Shin Da Enterprises was represented by Edward Kang, David Scott, and Gregory Mathews of Kang Haggerty LLC in Philadelphia. The trial, presided over by Judge Chad F. Kenney, started on October 16th, and concluded on October 24, 2023.

The jury verdict found the defendants liable on both counts–$370,160.80 on Count I under Section 1962(c) and $1,340,000 on Count II under Section 1962(d) for a total of $1,710.160.80.  The Court entered judgment on October 26 for $5,130,482.40 (mandatory treble damages under RICO) exclusive of mandatory attorney’s fees, which will be assessed via motion.

“This is a reminder that the purpose of RICO is to protect unsuspecting victims such as Shin Da Enterprises from unscrupulous businesses set on undermining them through a web of deceit,” said attorney Edward Kang. “The jury saw fit to compensate our clients for the wrongdoing conducted through multiple frauds and extortion,” added attorney David Scott.

This case (2:21-cv-03384-CFK) stemmed from a dispute over construction of an apartment renovation project in Philadelphia, where cabinet and countertop work were provided but proper payment was not made. The Defendants, who controlled the owner and general contractor of the project, submitted invoices to the bank for payment for the work done by Shin Da and were paid for the work through a pattern of wire fraud.

The Plaintiffs alleged that the Defendants had created several fake contracts that were submitted to the bank.  In addition, it was alleged that the defendants created fraudulent invoices to artificially inflate the on-paper costs of the rehabilitation project to boost the amount of a federal historical tax credit received for the rehabilitation.  The jury ultimately found predicate acts of wire fraud, bank fraud, theft by unlawful taking, theft by extortion, and interference with commerce by threats of violence.

To learn more about the facts of this case and the findings, please contact the attorneys at Kang Haggerty for additional information.

Read news coverage in The Legal Intelligencer on Law.com: Pa. Federal Jury Returns $5M Verdict in Civil RICO Suit

In the July 20, 2023 Edition of The Legal Intelligencer, Edward T. Kang wrote “Sophisticated Schemers Beware: Civil RICO Expands Creditors’ Arsenal—Part II.“

“No one understands RICO.” I reflected on this peculiar comment made by an opposing counsel in my January 2023 Legal Intelligencer column highlighting the U.S. Court of Appeals for the Ninth Circuit’s decision in Smagin v. Yegiazaryan, 37 F.4th 562 (9th Cir. June 10, 2022). The Supreme Court recently issued its opinion in Yegiazaryan v. Smagin, No. 22-381, (June 22, 2023), affirming the Ninth Circuit’s holding and providing RICO (Racketeer Influenced and Corrupt Organization) plaintiffs with a powerful tool against debtors employing fraudulent tactics to avoid payment. This decision not only resolves a circuit split on the application of RICO but also illustrates the expanding comprehension and scope of RICO.

Background

Smagin involved defendant Ashot Yegiazaryan (a Russian citizen at the time) using a series of transactions to defraud plaintiff Vitaly Smagin (also a Russian citizen) out of his investment in a joint real estate venture in Moscow, Russia, between 2003 and 2009. Yegiazaryan was criminally indicted for his fraudulent scheme in 2010. As a result of the indictment and to escape prosecution in Russia, Yegiazaryan fled to the United States, moving to a mansion in Beverly Hills, California.

Smagin commenced arbitration proceedings against Yegiazaryan in the London Court of International Arbitration for his fraudulent misconduct and attempts to conceal the fraud. In November 2014, the arbitration panel issued an award of $84 million against Yegiazaryan. The defendant refused to pay and Smagin filed an enforcement action in the U.S. District Court for the Central District of California. A district court judge confirmed the arbitration award and entered judgment against Yegiazaryan in accordance with the Convention of the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention). The district court issued injunctive relief freezing several of Yegiazaryan’s assets located in California.

In December 2020, Smagin filed a complaint against Yegiazaryan and his associates, alleging violations of RICO under 18 U.S.C. Section 1962(c) for participating in a criminal enterprise, as well as a RICO conspiracy claim in violation of 18 U.S.C. Section 1962(d). During the proceedings, Smagin alleged that Yegiazaryan had created a web of offshore entities with complex ownership structures to conceal his U.S. assets. Smagin also alleged that Yegiazaryan schemed to have associates file fraudulent claims against him in foreign jurisdictions to obtain sham judgments that would encumber his assets and impede the California judgment. Smagin further alleged that Yegiazaryan engaged in or aided these extensive racketeering acts to conceal a $198 million award he was granted in an unrelated case.

The district court dismissed Smagin’s complaint citing his failure to adequately plead a “domestic injury” as required by RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016). Under RICO, “any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue in an appropriate U.S. district court.” To establish standing under RICO, a civil plaintiff must show that the alleged harm qualifies as an injury to his business or property; and that his harm was a direct consequence of the RICO violation, which requires the plaintiff to establish proximate causation. While the Supreme Court’s decision in RJR Nabisco indicated that RICO may have some extraterritorial effects, it provided limited guidance on what qualifies as a “domestic injury” within the context of RICO.

The Ninth Circuit

As I highlighted in my January column, the Ninth Circuit reversed the district court’s decision and held that a judgment is considered property and recognized Smagin’s injury was domestic. The court held that since the judgment confirming a foreign arbitration awarded could only be enforced in California, it qualified as property within that state. Moreover, the court explained that its conclusion was bolstered by the fact that much of Yegiazaryan’s racketeering activity occurred in and targeted California. The court also cited Yegiazaryan’s living in and having assets in California as evidence that Smagin suffered a “domestic injury.” In arriving at its decision, the Ninth Circuit took a context-specific approach to analyze the scope of the injury suffered by the plaintiff.

The Third Circuit adopted a similar approach in determining whether an alleged injury to an intangible interest, such as a judgment, is considered “domestic.” The court held in Humphrey v. GlaxoSmithKline, 905 F.3d 694, 707 (3d Cir. 2018) that such an inquiry is fact-specific and requires the consideration of multiple factors. The Seventh Circuit, on the other hand, adopted a “rigid residency” test for injuries involving intangible property. In Amada (Singapore) PTE v. Amcol International, 885 F.3d 1090 (7th Cir. 2018), the court held that the key inquiry is determining where an injury is suffered. Injuries to intangible property, the court held, occur at the plaintiff’s residence. Therefore, under the Seventh Circuit framework, a plaintiff cannot successfully assert a RICO claim if their residence is outside the United States, as any injury sustained would not be domestic. Yegiazaryan relied on this argument before the Supreme Court. The court rejected this argument.

‘Yegiazaryan v. Smagin’

The Supreme Court affirmed the Ninth Circuit’s ruling, establishing that a context-specific inquiry is the appropriate method for determining whether an injury is considered “domestic” for RICO claims. Specifically, the Court emphasized that courts should examine the circumstances surrounding the alleged injury to assess whether it arose in the United States.

Circumstances to consider include “the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.” This approach is consistent with RJR Nabisco, which implies that the focus of Section 1964(c) is on injuries in “business or property by reason of a violation of RICO’s substantive provisions.” In other words, courts should engage in a case-specific analysis that considers the circumstances surrounding the injury when evaluating whether there is a domestic injury. The court also noted that “no set of factors can capture the relevant considerations for all cases. RICO covers a wide range of predicate acts and is notoriously expansive in scope.”

In its opinion, the court established that RICO claims are not barred simply because a claimant does not reside in the United States. A plaintiff may allege a domestic injury whenever the circumstances surrounding the injury indicate that it occurred within the United States. Accordingly, the court concluded that Smagin met this threshold by alleging that “he was injured in California because his ability to enforce a California judgment in California against a California resident was impaired by racketeering activity that largely occurred in or was directed from and targeted at California.” As a result, the court affirmed the Ninth Circuit’s ruling and remanded the case for further proceedings consistent with this opinion.

The court’s decision in Yegiazaryan provides two reasons that the context-specific approach is most fitting for these RICO claims. First, the court highlights that adopting the “rigid residency” test would preclude foreign business owners who reside abroad but own a brick-and-mortar business in the United States from bringing a RICO suit even if an American RICO organization burns down their storefront. Furthermore, under the “rigid residency” framework, if racketeering activity were to target the intangible business interests of two U.S. businesses— one owned by a U.S. resident and the other by an individual living abroad—only the former would have standing to bring a RICO suit. The court explained that there is no evidence to suggest that Congress intended to impose such a double standard, especially because doing so runs the risk of generating international discord. The court also rejects the petitioner’s argument that the context-specific approach is unworkable because it fails to establish a bright-line rule. The opinion notes that an approach that directs courts to consider the case-specific circumstances surrounding an injury does not render it unworkable. Moreover, a bright-line rule like the “rigid residency” test “is inconsistent with RJR Nabisco, the presumption against extraterritoriality, and the thrust of Section 1964(c) itself.”

Impact

Any experienced practitioner knows that a creative mind can be one of the most useful tools in litigation. This decision opens a new pathway for attorneys litigating RICO claims to implement that creativity in a way that illustrates their client’s story, the extent of their injury, and the nature of that injury as a “domestic” one. Rather than being bound to a “rigid residency” test that is virtually dispositive of any foreign plaintiff’s claims, attorneys can now analyze the context of the circumstances surrounding their client’s claims to build a stronger case at both the pleading stage and beyond. This ruling provides guidance to attorneys who frequently handle RICO claims to better understand the factors the courts consider when evaluating such claims. Accordingly, practitioners can lay out the framework of their case in a manner that clearly demonstrates how their client’s injury qualifies as “domestic.” The court explained that Smagin had presented a plausible RICO claim because his injury occurred in California, involved a California resident, and was the result of racketeering activities in California directed at a California judgment. In light of this decision, a practitioner who effectively presents their client’s story in a similar fashion is likely to succeed in establishing that the injury was “domestic.”

Those practicing in jurisdictions like the Seventh Circuit will no longer have to fight an uphill battle when bringing RICO claims on behalf of clients who do not reside in the United States. This decision will undoubtedly make the United States a more attractive forum for filing RICO suits to remedy unlawful efforts impeding the enforcement of foreign arbitration awards in the United States. Furthermore, foreign claimants can rest easy knowing that, regardless of where their injury occurred, as long as there is a sufficient nexus to the United States, they can sufficiently plead plausible claims of racketeering activity.

While I disagree with my opposing counsel’s comment that “no one understands RICO,” I acknowledge that RICO cases can be complex. The Smagin decision removed some of the complexity of RICO cases.

Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.

Reprinted with permission from the July 20, 2023 edition of “The Legal Intelligencer” © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.