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Bascunan v. Elsaca

United States Court of Appeals, Second Circuit

October 30, 2017

Jorge Yarur Bascunan, Tarascona Corp., Hofstra Corp., Inmobiliaria Milano S.A., Inmobiliaria E Inversiones Tauro S.A., and Inversiones T & V S.A., Plaintiffs-Appellants,
v.
Daniel Yarur Elsaca, Cristián Jara Taito, Oscar Bretón Dieguez, GM & E Asset Management S.A., Fintair Finance Corp., Euweland Corp., Hay's Finance Corp., Cary Equity's Corp., Agrícola E Inmobiliaria Chauquén Limitada, John Does 1-10, and Alapinjdp Investing Corp., Defendants-Appellees. []

          Argued: April 28, 2017

         Appeal from the United States District Court for the Southern District of New York.

         The question presented in this appeal is whether the plaintiffs have plausibly alleged a "domestic injury" to their business or property within the meaning of Section 1964(c) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the provision commonly referred to as civil RICO. 18 U.S.C. § 1964(c). This question is one of first impression-in this (or any) Court of Appeals-arising from the Supreme Court's decision in RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090 (2016).

         In RJR Nabisco, the Supreme Court held, among other things, that Section 1964(c) of the RICO statute, which gives a private right of action to "any person injured in his business or property by reason of a violation of [RICO's substantive provisions], " does not apply extraterritorially. Id. at 2111. Accordingly, the Supreme Court explained that "[s]ection 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries." Id. (emphasis added). The Supreme Court did not explain, however, how to determine whether an alleged injury is domestic or foreign.

         Plaintiff-appellant Jorge Bascuñán, a citizen and resident of Chile, brought an action under civil RICO in the United States District Court for the Southern District of New York (George B. Daniels, Judge) against his cousin, defendant-appellee Daniel Elsaca, also a citizen and resident of Chile. Bascuñán alleged that Elsaca, who had power of attorney over Bascuñán's finances, stole millions of dollars from Bascuñán through several fraudulent financial schemes.

         In the District Court, Elsaca moved to dismiss Bascuñán's complaint on the ground that he failed to allege a domestic injury as required by RJR Nabisco. The District Court granted the motion and, characterizing Bascuñán's injury broadly as a $64 million "economic loss, " held that, because individual plaintiffs suffer economic injuries at their place of residence and because Bascuñán was a resident of Chile, Bascuñán alleged only foreign injuries. On appeal, Bascuñán argues that the District Court erred in relying exclusively on his place of residence to determine that he alleged only foreign injuries.

         We conclude that, to the extent Bascuñán alleged injuries to property located within the United States, he satisfied civil RICO's domestic injury requirement. But to the extent Bascuñán alleged injuries to property located outside of the United States, the fact that Elsaca or his co-defendants transferred those stolen funds to (or through) the United States fails to transform an otherwise foreign injury into a domestic one.

         Accordingly, we REVERSE the District Court's order granting Elsaca's motion to dismiss, we VACATE the District Court's order denying Bascuñán's motion for leave to file a second amended complaint, and we REMAND the cause to the District Court for further proceedings consistent with this opinion.

          Robin L. Alperstein (Jesse T. Conan, on the brief), Becker, Glynn, Muffly, Chassin & Hosinski LLP, New Yo r k, NY, for Plaintiffs-Appellants.

          Jennifer M. Selendy (William B. Adams, on the brief), Quinn Emanuel Urquhart & Sullivan, LLP, New York, NY, for Defendants-Appellees.

          Before: Cabranes, Livingston, Circuit Judges, and Pauley, Judge. [*]

          JOSÉ A. CABRANES, CIRCUIT JUDGE

         The question presented in this appeal is whether the plaintiffs have plausibly alleged "a domestic injury" to their business or property within the meaning of Section 1964(c) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the provision commonly referred to as civil RICO.[1] This question is one of first impression-in this (or any) Court of Appeals-arising from the Supreme Court's decision in RJR Nabisco, Inc. v. European Community.[2]

         In RJR Nabisco, the Supreme Court held, among other things, that Section 1964(c) of the RICO statute, which gives a private right of action to "[a]ny person injured in his business or property by reason of a violation of [RICO's substantive provisions, codified in Section 1962], " does not apply extraterritorially.[3] Accordingly, the Supreme Court explained that "Section 1964(c) requires a civil RICO plaintiff to allege and prove a domestic injury to business or property and does not allow recovery for foreign injuries."[4] The Supreme Court did not explain, however, how to determine whether an alleged injury is domestic or foreign.

         Plaintiff-appellant Jorge Bascuñán, a citizen and resident of Chile, brought an action under civil RICO in the United States District Court for the Southern District of New York (George B. Daniels, Judge) against his cousin, defendant-appellee Daniel Elsaca, also a citizen and resident of Chile. Bascuñán alleged that Elsaca, who had power of attorney over Bascuñán's finances, stole millions of dollars from Bascuñán through several fraudulent financial schemes.

         In the District Court, Elsaca moved to dismiss Bascuñán's complaint on the ground that he failed to allege a domestic injury as required by RJR Nabisco. The District Court granted the motion and, characterizing Bascuñán's injury broadly as a $64 million "economic loss, " held that, because individual plaintiffs suffer economic injuries at their place of residence and because Bascuñán was a resident of Chile, Bascuñán alleged only foreign injuries. Its holding set forth, in sum and substance, the following rule: a foreign plaintiff who suffered an "economic loss" due to a RICO violation cannot, absent extraordinary circumstances, allege a domestic injury. On appeal, Bascuñán argues that the District Court erred in relying exclusively on his place of residence to determine that he alleged only foreign injuries. He asserts that, because he alleged injuries to property located within the United States, he satisfied civil RICO's domestic injury requirement. We agree.

         While Bascuñán claims a total loss of $64 million, he alleged, in part, the misappropriation of specifically identifiable property that was located in the United States when it was stolen. In particular, he alleged the misappropriation of about $3 million held in a bank account in New York, and the theft of bearer shares, worth roughly $40 million, from a safety deposit box also in New York. Because this property was located within the United States when it was stolen, we conclude that Bascuñán has plausibly alleged a domestic injury notwithstanding the fact that he is a citizen and resident of Chile.

         To be clear, we do not hold that a plaintiff's place of residence is never relevant to the domestic injury inquiry required by RJR Nabisco. Nor do we hold that any contact with the United States suffices to make an injury domestic. Indeed, with respect to Bascuñán's alleged injuries involving property located outside of the United States, the fact that Elsaca or his co-defendants transferred those stolen funds to (or through) the United States fails to transform an otherwise foreign injury into a domestic one. As noted, however, Bascuñán has alleged two injuries that have a sufficient relationship to the United States to qualify as "domestic" under the circumstances presented here.

         Accordingly, we REVERSE the District Court's order granting Elsaca's motion to dismiss, we VACATE the District Court's order denying Bascuñán's motion for leave to file a second amended complaint, and we REMAND the cause to the District Court for further proceedings consistent with this opinion.

         BACKGROUND

         I. Factual Overview

         We review de novo the grant of a motion to dismiss, "accept[ing] all factual allegations in the complaint as true and draw[ing] inferences from those allegations in the light most favorable to the plaintiff."[5] The relevant facts, as presented in Bascuñán's Amended Complaint, are as follows:

         Bascuñán, an only child, inherited a substantial fortune (the "Estate") from his parents after their deaths in the 1990s. The Estate includes various companies and assets owned (directly and indirectly) by Bascuñán, including shares in Banco de Credito e Inversiones ("BCI"), the third-largest bank in Chile, of which his father had been president.[6] At the time of his parents' death, and for years afterward, Bascuñán, who was afflicted with a number of emotional and physical ailments including depression and acquired immunodeficiency syndrome ("AIDS"), was unable to manage his own finances. He relied instead on a financial manager originally hired by his parents.

         In 1999, Bascuñán appointed his cousin Elsaca as a new financial manager to oversee the Estate. Elsaca, who was eight years Bascuñán's senior, was a trusted family member with a master of business administration ("MBA") degree from the London School of Economics and extensive financial experience. According to Bascuñán's complaint, Elsaca was "a licensed accountant, prominent Chilean economist, and [formerly] the head of the Superintendencia de Valores y Seguros (de Chile), Chile's equivalent to the U.S. Securities and Exchange Commission."[7] Bascuñán ultimately granted Elsaca a broad power of attorney, which included the power to engage in self-dealing transactions without Bascuñán's prior authorization.

         Over the next ten years, and until Bascuñán fired him in 2010, Elsaca and his co-defendants[8] allegedly engaged in a number of fraudulent financial schemes against Bascuñán, illegally transferring about $64 million from the Estate to entities and accounts under their own control. Specifically, Bascuñán claimed that Elsaca perpetrated four schemes: (1) the New York Trust Account Scheme; (2) the General Anacapri Investment Fraud Scheme; (3) the BCI Share Theft; and (4) the Dividend Scheme. We describe each scheme in turn, focusing on the injuries purportedly caused by each.

         A. The New York Trust Account Scheme

         In 1998, before he hired Elsaca to manage his finances, Bascuñán established the so-called Afghan Trust with money from the Estate. The Afghan Trust, a vehicle for Bascuñán's charitable giving, was organized under the laws of the Cayman Islands and is administered by the New York office of J.P. Morgan. Importantly, its funds are held in New York in a J.P. Morgan bank account.

         In 2001, Elsaca, then in control of Bascuñán's finances, created a second trust: the Capri Star Trust. According to Bascuñán, the Capri Star Trust-the stated purpose of which was also to finance Bascuñán's charitable goals-was entirely redundant of the already- existing Afghan Trust, and "served no purpose other than to generate sham fees" for his cousin.[9] The only difference between the two trusts was that the Capri Star Trust named Elsaca as an "Investment Advisor, " which entitled him to receive an "Investment Advisor" fee of 1% of the total value of the Capri Star Trust's assets each year, notwithstanding the fact that UBS (not Elsaca) actively managed the Trust.[10] According to Bascuñán, Elsaca transferred funds from the Afghan Trust's New York bank account into the Capri Star Trust solely to earn sham investment fees ($2.7 million in total), and to pay sham legal fees ($390, 000 in total) to José Pedro Silva Prado, Elsaca's personal attorney and alleged co-conspirator.

         Like the Afghan Trust, the Capri Star Trust was established in the Cayman Islands and administered by the New York office of a banking and financial services institution (in this instance, UBS AG).

         B. The General Anacapri Investment Fraud Scheme

         The next purported scheme, which Bascuñán dubbed the Anacapri Investment Fraud Scheme, involved several byzantine sub-schemes and resulted in Elsaca, and others, illegally transferring at least $60 million from the Estate to accounts and entities under their control. Simply put, Elsaca created a private investment fund in Chile-the Anacapri Fund (or "the Fund")-that took in a substantial amount of money from the Estate and paid back very little: it returned to the Estate only $7.5 million of the approximately $48 million it had under management. According to Bascuñán, Elsaca and his associates simply pocketed most of the Estate assets controlled by the Anacapri Fund; that is, they transferred large sums of money to themselves several times during the Fund's eight-year existence and retained most of the assets after they liquidated the Fund in 2009.[11] The Estate also paid Elsaca investment management fees amounting to approximately 30% of the total value of the assets contributed to the Anacapri Fund, or about $16 million.[12]

         The Anacapri Fund was financed with assets contributed by three foreign entities controlled by the Estate. The Amended Complaint does not describe where the money belonging to those foreign entities was held. Bascuñán did allege that, after misappropriating assets from the Anacapri Fund, Elsaca laundered those assets through bank accounts in New York and elsewhere.

         C. Theft of BCI Shares

         One of the Anacapri sub-schemes-the BCI Share Theft- requires a somewhat more detailed description. As mentioned above, the Estate included a 1.47% stake in BCI. An entity called Tarascona Corp. ("Tarascona") directly controlled the shares comprising that stake, and Tarascona was itself wholly owned by Hofstra Corp. ("Hofstra"), an entity belonging to the Estate. Both Tarascona and Hofstra were corporations organized under the laws of the British Virgin Islands ("BVI") and Hofstra's interest in Tarascona was represented by bearer shares stored in a J.P. Morgan safety deposit box in New York.

         In 2007, Elsaca, or an agent acting on his behalf, traveled to New York and, using the authority granted him in the power of attorney, removed the bearer shares from the safety deposit box. Elsaca then arranged for a Panamanian law firm to cancel Hofstra's bearer shares and re-register them in the name of a new entity created and controlled by him, Nueva T Corp. (or "New Tarascona"), a BVI corporation.[13] This maneuver effectively transferred control of Tarascona and its only asset, the BCI shares, from the Estate to Elsaca.

         At the last step of the BCI Share Theft sub-scheme, Elsaca caused the Anacapri Fund to use Estate assets to purchase New Tarascona, and thus (re)purchase the BCI shares, from him for $43 million.

         D. The Dividend Scheme

         Finally, Bascuñán alleged that Elsaca stole over $1.8 million in dividend payments earned by the Estate on its BCI shares. Between 2007 and 2010, a Tarascona account held at BCI in Chile received over $3.5 million in dividend payments. Elsaca diverted a portion of those funds from the Tarascona account to his personal investment accounts at Morgan Stanley in New York. This purported scheme was rather crude by comparison with the others: Elsaca withdrew funds derived from the dividend payments by writing checks out of the Tarascona account, he endorsed those checks in his own name, and then he deposited the funds into his own accounts.

         II. Procedural History

         On March 17, 2015, Bascuñán filed an initial complaint, followed by an amended complaint on August 24, 2015, accusing Elsaca and his co-defendants of violating RICO by continuously and systematically breaching the mail fraud, wire fraud, bank fraud, anti-money-laundering, and Travel Act statutes through their actions involving the Estate. On December 22, 2015, the defendants moved to dismiss Bascuñán's action on several grounds, including for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6).

         Six months later, after the District Court heard oral argument on the defendants' fully-briefed motion, the Supreme Court issued its decision in RJR Nabisco, which for the first time required a plaintiff bringing a private action under RICO to allege a "domestic injury."[14] In response to the Supreme Court's decision, Bascuñán sought leave to file a second amended complaint.

         The District Court denied as futile his motion for leave to amend and simultaneously granted the defendants' pending motion to dismiss, solely on the ground that Bascuñán failed to meet civil RICO's new "domestic injury" requirement.

         In determining whether Bascuñán's complaint set forth a domestic injury, the District Court characterized "[t]he RICO injury alleged [as] an economic loss of approximately $64 million."[15] It did not consider whether each of the four fraudulent schemes alleged by Bascuñán caused separately cognizable RICO injuries to property or business, but concluded instead that Bascuñán suffered a single "economic loss."[16]

         Then, in order to decide where in geographic terms it should locate that "economic loss, " the District Court drew an analogy to the tort claim accrual rules under Section 202 of the New York Civil Practice Law and Rules ("NYCPLR"), New York State's so-called "borrowing statute."[17] It observed that, "[w]hen applying this statute to determine where an economic injury accrued, courts typically ask two common-sense questions: [1] who became poorer, and [2] where did they become poorer."[18] That inquiry, according to the District Court, "usually focuses upon where the economic impact of the injury was ultimately felt, " which "is normally the state of plaintiffs['] residence."[19]

         In reliance on that analogy, the District Court held that "[a]ll of the funds at issue . . . were purportedly owned by Bascuñán, and thus, he is the person that ultimately suffered the loss. And as a Chilean citizen and resident, he suffered the losses in Chile."[20] It then dismissed Bascuñán's RICO action for failure to allege a domestic injury.

         The District Court favored this residency-based test primarily because it "focuse[d] on the plaintiff and where the alleged injury was suffered, " as opposed to focusing on the defendant's conduct.[21] It read RJR Nabisco as standing for the proposition that "the location where the plaintiff suffered the alleged injury dictates whether the plaintiff may pursue a private right of action under § 1964(c)."[22]

         DISCUSSION

         The sole question on appeal, subject to our de novo review, is whether Bascuñán plausibly alleged "a domestic injury to business or property."[23] No Court of Appeals has yet to consider how to determine whether a civil RICO injury is "domestic" or "foreign."

         As explained more fully below, we hold, as an initial matter, that where a civil RICO plaintiff alleges separate schemes that harmed materially distinct interests to property or business, each harm-that is to say, each "injury"-should be analyzed separately for purposes of this inquiry. Next, we hold, contrary to the District Court, that a plaintiff who is a foreign resident may nevertheless allege a civil RICO injury that is domestic. At a minimum, when a foreign plaintiff maintains tangible property in the United States, the misappropriation of that property constitutes a domestic injury. With respect to some of the schemes in the Amended Complaint, Bascuñán has alleged the misappropriation of tangible property located in the United States and thus, to that extent, has alleged a domestic injury. We therefore reverse the judgment of the District Court.

         I. RICO's Statutory Framework

         In enacting RICO, which is Title IX of the Organized Crime Control Act of 1970, Congress "establish[ed] new penal prohibitions, and . . . provid[ed] enhanced sanctions and new remedies" in order to thwart and punish individuals seeking to use illegal means and ends "to infiltrate and corrupt legitimate business."[24] Although commonly associated with the national effort to eradicate organized crime in America, "Congress drafted RICO broadly enough to encompass a wide range of criminal activity, taking many different forms and likely to attract a broad array of perpetrators operating in many different ways."[25]

         Specifically, RICO created "four new criminal offenses involving the activities of organized criminal groups in relation to an enterprise."[26] Those offenses are "founded on the concept of racketeering activity, " which "[t]he statute defines . . . to encompass dozens of state and federal offenses, known in RICO parlance as predicates."[27] A party commits a RICO violation when he engages in a "pattern of racketeering activity-a series of related predicates that together demonstrate the existence or threat of continued criminal activity"-in order to "infiltrate, control, or operate a[n] enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce."[28]

         Those four specific prohibitions, which are set forth in Section 1962 of RICO, were authoritatively summarized as follows:

Section 1962(a) makes it unlawful to invest income derived from a pattern of racketeering activity in an enterprise. Section 1962(b) makes it unlawful to acquire or maintain an interest in an enterprise through a pattern of racketeering activity. Section 1962(c) makes it unlawful for a person employed by or associated with an enterprise to conduct the enterprise's affairs through a pattern of racketeering activity. Finally, Section 1962(d) makes it unlawful to conspire to violate any of the other three prohibitions.[29]

         In addition, Section 1963(a) of RICO makes any violation of those four prohibitions subject to criminal penalties. Sections 1964(a) and (b) authorize the Attorney General of the United States to bring civil proceedings to enforce those prohibitions.[30] And Section 1964(c) of RICO, which is the focus of this appeal, permits "[a]ny person injured in his business or property by reason of a violation of section 1962" to bring a private civil suit in federal district court and authorizes the recovery of treble damages, attorney's fees, and costs.[31]

         II. RICO and Issues of ...


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