Opinion ID: 176236
Heading Depth: 4
Heading Rank: 1

Heading: Reliance as a component of causation

Text: In a professional-negligence case, [p]roof of causation requires both cause in fact and legal, or proximate, cause. Cause in fact requires that the harmful result would not have come about but for the defendant's negligent conduct. On the other hand, legal cause or proximate cause normally involves examining the foreseeability of consequences, and whether a defendant should be held legally responsible for such consequences. Haliw, 627 N.W.2d at 588 (citations and internal quotation marks omitted). Although Gold is correct in pointing out that reliance is not per se an element of professional negligence, proof of reliance is necessary here in order to show that Deloitte's allegedly deficient audits were the cause in fact of Venture's tenuous financial position and resulting bankruptcy. If no Venture insider was lulled by the audits in failing to detect the related-party transactions, then the harm to Venture would have come about even in the absence of Deloitte's conduct. See FDIC v. Ernst & Young, 967 F.2d 166, 170 (5th Cir.1992) (holding that if nobody relied upon the audit, then the audit could not have been the cause in fact of the harm). This conclusion is consistent with the holdings of many other courts that have examined the issue. See id. (stating that, in a professional-negligence action against an auditor, a claim that reliance is not a component of causation strains credulity); Smolen v. Deloitte, Haskins & Sells, 921 F.2d 959, 964 (9th Cir.1990) (affirming a grant of summary judgment in favor of the auditor in a professional-negligence case, stating that the plaintiffs must present some evidence establishing the element of causation, in the sense of actual and justifiable reliance upon misrepresentations or omissions of material fact, to avoid summary judgment); Branch v. Ernst & Young U.S., 311 F.Supp.2d 179, 184 (D.Mass.2004) (stating that reliance is a necessary element of [the plaintiff's] negligence and malpractice counts against an auditor); Resolution Trust Corp. v. Coopers & Lybrand, 915 F.Supp. 584, 588 (S.D.N.Y.1996) (If no one relies on an audit, then presumably it could not be a substantial factor in causing an injury.); PNC Bank, Ky., Inc. v. Hous. Mortgage Corp., 899 F.Supp. 1399, 1403 (W.D.Pa. 1994) (Thus, if [the accounting firm] can establish, based upon the pleadings and admissions on file, that [the plaintiff] did not rely upon the audits in conducting its affairs, then it will be entitled to dismissal of [the plaintiff's] claims for negligence.). In response, Gold cites Allard v. Arthur Andersen & Co., 924 F.Supp. 488 (S.D.N.Y.1996), for the proposition that Michigan law does not require proof of reliance in a professional-negligence claim. There, the district court in New York applied Michigan law to analyze a motion for summary judgment in a professional-negligence action brought by a corporation's trustee in bankruptcy against the corporation's auditors. The auditor argued that the corporation was barred from recovering on its malpractice claim because the intentional conduct of the corporation's CEO in siphoning money from the corporation should be imputed to the corporation. Id. at 494. In denying summary judgment because questions of fact remained as to whether the CEO's actions were wholly adverse to the company, the court held that the issue of imputation should be decided at trial: Generally, under both New York and Michigan law, the knowledge and conduct of corporate officials acting within the scope of their duties are imputed to the corporation. However, when a corporate agent has totally abandoned his principal's interests and [acts] entirely for his own or another's purposes, there is no imputation under the adverse interest exception to the general rule. The court continued: If it is determined at trial that imputation is appropriate here notwithstanding the adverse interest exception, that imputation will bar recovery by the Trustee on his fraud claims because access to the truth renders reliance on representations to the contrary unreasonable as a matter of law. However, imputation would not necessarily operate as a complete bar to the Trustee's negligence and malpractice claims, because both New York and Michigan are comparative negligence jurisdictions. Id. at 494-95 (citations and internal quotation marks omitted). Gold contends that this last paragraph by the court in Allard recognizes that negligence and malpractice claims do not require a showing of reliance by the plaintiff. We respectfully disagree. Concluding that access to the truth renders reliance on representations to the contrary unreasonable is hardly a repudiation of reliance as an element of causation. And the second sentence of the paragraph addresses comparative negligence rather than causation. The quoted language does not negate that some type of innocent reliance is necessary to establish causation in fact; it simply observes that, due to comparative negligence, imputed knowledge may not be a complete bar to recovery. Imputed knowledge and innocent reliance are not necessarily mutually exclusive. Moreover, these brief statements are dicta because the Allard court's holding turned on the factual question of whether the CEO's actions were wholly adverse to the company, not on whether the trustee's complaint adequately alleged causation. In sum, we conclude that Allard is not persuasive for the point argued. The district court therefore did not err in holding that reliance is a critical part of establishing causation in this professional-negligence action.