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

Last year about this time, I wrote about an important decision in creditor-debtor law in my article Ninth Circuit Expands Use Of Civil RICO Against Debtors And Their Affiliated Entities And Persons In Smagin (July 25, 2022). This decision went up to the U.S. Supreme Court, which granted certiorari and heard the appeal, resulting in what will be a landmark opinion in Yegiazaryan v. Smagin, 599 U.S. ____ (June 22, 2023). The decision will also have potentially far-reaching effects on how asset protection planning is conducted and the exposure of persons and entities that assist in such planning. The facts of this case are recited in my earlier article, and I will spare readers from a rehash of that. Certainly, this article will make more sense if you read that earlier article first.

The question before the U.S. Supreme Court ultimately comes down to whether a creditor may maintain a civil RICO action under federal law, being 18 U.S.C. § 1864, against the debtor and others in a state where the creditor’s attempts to enforce the judgment were thwarted, where these other parties were outside the state but their actions had the effect of thwarting the enforcement of the judgment in the state. Or, more particularly, whether creditor Smagin could hold certain persons and entities liable for civil RICO in California, where these other persons and parties were outside of California but their conduct was meant to and did prevent Smagin from enforcing his judgment in California.

The stakes in this case are enormous. The original judgment held by Smagin against Yegiazaryan was $84 million, which is probably more than double that today under California 10% post-judgment interest statute. Smagin now seeks an additional $130 million in damages under civil RICO, which would be automatically trebled by statute to $390 million in addition to the amount owed by Yegiazaryan under the original judgment. So, this is a half-billion dollar controversy. Facing the civil RICO liability are not just Yegiazaryan, but also CMB Monaco, fka Compagnie Monegasque de Banque, and

“The other defendants include three family members (Suren Yegiazaryan, Artem Yegiazaryan, and Stephan Yegiazaryan); an alleged Russian accomplice (Vitaly Gogokhia); French, Russian, and Luxembourger individuals who have been administrators of the trust holding the $198 million (Natalia Dozortseva, Murielle Jouniaux, and Alexis Gaston Thielen); an allegedly corrupt Russian bankruptcy officer (Ratnikov Evgeny Nikolaevich); and a registered company hired by Yegiazaryan (Prestige Trust Company, Ltd.) and its U. S. lawyer (H. Edward Ryals).”

Each of these parties could be held jointly and severally liable for up to the $390 million in treble damages sought by Smagin under civil RICO, and probably at least CMB Monaco has the money to pay. But can these other parties, besides Yegiazaryan himself, be made to pay in California when they didn’t themselves have anything to do with California other than their actions caused Smagin’s judgment to be thwarted in California?

Six Justices of the U.S. Supreme Court said “yes” and Justice Sotomayor wrote the majority opinion. She noted that civil RICO has a “domestic-injury” requirement that posits that the civil RICO remedy will only be available where a plaintiff has suffered an injury in the United States, but does not apply to injuries suffered outside the country. But did Smagin’s injury really occur in California, where the enforcement of his judgment was thwarted, or did it occur outside the United States where the actions of the other persons and entities took place?

Yegiazaryan and CMB Monaco argued that because Smagin resides in Moscow, and a judgment is fundamentally a form of intangible personal property that is said to exist if anywhere at all with the plaintiff (i.e., Moscow), that Smagin’s injury in not being able to enforce his judgment was in Russia and thus outside of the United States, in which event civil RICO would not be available.

Nice try, but no cookie. Justice Sotomayor rejected this argument by noting that whether a domestic injury occurred is determined by all the surrounding facts and circumstances of that injury, including the conduct of the defendants and their “injurious aims”. Thus, the Court:

“This suit illustrates well why the domestic-injury inquiry must account for the facts of the case, rather than rely on a residency-based rule. While it may be true, in some sense, that Smagin has felt his economic injury in Russia, focusing solely on that fact would miss central features of the alleged injury. Zooming out, the circumstances surrounding Smagin’s injury make clear it arose in the United States.”

Here, the actions taken by Yegiazaryan, CMB Monaco and the other defendants had the “central goal” of thwarting the enforcement of Smagin’s judgment in California. Even if those defendants had taken some of the actions outside of the United States in support of this goal, other of the actions did occur in California and ultimately that is where the totality of the defendants’ efforts had their ultimate effect of keeping Smagin from enforcing his judgment in California. Thus, as the majority saw it, California was the place there Smagin’s domestic injury occurred.

Likewise, the majority rejected the notion that the creditor’s place of residence will invariably be the place where the injury occurred when it comes to the enforcement of judgments being thwarted, as three of the justices argued in dissent, since such a bright-line rule would be inflexible. Instead, the application of civil RICO must take into account the totality of the relevant facts and circumstances of each case and be flexible in its application:

“On petitioners’ primary view, a business owner who resides abroad but owns a brick-and-mortar business in the United States cannot bring a § 1964(c) suit even if an American RICO organization burns down her storefront. Perhaps aware of how odd this seems, petitioners offer a fallback rule for intangible property. That rule fares no better. It provides that if racketeering activity targets the intangible business interests of two U. S. businesses, one owned by a U. S. resident and one owned by someone living abroad, only the former business owner can bring a § 1964(c) suit. There is no evidence Congress intended to impose such a double standard, especially because doing so runs its own risks of generating international discord.”

Thus, the majority held that Smagin had alleged a sufficient domestic injury by way of the actions of the defendants being aimed at thwarting the collection of his judgment in California, and in so doing rejected the contrary positions of various lower U.S. Circuit Court of Appeals that a bright-line test should instead apply, based on the creditor’s place of residence.

ANALYSIS

The decision here holds very long-reaching ramifications for civil RICO lawsuits in general, but I’ll leave that discussion for others. Instead, let’s focus on the implications of this decision for creditor-debtor law in particular.

The vast majority of big-dollar judgment enforcement cases settle because the creditor has put enough pressure on the debtor for the debtor to finally cough up enough money to make the creditor go away. Pressure, pressure, pressure, it is all about pressure. The pressure is usually economic in nature, such as tying up the debtor’s collateral or making the debtor’s business partners uneasy, both of which inhibit a debtor’s ability to do new deals. But there is also personal pressure that can be applied to debtors, the most common to simply keep hounding them through debtor’s exams and discovery and doing little things such as repeatedly garnishing non-exempt bank accounts to keep the debtor from living a desired lifestyle.

One of the best pressure points for a debtor is found in those close around him. Often a debtor will engage family and friends to assist in holding and hiding assets until the debtor’s creditor’s problems have passed. This has the potential, however, to create liabilities for these non-debtor persons to the creditor by way of voidable transaction (was: fraudulent transfer) and conspiracy theories, etc. Stated otherwise, the debtor might be able to stand up to the creditor’s pressure, but the debtor’s spouse might not be so keen on the arrangement and demand that the case settle. This has happened in more of my own judgment enforcement cases over the decades than I can even remember. The situation is even more pronounced when the debtor has involved his or her children, since now the debtor has made his creditor problems the problems of his children to deal with.

The U.S. Supreme Court has now given creditors a hydrogen bomb with which to bring this pressure, and not only against those who help the debtor avoid enforcement of the judgment, but also banks (such as CMB Monaco in this case) and even the lawyers who devise schemes and implement transactions for this wrongful purpose. And it no longer matters if these persons have any connection at all to the jurisdiction where the judgment is being enforced, so long as they intended that the effect of their efforts be in that jurisdiction. We’re not talking ordinary damages, either, but trebled damages under civil RICO. Horrible pain times three.

I’ve written many times before that doing planning for debtors post-claim is not “asset protection planning” as that term is commonly understood, but rather just good old fraud on creditors. Asset protection planning must be done at a time when the client has no creditors, or, as the saying goes “the skies are clear blue with no clouds on the horizon”. If clouds have already appeared and the client has a claim (even if yet unmatured or unliquidated), then whatever planning that is done for the client is simply creditor fraud.

Years ago, a theory went around with debtor planning attorneys that it was fine to do planning for clients who had claims, because — the theory went — their situation couldn’t be made worse anyway. This theory was total nonsense from the beginning. Where a debtor engages in planning against an existing claim, they risk losing their right to a discharge in bankruptcy and expose any other persons or entities that are involved with transfers in voidable transaction cases. Of course, with the rise of civil RICO in the recent cases, things go from worse for the debtor and these assisting parties to horribly worse because of the threat of trebled damages and having a claim that basically has no chance of being discharged in bankruptcy.

But now it is not just the debtor and the counterparties to the debtor’s transactions that are at risk, since the use of civil RICO has been expanded to include the attorneys, accountants and financial planners who assist with these post-claim transactions, and even the banks and trust companies that facilitate these post-claim transactions. Included in the civil RICO claim here is not just CMB Monaco, which was involved in Yegiazaryan’s transactions, Prestige Trust Company, Ltd., and an American lawyer by the name of H. Edward Ryals.

This illustrates why civil RICO is the creditor’s hydrogen bomb to obliterate not just the post-claim planning, but all those who touched that planning. It is not just the huge monetary stakes, recalling that with trebled damages Smagin is asserting a $390 million claim, but also the reputational risk of being tagged as a racketeer and corrupt organization. These are very serious claims which, if proven, would subject the banks and trust companies to regulatory review (assuming that they even continue to exist if such a judgment is levied against them) and potential professional discipline for the licensed professionals involved. Basically, a civil RICO claim is nothing like an ordinary claim for damages but a potentially enterprise-destroying and career-destroying event.

That then brings us back to the core of this decision. Not only did the U.S. Supreme Court affirm that a civil RICO action could be brought in a post-claim case like this, but just as importantly held that the action could be brought where the judgment is being enforced. This means that not only will Yegiazaryan, et al., be required to defend a civil RICO case, but they also have to defend it in a distant forum and before a court that is likely to be hostile from the get-go because its judgments are being thwarted. That is what is known as an “uphill defense” and it will be extremely costly for all these defendants even if they are ultimately successful.

If you haven’t by now figured out the bottom-line lesson of this case by now, let me give it to you bluntly: Before this opinion, post-claim planning was dangerous for the debtor and those who acted as counterparties with the debtor in transactions. After this opinion, post-claim planning is flatly suicidal for all — each and every — persons, parties, planners, attorneys, you-name-it, you are involved in assisting a debtor in any way. You might as well just take a gun and blow your brains out instead, because that will be much less painful and much less costly. Creditors are not going to be intimidated or put off by post-claim debtor planning, but they are going to look for that sort of planning with glee, knowing that they then have the potential to collect not just the full amount of the judgment, but possibly much more than that through a civil RICO recovery.

Where this is going to get interesting going forward is in at least two areas.

First, I expect that creditors will test whether even “innocent” banks who transfer a debtor’s funds around, not knowing the debtor’s intent, will be susceptible to a civil RICO action. If this sounds crazy, consider that banks are now routinely being held into Ponzi scheme cases where they were not involved in the Ponzi scheme but were mere conduits for the money going in and out of the scheme, under the theory that the transactions were “suspicious” and the banks should have known what was going on had they exercised reasonable diligence. It doesn’t take much imagination to envision a similar theory being asserted by creditors against a bank where a debtor likewise starts to make a bunch of “suspicious” transfers.

Second, I expect that creditors will test pre-claim planning for persons who ultimately end up as debtors, i.e., what we would now consider to be ordinary asset protection. The theory here would be along the lines that the trust companies and asset protection attorneys, and like persons and entities, basically make up a “corrupt organization” because they know that some percentage (however small) of their clients will end up as debtors. I’ll save my speculation about how such a challenge might come out for a later discussion. Suffice it to say, however, that the risk level for even routine asset protection planning has gone up exponentially.

What is not subject to speculation is that creditors will start using civil RICO claims much more often against post-claim debtor planning. This will lead to cases that go to conclusion and then to appellate opinions which will start to give us an idea of how expansive the liability in this area will be and where the boundaries of that liability can be found. Right now, we really just don’t know — nobody’s OUIJA board is that good. What we do know is that post-claim planning for debtors (outside of perhaps some very limited exemption planning in some states) has become so extremely dangerous that it no longer even registers in a risk/reward calculation.

Stay tuned.