s harm must be a “domestic injury.”^[8] The Supreme Court did not define the parameters of a “domestic injury,” because the harm in RJR Nabisco was entirely extraterritorial.^[9]

The absence of a definition of a “domestic injury” led to a Circuit split. The Second and Third Circuits developed a context-specific approach to the domestic injury question. The Third Circuit held that the assessment ought to “consider[] . . . multiple factors that vary from case to case” including, among others, the location of the injury, the location of plaintiff’s home and business, and the “location of the activities giving rise to the underlying dispute.”^[10] The Second Circuit adopted a similar fact-focused inquiry, although it did not extend its decision beyond tangible property.^[11] On the other hand, the Seventh Circuit held that harm to intangible property is felt only at a plaintiff’s residence. Therefore, persons who reside or corporations that have a principal place of business outside the United States cannot have suffered a “domestic injury.”^[12]

In Smagin, the District Court for the Central District of California applied both the Third Circuit’s multi-factor test and the Seventh Circuit’s bright line residency rule.^[13] It found Smagin failed under both tests. The Ninth Circuit reversed on appeal. It first considered where the California Judgment existed as property.^[14] The court concluded that the California Judgment granted rights enforceable only in California such that the property existed in California. The Ninth Circuit likewise found that harm to the California Judgment occurred in California, due to Yegiazaryan’s allegedly illegal conduct “designed to subvert Plaintiff's rights . . . executable in California.”^[15] Because the California Judgment existed in and was harmed in California, the Ninth Circuit held that Smagin suffered a “domestic injury” under RICO. The Ninth Circuit rejected the Seventh Circuit’s bright line residency test as out of step with RJR Nabisco, arguing that the test improperly prioritized the “location of the plaintiff” rather than the “location of the injury.”^[16]

In a 6-3 decision, the Supreme Court affirmed the Ninth Circuit’s holding that RICO “domestic injury” analyses are context-specific inquiries. The Court directed lower courts to determine if an injury “arose in the United States” by looking at the surrounding context.^[17] This context may include the “nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.”^[18] When rejecting the bight line residency rule, the Court reiterated its holding in RJR Nabisco that foreign plaintiffs may bring claims under RICO—an avenue impossible under a pure residency test. Finally, the Court clarified that the focus of a RICO private right of action is “on the injury, not in isolation, but as the product of racketeering activity.”^[19]

RICO as a Mechanism for Foreign Plaintiffs to Collect on Arbitration Awards in the United States

Under RICO, racketeering activity is defined broadly and includes, among other things, money laundering, bribery, and a series of fraudulent activities.^[20] RICO makes it unlawful for any person:

To engage, directly or indirectly, with income derived from racketeering activity and use the illegal income to invest or acquire an interest in an enterprise which is engaged in or impacts interstate or foreign commerce.^[21]

To acquire or maintain, directly or indirectly, any interest in or control of an enterprise engaged in or affecting interstate or foreign commerce through racketeering activity.^[22]

Employed by or associated with any enterprise engaged in or affecting interstate or foreign commerce to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through racketeering activity.^[23]

To conspire to violate these provisions.^[24]

RICO’s private right of action allows any person injured in his business or property by reason of a violation of RICO to sue in the appropriate U.S. district court and recover treble damages and the cost of the suit.^[25]

Therefore, if an individual or entity is avoiding payment on an arbitral award through racketeering activity, such as money laundering or fraud, the beneficiary of the award may be able to seek justice under RICO. Prior to the Smagin decision, however, this avenue was largely unavailable to arbitration award beneficiaries residing abroad. Only a few foreign plaintiffs have attempted to use RICO’s private right of action to execute on assets resulting from a foreign arbitral award, with mixed results.

For example, in Armada (Singapore) Pte Ltd. v. Amcol Int’l Corp., a Singaporean carrier, Armada, won several multimillion dollar arbitral awards in London against an Indian company, Ashapura.^[26] Ashapura then began insolvency proceedings in India and New York. Armada alleged that insiders of Ashapura engaged in schemes to drain Ashapura’s assets and prevent Armada from collecting its award. Armada brought a RICO action in Illinois. The defendants argued that RJR Nabisco barred Armada’s action because Armada had not alleged a “domestic injury.” The district court agreed with defendants, holding that Armada’s harm—an inability to collect its award—was a purely economic harm felt at Armada’s principal place of business in Singapore.^[27] On appeal, the Seventh Circuit affirmed, holding that, as a Singaporean company, “any harm to Armada’s intangible bundle of litigation rights was suffered in Singapore.”^[28]

The court in Tatung Co., Ltd. v. Shu Tze Hsu reached the opposite conclusion on a similar set of facts.^[29] In Tatung, the plaintiff, a Taiwanese company, “extended credit and delivered goods” to a United States creditor.^[30] When the American creditor stopped paying its debts, plaintiff initiated arbitration, won, and confirmed the arbitration award in California. Plaintiff alleged that defendants then conspired to drain the creditor’s assets, in violation of RICO. The court held that plaintiff suffered a domestic injury because the defendants’ alleged bad acts which were directed at property in California and aimed to prevent plaintiff from exercising rights that existed in California.^[31]

Following the Smagin decision, foreign plaintiffs now have the opportunity to use the RICO private action as a tool in collecting on arbitration awards in circumstances where the award debtor has engaged in racketeering activity to abscond from paying its debt and the circumstances surrounding the injury arose in the United States. A unique benefit of RICO includes the possibility of recovery not only from the award debtor but also from conspirators and others involved in the racketeering activity. It also leaves open the possibility of treble damages and recovery of litigation costs.

Foreign plaintiffs may be able to increase their odds of having a “domestic injury” by confirming the relevant arbitration award in the United States and receiving a US judgment. However, other factors will also impact the inquiry, such as where the racketeering activity was directed from and targeted at, as well as the location of the defendant. Ultimately, whether there is a “domestic injury” for purposes of RICO will need to be analyzed on a case-by-case basis.

Footnotes

[1] Yegiazaryan v. Smagin, 599 U. S. ____, *14 (2023).
[2] Smagin v. Yegiazaryan, No. 2:14-CV-09764, (C.D. Cal. Feb 04, 2015) (order granting stay of proceedings and preliminary injunction).
[3] Smagin v. Yegiazaryan, 37 F.4th 562, 565 (9th Cir. 2022), cert. granted, 143 S. Ct. 645 (2023), and cert. granted sub nom. CMB Monaco v. Smagin, 214 L. Ed. 2d 382, 143 S. Ct. 646 (2023), and aff'd and remanded, 599 U. S. ____ (2023).
[4] 18 U.S.C. §1964(c)

[5] 18 U.S.C. §1962(c).
[6] 18 U.S.C. §1962(d).
[7] 18 U.S.C. § 1964(c).
[8] RJR Nabisco, Inc. v. European Community, 579 U.S. 325, 346 (2016).
[9] Id. at 354.
[10] Humphrey v. GlaxoSmithKline PLC, 905 F.3d 694, 701, 707 (3d Cir. 2018).
[11] Bascunan v. Elsaca, 927 F.3d 108, 119 (2d Cir. 2019); see also Bascunan v. Elsaca, 874 F.3d 806 (2d Cir. 2017).
[12] Armada (Singapore) PTE Ltd. v. Amcol Int'l Corp., 885 F.3d 1090, 1093–95 (7th Cir. 2018), abrogated by Yegiazaryan v. Smagin, 599 U. S. ____ (2023).
[13] Smagin v. Compagnie Monegasque De Banque, No. 220CV11236RGKPLA, 2021 WL 2124254, *4 (C.D. Cal. 2021), rev'd and remanded sub nom. Smagin v. Yegiazaryan, 37 F.4th 562 (9th Cir. 2022), cert. granted, 143 S. Ct. 645 (2023), and cert. granted sub nom. CMB Monaco v. Smagin, 214 L. Ed. 2d 382, 143 S. Ct. 646 (2023), and aff'd and remanded, 599 U. S. ____ (2023).
[14] Smagin v. Yegiazaryan, 37 F.4th 562, 567 (9th Cir. 2022), aff'd and remanded, 599 U. S. ____ (2023).
[15] Id. at 568.
[16] Id. at 570 (emphasis added).
[17] Yegiazaryan v. Smagin, 599 U. S. ____, *8 (2023).
[18] Id. at *8-*9.
[19] Id. at *9.
[20] 18 U.S.C. § 1961(1).
[21] 18 U.S.C. § 1962(a).
[22] 18 U.S.C. § 1962(b).
[23] 18 U.S.C. § 1962(c).
[24] 18 U.S.C. § 1962(d).
[25] 18 U.S.C. §1964(c).
[26] Armada (Singapore) Pte Ltd. v. Amcol Int'l Corp., 244 F. Supp. 3d 750, 752 (N.D. Ill. 2017), aff'd, 885 F.3d 1090 (7th Cir. 2018).
[27] Id. at 756.
[28] Armada (Singapore) PTE Ltd. v. Amcol Int'l Corp., 885 F.3d 1090, 1095 (7th Cir. 2018), abrogated by Yegiazaryan v. Smagin, 599 U. S. ____ (2023). For further discussion of the Seventh Circuit’s decision, see previous section on the pre-Smagin circuit split.
[29] Tatung Co., Ltd. v. Shu Tze Hsu, 217 F. Supp. 3d 1138 (C.D. Cal. 2016)
[30] Id. at 1156.
[31] Id.

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