United States: Second Circuit Clarifies Civil Rico "Domestic Injury" Requirement

Last Updated: November 14 2017
Article by Nicholas M. Rose

On Monday, the Second Circuit brought a measure of clarity to the debate about the definition of a domestic injury under the Racketeering Influence and Corrupt Organizations Act (RICO), while also seeming to announce a new rule for shareholder suits under RICO that may prove consequential going forward.
In RJR Nabisco, Inc. v. European Community (decided June 20, 2016), the Supreme Court held that civil plaintiffs may only recover for domestic – but not foreign – injuries when bringing suit. The statute is attractive to private plaintiffs because it offers treble damages along with the recovery of attorney's fees. But the Supreme Court conspicuously failed to explain what makes an injury domestic in the first place, leaving district courts around the country to develop competing tests. The Second Circuit has now stepped into that void.

In Bascunan v. Els, a Chilean national brought suit under RICO in the Southern District of New York against his financial manager (also a Chilean national), claiming that the defendant had stolen approximately $64 million from him through several different schemes, two of which included the theft of the plaintiff's property (bearer shares, and funds in a bank account) held within the United States. Judge Daniels dismissed the complaint, ruling that the plaintiff had failed to allege a domestic injury under Nabisco because the plaintiff, as a Chilean resident, had suffered his injuries in Chile. Judge Daniels reached this determination by relying on a New York choice of law statute that ties the location of the injury to the plaintiff's residency.

On October 30, 2017, the Second Circuit rejected Judge Daniels' residency-based test and instead held in Bascunan v. Elsaca that, "when a foreign plaintiff maintains tangible property in the United States, the misappropriation of that property constitutes a domestic injury" under RICO. Specifically, the Second Circuit held that two of the alleged schemes caused domestic injury by depriving the foreign plaintiff of tangible property he owned that was located within the United States. Under the first scheme, the defendant improperly siphoned the plaintiff's trust funds that were held in a J.P. Morgan bank account in New York. And under the second scheme, the defendant caused the plaintiff's bearer shares located in a safety deposit box in New York to be removed and improperly re-registered to an entity the defendant controlled. According to the Second Circuit, both schemes caused domestic injury – regardless of the plaintiff's residency – because "the plaintiff's property was located in the United States when it was stolen or harmed."

The Second Circuit's holding is notable for two reasons. First, although the Second Circuit rejected the district court's residency-based rule, the Second Circuit's test nevertheless relied on choice of law principles – just as the District Court had – in determining how to identify the location of the injury. While the District Court looked to New York's borrowing statute, the Second Circuit relied on the "Second Restatement's presumptive choice-of-law rule regarding 'Injuries to Tangible Things.'" As we observed in our analysis of the District Court's ruling, choice of law rules and principles vary across jurisdictions. Continued reliance on choice of law rules and principles to determine how to identify the location of a RICO injury may, therefore, result in different "location of the injury" tests across the different jurisdictions, incentivizing forum shopping to find the jurisdiction that has the most favorable rules for determining the location of the specific injury in question.

Second, and perhaps more importantly, the Second Circuit limited the application of its "location of the property" test to tangible property (or property that is analogous to tangible property): bearer shares located in a New York safety deposit box and funds held in a New York bank account, which the Court treated as tangible property for purposes of the case. That test does not appear to apply to other sorts of property interests, such as ownership of shares in a company. Indeed, the Court reaffirmed its holding from a different case – Atlantic Holdings – that a shareholder's injury (in the form of "the diminished value of ownership interest in a company") occurs in "the shareholder's place of residence." In other words, while the district court's "place of residence" test does not apply to tangible (or analogously tangible) property, it does apply to certain other forms of property.

We anticipate that the Second Circuit's tangible/intangible distinction will be difficult to apply on a principled basis. The Court's determination that funds in a bank account were "situated in a specific geographic location at the time of injury such that we can treat it as tangible property for purposes of this inquiry" was not explained and did not appear to be based on an analysis of state law or banking regulation. Going forward, it will be difficult to predict which sorts of property are "analogous" to tangible property such that they will be treated as tangible property. Nor did the Court explain how to determine where such analogously tangible property is located – it is not, for example, obvious that electronic funds debited to an account in New York are located there in the same way that bearer shares are located in a New York safe deposit box. These issues now must be litigated on a case by case basis, with little guidance. By tailoring the "location of the injury" test to the nature of the "property interests at issue," the Second Circuit has signaled that there may be as many "location of the injury" tests as there are property interests – a frightening prospect for prospective RICO defendants, given the amount of uncertainty such an approach introduces. Further, the Second Circuit's statement (in dicta) that a U.S. shareholder is injured in its place of residency when the value of the shares is diminished may have unintentionally given the green light for U.S.-based shareholder RICO suits regardless of the location of the company whose shares the U.S. investor owns.

While the Second Circuit's opinion therefore provides some guidance on civil RICO's domestic injury requirement, it also appears to raise more questions than it answers. Going forward, prospective RICO plaintiffs (and their counsel) will be well-advised to consider not only the choice of law rules in potential jurisdictions, but also the interplay between those choice of law rules and the property interests at stake. And U.S.-based shareholders of international companies should carefully consider the potential for lucrative recoveries under RICO following the Second Circuit's indication that a U.S. shareholder's residency satisfies the domestic injury requirement when that shareholder is injured due to "the diminished value of [its] ownership interest in a company."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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