Opinion ID: 765860
Heading Depth: 3
Heading Rank: 1

Heading: The different significance of the causal elements in fraud cases and negligence cases.

Text: 42 1)Transaction causation. For a fraud-related RICO suit to lie, the plaintiffs must show transaction causation. See First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994). To do this, it is frequently said, the plaintiff must demonstrate that but for the defendant's wrongful acts the plaintiff would not have entered into the transaction that resulted in his or her losses. Thus, in the context of this case, it must be shown that, more probably than not, the plaintiffs would not have bought the Provider absent PaineWebber's misrepresentations. 43 For purposes of proving transaction causation, but-for cause is typically treated as both a necessary and a sufficient condition. That is probably an oversimplification, however. Courts have not had occasion to consider whether the traditional common-law exceptions to the but-for requirement apply in a RICO suit; the unusual situations justifying such exceptions have apparently not come up in the RICO context. 1 Conversely, there has been little discussion of whether distance in time or space, the presence of intervening causes, and the lack of foreseeability that the analysis of proximate cause seeks to identify might, in appropriate circumstances, preclude a finding of transaction causation even when a plaintiff would not have entered into a transaction but for a defendant's acts. The cases in which the defendant's wrongdoings are potentially not proximate to plaintiff's entry into the deal -- though certainly possible -- seem to be rare in the RICO context. As a result, the courts have not focused on them, concentrating instead on the existence of a but-for relationship. 44 Nevertheless, the following hypothetical illustrates how such a case might occur: Taney leaves Marshall's cabbage patch, phones a friend, and repeats Marshall's lie that the cabbages are from Maryland and, we will assume, are therefore especially valuable. The telephone line is crossed with another, and an unrelated party hears the conversation. A week later, this unrelated party mentions to a friend -- call him Story -- that he heard a report of bargains in Maryland cabbages. Story tracks down Marshall's cabbage patch and buys, thinking that he has stumbled on a hot tip. Marshall's misrepresentation is a but-for cause of Story's entering into that transaction, but may well not be a proximate cause. 2 45 In the end, however, the issue remains the same with respect to all elements of causation: to what extent does the RICO statute intend that these common-law exceptions to, and requirements of, causation inform the idea of cause when the question is whether a defendant's acts caused the plaintiffs to enter into the transaction? 46 2)Loss causation. But showing that the defendant's wrongful acts led the plaintiffs to enter into the transaction is not enough. For a RICO suit to lie, the plaintiffs must also demonstrate that the defendant's wrongful acts were responsible for the loss that occurred. See First Nationwide Bank, 27 F.3d at 769. The plaintiffs must, in other words, demonstrate with respect to that loss, the existence of all three of the traditional common-law elements of causation (but-for, causal link, and proximate cause). This jurisdictional requirement, which is normally termed loss causation, is, in fact, not significantly different from the standard tort law requirement that a defendant's acts cause not only an accident but also the injury to the plaintiff that followed from the accident. See Bastian, 892 F.2d at 683-84. In the typical common-law negligence context, however, the showing of causality with respect to the accident usually suffices to demonstrate causality with respect to the injury, and so the causal requirements are not given separate names. 3 47 What is true in negligence cases is also true in fraud cases (and hence in RICO fraud cases) insofar as but-for cause is concerned. 4 Thus, in the typical fraud case, but for the plaintiff's entry into the transaction, he or she would not have suffered the loss at all. With respect to this element of causation, therefore, what is needed to show transaction causation normally suffices to prove loss causation as well. And a showing that, absent the defendant's wrongdoing, the plaintiff would not have been part of the deal that went wrong is enough to show the requisite sine qua non relationship to the loss suffered. 48 It is quite different with respect to the second element, i.e., causal link or tendency. This requirement, which is rarely a problem in the standard negligence case, is not infrequently the essence of the loss-causation question in a fraud situation, and therefore in a RICO fraud case. This fact probably accounts for the presence of the separately denominated requirements of transaction causation and loss causation in such cases, and also leads me to focus on this aspect of causation a bit. 49 Suppose Taney's cart carrying the cabbages, which he bought from Marshall as a result of Marshall's misrepresentation, is destroyed by a fire on the way to market. But for Marshall's wrong, Taney would not have bought the cabbages, would not have been on his way to market, and would not have suffered from the fire. Yet, Marshall would not be responsible for the loss. 50 This would be so even if Marshall's misrepresentation was manifestly material, as for example if Marshall had induced Taney to buy the cabbages by asserting, falsely, that these were Maryland cabbages and hence unusually valuable. Even after the fire occurred, we could not say that Marshall's misrepresentation had anything to do with the fire. Marshall's wrong would therefore be legally irrelevant to Taney's loss. And this would be so even though but for the misrepresentation, Taney would not have entered into the deal that, by chance, put him in the position of suffering from the fire. 51 In the classic case of Berry v. Sugar Notch Borough, 191 Pa. 345, 43 A. 240 (1899), a speeding streetcar was damaged by a falling tree. It was indisputable that, but for the fact that the trolley was traveling faster than the local speed limit, it would not have been damaged, because it would not have arrived at the relevant spot in the road until after the tree had fallen. But although driving too fast does increase a streetcar's chance of coming to harm, being hit by a falling tree is not the kind of injury the probability of which is thereby raised. This kind of dangerous behavior does not tend to cause that kind of damage. The court therefore reasoned that the driver of the streetcar could not be held to have caused the harm. See id. at 348, 43 A. at 240. The conclusion was correct, even though the driver's chosen speed was a but-for cause of the damage and proximate to the accident in both space and time. Significantly, the issue in such cases is not foreseeability; it is whether, even after the event, we can say that the risk of such an accident was increased by the defendant's behavior. 52 To show the existence of a causal link or tendency, a plaintiff must demonstrate that the defendant's wrong increased the chances of the harm to plaintiff that in fact occurred, in the sense that, if the wrong were repeated, the likelihood of the harm's recurrence would also increase. In the fiery cabbage hypothetical, Marshall's misrepresentation, if repeated, certainly would increase the chance that the plaintiffs would buy cabbages, but it would in no way subject the plaintiffs or their cabbages to any greater risk of future fire damage. 53 In RICO fraud cases or other fraud situations, showing that the loss that occurred was in this fundamental sense related to the wrong is often a key issue. Thus, the purchase of a particular stock as a result of fraud does not suffice to show loss causation when the whole market collapses. Cf. Powers v. British Vita, P.L.C., 57 F.3d 176, 189 (2d Cir. 1995) (holding that no loss causation exists when the market value of the stock falls due to nationwide economic recession). This is true despite the fact that but for the fraud the plaintiffs would not yet have been in the market (and therefore would not have suffered the loss). Similarly, the fraudulently induced purchase of a building that is subsequently destroyed by earthquake or fire does not cause the loss to the purchaser unless the fraud involved the fire- or earthquake-resistant qualities of the building. See W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 110, at 767 (5th ed. 1984). And again, this is the case even if the plaintiff shows that but for the fraud he or she would have made a different investment -- in securities, perhaps -- that would have been unaffected by fire or earthquake. 54 Although the two are often conflated, the showing of causal link or tendency is different from the (at least as important) requirement of proximate cause. See Zuchowicz v. United States, 140 F.3d 381, 388-89 & n.7 (2d Cir. 1998) (distinguishing between these two forms of causation); Kinderavich v. Palmer, 127 Conn. 85, 15 A.2d 83 (1940) (same). 5 Lack of causal link may exist even when there is little or no distance in time or space and no human causes intervening between the defendant's acts and the plaintiff's loss. Lightning could strike Taney's cabbages immediately after Marshall's lie and Taney's purchase, and yet loss causation would not be shown. Conversely, the manifest presence of a causal link does not mean that the plaintiff has demonstrated sufficiently that the loss was proximately caused by the defendant's wrong. 55 Thus, even when we can say that a defendant's wrongful act does in fact increase the chances of the type of harm that occurred to the plaintiff, the defendant may, nevertheless, not have proximately caused the loss. This is so where the loss is sufficiently removed in time or space from the misrepresentations, where intervening causes are sufficiently numerous and varied, and, in some instances, where the various requirements of foreseeability associated with proximate cause are not present. 6 All these factors are relevant to a showing of proximate cause. They are, moreover, relevant in much the same way whether in fraud cases or in ordinary negligence cases. But because they usually come up in the context of proximity between defendant's wrongful acts and plaintiff's loss, they are, in fraud cases, generally -- if perhaps unnecessarily -- analyzed under the particular rubric of loss causation. 56