RICO Statute May Be Used To Enforce Arbitration Awards by Foreign Nationals Says U.S. Supreme Court

By John S. Delikanakis

On June 22, 2023, the U.S. Supreme Court ruled that the U.S. Racketeer Influenced and Corrupt Organizations Act, commonly known as the RICO statute, may be used to enforce a foreign arbitration award. The Court’s opinion in CMB Monaco, fka Compagnie Monegasque de Banque, Petitioner v. Vitaly Ivanovich Smagin, et al. can be found here.

The case arose from a U.S. District Court lawsuit brought by Vitaly Ivanovich Smagin alleging RICO claims against a former business partner, Ashot Yegiazaryan. Smagin sought to enforce a 2014 $92 million arbitration award issued in a London-seated arbitration. That arbitration award was then confirmed in 2014 by the U.S. Central District of California pursuant to the New York Convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards). The Federal Arbitration Act provides that the New York Convention is enforceable in the United States and that federal district courts have original jurisdiction of actions falling under the Convention. The district court also entered a temporary protective order freezing Yegiazaryan’s assets in California.

In 2020, Smagin filed a RICO action against Yegiazaryan and others purportedly acting on his behalf alleging that they all engaged in concerted RICO activities in an effort to hide assets that could have satisfied Smagin’s California judgment. In 2021, the U.S. Central District of California court dismissed the complaint on the ground that Smagin "fail[ed] to adequately plead a domestic injury in support of his two RICO claims." Smagin then appealed to the U.S. Court of Appeals for the Ninth Circuit, which reversed the district court’s order after reviewing the analysis of sister Circuit Courts of Appeal which were split on what constitutes a “domestic injury” for the purposes of pleading a valid RICO claim. The Court of Appeals found that the California judgment that Yegiazaryan obtained exists as his property in California, as opposed to his property in his foreign domicile. Therefore Smagin had adequately plead a claim under the RICO statute that his property in California was harmed. In contrast, the Seventh Circuit Court of Appeals fashioned a bright line rule that harm suffered by a foreign plaintiff resulting from interference with a U.S. judgment occurs in the foreign plaintiff’s domicile, which bars the RICO statute as a remedy as it has no extra-territorial effect. The U.S. Supreme Court granted certiorari to resolve the Circuit split.

The Court rejected a bright line test and instead found that in “determining whether a plaintiff has alleged a domestic injury [for purposes of RICO] is a context-specific inquiry that turns largely on the particular facts alleged in a complaint. Specifically, courts should look to the circumstances surrounding the alleged injury to assess whether it arose in the United States.” This specific case-by-case circumstantial inquiry requires “looking to the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.” The Court found that the injurious acts (to thwart collection of a California judgment) were directed at Los Angeles County, California, and the harms suffered of the alleged racketeering activity occurred in California where Yegiazaryan lives (the inability to collect on a California judgment in California and seek post judgment relief from California courts).

The key takeaways:

• The Court’s decision provides lawyers and courts with concrete factual guideposts to assess the viability of RICO claims against judgment debtors brought by foreign nationals.
• The viability of RICO actions against judgment debtors brought by foreign nationals is greatly enhanced now that the Seventh Circuit’s bright line test of what constitutes a domestic injury under RICO is rejected.
• The threat of treble damages under the RICO statute should provide parties with a powerful negotiation and enforcement weapon in collection actions.