Reed Smith LLP attempted to use an arbitration clause from its engagement letter to push a civil RICO lawsuit out of federal court, but the strategy failed.
Bankruptcy Judge John P. Mastando III denied the firm’s motion to compel arbitration in a 96-page opinion issued on Monday, also rejecting an alternative motion to dismiss.
The ruling simultaneously disposed of a parallel motion brought by Eletson Holdings’ former shareholders, clearing the way for the case to advance.
Civil RICO claims will now move into discovery against Reed Smith and its Head of International Litigation, Louis Solomon, a significant development for the prominent firm.
Eletson Holdings is a Greek gas shipping company that was pulled into involuntary Chapter 11 bankruptcy proceedings by its noteholders, setting off a prolonged legal battle.
A creditors’ reorganization plan came together in November 2024, but the company’s former owners refused to accept the outcome and launched an extensive legal counteroffensive.
That response produced multiple sanctions orders, contempt findings, bench warrants, and an SDNY ruling vacating an underlying arbitration award on clear and convincing evidence of fraud.
Reed Smith served as debtor’s counsel through much of the proceedings, and the firm and Solomon now face allegations that they helped former Eletson insiders obstruct a court-approved reorganization plan.
Judge Mastando ruled that Eletson Holdings Inc. adequately alleged that Reed Smith committed fraud and engaged in a racketeering scheme to frustrate the confirmed plan and help former owners maintain control over company assets and siphon corporate revenue.
Reed Smith argued that its litigation conduct was protected under the Noerr-Pennington doctrine, which shields petitioning activity directed at courts and government bodies from certain legal liability.
The firm contended its positions were not objectively baseless, a standard required to trigger the doctrine’s sham-litigation exception, but Judge Mastando rejected that framing outright.
The court sided with the plaintiffs’ alternative argument, stating plainly that “the First Amendment does not protect fraud,” cutting off that line of defence for the firm.
Reed Smith also leaned on the Second Circuit’s decision in Kim v. Kimm, which holds that a single frivolous lawsuit cannot constitute a RICO predicate act, arguing the ruling broadly immunised litigation conduct.
Judge Mastando distinguished the circumstances, writing that “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.”
With all three of the firm’s key arguments rejected, the civil RICO claims against Reed Smith and Solomon are now set to proceed toward full discovery.