United States: FSIA, RICO, And New York Convention Developments All In One Month

First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. We interrupt our three-part series examining whether the English courts can issue a worldwide freezing order against a foreign state in support of efforts to enforce an arbitral award or foreign judgment to cover three significant updates.

First, the United States Supreme Court issued its decision in Turkiye Halk Bankasi A.S. v. United States, No. 21-1450, 598 U.S. __ (2023) (Halkbank), holding that the Foreign Sovereign Immunities Act (FSIA) applies only in civil, not criminal, cases, rejecting Defendants' argument that language from Amerada Hess v. Argentine Republic, 488 U.S. 428, 439 (1989) that the FSIA is the "sole basis" for jurisdiction over foreign state actors. Second, the Supreme Court heard oral argument in Yegiazaryan v. Smagin and CMB Monaco v. Smagin, which will decide whether a RICO claim against a Russian citizen who resides in California can be brought based on conduct that impairs enforcement of a foreign arbitration award, which was confirmed as a California judgment. Finally, we update one of our prior reports—the Eleventh Circuit issued its en banc decision in Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., and ruled that in a New York Convention case where the arbitration is seated in the United States, or where United States law governs the conduct of the arbitration, domestic law—that is, Chapter 1 of the Federal Arbitration Act (FAA)—provides the grounds for vacatur of an arbitral award.

Halkbank – SCOTUS Holds FSIA Doesn't Apply to Criminal Cases

Halk Bankasi A.S. (Halkbank), a Turkish state-owned bank, was accused of conspiring to evade US sanctions against Iran. See Turkiye Halk Bankasi A.S. v. United States, No. 21-1450, 598 U.S. __ (2023) (Halkbank). Halkbank moved to dismiss the indictment on sovereign immunity grounds; the district court denied the motion and the Second Circuit affirmed. Defendants argued that Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 (1989) stands for the proposition that the FSIA is the "sole basis" for jurisdiction over foreign state actors in all cases, including criminal cases. However, the Supreme Court expressly rejected this proposition. Halkbank, slip op. at 12. The Supreme Court warned that these prior statements are "general language in [a] judicial opinion," which must be read "as referring in context to circumstances similar to the circumstances then before the Court." Id. at 12. The Court explained that the circumstances before the Court in prior cases, like Amerada Hess, involved "general 'grants of subject matter jurisdiction in Title 28.'" Id. at 12-13. The Court, thus, "had no occasion to consider the FSIA's implications" on 18 U.S.C. § 3231's grant of criminal jurisdiction. Id. at 13. Accordingly, writing for the Court, Justice Kavanaugh, found that 18 U.S.C. § 3231 conferred the district courts with jurisdiction over crimes against the United States irrespective of whether the defendant is a sovereign. The Court went on to hold that the FSIA affords sovereign immunity to sovereigns in civil cases unless one of the statutory exceptions are met. The Court concluded, based on the language of the statute, that the FSIA was not intended to cover criminal cases. So, the FSIA is inapplicable and 18 U.S.C. § 3231's grant of jurisdiction applies to any criminal prosecution of a foreign sovereign. The Court remanded the case back the Second Circuit to determine whether Halkbank's arguments that it was nonetheless entitled to common law sovereign immunity—an issue the Second Circuit had not fully reached.

Justice Gorsuch (joined by Justice Alito) concurred insofar as 18 U.S.C. § 3231 applies to sovereigns but dissented insofar as the Court found the FSIA to be inapplicable. The concurrence would have applied the FSIA both to criminal and civil proceedings and would have found that the FSIA's commercial activity exceptions were satisfied here.

RICO—Supreme Court Holds Oral Argument About Whether a Foreign Party Can Assert a RICO Claim Based on Interfering With a California Judgment Confirming an International Arbitral Award

In Yegiazaryan v. Smagin, Smagin asserted that Yegiazaryan and others defrauded him of his shares in a joint real estate venture in Moscow between 2003 and 2009. In 2010, Yegiazaryan and his brother, Artem, fled to California after being indicted for fraud in Russia.

After fleeing Russia, Smagin initiated arbitration proceedings against Yegiazaryan in London, obtaining a $92 million award. Smagin then went to federal court in California to confirm the arbitration award. The district court confirmed the award pursuant to the New York Convention.

Yegiazaryan allegedly created a complex ownership structure and web of offshore entities to shelter his assets from the jurisdiction of the district court. In response, Smagin filed a civil RICO complaint alleging that Yegiazaryan's actions "injured" his property, the California judgment, by delaying and preventing execution of the judgment.

The district court dismissed Smagin's complaint for failing to plead a "domestic RICO injury." The Ninth Circuit reversed, finding that interfering with the enforcement of the California judgment constituted a cognizable RICO domestic injury to Smagin's property. The court held that the California judgment existed as property in California, and Yegiazaryan's alleged actions caused a domestic injury in California for various reasons, including that Smagin's rights under the California judgment exist only in California.

The Supreme Court granted cert as to whether a foreign party can file a RICO claim when they suffer injury to intangible property, such as an arbitral award or impairment to enforcing a judgment. The Court has previously held that RICO injuries must be "domestic" and not "foreign."

During the April 25, 2023 oral argument, some of the justices appeared supportive of the notion that interfering with the enforcement of a California judgment was a domestic injury. Others seemed to focus on the domicile of the injury—Russia—or the seat of arbitration, and questioned whether simply obtaining recognition of an arbitral award was sufficient to trigger a domestic injury under RICO jurisprudence. A decision should come out this summer and could provide another important enforcement tool in the US if Smagin's RICO claim prevails.

NY Convention—Eleventh Circuit Synchs Up With Other Courts of Appeal

In November 2022, we covered the Eleventh Circuit's grant of en banc review of its May 2022 decision in Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., to reconsider its unique precedent barring courts from vacating international arbitral awards rendered in the United States under broader domestic standards. In its April 13, 2023 opinion, the Eleventh Circuit held that under the New York Convention, the "primary jurisdiction's domestic law acts as a gap-filler and provides the vacatur grounds for an arbitral award." Thus, "[i]n a New York Convention case where the arbitration is seated in the United States, or where United States law governs the conduct of the arbitration, Chapter 1 of the FAA provides the grounds for vacatur of an arbitral award." The Eleventh Circuit—which includes Miami, where international arbitrations are often held—is now in line with how the Second, Third, Fifth, and Seventh Circuits have interpreted the New York Convention. The case gives a good overview of the New York Convention and how the Convention provides different roles to the primary jurisdiction versus the secondary jurisdiction reviewing the case. Our prior update is available here.

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