Supreme Court Determines How to Evaluate What Constitutes a Domestic Injury That is Recoverable Under RICO
June 26, 2023
By: Stephen B. Stern
In Yegiazaryan v. Smagin, No. 22-381, 599 U.S. ____ (2023), the United States Supreme Court was asked to define the contours of what constitutes a “domestic injury” that is subject to recovery under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, et seq. Ultimately, it concluded that defining what constitutes a “domestic injury” is a contextual inquiry that is based on the particular facts of each case, and it is not subject to a bright line rule.
In Yegiazaryan, from 2003 to 2009, Ashot Yegiazaryan (“Yegiazaryan”), a resident of California, allegedly committed various acts of fraud against Vitaly Smagin (“Smagin”), a resident of Russia, including stealing his shares in a joint real estate venture located in Moscow, Russia. To avoid indictment in Russia, Yegiazaryan fled to California in 2010, where he has resided since. In 2014, Smagin obtained an $84 million arbitration award in London against Yegiazaryan for the misappropriation of his real estate investment. Smagin then filed an action in federal court in California to enforce the arbitration award. The district court issued a temporary restraining order, followed by a preliminary injunction, freezing Yegiazaryan’s California assets. Meanwhile, Yegiazaryan had been granted a multimillion-dollar arbitration award in another matter against a Russian businessman, which Yegiazaryan later settled in 2015 for $198 million. To avoid the asset freeze ordered by the California federal court, Yegiazaryan accepted payment of the arbitration award through the London office of an American law firm headquartered in Los Angeles, and then created “a complex web of offshore entities to conceal the funds.” Yegiazaryan also had certain friends file fraudulent claims against him in foreign jurisdictions, which he did not oppose, to obtain sham judgments that were aimed at encumbering and blocking his access to the $198 million settlement funds. Yegiazaryan, however, actually was hiding his assets in the United States through a series of “shell companies” owned by family members. Smagin learned of the $198 million settlement in 2016 when he was granted leave to intervene in Yegiazaryan’s California divorce proceeding. The court in the enforcement proceeding Smagin filed granted summary judgment to Smagin and entered several post-judgment orders barring Yegiazaryan and those acting at his direction from preventing collection of the judgment. Yegiazaryan failed to comply with these orders, however, and the district court in California found him in contempt of court. To avoid compliance with the contempt order, Yegiazaryan forged a doctor’s note indicating that he was too ill and, when Smagin gave notice that he planned to depose the doctor who allegedly signed the note, Yegiazaryan allegedly engaged in “intimidation, threats, or corrupt persuasion” to get the doctor to avoid service of the subpoena.
Smagin sued Yegiazaryan and numerous other defendants in federal district court in California under RICO, claiming the defendants worked together at Yegiazaryan’s direction to frustrate Smagin’s collection efforts, and their actions to frustrate those collection efforts included wire fraud, witness tampering, obstruction of justice, and other predicate racketeering activity under RICO. The district court dismissed the lawsuit, finding that it did not allege a domestic injury, as required by RICO. The United States Court of Appeals for the Ninth Circuit reversed, refusing to apply what it found to be a rigid residency-based test for injuries involving tangible property, and found that the efforts to avoid the California judgment constituted a domestic injury. The Supreme Court granted certiorari.
Although the Supreme Court in RJR Nabisco, Inc. v. European Community, 579 U.S. 325 (2016), previously established the requirement that a claim under RICO must seek redress for a domestic injury, it did not have the opportunity to define what constitutes a domestic injury that is recoverable under RICO. In addressing this issue for the first time, the Court found that the domestic injury requirement does not entail a “bright line rule” and, instead, it involves a “context specific inquiry that turns largely on the particular facts alleged in the complaint.” In this case, the inquiry required an examination of the nature of the alleged injury, the racketeering activity that directly caused the injury, and the injurious aims and effects of the alleged racketeering activity. Such an analysis was consistent with its previous decision in RJR Nabisco according to the Court, in that its decision in RJR Nabisco specifically noted that the domestic injury requirement does not necessarily preclude a foreign plaintiff from suing under RICO. In addition, according to the Court, a contextual inquiry also focuses on the injury as a product of racketeering activity and whether that activity “sufficiently ground the injury in the United States.” The Court cautioned, however, that because RICO covers such a broad range of predicate acts and it is important to conduct a contextual inquiry, “no set of factors can capture the relevant considerations for all cases.”
In looking at the facts of the case, the Court noted that Smagin alleged that he was injured in his ability to collect a substantial judgment and most of the alleged racketeering activity that caused the injury took place in the United States. In this regard, Yegiazaryan engaged in numerous domestic actions to avoid collection of a judgment entered by a court in the United States, such as creating shell companies in the United States to hide assets located in the United States, submitting a forged doctor’s note to a federal court in California, and intimidating a witness based in the United States. In addition, the racketeering activities at issue undercut orders of a federal court in California and “thwarted” Smagin’s rights to collect and enforce a judgment in California. Under these circumstances, the Court concluded that Smagin had alleged a domestic injury.
The Supreme Court’s decision in Yegiazaryan is significant because it gives some guidance on how to define, or at least analyze, what constitutes a domestic injury for RICO claims. While the Court filled a void in ruling on an issue where it previously had not ruled, it is not likely to reduce the amount of litigation on the issue because the “domestic injury” inquiry is contextual and so fact specific that there are limited guidelines for courts to follow when analyzing this issue.