Dandong Old North-East Agricultural & Animal Husbandry Co., Ltd., v Gary Ming Hu, 2017 WL 3328239 (S.D.N.Y., August 3, 2017)
Plaintiff Dandong Old North-East Agriculture & Animal Husbandry Co., Ltd. (“Plaintiff” or “Dandong”) alleged civil RICO claims against its former executive, Gary Ming Hu, and others, contending that Hu conspired with individuals and entities to defraud Plaintiff into paying above-market prices for tons of soybeans, and then laundered proceeds of that fraud through New York real estate purchases involving his ex-wife, Yuhua Wang, and their daughter, Esther Hu Mangan.
The court granted the joint motion of two other individual defendants Wang and Mangan (collectively, “Defendants”) to dismiss the claims asserted against them for failure to state a claim under RICO because it does not properly allege that Defendants’ conduct caused a domestic injury to its business.
Civil RICO “Domestic Injury” Requirement
Plaintiff alleges domestic injury by cataloging: (i) the damage to its reputation in the U.S. soybean market; (ii) its strong business connection to the U.S., including during the period of the alleged fraud; (iii) the losses it incurred over the life of the fraud, both early (in the form of overpayment and increased soybean costs) and late (in the form of reduced production and layoffs); and (iv) the costs incurred by Plaintiff in investigating and litigating Defendants’ fraudulent conduct.
Defendants countered that even if Plaintiff suffered from losing its soybean supplier in the United States, it felt the effects of that loss only in China, its country of incorporation and principal place of business. Further, Defendants argue that damage to Plaintiff’s reputation is considered a “personal injury and … not an injury to business or property within the meaning of 18 U.S.C. § 1964(c).” (Id. at 7 (quoting Hamm v. Rhone-Poulenc Rorer Pharms., Inc., 187 F.3d 941, 954 (8th Cir. 1999))).
Legal Analysis of “Domestic Injury”
The Supreme Court’s decision in RJR Nabisco set forth that putative RICO violations are construed narrowly to adhere to the well-established presumption against extraterritoriality. RJR Nabisco, 136 S. Ct. at 2108. This presumption holds that “federal laws will be construed to only have domestic application.” Id. at 2100. As relevant here, the Court in RJR Nabisco held that a private cause of action under 18 U.S.C. § 1962 requires a plaintiff to prove—with attention to both the elements specified above and the extraterritoriality limitations on certain predicate acts—a domestic injury to the plaintiff’s business or property.
The Supreme Court left open the question of determining what constitutes a domestic injury, and federal district courts have adopted one of two lines of reasoning: “[t]he first line … focuses on where the alleged injury was suffered. The second line … focuses on where the conduct occurred that caused the injury.” Id. (citing Cevdet Aksüt Oğullari Koll. Sti v. Cavusoglu, Civ. No. 2:14-3362, 2017 WL 1157862, at *4 (D.N.J. Mar. 28, 2017)).
SDNY Adopts Option One
The SDNY has adopted the former, locus-of-effects approach which determines the existence of a domestic injury by focusing on where the plaintiff felt the effects of the injury, and not where the defendant committed the injury-inducing acts.
Under this analysis, the court concluded plaintiff has failed to allege a domestic Injury to Its business rejecting arguments that Defendants caused domestic injury by substantially damaging Plaintiff’s reputation in the United States soybean market. The court rejected the view of the Plaintiff, citing to a Ninth Circuit district court case (Tatung), that the “domestic injury” requirement is satisfied so long as “the actions causing the injury took place primarily in the United States.”
The court stated that it explicitly adopted the approach described in Bascuñan, which defined a domestic injury to occur “where the plaintiff suffered the injury, not at all where the defendant’s alleged conduct took place.” Id.; see also Elsevier III, 2017 WL 1843298, at *5. The court discussed that Plaintiff sought to find a domestic injury with regard to soybean contracts that shipped the commodity outside the United States. Any deprivation of Plaintiff’s money was felt in China. And, in sharp contrast to Elsevier, Plaintiff was not deprived of its property in the United States; indeed, Plaintiff received all of the soybeans for which it contracted with U.S. suppliers. And while Defendants’ conduct may have impaired Plaintiff’s later ability to secure soybean suppliers in the United States, such a loss of potential business opportunities is not a cognizable domestic injury. In other words, Plaintiff’s expectation of continued contract counterparties among U.S. soybean suppliers is far too attenuated to suffice as a domestic injury under RICO.
Also, costs to investigate and litigate are not “domestic” simply because the alleged conduct that produced them occurred in the United States. Defendants may have engaged in fraudulent conduct within the United States, but “it does not follow that [Plaintiff was] injured” there. Elsevier II, 199 F. Supp. 3d at 788. Similarly, a foreign corporation cannot allege a domestic injury to its business if it only experiences the effects of an alleged RICO scheme abroad. Cevdet, 2017 WL 1157862, at *6.
Plaintiff here only felt the effects of Defendants’ overpricing scheme in China. After Defendants allegedly overpriced the soybean contracts and siphoned the excess funds, Plaintiff terminated ninety employees and reduced its soybean production in its Dandong City factory. And while Plaintiff did incur attorneys’ fees in the United States, those expenses were paid from China.
The court concluded that regardless of where the conspirators’ conduct took place, Plaintiff’s injury was felt in China, the only place its business had ever been located. In short, the Amended Complaint failed to plead domestic injury, and thus fails to state a claim under 18 U.S.C. § 1962(c).
The court also discussed “comity,” stating the Chinese government has prosecuted Gary Hu and sentenced him to twenty years’ imprisonment for his role in this very fraud. The Court stated that –
“Allowing [Plaintiff’s] RICO claims to proceed under these circumstances would be at odds with the Supreme Court’s directive that the need to enforce the presumption against extraterritoriality is ‘at its apex’ when remedies available in United States courts may conflict with those available abroad.”
Court Finds Civil RICO Conspiracy Claim Thus Fails
The court uses Salinas language, but is wrong in its conclusion. The court stated that to state a cause of action under conspiracy, a plaintiff must allege facts demonstrating an intent to further “an endeavor which, if completed, would satisfy all of the elements” of the substantive offense under 18 U.S.C. § 1962(c). Ritchie v. N. Leasing Sys., Inc., No. 12 Civ. 4992 (KBF), 2016 WL 1241531, at *8 (S.D.N.Y. Mar. 28, 2016) (quoting Baisch v. Gallina, 346 F.3d 366, 376-77 (2d Cir. 2003)).
But the court erred in concluding a RICO conspiracy claim “necessarily must fail if the substantive claims are themselves deficient.” See Salinas etc.
Ed Note: The civil RICO Attorney practitioner must be able to thoroughly understand the complex rules governing “extraterritoriality” and recognize the split in the circuits (Second v. Third/Ninth) on the application of the “domestic injury” rules.