Opinion ID: 766109
Heading Depth: 2
Heading Rank: 2

Heading: Direct Injury as a Requirement of Proximate Cause

Text: 22 Over the passage of time, however, courts have somewhat clarified the definition of proximate cause by identifying several traditional common law principles limiting liability whose application, in aggregate, formulates the proximate cause analysis. As noted in Holmes, 'proximate cause' [is used] to label generically the judicial tools used to limit a person's responsibility for the consequences of that person's own acts. 503 U.S. at 268; see also AGC, 459 U.S. at 532-33, 537-38 (conducting a proximate cause analysis by looking at a number of ... controlling factors). 23 Among these judicial tools, one notion traditionally included in the concept of proximate causation is the requirement that there be some direct relation between the injury asserted and the injurious conduct alleged. Holmes, 503 U.S. at 268. For this reason, a plaintiff who complain[s] of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts [is] generally said to stand at too remote a distance to recover. Id. at 268-69 (citing 1 J.G. Sutherland, A Treatise on the Law of Damages 55-56 (1883)); see also AGC, 459 U.S. at 532-33 & n.25; Anthony v. Slaid, 52 Mass. (11 Met.) 290 (1846). 24 Holmes emphasized that although the direct injury test is not the sole requirement of [proximate] causation, it has been one of its central elements. 503 U.S. at 269 (citing AGC, 459 U.S. at 540). This language tells us that to plead a direct injury is a key element for establishing proximate causation, independent of and in addition to other traditional elements of proximate cause. Thus, the other traditional rules requiring that defendant's acts were a substantial cause of the injury, and that plaintiff's injury was reasonably foreseeable, are additional elements, not substitutes for alleging (and ultimately, showing) a direct injury. 25 We also have had occasion to observe that foreseeability and direct injury (or remoteness) are distinct concepts, both of which must generally be established by a plaintiff. For example, in Kinsman Transit Co. v. City of Buffalo, 388 F.2d 821, 824-25 & n.8 (2d Cir. 1968), defendant's ship broke loose, crashing into and collapsing a bridge, such that the debris disrupted river traffic and caused damage to plaintiffs' businesses that depended on that traffic. We ruled that even though plaintiffs' injuries were foreseeable, the damages incurred were too remote to permit recovery. 26 Proximate cause was lacking because those injuries were not direct but occurred only because the downed bridge made it impossible to move traffic along the river; in other words, the injuries were merely indirect and therefore too remote as a matter of law, since they were wholly derivative of an injury to the property of a third party, the bridge owner. Id. at 825; see also Dundee Cement Co. v. Chemical Labs., Inc., 712 F.2d 1166, 1168 (7th Cir. 1983) (regardless of foreseeability, plaintiff had no standing because damages derived solely as a result of injury to the person or property of another). 27 Although plaintiffs attempt to read our case law subsequent to Kinsman to permit recovery for indirect injuries so long as those injuries are foreseeable, those decisions, which we discuss in section II B., do not sustain such a reading since they dealt with direct, not indirect, injuries. Moreover, in light of the discussion of case law above, substituting the foreseeability test, in place of finding the existence of a direct injury, is error. As a general rule, proximate cause requires that both be present. 28 Plaintiffs further contend that because they assertedly meet another traditional test required for statutory torts, namely, the zone of interests test, they need not also meet the direct injury test in order to show proximate cause. Yet the zone of interests test assertedly met by plaintiffs is an inquiry into whether, apart from the directness of the injury, the plaintiff is within the class of persons sought to be benefited by the provision at issue. Holmes, 503 U.S. at 287 (Scalia, J., concurring) (emphasis added); see also id. at 287 n. (explaining that the zone of interests test should be viewed as an additional requirement for statutory torts, separate from the common law principles of proximate cause generally applicable to both statutory and non-statutory torts). Like the foreseeability test, such an inquiry is distinct from the direct injury test and, accordingly, may not be substituted for the direct injury test in order to establish standing under RICO. See id. at 287. 29 II The Direct Injury Test: Explanation and Application 30 As Justice Holmes writing for the Court observed in Southern Pac. Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 533 (1918), [t]he general tendency of the law, in regard to damages at least, is not to go beyond the first step. Accord Holmes, 503 U.S. at 271-72 (quoting AGC, 459 U.S. at 534). For that reason, where a plaintiff complains of injuries that are wholly derivative of harm to a third party, plaintiff's injuries are generally deemed indirect and as a consequence too remote, as a matter of law, to support recovery. See Holmes, 503 U.S. at 268-69. At the same time, the Supreme Court noted the impossibility of articulating a black-letter rule capable of dictating a result in every case. See id. at 272 n.20. Accordingly, it identified three policy factors to guide courts in their application of the general principle that plaintiffs with indirect injuries lack standing to sue under RICO. See id. at 269-70. First, the more indirect an injury is, the more difficult it becomes to determine the amount of plaintiff's damages attributable to the wrongdoing as opposed to other, independent factors. Second, recognizing claims by the indirectly injured would require courts to adopt complicated rules apportioning damages among plaintiffs removed at different levels of injury from the violative acts, in order to avoid the risk of multiple recoveries. Third, struggling with the first two problems is unnecessary where there are directly injured parties who can remedy the harm without these attendant problems. See Holmes, 503 U.S. at 269-70. A. Examples of Indirect Injury 31 In order to illustrate the difference between direct and indirect injuries, we review several cases on the subject. First, we examine cases where the injuries were indirect. 32 In Holmes, plaintiff Securities Investor Protection Corp. (SIPC) insured brokers, such that when a broker went bankrupt, SIPC was obligated by statute to reimburse the broker's customers for certain claims not satisfied by the broker's liquidated assets. SIPC alleged that Robert Holmes had conspired in a stock manipulation scheme that led to the bankruptcy of two brokers, disabling them from meeting their obligations and, as a result, triggering SIPC's statutory duty to reimburse the customers. Asserting a subrogation claim that allowed SIPC to stand in the shoes of the brokers' customers, SIPC sued Holmes under RICO for amounts reimbursed to the customers because of the bankruptcies resulting from Holmes' alleged scheme. 33 The Supreme Court found the plaintiffs' injuries to be indirect, because their losses were purely contingent on the insolvency of third parties, the brokers, that had resulted from defendants' actions. See id. at 271. Hence, the Court ruled that the suit by SIPC against Holmes could not stand, because the harm to the customers was too remote, i.e., there was no proximate cause. See id.; see also Manson v. Stacescu, 11 F.3d 1127, 1130-31 (2d Cir. 1993) (creditors of bankrupt corporation lacked RICO standing to sue defendants who had caused bankruptcy). 34 Similarly, courts have held that plaintiffs who are obligated to pay the medical expenses of another may not recover against the tortfeasor who caused the damage, because their injuries are indirect since they derive wholly from the injuries sustained by the third party. This concept is not new. An 1883 treatise cited a case where 35 A, who had agreed with a town to support for a specific time, and for a fixed sum, all the town paupers, in sickness and in health, was held to have no cause of action against S for assaulting and beating one of the paupers, whereby A was put to increased expense. The damage was held too remote and indirect. 36 1 J.G. Sutherland, A Treatise on the Law of Damages 55 (1883) (citing Anthony v. Slaid, 52 Mass. (11 Met.) at 291). And, citing a Connecticut case, the treatise goes on to say 37 An insurance company cannot recover from a wrongdoer, who causes the loss insured against, the money paid to satisfy such loss. 38 Id. at 56 (citing Connecticut Mut. Life Ins. Co. v. New York & New Haven R.R. Co., 25 Conn. 265 (1856)); see also Great Am. Ins. Co. v. United States, 575 F.2d 1031, 1033 & n.3 (2d Cir. 1978) (collecting cases) (insurer barred from suing tortfeasor directly, when tortfeasor damaged insured). B. Examples of Direct Injury 39 In contrast, a direct injury has been found when the plaintiff's injuries are not derivative of damage to a third party. For instance, in Standardbred Owners Assoc. v. Roosevelt Raceway Assocs., 985 F.2d 102, 104 (2d Cir. 1993), the defendant corporation decided to close a racetrack it owned thereby injuring the plaintiffs, a group of horse owners, trainers, drivers, grooms, and similar persons who had invested in equipment and horses for use at the track in reliance on the corporation's oral assurances that the track would stay open. The adjoining municipality had financed the defendant corporation's acquisition of the racetrack so that the track, a valuable town asset, would continue to operate. Plaintiffs endured a direct injury from the closing because the injury did not derive from harm to a third person, where the plaintiffs' injuries flowed from their own investments in the racetrack and were not derivative of injuries to the local municipality's investments in the racetrack. Id. at 104. 40 In Ceribelli v. Elghanayan, 990 F.2d 62, 64 (2d Cir. 1993), we ruled that the plaintiffs could proceed with their RICO claims where the defendants' misrepresentations induced plaintiffs to purchase over-valued stock from the defendants in a cooperative corporation. At the same time, we noted that standing to sue would have been doubtful had the plaintiffs simply alleged a diminution in the value of their shares resulting from harm to the corporation subsequent to the purchase. Id. 41 In Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1101 (2d Cir. 1988), a creditor brought a RICO action against the officers of the debtor corporation. The creditor had standing to bring its RICO claims only for injuries it suffered directly. Id. These injuries included damages for defending against frivolous lawsuits initiated by the defendant officers directly against the creditor in an attempt to delay the debt collection as well as to increase the creditor's legal fees. See id. at 1099. Additionally, based upon fraudulent misrepresentations by the defendant officers that concealed the availability of a major asset, the plaintiff creditor agreed to a reorganization plan where it relinquished all but 17.5 percent of its allowed claim against the debtor corporation. Id. at 1098. This last injury was direct because it was not dependent upon any actual injury the debtor corporation may have suffered as a result of the concealment, but instead arose solely from the misrepresentation by the defendant officers to the plaintiff creditor about the status of the debtor's assets. See also Ceribelli, 990 F.2d at 63 (characterizing the injury in Bankers Trust as direct). Cf. Manson, 11 F.3d at 1130 (injury to creditors from actual diminution in debtor corporation's assets was indirect). 42 In GICC Capital Corp. v. Technology Finance Group, Inc., 30 F.3d 289, 290 (2d Cir. 1994), plaintiff accepted a promissory note from defendants as part of an unrelated settlement. During the negotiation of the terms and issuance of the note the defendants did not disclose that, at the same time they were agreeing to cause the corporation to issue the note, they were stripping it of assets, rendering it unable to meet that obligation. Id. at 292-93. The defendants' failure to disclose the stripped-down status of the corporation induced the plaintiff to accept the note in settlement. We stated that because of the timing and magnitude of the note, the plaintiffs had RICO standing. Id. at 293. In other words, if the plaintiffs had accepted a promissory note from a corporation that was at that time able to repay the note, and later the defendants stripped the corporation, the injury would have been indirect because it would have derived wholly from injuries to the corporation. But, when the promissory note was issued, the corporation had already been stripped of enough assets to undermine the possibility of repayment. Thus, because of the defendants' misrepresentations, the plaintiff in GICC (much like the plaintiffs in Cerebelli) accepted an over-valued asset, the note, in exchange for the settlement of their litigation claims. The injury was direct because the plaintiff was immediately injured in the process of negotiating the settlement contract with the defendants, rather than as a derivative result of later injuries to a third party namely, the corporation that issued the note. 43 As these cases demonstrate, the critical question posed by the direct injury test is whether the damages a plaintiff sustains are derivative of an injury to a third party. If so, then the injury is indirect; if not, it is direct. 4 44