City of Almaty v. Viktor Khrapunov

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CITY OF ALMATY, a foreign state, No. 18-56451
Plaintiff-Appellant,
D.C. Nos.
v. 2:14-cv-03650-
FMO-FFM
VIKTOR KHRAPUNOV, an individual; 2:15-cv-02628-
LEILA KHRAPUNOV, an individual; FMO-CW
ILIYAS KHRAPUNOV, an individual;
MADINA ABLYAZOVA, AKA Madina
Khrapunova, an individual; OPINION
CROWNWAY, LTD., a Belize
corporation; VILDER COMPANY S.A.,
a Panama corporation; RPM USA,
LLC, a New York corporation;
WORLD HEALTH NETWORKS, INC.,
FKA Health Station Networks, Inc.,
a Delaware corporation; RPM-
MARO, LLC, a New York
corporation; DANIEL KHRAPUNOV, an
individual; MARO DESIGN LLC, a
California corporation; THIRTYEIGHT
ENTERPRISES, LLC, a California
Corporation; HAUTE HUE LLC, a
California corporation; 628
HOLDINGS LLC, a California
corporation; CANDIAN
INTERNATIONAL LTD., a British
Virgin Islands corporation; ELVIRA
KHRAPUNOV, as Trustee for The
2 CITY OF ALMATY V. KHRAPUNOV
Kasan Family Trust; DMITRI
KUDRYASHOV, AKA Dmitry
Kudryashov, an individual, and as
Trustee for The Kasan Family Trust,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Fernando M. Olguin, District Judge, Presiding
Argued and Submitted February 4, 2020
Pasadena, California
Filed April 22, 2020
Before: Sandra S. Ikuta and Morgan Christen, Circuit
Judges, and Algenon L. Marbley, * District Judge.
Opinion by Judge Marbley
*
The Honorable Algenon L. Marbley, United States Chief District
Judge for the Southern District of Ohio, sitting by designation.
CITY OF ALMATY V. KHRAPUNOV 3
SUMMARY **
Racketeer Influenced and Corrupt Organizations Act
The panel affirmed the district court’s dismissal for
failure to state a claim of an action brought under the
Racketeer Influenced and Corrupt Organizations Act by a
city in Kazakhstan.
The city alleged that Victor Khrapunov and his family
engaged in a scheme to defraud it of millions of dollars.
After absconding with the money to Switzerland, the family
allegedly began laundering the money into property and
other investments in the United States. The city alleged that
it was forced to spend money and resources in the United
States to trace where its money was laundered.
The panel held that the city failed to state any cognizable
injury other than the foreign theft of its funds, and its
voluntary expenditures in the United States were not
proximately caused by defendants’ alleged acts of money
laundering. Accordingly, the city failed to state a RICO
claim.
**
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
4 CITY OF ALMATY V. KHRAPUNOV
COUNSEL
Richard P. Bress (argued) and Margaret A. Upshaw, Latham
& Watkins LLP, Washington, D.C.; David J. Schindler and
Kendall M. Howes, Latham & Watkins LLP, Los Angeles,
California; for Plaintiff-Appellant.
Martha Boersch (argued) and Matthew C. Dirkes, Boersch
Shapiro LLP, Oakland, California, for Defendants-
Appellees.
Matthew L. Schwartz, Boies Schiller Flexner LLP, New
York, New York, for Amici Curiae Anti-Money Laundering
Experts.
OPINION
MARBLEY, District Judge:
The City of Almaty, in Kazakhstan, alleges that Victor
Khrapunov and his family engaged in a scheme to defraud
the city of millions of dollars. After absconding with the
money to Switzerland, the family allegedly began laundering
the money into property and other investments in the United
States. Almaty brought suit pursuant to 18 U.S.C. § 1964(c),
alleging that it was forced to spend money and resources in
the United States to trace where its money was laundered.
The district court dismissed Almaty’s claim on the basis that
it failed to state a domestic injury pursuant to the Supreme
Court’s recent decision in RJR Nabisco, Inc. v. European
Community, 136 S. Ct. 2090 (2016), holding that the
presumption against extraterritoriality applies to the civil
remedy of the Racketeer Influenced and Corrupt
Organizations Act. The City of Almaty appeals the district
CITY OF ALMATY V. KHRAPUNOV 5
court’s decision arguing that its injury was domestic. We
affirm the district court’s decision since Almaty failed to
state any cognizable injury other than the foreign theft of its
funds and since its voluntary expenditures were not
proximately caused by Appellees’ acts of money laundering.
BACKGROUND
Appellant, the City of Almaty, (hereinafter “Plaintiff” or
“Almaty”), is the largest in the Republic of Kazakhstan.
From 1997 until December 2004, Victor Khrapunov served
as its mayor. According to Almaty, Khrapunov oversaw the
privatization of much of its real estate while he was mayor.
During the process, however, Khrapunov allegedly abused
his power by rigging auctions for properties so that his wife,
Leila Khrapunova, and children, Iliyas Khrapunov and
Elvira Kudryashova, could purchase these properties
through shell entities at drastically reduced prices.
Appellees, (hereinafter “the Khrapunovs” or
“Defendants”), fled Kazakhstan for Switzerland around
2007, taking the proceeds from the sale of the government
properties with them. Kazakh authorities traced the allegedly
stolen proceeds to Switzerland and informed Swiss
authorities. Swiss authorities began an investigation into the
Khrapunovs for money laundering and froze the
Khrapunovs’ Swiss bank accounts.
In 2010, Elvira and her husband left Switzerland for the
United States, where they purchased a home in Beverly
Hills, California. Almaty alleges that this home, along with
other real estate and property in California, was purchased
using the stolen proceeds. According to Almaty, the
Khrapunovs increased their efforts to launder money into the
United States as the Swiss investigations against them
intensified in 2012. In early 2012 and 2013, Almaty alleges
6 CITY OF ALMATY V. KHRAPUNOV
that Iliyas and his wife used several shell companies to
purchase two homes in Beverly Hills, California. In addition
to using the stolen funds to launder the money into real estate
in the United States, Almaty alleges that Elvira made “sham
business investments” in the United States as a means of
securing “under false pretenses U.S. visas for Elvira” and her
husband. Almaty also alleges that the Khrapunovs cycled the
stolen money in and out of California real estate and other
investments in order to prevent Almaty from locating and
recovering the funds.
In 2014, Almaty filed the instant lawsuit alleging RICO
violations by the Khrapunovs as well as violations of U.S.
mail, wire and bank fraud, anti-money laundering, and
Travel Act statutes, in addition to various state law claims
including fraud, conversion, and breach of fiduciary duty. In
2015, Almaty and a state-owned Kazakh bank, BTA Bank,
also brought suit against the Khrapunovs and others in the
Southern District of New York, bringing RICO claims for
money laundering the stolen proceeds, along with other
claims against another defendant. City of Almaty,
Kazakhstan v. Ablyazov, No. 15-CV-5345 (AJN), 2018 WL
3579100 (S.D.N.Y. July 25, 2018). The Southern District of
New York dismissed the case for failure to allege a plausible
domestic injury, determining that the money laundering in
the United States did not turn the plaintiffs’ injuries into
domestic ones where the alleged misappropriations occurred
in Kazakhstan. Id. at *5.
Since filing the instant lawsuit in 2014, Almaty has
amended the complaint several times. The first consolidated
complaint, which is the operative complaint and at issue in
this proceeding, was filed in January 2018. The Khrapunovs
moved to dismiss the first consolidated complaint in
February 2018. The district court granted the motion to
CITY OF ALMATY V. KHRAPUNOV 7
dismiss the RICO claims with prejudice in September 2018,
determining that Almaty failed to allege a domestic injury.
After the court entered judgment, Almaty appealed.
JURISDICTION AND STANDARD OF REVIEW
This Court has jurisdiction under 28 U.S.C. § 1291. We
review a district court’s order granting a motion to dismiss
for failure to state a claim de novo. Palm v. Los Angeles
Dep't of Water & Power, 889 F.3d 1081, 1085 (9th Cir.
2018). The plaintiff’s factual allegations are taken as true,
and dismissal is affirmed “only if it appears beyond doubt
that [plaintiff] can prove no set of facts in support of [its]
claims which would entitle [it] to relief.” Painters & Allied
Trades Dist. Council 82 Health Care Fund v. Takeda Pharm.
Co. Ltd., 943 F.3d 1243, 1248 (9th Cir. 2019) (citation and
internal quotation marks omitted).
ANALYSIS
Plaintiff asks that we reverse the district court’s
dismissal of its complaint. Plaintiff argues that it has alleged
a domestic injury pursuant to 18 U.S.C. § 1964(c) by
alleging that it was “compelled . . . to expend additional
resources in the United States to find its stolen assets in the
United States.” Defendants urge us to affirm the district
court’s decision, arguing that there are two reasons why
Almaty cannot bring a civil RICO claim. First, Defendants
argue that Almaty has failed to allege a viable domestic
injury. Second, Defendants argue that Plaintiff lacks
standing to bring its claim, because one of our prior
decisions forecloses civil RICO claims brought by
governments in their sovereign capacity.
First, Plaintiff argues that Defendants’ act of laundering
money into the United States forced it to spend money to
8 CITY OF ALMATY V. KHRAPUNOV
investigate and locate its stolen money in the United States.
According to the City of Almaty, this is a domestic injury to
its property pursuant to 18 U.S.C. § 1964(c), the provision
of the Racketeer Influenced and Corrupt Organizations Act
(hereinafter “Civil RICO”) permitting individuals to bring
civil suit after being harmed by a violation of the statute.
Defendants argue that the Supreme Court implicitly
rejected a definition of domestic injury that includes
spending money and time to “trace and recover . . . stolen
funds hidden in the United States” in RJR Nabisco, Inc. v.
European Community, 136 S. Ct. 2090 (2016). According to
Defendants, one of the primary allegations made by the
European Community in RJR Nabisco was that illegal drug
proceeds were laundered into the United States. Defendants
claim that since the European Community expended funds
in the U.S. in pursuit of its legal claims, and no one in that
case suggested that such voluntary expenditures could
constitute domestic injury, the Supreme Court implicitly
determined that those were not domestic injuries.
The Supreme Court’s decision in RJR Nabisco, however,
does not address, either explicitly or implicitly, whether the
injuries alleged in that case were domestic or foreign. In RJR
Nabisco, the Supreme Court only determined that the
presumption against extraterritorial application of statutes
applies to 18 U.S.C. § 1964(c). The terms of the Civil RICO
statute permit “[a]ny person injured in his business or
property by reason of a violation of § 1962” to recover treble
damages. RJR Nabisco clarified that injuries must be
domestic but declined to decide the question of how to
determine whether injuries are “foreign” or “domestic”
because the European Community had stipulated that all the
injuries they alleged were foreign. 136 S. Ct. at 2111. Thus,
RJR Nabisco provides little guidance as to how to resolve
CITY OF ALMATY V. KHRAPUNOV 9
the question of whether the injuries alleged here are
domestic or foreign.
The Ninth Circuit has not yet addressed the question of
how to determine whether an injury is domestic or foreign
after RJR Nabisco, and we need not do so today. That is
because Plaintiff’s alleged injury is merely a consequential
effect of its admittedly foreign injury, and not an
independent injury cognizable under § 1964(c).
To state a claim under RICO, a plaintiff is required to
show harm to a specific business or property interest, an
inquiry “typically determined by reference to state law.”
Diaz v. Gates, 420 F.3d 897, 900 (9th Cir. 2005) (en banc).
In Diaz, we determined that financial loss alone is
insufficient to state a claim, noting that there must be an
injury to a “business or property interest.” Id. Plaintiff
alleges that its property, here money, was injured by reason
of the Khrapunovs’ acts of money laundering in the U.S.,
because it spent money to trace its already stolen funds. But,
there is no state law indicating that voluntary expenditures
to track down stolen property constitutes a separate injury to
property. And, while California does recognize the tort of
conversion, 1 the injuries caused by that tort encompass the
injury Plaintiff alleges was caused by money laundering,
“fair compensation for the time and money properly
expended in pursuit of the property.” Cal. Civ. Code § 3336.
Therefore, the district court properly determined that
Plaintiff’s alleged injury was a mere downstream effect of
the Khrapunovs’ initial theft and not an independent harm
itself.
1
See Lee v. Hanley, 354 P.3d 334, 344 (Cal. 2015) (“Conversion is
the wrongful exercise of dominion over the property of another.”).
10 CITY OF ALMATY V. KHRAPUNOV
Plaintiff also fails to satisfy the proximate cause inquiry.
That is, it cannot show that Defendants’ predicate act of
money laundering was the actual cause of its expenditure of
money. Proximate cause requires “some direct relation
between the injury asserted and the injurious conduct
alleged.” Holmes v. Sec. Inv’r Prot. Corp., 503 U.S. 258, 268
(1992). Plaintiff argues that money is a form of property and
consequently, its expenditures to track the laundered money
constitutes an injury to property, citing our decisions in
Harmoni Int'l Spice, Inc. v. Hume, 914 F.3d 648 (9th Cir.
2019) and Canyon Cty. v. Syngenta Seeds, Inc., 519 F.3d
969, 976 (9th Cir. 2008). In Harmoni, plaintiffs were
Chinese garlic importers who brought a civil RICO action
after their competitors made sham filings requesting an
administrative review of Harmoni’s business. 914 F.3d at
650. We determined that plaintiffs stated a viable injury—
being “forced to incur significant expenses responding to the
administrative review”—and that the injury was proximately
caused by defendant’s sham filings because “refusing to
respond was not a viable option” since it would result in
prohibitively high import duties. Id. at 652. We noted that
“this is not a case in which the Department of Commerce
acted independently to initiate an investigation, which would
perhaps have been an intervening act that broke the causal
chain,” finding it determinative that the Department of
Commerce was required by law to initiate an administrative
review when it receives a request for review from a party
with standing. Id.
Plaintiff also relies on Canyon County, where we
decided that a government’s expenditures on healthcare and
policing services are not an injury to business or property
because the government does not have a property interest in
the services it provides to enforce law and promote public
welfare. 519 F.3d at 976. We specifically noted, however, a
CITY OF ALMATY V. KHRAPUNOV 11
line of cases indicating that forced expenditures made in a
state’s commercial capacity state an injury to property. Id.
We relied on the Supreme Court’s decision in Reiter v.
Sonotone Corp., 442 U.S. 330, 342 (1979), and other cases
where government entities overcharged in commercial
transactions could claim injury to their property. See
519 F.3d at 976.
Unlike in Harmoni and Canyon County, however,
Plaintiff has not shown that it was forced to spend its money
or that it was otherwise shortchanged by Defendants’ actions
in the United States. Plaintiff points to no legal obligation to
track its money nor evidence that it would otherwise be
unable to collect the money it is owed. Furthermore, upon
obtaining a legal judgment anywhere in the world against
Defendants, Plaintiff could bring that judgment to the United
States and execute it against any of Defendants’ assets for
the full amount of money owed. See, e.g., Cal. Civ. Proc.
Code § 1716 (permitting the enforcement of foreign
judgments in California courts). This is because money is a
fungible asset, and not an otherwise unique or irreplaceable
piece of property. See United States v. Sperry Corp.,
493 U.S. 52, 62 n.9 (1989).
Moreover, there will still be instances where the
predicate act of money laundering is so integral to a scheme
to deprive a plaintiff of his or her money that he or she can
state a domestic injury. In fact, this was the case in Maiz v.
Virani, 253 F.3d 641 (11th Cir. 2001), where the court
determined that money laundering was integral to
defendants’ scheme to defraud plaintiffs of their money. In
Maiz, defendants argued that plaintiffs suffered no injury
proximately caused by their alleged money laundering
because they had committed these acts after plaintiffs had
made their initial investments. Id. at 673–74. The court
12 CITY OF ALMATY V. KHRAPUNOV
rejected this argument, noting that plaintiffs had made those
investments for a specific purpose and defendants had
misappropriated and laundered those funds “in order to
conceal the existence of those profits from the Plaintiffs and,
indeed, induce further contributions.” Id. at 674. In other
words, the Maiz plaintiffs’ monetary losses were not caused
by the initial investment, but by the money laundering. Here,
Plaintiff was not separately harmed by the money
laundering, and the amount allegedly due to it has not been
devalued as a result of Defendants’ money laundering.
Accordingly, we need not determine whether Plaintiff
states a domestic or foreign injury, since it fails to state a
cognizable injury at all. The City of Almaty’s expenditure of
funds to trace its allegedly stolen funds is a consequential
damage of the initial theft suffered in Kazakhstan and is not
causally connected to the predicate act of money laundering.
Defendants also argue for the first time on appeal that the
district court’s decision should be affirmed for the separate
reason that Almaty lacks standing to bring claims for injuries
sustained in its sovereign capacity. A party waives an
argument relating to statutory or prudential standing if the
argument was not raised in the district court. See Bilyeu v.
Morgan Stanley Long Term Disability Plan, 683 F.3d 1083,
1090 (9th Cir. 2012). Additionally, because we determine
that Almaty failed to allege a cognizable injury, we need not
decide this issue.
AFFIRMED.