Second Circuit Offers Primer on Extraterritoriality Issues in Civil RICO Litigation

Bascunan v. Elsace, ___ F.3d ___, 2017 WL 4872400 (2d Cir., Oct. 30, 2017)

The Second Circuit reversed, in part, a lower court decision granting a motion to dismiss in which plaintiff, a citizen and resident of Chile and entities owned and controlled by citizen brought civil RICO action against his cousin, who was also citizen and resident of Chile, and the cousin’s employees and corporate entities, alleged the cousin had power of attorney over his finances and stole millions of dollars from him through several fraudulent financial schemes.

Of the four schemes analyzed, two were found to constitute “domestic injury,” and thus provide standing to Plaintiff.

As a matter of first impression, in the Second Circuit and elsewhere, the court analyzed the Supreme Court decision in RJR Nabisco to consider whether the RICO statute applies extraterritorially. The Court determined, as an initial matter, that “[t]he question of RICO’s extraterritorial application really involves two questions”: (1) “do RICO’s substantive prohibitions, contained in § 1962, apply to conduct that occurs in foreign countries?” and (2) “does RICO’s private right of action, contained in § 1964(c), apply to injuries that are suffered in foreign countries?” In answering both questions, the Court applied the presumption against extraterritoriality.

With respect to the first question, the Court held that “RICO applies to some foreign racketeering activity,” explaining that “[a] violation of § 1962 may be based on a pattern of racketeering that includes predicate offenses committed abroad, provided that each of those offenses violates a predicate statute that is itself extraterritorial.”

On the second question, the one directly relevant to this appeal, the Court concluded that a plaintiff must allege a domestic injury. In answering the second question, the Court made a point of separately applying the presumption against extraterritoriality to Section 1964(c). Nevertheless, the Supreme Court stated that the “domestic injury” requirement of Section 1964(c)—more specifically, the fact that RICO’s private right of action lacks language expressly providing recovery for injuries to foreign persons—“does not mean that foreign plaintiffs may not sue under RICO.”

Ultimately, because the plaintiffs had stipulated that they waived their damages claims for any domestic injuries, the Court did not explain how to identify a “domestic injury” and noted only that “[t]he application of this rule in any given case will not always be self-evident, as disputes may arise as to whether a particular alleged injury is ‘foreign’ or ‘domestic.’ ”

Based on this sparse guidance, the Court did not indicate what factors a court should examine to determine whether a plaintiff’s alleged injury is foreign or domestic. If a plaintiff alleges more than one “injury,” courts should separately analyze each injury to determine whether any of the injuries alleged are domestic. If one of the alleged injuries is domestic, then the plaintiff may recover for that particular injury even if all of the other injuries are foreign.

Schemes Not Found to Have Caused “Domestic Injury”

Based on the above, the Second Circuit analyzed each fraud scheme, and concluded first that two schemes, i.e., the Dividend Scheme and the General Anacapri Investment Fraud Scheme, failed to allege a “domestic” injury, as the only domestic element alleged is that Defendant Elsaca transferred these foreign funds to his own accounts in New York, and Elsaca laundered stolen money using bank accounts in the United States and elsewhere.

The Second Circuit ultimately concluded that an injury to tangible property is generally a domestic injury only if the property was physically located in the United States, and that a defendant’s use of the U.S. financial system to conceal or effectuate his tort does not, on its own, turn an otherwise foreign injury into a domestic one. The court thus held that the use of bank accounts located within the United States to facilitate or conceal the theft of property located outside of the United States does not, on its own, establish a domestic injury. In addition, and importantly, the court stated that these injuries did not arise from any preexisting connection between Bascuñán and the United States. To allow such a plaintiff to recover treble damages would thus “unjustifiably permit [foreign] citizens to bypass their own [nation’s] less generous remedial schemes.”

Schemes Finding “Domestic Injury”

The Second Circuit did hold that two other schemes constituted domestic injury, i.e., when certain property—although belonging to a foreign owner—was located within the United States when it was stolen. Thus, the District Court erred in holding that these schemes caused only foreign injuries. Thus, when Defendant Elsaca misappropriated funds held in a New York bank account at J.P. Morgan this scheme was to involve the misappropriation of tangible property located within the United States. Where the injury is to tangible property, the court concluded that, absent some extraordinary circumstance, the injury is domestic if the plaintiff’s property was located in the United States when it was stolen or harmed, even if the plaintiff himself resides abroad. it ensures that both foreign and domestic plaintiffs can obtain civil RICO’s remedy for damage to their property, but only if their property was located within the territorial jurisdiction of the United States. In so doing, it protects the interest each sovereign has in regulating the private property situated in its own territory without extending the reach of American law or discriminating against foreign plaintiffs. Accordingly, the Second Circuit stated that its holding reduces the possibility of international discord. Id. * 11.

The Second Circuit stated that, to be clear, it did not hold that a plaintiff’s place of residence is never relevant to the domestic injury inquiry required by RJR Nabisco. A plaintiff’s residence may often be relevant—perhaps even dispositive—in determining whether certain types of business or property injuries constitute a domestic injury. But with respect to the particular type of property injury alleged here—the misappropriation of Bascuñán’s trust funds from a specific bank account located in the United States—the court concluded that the location of the property and not the residency of the plaintiff is the dispositive factor.

Regarding the second scheme, the BCI Share Theft scheme, the court found that the misappropriation of the bearer shares, located in a safety deposit box in New York, also constitutes the misappropriation of tangible property, and thus a “domestic injury” within the meaning of the civil RICO statute.

Ed Note: This detailed opinion provides a primer on interpreting factual scenarios involving whether a Plaintiff has standing when there is a question as to whether there is “domestic injury.”

David J. Stander is a civil RICO Attorney who focuses on complex issues involved in civil RICO litigation.

 

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