Proximate Cause and Civil RICO Standing: The Narrowly Restrictive and Mechanical Approach in Lerner v. Fleet Bank and Baisch v. Gallina

Brigham Young University Law Review, 2004 by Morris, Ryan C

"The most important and most constant cause of dissatisfaction with all law at all times is to be found in the necessarily mechanical operation of legal rules." Roscoe Pound1

I. INTRODUCTION

In the context of civil RICO, standing is an important and difficult issue. The complexity of the civil provisions of the Racketeer Influenced and Corrupt Organizations (RICO) statute of the Organized Crime Control Act makes standing particularly problematic.2 One of the primary dilemmas of the RICO statute is the tension resulting from the treble damages provision of § 1964(c).3 While many litigants have a large incentive to transform their fraud cases, for example, into RICO suits in order to obtain treble damages, courts are tempted to limit the availability of the federal court system for just such attempts.4 In light of this friction, courts have long employed standing as a powerful tool to rid themselves of civil RICO cases.5 At the same time, federal circuit courts have either created standing rules that have been overturned as needlessly restrictive6 or have yet to set down a standard that is consistent and uniform with other circuits or the broad purposes of the RICO statute.7 Circuit courts, however, are not left afloat on troubled waters without any guiding light to bring them safely ashore.8 Even though courts have applied various standards in judging civil RICO standing, the Supreme Court set forth an appropriate three-factor approach to decide proximate cause, and therefore standing, under civil RICO.

Historically, although the Supreme Court has struck down several lower court attempts at fashioning standing requirements,9 the Court, in the eyes of many other courts, has less successfully provided any concrete guidelines for standing under civil RICO.10 In 1992, the Supreme Court faced a case that gave ample opportunity to delineate some of the details of civil RICO standing in Holmes v. securities Investor Protection Corp.11 The Court, however, read a proximate cause element into the civil RICO statute and decided the case on proximate cause grounds without addressing the exact standing question presented.12 This decision has led the vast majority of courts to adopt proximate cause as the primary tool for judging standing under civil RICO.13 Although the Court discussed proximate cause at length in the Holmes decision, lower courts have found no general standard explicated by the Court14 and have subsequently employed a variety of proximate cause tests to determine civil RICO standing.15 Courts have principally derived these tests from dicta found throughout the majority and concurring opinions of Holmes.16 The Supreme Court's decision in Holmes, however, did provide a proper tripartite standard for determining proximate cause, and therefore standing, under civil RICO.17 It set forth three factors, none of which are rigid or per se rules, to determine whether a plaintiff satisfies the proximate cause requirement of civil RICO standing.18 This fluid approach allows courts to account for the limits of standing as well as the policies and compromises embodied in the RICO statute.

In 2003, the Second Circuit declared its standard for standing in federal court under the civil provisions of the RICO statute in Lerner v. Fleet Bank19 and Baisch v. Gallina.20 In both cases, the Second Circuit appropriately decided to rely on a proximate cause analysis as the primary test to determine standing under civil RICO.21 The court in each case focused on proximate cause and eliminated any zone-of-interest analysis,22 which many courts (including the district court in Lerner)23 have employed to decide standing under civil RICO.24 The Second Circuit, however, required a "direct injury that was foreseeable,"25 which it specifically defined, coupled with a complete absence of any intervening causes to establish proximate cause and therefore standing.26 The court's analysis rested squarely on a narrowly focused, mechanical test, allowing standing only to plaintiffs that can prove strict standards of proximity. This directness test flies in the face of the Supreme Court's adoption of a more fluid three-factor approach for proximate cause.

Contrary to the Supreme Court's appropriate tripartite analysis for standing in Holmes, which correctly addresses the concerns of civil RICO, standing, and the tensions and balances between RICO's broadness and standing limitations, the second Circuit formulated a mechanical and categorical proximate cause test that focuses too narrowly on directness in order to find standing under civil RICO. Part II gives a brief overview of the Court's standing doctrine and the background for the second Circuit's decisions in Lerner and Baisch, examining 18 U.S.C. § 1964, otherwise known as civil RICO, and its legislative history, as well as the Court's principal decisions on civil RICO standing-Sedima-, S.P.R.L. v. Imrex, Co.27 and Holmes v. Securities Investor Protection Corp.28-and the circuit decisions that have followed. Part III discusses the pertinent policies underlying the Court's standing analysis and how the Court's decision in Holmes properly set forth a three-factor analysis for civil RICO standing that addresses the concerns of standing in federal court and the policies of RICO. Contrary to the Court's decision in Holmes, the Second Circuit created a narrowly focused and mechanical test for directness in deciding proximate cause. Ultimately, the Second Circuit sub silentio rids itself of the analysis found in Holmes and its own decision in Commercial Cleaning Services v. Colin Service Systems, Inc.29 in favor of a standard that mechanistically and directly disrupts the policies and compromises formulated by the Court and Congress to determine civil RICO standing. Part V offers a brief conclusion.