Supreme Court Holds Attorney’s Fees Incurred by Creditor in Investigating Fraud Are Not Recoverable in Criminal Restitution Proceeding
By Michael Enright, Robinson & Cole LLP
The U.S. Supreme Court recently held that professional fees incurred by a creditor in investigating the fraudulent scheme of a criminal defendant, including in related bankruptcy proceedings, were not properly included in a criminal restitution order targeting the defendant pursuant to the Mandatory Victims Restitution Act (the “Act”). Lagos v. U.S.A., No. 16-1519 (May 29, 2018). Although the Act could be broadly interpreted to include the fees incurred by a private party conducting its own investigation of the fraud, the Court held that it should be narrowly construed, particularly given choices that Congress made when it drafted the Act, which the Court demonstrated by cross-referencing other legislation requiring restitution more broadly. In the criminal case, the defendant had used one of his companies to defraud the lender by generating fictitious invoices, which he then identified to the lender as valid collateral to secure advances by the lender. The lender spent a significant amount in professional fees investigating the transactions and the fraudulent scheme in the bankruptcy case of the defendant’s company. The Court pointed out that even though the lender’s professional fee claims could not be included in the restitution order, it was not without remedy, and it had already obtained a civil judgment against the defendant for its losses. Restitution orders are not the most reliable means to recover significant financial losses, but are often viewed favorably because of the leverage the criminal aspects of the award might provide. After Lagos, lenders may focus, instead, on pursuing civil remedies.
Second Circuit Rules on Creditors' Rights Against Foreign Sovereigns
By Joseph E. Neuhaus, Sullivan & Cromwell LLP
On May 7, 2018, petitions for cert were filed from the Second Circuit’s decision in Peterson v. Islamic Republic of Iran, 876 F.3d 63 (2d Cir. 2017). In Peterson, the Second Circuit became the first court to hold that U.S. courts can compel banks to bring funds held by foreign sovereigns outside the United States to New York to satisfy judgments against those sovereigns. Peterson has significant implications for international banks, as the decision will encourage plaintiffs to seek to attach assets held by sovereign judgment debtors at foreign branches of U.S. banks, foreign headquarters of banks with New York branches, and other multinational entities holding foreign assets abroad. The Second Circuit acknowledged that the Seventh Circuit “had suggested the contrary conclusion: that . . . a foreign sovereign’s extraterritorial assets remain absolutely immune from attachment,” referring to Rubin v. Islamic Republic of Iran, 830 F.3d at 470 (7th Cir. 2016). There are significant prerequisites to forcing banks to bring a foreign sovereign’s money from abroad into the United States, which may limit the impact of the opinion. These include the requirement that the district court have general or specific personal jurisdiction over the bank; New York’s “separate entity doctrine,” pursuant to which bank branches outside New York are treated as separate entities for purposes of garnishment and attachment; and the requirements under the Foreign Sovereign Immunities Act that assets sought to be attached in the United States have been used for commercial activity in the United States.