On 22 June 2023, the U.S. Supreme Court issued its opinion in Yegiazaryan v. Smagin and CMB Monaco v. Smagin. In this long-awaited opinion, the Supreme Court held upheld the holding of the 9^th Circuit Court of Appeal that the Racketeering Influenced and Corrupt Organizations Act 18 USC 96 (“RICO Act“), a federal statute originally enacted in 1970 to combat organised crime, may provide civil remedies to foreign creditors against US-based debtors avoiding enforcement of (confirmed) foreign arbitral awards against them.

I. Factual Background

The case was brought to U.S. courts by Mr. Vitaly Smagin (“Smagin“), a Russian national, who won a 84-million dollar award in a London-seated arbitration (the “London Award“) against Mr. Ashot Yegiazaryan (“Yegiazaryan“).

The dispute stemmed from the misappropriation of investment funds by Yegiazaryan. From 2003 to 2009, Yegiazaryan committed fraud against Smagin, stealing his shares in a joint real estate venture in Moscow. To avoid criminal indictment in Russia, Yegiazaryan fled to Beverly Hills in 2010, where he has lived ever since. In 2014, Smagin, obtained the London Award against Yegiazaryan, but given that Yegiazaryan refused to pay the award and instead undertook a serious of actions to hide his assets. To thwart the enforcement, Yegiazaryan accepted the money through the London office of an American law firm headquartered in Los Angeles. Yegiazaryan then created “a complex web of offshore entities to conceal the funds,” and ultimately transferred the funds to a bank account with CMB Monaco, another petitioner before the Supreme Court. Yegiazaryan also directed those in his inner circle to file fraudulent claims against him in foreign jurisdictions, which he would not oppose, in an attempt to obtain sham judgments that would encumber the $198 million, thereby blocking Smagin’s access to it. Around the same time, Yegiazaryan was hiding his assets in the United States through a system of “shell companies” owned by family members.  This included a Nevada company, which was owned by his brother and created for the purpose of sheltering Yegiazaryan’s U. S. assets from his creditors, including Smagin.

Smagin brought a civil RICO lawsuit against Yegiazaryan, CMB Monaco and 10 other defendants citing their wrongdoings as the cause of action before US Courts. In particular, he alleged that the defendants worked together under Yegiazaryan’s direction to frustrate Smagin’s collection on the London Award through a pattern of wire fraud and other RICO predicate racketeering acts, including witness tampering and obstruction of justice. For these violations, Smagin sought not only actual damages, but also attorney’s fees and treble damages as authorized under RICO.

II. Issue Before the Court

The District Court dismissed the lawsuit on the basis that Smagin has failed to show a “domestic injury” since he was a resident of Russia and any damage to his property interests stemming from the London Award would therefore be caused in Russia. The Ninth Circuit Court overruled that decision, adopting a “context-specific” approach concluding that Smagin had pleaded a domestic injury because he had alleged that his efforts to execute on a California judgment in California against a California resident were foiled by a pattern of racketeering activity that largely occurred in, or was targeted at, California and was designed to subvert enforcement of the judgment in California.

Confronted with the issue, the Supreme Court rejected the approach advanced by Yegiazaryan and CMB Monaco who pleaded that the nature of the economic injury suffered by Smagin is that it is felt at his residence only, that is to say in Russia, and that well-established conflict-of-laws principles would point to the place of residence where the damage to Smagin’s intangible property, i.e. the London Award, is caused.  Instead, the Supreme Court sided with Smagin holding that 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 and that the bright-line ruled as alleged by the petitioners would bar any foreign plaintiffs from suing under RICO Act.

In the context of this case the Supreme Court paid particular attention that the injurious effects of the racketeering activity largely manifested in California. Smagin obtained a judgment in California because that is where Yegiazaryan lives, and where Smagin had thus hoped to collect. The rights that the California judgment provides to Smagin exist only in California, including the right to obtain postjudgment discovery, the right to seize assets in California, and the right to seek other appropriate relief from the California District Court. The alleged RICO scheme thwarted those rights, thereby undercutting the orders of the California District Court and Smagin’s efforts to collect on Yegiazaryan’s assets in California.

IV. RICO Act and International Arbitration: Unexpected Allies? 

It is not the first time that RICO Act appears in the context of international arbitration. However, for the last several decades the debate centred on arbitrability of RICO remedies.  As early as in 1987, the US Supreme Court held in Shearson/American Express, Inc. v. McMahon that RICO civil claims are arbitrable.  However, in 2003, it declined to rule on the question of whether parties can be compelled to arbitrate RICO claims when an arbitration agreement arguably prohibits some of the statutorily available remedies under RICO in PacifiCare Health Systems, Inc., et al v. Jeffrey Book, D.O., et al.

That RICO Act may step in to enhance the enforcement of foreign arbitral awards was far from most arbitration practitioners’ minds.  Now, the US Supreme Court’s opinion in Yegiazaryan v. Smagin and CMB Monaco v. Smagin is a welcome development which will have far-reaching implications. First, foreign award creditors in the US will now have a new powerful tool for enforcement of collecting under their foreign arbitral awards not just against their award debtors, but against third parties, including non-US banks and financial institutions, who assisted the debtors in avoiding compliance with the awards.  Such third parties will be jointly and severally liable to the award creditors for all the damage caused by the non-compliance plus treble damages and attorneys’ fees.

Second, the application of RICO Act to enforcement of arbitral awards may make the United States a more appealing jurisdiction for enforcement proceedings.

Last but not the least, the US Supreme Court’s ruling will likely encourage debates on improvements of the enforcement of foreign arbitral awards in many countries. RICO Act clearly makes it easier to trace the debtor’s assets fraudulently dissipated by it to thwart the actual collection and to collect from all parties implicated in the fraud. Unlike the more traditional common law remedy of constructive trust or civil law remedy of actio Pauliana RICO Act provides a sizeable premium of punitive damages to daring creditors and strongly sanctions defendants’ misconduct. This is worth serious consideration by any countries who take arbitration reform seriously.

by Sergiy Gryshko