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The U.S. Ninth Circuit Court of Appeals in Smagin v. Yegiazaryan, 37 F.4th 562 (9th Cir., June 10, 2022), involved a Russian citizen, Vitaly Smagin, who won a foreign arbitration award against another Russian citizen, Ashot Yegiazaryan (“Ashot”), who lived in California. How Ashot came to live in California is of interest. Between 2003 and 2009, Ashot and others used a series of fraudulent transactions to steal Smagin’s shares in a Moscow real estate investment. In 2010, Russia indicted Ashot and Artem Yegiazaryan for fraud. The two fled Russia to avoid prosecution and now live in Beverly Hills in a home own by Ashot’s cousin, Suran Yegiazaryan, who is also a defendant in Smagin’s lawsuit.

By 2014, Smagin had won a $84 million award against Ashot in a London arbitration proceeding, which was entered into a California judgment by the U.S. District Court for the Central District of California that same year. Almost simultaneously, the U.S. District Court entered a temporary protective order which froze Ashot’s assets in California, and this TRO was converted into a preliminary injunction in February, 2015.

While all of this was going on, Ashot himself was in an arbitration proceeding against a person named Suleymon Kerimov, and this ended with a settlement in May, 2015, whereby Kerimov was to pay Ashot $198 million.

Smagin now brought a lawsuit against Ashot, Artem and Suren Yagiazaryan, a bunch of other folks, and Prestige Trust Company, Ltd., for Civil RICO and alleging that all these other persons essentially worked together to keep Smagin from collecting his judgment against the Kerimov settlement. Smagin’s allegations included that Ashot and others created a “web of offshore entities and a complex ownership structure” to protect the Kerimov settlement proceeds from Smagin’s collection efforts.

Among other things, Ashot was alleged to have created a trust (“Alpha Trust”) in Lichtenstein to hold the Kerimov proceeds, purchased a Nevis company with an account in Monaco, and then moved the Kerimov funds to that account. Back in California, Ashot and others were have alleged to have schemed to hide Ashot’s assets by way of shell companies created in Nevada, including one called Clear Voices, Inc. Then, as if all that were not enough, it was alleged that Ashot “schemed to have associates file fraudulent claims against him in foreign jurisdictions so that they could obtain sham judgments that were designed to compete with the California Judgment.”

The U.S. District Court on April 1, 2020, issued an order compelling Ashot and others to immediately cease all activities anywhere that would hinder Smagin’s ability to collect against the Alpha Trust or related bank accounts without first obtaining the court’s approval. On July 9, 2020, the U.S. District Court further ordered Ashot from making any modifications to the Alpha Trust or to the related bank accounts. But of course Ashot was found in contempt on September 16, 2020, for violating both of these orders.

Then, as so many of these cases do, it gets silly: Ashot was alleged to have submitted a forged doctor’s note to the U.S. District Court, and further alleged that when Smagin attempted to depose the doctor, Ashot tried to influence the doctor to avoid service of the deposition subpoena.

Smagin’s Civil RICO lawsuit was filed on December 11, 2020, and claimed that Ashot and others participated in a criminal enterprise to harm Ashot’s property, being the California judgment and the loss of Ashot’s legal rights to collect on that judgment. The U.S. District Court, however, dismissed Smagin’s lawsuit on the grounds that Smagin had failed to “adequately plead a domestic injury in support of his two RICO claims,” and Smagin appealed to the U.S. Ninth Circuit Court of Appeals leading to the opinion that I shall next relate.

The issue on appeal was this: Was Smagin’s judgment considered “property” in California that suffered a “domestic injury” by the acts of Ashot and the other defendants in attempting to defeat the enforcement of that judgment?

It was clear to the Ninth Circuit that a judgment does indeed constitute “property”, and that property was in California by way of the registration of the judgment in the Golden State. That the judgment arose from a foreign arbitration award was irrelevant, since once the judgment as registered in California it became a California judgment for all intents and purposes. Thus, the Ninth Circuit:

“We conclude that, for purposes of standing under RICO, the California Judgment exists as property in California. The rights that the California Judgment provides to Plaintiff exist only in California, the place where he can obtain a writ of execution against or obtain discovery from Ashot. Indeed, Plaintiff obtained the judgment in California precisely because Ashot resides in California, and that is where Plaintiff desires to exercise the rights conferred by the California Judgment. It would make no sense to conclude that the California Judgment exists as property in Russia, because the judgment grants no rights whatsoever to Plaintiff in Russia.”

The next inquiry was whether Smagin’s injury to his California judgment occurred in California. Ashot and the other defendants argued that Smagin’s injury occurred, if at all, outside California where the majority of their misconduct was alleged to have taken place. For his part, Smagin countered that the ultimate effect of all these actions ended up being in California.

Although a great deal of activity occurred outside of California, the Ninth Circuit held that the ultimate purpose of those activities was to prevent the enforcement of Smagin’s California judgment. Thus, the Court held:

“Those alleged illegal acts were designed to subvert Plaintiff’s rights that are executable in California. Accordingly, the alleged harm to Plaintiff’s rights under the California Judgment constitutes a domestic injury.”

The Ninth Circuit noted that its decision was consistent with the approaches in similar cases of the U.S. Second and Third Circuit Courts of Appeal, albeit the Second Circuit’s position was limited to tangible property, but not the Seventh Circuit which had decided to go its own way and look at little more than the residency of the creditor (who was Chilean in the one Seventh Circuit case that had looked at the issue). But the Ninth Circuit thought that the Seventh Circuit’s position did not comport with precedent of the U.S. Supreme Court in RJR Nabisco, Inc. v. Eur. Cmty., 579 U.S. 325, 346, 136 S.Ct. 2090, 195 L.Ed.2d 476 (2016).

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Finally, the Ninth Circuit gave a final caveat that “we note that, in holding that Plaintiff alleges a domestic injury, we express no view on the merits of Plaintiff’s claims. Nor do we assess whether the district court has jurisdiction over all parties in the action or whether Plaintiff has sufficiently alleged proximate causation for each Defendant, [] hold only that Plaintiff’s well-pleaded allegations include a domestic injury.”

ANALYSIS

In the past, most creditor attacks against sophisticated debtor schemes were focused around fraudulent transfer law. The idea here is that assets which have been transferred into some protective structure or another could be clawed back out through avoidance and thus made available for creditor collection in the normal course. These attacks were bolstered over time by concepts of reverse veil-piercing, where the creditor sought to prove that a particular entity was effectively the debtor in another form such that the creditor should be able to collect against the alter ego’s assets as well. Both of these avenues of attack are well-known and there is no reason to further dwell on them here. Suffice it to say that theories of fraudulent transfer and reverse veil-piercing were usually either asset-specific or entity-specific, and often resulted in limited recovery against only a part of a debtor’s protected assets.

The recent development of Civil RICO theories to attack sophisticated debtor schemes has introduced what amounts to area-wide carpet bombing of everything that the debtor has put into place to protect assets. By lumping all the debtor, entities formed or controlled by the debtor, and aiders and abettors of the debtor’s anti-creditor activities into a single group designated as the “organization”, a creditor who succeeds on such a theory can get a judgment against literally everybody and everything involved in the debtor’s attempt to protect assets. Once this judgment is obtained, there is direct liability against these entities and persons such that the creditor’s enforcement activities can proceed against them directly without having to revert to fraudulent transfer or reverse veil-piercing theories. Moreover, for creditors who are successful on a Civil RICO theory, the judgment obtained against these entities and persons is also trebled by statute, thus leading to a creditor obtaining not just collection of the judgment but also a potential windfall to the extent of assets available to satisfy a treble damages judgment.

Banks and trust companies that assist debtors post-claim are also at considerable risk here, since it is relatively easy for them to be dragged into a Civil RICO case and of course they have the deep pockets to pay a treble damages award. Bank and trust officers henceforth need to heighten their scrutiny of proposed asset protection transactions and accounts to make sure that at the time those transactions are done or accounts opened, the owner and affiliates have no creditors lurking about.

However, the use of Civil RICO theories does have one significant shortcoming. As the Ninth Circuit so carefully explained in this opinion, for a Civil RICO claim to succeed there must be injury to a property right, and the property right involved in cases like these is the judgment itself. The flipside to this is that if a creditor does not yet have a liability claim against a debtor, there can be no Civil RICO claim against the “organization” (i.e., the debtor, entities and others), simply because at this point is that the creditor has nothing to injure.

While this case involves a judgment, and that was the “property” identified by the Ninth Circuit, it will be interesting to see if the law expands to those situations where a creditor holds only an unliquidated claim and not yet a finite judgment. Fraudulent transfer law, by comparison, operates on the concept of a “claim” as opposed to a “judgment” (the latter being hardly mentioned at all in the UFTA
FTA
or UVT
VT
A), and it is not difficult to see a court holding in the future that a claim can be injured by post-claim activity of the debtor and others, just as a judgment would be.

The practical import of all this is that ordinary and legitimate asset protection planning, which is always done in advance of any claim (or a reserve is set aside sufficiently to pay any existing claim), should not be at risk at all of a Civil RICO claim, at least under currently-existing law on the subject. So long as the putative debtor does planning while there are no claims pending, then a Civil RICO claim should not be in the works.

On the other hand, a debtor who engages in post-judgment planning through the use of sophisticated schemes involving other entities and persons is now at a very real risk of being on the receiving end of a Civil RICO claim with its wide breadth and treble damages. Further, Civil RICO can rather easily expand to encompass attorneys and others who assist with a debtor’s post-judgment planning, and put them personally on the hook for treble damages as well. That sort of planning (fraud on creditors is a more apt phrase) was always fraught with peril anyway, but the expansion of Civil RICO theories now makes it almost suicidal.

Note, however, that unlike fraudulent transfer actions, Civil RICO actions do not actually get at assets directly, but merely places liability directly against debtor and entities and persons who assist the debtor. In this case, for instance, even if Smagin wins on this Civil RICO claim, he will still be forced to enforce that liability where the assets are located, assuming of course that he cannot get a repatriation order which compels Ashot to bring the assets to California under penalty of contempt (and even then would have to worry about Ashot again fleeing to avoid the effect of such an order). The point being that Civil RICO is not a creditor’s endgame, but rather a shortcut which creates liability directly against otherwise liability-remote persons and entities.

It will be most interesting to see how Civil RICO continues to develop in the creditor-debtor context, so please stay tuned.

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