Corporate

Proximate Cause Is Required to Win Your Fraud Claim

 To state a cause of action for fraud in Virginia, a plaintiff must plead that there was (1) a false representation of (2) a material fact, (3) made intentionally and knowingly, (4) with intent to mislead, and that the plaintiff (5) reasonably relied on that false representation and (6) that his reliance resulted in damages. What lawyers and judges often overlook is that to survive demurrer, a plaintiff must also show (as part of the causation requirement of elements 5 and 6) that the damage was proximately caused by the defendant's alleged misrepresentation. (See, e.g.Cohn v. Knowledge Connections, Inc., 266 Va. 362, 369 (2003) [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]; Murray v. Hadid, 238 Va. 722, 731 (1989) [lexis.com | Lexis Advance]). Not just caused--proximately caused.

The Virginia Supreme Court has defined proximate cause of an event as "that act or omission which, in natural and continuous sequence, unbroken by an efficient intervening cause, produces the event, and without which that event would not have occurred." Beale v. Jones, 210 Va. 519, 522 (1970) [lexis.com | Lexis Advance]. According to the Restatement of Torts, the concept of proximate cause encompasses both (1) causation in fact, which exists where a plaintiff's reasonable reliance is a "substantial factor in determining the course of conduct" that results in the plaintiff's loss; and (2) legal causation, which exists where the loss might "reasonably be expected to result from the reliance." (See Restatement (Second) of Torts §§ 546, 548A). It's this second element that is most often neglected. Proximate cause is more than simple "but for" causation, which refers only to the first element of the test (i.e., causation in fact).

Striving to define proximate cause using plain English, the Virginia Model Jury Instructions offer this definition: "A proximate cause of an accident, injury, or damage is a cause that, in natural and continuous sequence, produces the accident, injury, or damage. It is a cause without which the accident, injury, or damage would not have occurred. There may be more than one proximate cause of an accident, injury, or damage."

These definitions all basically mean the same thing: to establish the causation element of a fraud claim, it must appear to an appreciable degree that the damage flowed naturally from the misrepresentation. Unforeseeable consequences do not meet this test and should not result in liability for fraud. An example will help clarify what I mean.

Suppose a corporate CEO misrepresents the company's financial condition with the intent of misleading investors and inflating the stock price. You rely on the statements and purchase several shares of stock. Soon afterwards, the true financial outlook is revealed and the stock price plummets. You would have a valid securities-fraud claim for the lost value, because the change in the value of your shares was the obvious and foreseeable result of the misrepresented facts. The natural and expected consequence of the CEO's misrepresentation is that people would pay more for the shares than they were really worth; when the truth came out, the damage "flowed naturally" from the fraud.

 Read the rest of the article at the Virginia Business Litigation Lawyer Blog.

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