Reed Smith pointed to the arbitration clause in its engagement letter hoping it could bump the civil RICO suit out of court. It did not.
Bankruptcy Judge John P. Mastando III denied the firm’s motion to compel arbitration and its alternative motion to dismiss on Monday, in a 96-page opinion that also disposed of a parallel motion from Eletson Holdings’ former shareholders. The civil RICO claims will now proceed into discovery against the firm and its Head of International Litigation, Louis Solomon.
Eletson is a Greek gas shipping company dragged into involuntary Chapter 11 by its noteholders, presumably for angering Poseidon. A creditors’ plan came together in November 2024, but the former owners declined to accept that result, launching instead into a sustained and creative response that has resulted in multiple sanctions orders, contempt findings, bench warrants, and an SDNY ruling vacating the underlying arbitration award on clear and convincing evidence of fraud. Reed Smith was debtor’s counsel through most of it. There was even Greek court proceeding to install a “provisional board” that Judge Lewis Liman later described as a fiction.
A Greek company created a false shell in an effort to trick its adversaries? Still playing the hits after all these years!
Reed Smith’s engagement letters contain a clause reaching “[a]ny controversy, claim or dispute arising out of or relating to our agreement.” Nice, broad language. The problem, according to the court, is the neighborhood it lives in. The clause appears under the bolded heading, “New York Arbitration Clause,” right after language about the right to arbitrate fee disputes under Part 137 of the New York rules.
As Judge Mastando explained:
The express purpose of this section, then, is to address fee disputes, “including any fee dispute which would otherwise be subject to Part 137,” id., but also including other fee disputes that are not subject to Part 137 — for example, fee disputes for less than $1,000 or greater than $50,000.
To read it as a catch-all to escape liability for racketeering would amount to “burying this purported waiver of important rights inside a misleading fee-dispute wrapper.”
It’s not even clear that this clause was even signed. The engagement letters condition the arbitration clause on the client separately signing a consent form called “Attachment 2.” The court went and looked:
And the initials of Lascarina Karastamati and Vasilis Hadjeleftheriadis — what the Reed Smith Defendants argue are valid and binding signatures — do not appear on the same page as Attachment 2, or next to Solomon’s undated signature, but instead on the bottom righthand corner of the next page, which is otherwise entirely blank. The same initials also appear, in the same fashion, on the bottom righthand corner of every other alternating page of the 2022 Agreement.
The court ultimately declined to resolve whether the attachments were properly executed, but noted the signatures were “at best unclear.” It then held that even assuming perfect execution, there was no “meeting of the minds and a manifestation of mutual assent” to arbitrate fraud, RICO, and fiduciary-duty claims through clauses “which focus so heavily on fee disputes.”
Reed Smith also argued that petitioning the government, courts included, is protected under Noerr-Pennington, and that doctrine’s sham-litigation exception requires objective baselessness — and Reed Smith claimed that its positions weren’t hopeless. Mastando rejected the premise, ruling that the plaintiffs’ argument in the alternative made more sense, as “the First Amendment does not protect fraud.”
The third argument was Kim v. Kimm, the Second Circuit’s holding that a single frivolous lawsuit can’t serve as a RICO predicate act. Reed Smith read that as a general rule immunizing litigation conduct:
This is a unique situation where the District Court has already concluded that fraud was committed in the Preferred Shares Arbitration, and that the Reed Smith Defendants’ conduct crossed the line between aggressive advocacy and false statements.
In January, vacating the arbitration award, Judge Liman wrote that he need not decide whether Reed Smith was complicit “either directly or through a wink and a nod or instead was incredulous and was its clients’ innocent dupe,” because “[a]t a minimum, it was the vehicle through which a fraud was committed.”
Reed Smith and Solomon now face discovery on nine counts, including into internal communications — a category that has already lost some protection, since Judge Liman found sufficient reason to trigger the crime-fraud exception back in September.
Ken White likes to remind us all that, generally speaking, “It’s Not RICO.” But this one is going to have to get through discovery first.
(Order on the next page…)
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter or Bluesky if you’re interested in law, politics, and a healthy dose of college sports news.
