Supreme Court Upholds Civil RICO Actions re Post-Claim Debtor Planning

Final yr about this time, I wrote about an essential determination in creditor-debtor regulation in my article Ninth Circuit Expands Use Of Civil RICO Against Debtors And Their Affiliated Entities And Persons In Smagin (July 25, 2022). This determination went as much as the U.S. Supreme Court docket, which granted certiorari and heard the attraction, leading to what will probably be a landmark opinion in Yegiazaryan v. Smagin, 599 U.S. ____ (June 22, 2023). The choice may also have doubtlessly far-reaching results on how asset safety planning is performed and the publicity of individuals and entities that help in such planning. The details of this case are recited in my earlier article, and I’ll spare readers from a rehash of that. Actually, this text will make extra sense in case you learn that earlier article first.

The query earlier than the U.S. Supreme Court docket in the end comes down as to whether a creditor might keep a civil RICO motion below federal regulation, being 18 U.S.C. § 1864, in opposition to the debtor and others in a state the place the creditor’s makes an attempt to implement the judgment have been thwarted, the place these different events have been outdoors the state however their actions had the impact of thwarting the enforcement of the judgment within the state. Or, extra significantly, whether or not creditor Smagin might maintain sure individuals and entities responsible for civil RICO in California, the place these different individuals and events have been outdoors of California however their conduct was meant to and did stop Smagin from imposing his judgment in California.

The stakes on this case are huge. The unique judgment held by Smagin in opposition to Yegiazaryan was $84 million, which might be greater than double that immediately below California 10% post-judgment curiosity statute. Smagin now seeks a further $130 million in damages below civil RICO, which might be mechanically trebled by statute to $390 million along with the quantity owed by Yegiazaryan below the unique judgment. So, it is a half-billion greenback controversy. Going through the civil RICO legal responsibility usually are not simply Yegiazaryan, but in addition CMB Monaco, fka Compagnie Monegasque de Banque, and

“The opposite defendants embrace three relations (Suren Yegiazaryan, Artem Yegiazaryan, and Stephan Yegiazaryan); an alleged Russian confederate (Vitaly Gogokhia); French, Russian, and Luxembourger people who’ve been directors of the belief holding the $198 million (Natalia Dozortseva, Murielle Jouniaux, and Alexis Gaston Thielen); an allegedly corrupt Russian chapter officer (Ratnikov Evgeny Nikolaevich); and a registered firm employed by Yegiazaryan (Status Belief Firm, Ltd.) and its U. S. lawyer (H. Edward Ryals).”

Every of those events may very well be held collectively and severally responsible for as much as the $390 million in treble damages sought by Smagin below civil RICO, and possibly not less than CMB Monaco has the cash to pay. However can these different events, moreover Yegiazaryan himself, be made to pay in California after they did not themselves have something to do with California aside from their actions brought on Smagin’s judgment to be thwarted in California?

Six Justices of the U.S. Supreme Court docket mentioned “sure” and Justice Sotomayor wrote the bulk opinion. She famous that civil RICO has a “domestic-injury” requirement that posits that the civil RICO treatment will solely be accessible the place a plaintiff has suffered an damage in america, however doesn’t apply to accidents suffered outdoors the nation. However did Smagin’s damage actually happen in California, the place the enforcement of his judgment was thwarted, or did it happen outdoors america the place the actions of the opposite individuals and entities happened?

Yegiazaryan and CMB Monaco argued that as a result of Smagin resides in Moscow, and a judgment is essentially a type of intangible private property that’s mentioned to exist if wherever in any respect with the plaintiff (i.e., Moscow), that Smagin’s damage in not with the ability to implement his judgment was in Russia and thus outdoors of america, through which occasion civil RICO wouldn’t be accessible.

Good attempt, however no cookie. Justice Sotomayor rejected this argument by noting that whether or not a home damage occurred is set by all the encircling details and circumstances of that damage, together with the conduct of the defendants and their “injurious goals”. Thus, the Court docket:

“This swimsuit illustrates properly why the domestic-injury inquiry should account for the details of the case, quite than depend on a residency-based rule. Whereas it might be true, in some sense, that Smagin has felt his financial damage in Russia, focusing solely on that reality would miss central options of the alleged damage. Zooming out, the circumstances surrounding Smagin’s damage clarify it arose in america.”

Right here, the actions taken by Yegiazaryan, CMB Monaco and the opposite defendants had the “central aim” of thwarting the enforcement of Smagin’s judgment in California. Even when these defendants had taken among the actions outdoors of america in help of this aim, different of the actions did happen in California and in the end that’s the place the totality of the defendants’ efforts had their final impact of holding Smagin from imposing his judgment in California. Thus, as the bulk noticed it, California was the place there Smagin’s home damage occurred.

Likewise, the bulk rejected the notion that the creditor’s place of residence will invariably be the place the place the damage occurred in terms of the enforcement of judgments being thwarted, as three of the justices argued in dissent, since such a bright-line rule can be rigid. As an alternative, the applying of civil RICO should have in mind the totality of the related details and circumstances of every case and be versatile in its utility:

“On petitioners’ main view, a enterprise proprietor who resides overseas however owns a brick-and-mortar enterprise in america can not convey a § 1964(c) swimsuit even when an American RICO group burns down her storefront. Maybe conscious of how odd this appears, petitioners provide a fallback rule for intangible property. That rule fares no higher. It offers that if racketeering exercise targets the intangible enterprise pursuits of two U. S. companies, one owned by a U. S. resident and one owned by somebody dwelling overseas, solely the previous enterprise proprietor can convey a § 1964(c) swimsuit. There isn’t a proof Congress supposed to impose such a double normal, particularly as a result of doing so runs its personal dangers of producing worldwide discord.”

Thus, the bulk held that Smagin had alleged a ample home damage by means of the actions of the defendants being aimed toward thwarting the gathering of his judgment in California, and in so doing rejected the opposite positions of varied decrease U.S. Circuit Court docket of Appeals {that a} bright-line check ought to as a substitute apply, based mostly on the creditor’s place of residence.

ANALYSIS

The choice right here holds very long-reaching ramifications for civil RICO lawsuits usually, however I am going to go away that dialogue for others. As an alternative, let’s deal with the implications of this determination for creditor-debtor regulation specifically.

The overwhelming majority of big-dollar judgment enforcement circumstances settle as a result of the creditor has put sufficient stress on the debtor for the debtor to lastly cough up sufficient cash to make the creditor go away. Strain, stress, stress, it’s all about stress. The stress is often financial in nature, akin to tying up the debtor’s collateral or making the debtor’s enterprise companions uneasy, each of which inhibit a debtor’s skill to do new offers. However there may be additionally private stress that may be utilized to debtors, the commonest to easily hold hounding them by way of debtor’s exams and discovery and doing little issues akin to repeatedly garnishing non-exempt financial institution accounts to maintain the debtor from dwelling a desired way of life.

Among the finest stress factors for a debtor is present in these shut round him. Typically a debtor will have interaction household and pals to help in holding and hiding property till the debtor’s creditor’s issues have handed. This has the potential, nevertheless, to create liabilities for these non-debtor individuals to the creditor by means of voidable transaction (was: fraudulent switch) and conspiracy theories, and many others. Acknowledged in any other case, the debtor would possibly be capable to stand as much as the creditor’s stress, however the debtor’s partner won’t be so eager on the association and demand that the case settle. This has occurred in additional of my very own judgment enforcement circumstances over the a long time than I may even bear in mind. The state of affairs is much more pronounced when the debtor has concerned his or her youngsters, since now the debtor has made his creditor issues the issues of his youngsters to take care of.

The U.S. Supreme Court docket has now given collectors a hydrogen bomb with which to convey this stress, and never solely in opposition to those that assist the debtor keep away from enforcement of the judgment, but in addition banks (akin to CMB Monaco on this case) and even the attorneys who devise schemes and implement transactions for this wrongful function. And it not issues if these individuals have any connection in any respect to the jurisdiction the place the judgment is being enforced, as long as they supposed that the impact of their efforts be in that jurisdiction. We’re not speaking peculiar damages, both, however trebled damages below civil RICO. Horrible ache instances three.

I’ve written many instances earlier than that doing planning for debtors post-claim will not be “asset safety planning” as that time period is often understood, however quite simply good outdated fraud on collectors. Asset safety planning should be executed at a time when the consumer has no collectors, or, because the saying goes “the skies are clear blue with no clouds on the horizon”. If clouds have already appeared and the consumer has a declare (even when but unmatured or unliquidated), then no matter planning that’s executed for the consumer is solely creditor fraud.

Years in the past, a principle went round with debtor planning attorneys that it was tremendous to do planning for purchasers who had claims, as a result of — the speculation went — their state of affairs could not be made worse anyway. This principle was complete nonsense from the start. The place a debtor engages in planning in opposition to an current declare, they threat dropping their proper to a discharge in chapter and expose another individuals or entities which might be concerned with transfers in voidable transaction circumstances. After all, with the rise of civil RICO within the current circumstances, issues go from worse for the debtor and these helping events to horribly worse due to the specter of trebled damages and having a declare that principally has no likelihood of being discharged in chapter.

However now it isn’t simply the debtor and the counterparties to the debtor’s transactions which might be in danger, since the usage of civil RICO has been expanded to incorporate the attorneys, accountants and monetary planners who help with these post-claim transactions, and even the banks and belief firms that facilitate these post-claim transactions. Included within the civil RICO declare right here isn’t just CMB Monaco, which was concerned in Yegiazaryan’s transactions, Status Belief Firm, Ltd., and an American lawyer by the identify of H. Edward Ryals.

This illustrates why civil RICO is the creditor’s hydrogen bomb to obliterate not simply the post-claim planning, however all those that touched that planning. It isn’t simply the large financial stakes, recalling that with trebled damages Smagin is asserting a $390 million declare, but in addition the reputational threat of being tagged as a racketeer and corrupt group. These are very critical claims which, if confirmed, would topic the banks and belief firms to regulatory assessment (assuming that they even live on if such a judgment is levied in opposition to them) and potential skilled self-discipline for the licensed professionals concerned. Mainly, a civil RICO declare is nothing like an peculiar declare for damages however a doubtlessly enterprise-destroying and career-destroying occasion.

That then brings us again to the core of this determination. Not solely did the U.S. Supreme Court docket affirm {that a} civil RICO motion may very well be introduced in a post-claim case like this, however simply as importantly held that the motion may very well be introduced the place the judgment is being enforced. Which means that not solely will Yegiazaryan, et al., be required to defend a civil RICO case, however additionally they should defend it in a distant discussion board and earlier than a courtroom that’s more likely to be hostile from the get-go as a result of its judgments are being thwarted. That’s what is called an “uphill protection” and will probably be extraordinarily pricey for all these defendants even when they’re in the end profitable.

If you have not by now found out the bottom-line lesson of this case by now, let me give it to you bluntly: Earlier than this opinion, post-claim planning was harmful for the debtor and people who acted as counterparties with the debtor in transactions. After this opinion, post-claim planning is flatly suicidal for all — each — individuals, events, planners, attorneys, you-name-it, you’re concerned in helping a debtor in any means. You would possibly as properly simply take a gun and blow your brains out as a substitute, as a result of that will probably be a lot much less painful and far more cost effective. Collectors usually are not going to be intimidated or delay by post-claim debtor planning, however they’re going to search for that kind of planning with glee, realizing that they then have the potential to gather not simply the complete quantity of the judgment, however presumably way more than that by way of a civil RICO restoration.

The place that is going to get fascinating going ahead is in not less than two areas.

First, I count on that collectors will check whether or not even “harmless” banks who switch a debtor’s funds round, not realizing the debtor’s intent, will probably be vulnerable to a civil RICO motion. If this sounds loopy, contemplate that banks at the moment are routinely being held into Ponzi scheme circumstances the place they weren’t concerned within the Ponzi scheme however have been mere conduits for the cash going out and in of the scheme, below the speculation that the transactions have been “suspicious” and the banks ought to have identified what was occurring had they exercised cheap diligence. It does not take a lot creativeness to ascertain an identical principle being asserted by collectors in opposition to a financial institution the place a debtor likewise begins to make a bunch of “suspicious” transfers.

Second, I count on that collectors will check pre-claim planning for individuals who in the end find yourself as debtors, i.e., what we might now contemplate to be peculiar asset safety. The idea right here can be alongside the traces that the belief firms and asset safety attorneys, and like individuals and entities, principally make up a “corrupt group” as a result of they know that some share (nevertheless small) of their purchasers will find yourself as debtors. I am going to save my hypothesis about how such a problem would possibly come out for a later dialogue. Suffice it to say, nevertheless, that the chance stage for even routine asset safety planning has gone up exponentially.

What will not be topic to hypothesis is that collectors will begin utilizing civil RICO claims way more typically in opposition to post-claim debtor planning. It will result in circumstances that go to conclusion after which to appellate opinions which is able to begin to give us an concept of how expansive the legal responsibility on this space will probably be and the place the boundaries of that legal responsibility may be discovered. Proper now, we actually simply do not know — no one’s OUIJA board is that good. What we do know is that post-claim planning for debtors (outdoors of maybe some very restricted exemption planning in some states) has change into so extraordinarily harmful that it not even registers in a threat/reward calculation.

Keep tuned.