In asset protection planning, sometimes things go as planned. Other times, they go horribly wrong. The United States Supreme Court just issued its opinion in Yegiazaryan v. Smagin[1] which illustrates one situation where the debtor finds himself facing the potential treble damages due to alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”). Along for the ride are others who are alleged to have assisted him in planning to avoid his creditor’s ability to recover on a foreign arbitration award ultimately enrolled as a judgment in California. Included in the list of defendants being sued under RICO are the debtor’s attorney, bank, and trust company.
The Sixth Circuit Court of Appeals has recognized that “asset protection is a legitimate, legally sanctioned objective; though one that has limits of its own.”[2] Certainly, there is nothing wrong with asset protection planning. There is, however, potential liability for assisting debtors in fraudulent transfers, hiding assets, or other acts which serve no purpose other than to hinder, defraud, or delay a known or reasonably foreseeable creditor. Yegiazaryan is not the first case where an attorney, bank, and others have been named as RICO defendants for assisting a debtor in “asset protection” planning when there are known claims. The recent case of Kruse v. Repp is another example of where those persons have faced RICO exposure for assisting a debtor in avoiding the ability of a creditor to collect.[3]
A full discussion of RICO and the Yegiazaryan case is beyond the scope of this writing. However, a basic understanding of some of the relevant considerations is important to understand in mitigating risks of liability for assisting debtors.
RICO
Under RICO, it is unlawful “for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity.”[4] Anyone who conspires to violate RICO is subject to RICO liability.[5]
RICO liability is established when the defendant is found to have engaged in “(1) the conduct (2) of an enterprise (3) through a pattern of racketeering activity.”[6] While each of these requirements is subject to a large body of law, a general summary is as follows:
- Conduct: For civil liability, actionable “conduct” under RICO requires that the defendant “conduct or participate, directly or indirectly, in the conduct of the enterprise’s affairs”[7] requiring the defendant to have played some part in directing those affairs.[8]
- Enterprise: An “enterprise” under RICO is defined as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.”[9] The statute is to be construed liberally in determining whether an “enterprise” exists.[10] It may be that no unlawful purpose is required of the enterprise, the purpose of RICO being to attack “the infiltration of organized crime and racketeering into legitimate organizations.”[11]
- Pattern of racketeering activity: A “pattern of racketeering activity” under RICO is defined as “at least two acts of racketeering activity” occurring “within ten years” of each other.[12] The list of what constitutes “racketeering activity” is likewise defined[13] and includes a long list of potential offenses.[14] The plaintiff must show “that the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity.”[15]
A conspiracy is established when there is sufficient evidence showing (1) “an enterprise existed,” (2) “the enterprise affected interstate or foreign commerce,” (3) “the defendant associated with the enterprise,” and (4) “the defendant objectively manifested an agreement to participate … in the affairs of [the] enterprise.”[16] When there is a conspiracy, no single conspirator is required to have conducted the affairs of the enterprise, but rather may be found liable for acts of their co-conspirators when there is a common purpose[17] as long as the conspirator has knowledge of the general objective of the conspiracy.[18] As such, the alleged conspirator merely must intend to further an endeavor which, if completed, would give rise to liability. Therefore, it need not be shown that the conspirator actually engaged in any particular element of the wrongful conduct.
When these elements are proven, in addition the potential for criminal liability, a RICO plaintiff in a civil action may seek to recover treble damages as well as costs of the suit and reasonable attorneys’ fees.[19] Given the broad nature of how the RICO statute is to be interpreted, the limited knowledge and participation required of a RICO defendant, and the substantial exposure to liability, becoming a defendant in a civil RICO suit would be quite concerning to anyone who assisted a debtor in avoiding creditors.
Yegiazaryan v. Smagin
In the Yegiazaryan case, Vitaly Smagin obtained an arbitration award against Ashot Yegiazaryan related to misappropriation of funds in a real estate venture in Moscow. After obtaining this award, Smagin (a resident of Russia) enrolled the award in California where Ashot Yegiazaryan resided and filed suit to enforce the award. In his subsequent civil RICO action, Smagin argued that the defendants “worked together to frustrate Smagin’s collection on the California judgment through a pattern of wire fraud and other RICO predicate racketeering acts, including witness tampering and obstruction of justice.”[20]
At issue in Smagin’s RICO action was whether there was a “domestic injury” which is required prior to the exercise of jurisdiction by a U.S. court.[21] The trial court found no domestic injury and, therefore, dismissed the case. On appeal, the Ninth Circuit reversed, and the U.S. Supreme Court ultimately granted certiorari. Ultimately, the Supreme Court refused to adopt a bright-line rule that would locate a plaintiff’s injury at the place of the plaintiff’s residence (here, Russia). Rather, the Court held that a “context-specific” approach requiring an analysis of the facts to determine where the injury occurred. Here, since the alleged RICO violations occurred in California where steps were taken to avoid Smagin’s ability to collect on his judgment (an intangible asset which generally would be located at Smagin’s residence). As such, the injury was found to have occurred in California and Smagin was allowed to continue the civil RICO action even though the conduct injured an intangible asset located outside the United States.
Conclusion
Yegiazaryan may have broad implications under RICO and for enforcement of foreign judgments. The purpose of this writing, however, is to address the example this case shows for attorneys, accountants, financial advisors, banks, trust companies, etc. Here, each of these defendants is facing the potential for significant liability (treble damages, costs, and fees) in California under Smagin’s civil RICO suit. That is the case under RICO’s liberal interpretations of the elements necessary to result in liability.[22] This is not to say any of the defendants will ultimately be found liable, merely that they all are facing serious litigation. As stated above, this is not the first recent case where third-party advisors and banks have been sued under RICO for assisting in post-claim “asset protection.”
I have written in the past about how moving to another state may affect creditors’ rights[23] and in what ways choice of formation of a legal entity affects creditors’ rights.[24] This case is another example of the complicated jurisdictional issues involved in asset protection matters. Not only does this case illustrate circumstances where third parties may find themselves liable for participating in improperly avoiding creditors’ rights, but also illustrates that they may end up litigating that potential liability far away from where they reside.
Here, the defendants face litigation in California. That is because, under the test established by the Supreme Court and on the facts of this case, the actionable injury occurred where the judgment was being enforced. Where a person resides is not necessarily where judgments may be entered against them, nor is it necessarily where third parties may assist in avoiding those judgments. This case shows how third parties, including professional advisors, trust companies, and banks, may be forced into litigation in distant states even if their individual conduct occurred where they reside. If the injury they are alleged to have conspired to cause relates to a judgment being enforced elsewhere, courts sitting in that other state may have jurisdiction.
As stated by the Sixth Circuit, “asset protection is a legitimate, legally sanctioned objective; though one that has limits of its own.” Those who assist with asset protection planning, or even those who know about current or potential claims or judgements, would be well served to seriously consider the limits of their involvement. Exceeding the limits of asset protection, or participating when others are exceeding those limits, can have significant consequences. In this case and in Kruse v. Repp, attorneys, banks, and similar third parties have not been found liable by a court. As such, how far RICO liability ultimately will extend into the actions of such persons has not been fully adjudicated. However, even the prospect for treble damages, costs, fees, and litigating in distant jurisdictions, may have a significant chilling effect. Certainly, once there are known or reasonably foreseeable creditors, we would be well served to be cautious in how we engage with current or potential debtors.
[1] Yegiazaryan v. Smagin, 143 S. Ct. 1900 (2023).
[2] Church Joint Venture, L.P. v. Blasingame, 947 F.3d 925, 931 (6th Cir. 2020).
[3] Kruse by and through Kruse v. Repp, 543 F.Supp.3d 654 (S.D. Iowa 2021). For a discussion of this case, see McEowen, Roger E., Shawn S. Leisinger, and Timothy P. O’Sullivan, “Estate Planning to Protect Assets from Creditors – Dancing on the Line Between Legitimacy and Fraud,” 49 Est. Plan. 30 (Feb. 2022).
[4] 18 U.S.C. 1962(c).
[5] 18 U.S.C. 1962(d).
[6] 18 U.S.C. 1962(c) and Salinas v. United States, 522 U.S. 52, 62 (1994).
[7] 18 U.S.C. 1962(c).
[8] Reves v. Ernst & Young, 507 U.S. 170 (1993).
[9] 18 U.S.C. 1961(4).
[10] United States v. Delano, 825 F.Supp. 534, 538-39 (W.D.N.Y. 1993).
[11] Reves v. Ernst & Young, 507 U.S. 170 (1993). See also Aetna Cas. Sur. Co. v. P&B Autobody, 43 F.3d 1546, 1558 (1st Cir. 1994), stating that an enterprise for RICO purposes “includes legitimate corporations.”
[12] 18 U.S.C. 1961(5).
[13] 18 U.S.C. 1961(1).
[14] For example, in the Kruse case, the alleged offenses included mail fraud and wire fraud requiring a showing of require a showing of “(1) a plan or scheme to defraud, (2) intent to defraud, (3) reasonable foreseeability that the mail or wires will be used, and (4) actual use of the mail or wires to further the scheme” where the mailing/wiring may be innocent without any false information if it furthers the scheme or is a step in the plot. See Kruse, 543 F.Supp.3d at 681.
[15] H.J. Inc. v. Nw. Bell Tel. Co., 492 U.S. 229, 239 (1989).
[16] Aguilar v. PNC Bank, N.A., 853 F.3d 390, 402 (8th Cir. 2017).
[17] Salinas, 522 U.S. at 64.
[18] Aguilar, 835 F.3d. at 403.
[19] 18 U.S.C. 1964(c).
[20] Yegiazaryan, 143 S. Ct. at 1902.
[21] RJR Nabisco Inc. v. European Community, 579 U.S. 325, 346 (2016).
[22] I note that there also could be liability under other theories including tortious interference and professional discipline (for attorneys, see, e.g., Rules of Professional Conduct 1.2(d) and 4.4(a)). Also, in California and certain other states, assisting in fraudulent transfers may be a crime.
[23] Edmondson, S. Gray, “Can You Avoid Creditors by Moving Assets (or Yourself) to Another State?,” Oct. 23, 2019, https://esapllc.com/can-you-avoid-creditors-by-moving-assets-to-another-state/.
[24] Edmondson, S. Gray, “Where Should You Form Your New LLC – Creditors’ Rights?,” May 16, 2023, https://esapllc.com/where-should-you-form-your-new-llc-creditors-rights-2023/.
