Bastian v. Petren Resources Corp.

Decision Date09 January 1990
Docket NumberNo. 88-3299,88-3299
Citation892 F.2d 680
Parties, Fed. Sec. L. Rep. P 94,908, RICO Bus.Disp.Guide 7406 R. Richard BASTIAN, III, et al., Plaintiffs-Appellants, v. PETREN RESOURCES CORPORATION, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Shelly B. Kulwin, Michael H. Moirano (argued), Nisen & Elliott, and James E. Dahl, Dahl & Moirano, Chicago, Ill., for plaintiffs-appellants.

Delilah Brummet, Kirkland & Ellis, William O'Connor, Zukowski, Rogers, Flood, McArdle & O'Connor, Stephen Novack (argued), Donald A. Tarkington, and Mitchell L. Marinello, Novack & Macey, Chicago, Ill., for defendants-appellees.

Before BAUER, Chief Judge, POSNER, Circuit Judge, and ESCHBACH, Senior Circuit Judge.

POSNER, Circuit Judge.

In 1981 the plaintiffs invested $600,000 in oil and gas limited partnerships promoted by the defendants. The plaintiffs allege that, had it not been for the offering memoranda's misrepresentations and misleading omissions concerning the defendants' competence and integrity, the plaintiffs would not have invested in these partnerships, which by 1984 were worthless. The original complaint charged violations of Rule 10b-5 of the Securities and Exchange Commission, and the RICO statute (18 U.S.C. §§ 1961 et seq.), and sought damages equal to the investment. The district judge dismissed this complaint, but without prejudice, on the defendants' motion under Fed.R.Civ.P. 12(b)(6) to dismiss for failure to state a claim. 681 F.Supp. 530 (N.D.Ill.1988). With respect to the RICO charge he found only a minor technical deficiency easily curable by filing an amended complaint. With respect to the Rule 10b-5 charge he found a more serious deficiency: a failure to allege "loss causation"--that is, that if the facts had been as represented by the defendants the value of the limited partnerships would not have declined. This deficiency, too, was potentially curable by an amendment to the complaint, but the judge warned the plaintiffs that if they alleged but later failed to prove loss causation he might impose sanctions on them under Fed.R.Civ.P. 11.

The plaintiffs filed an amended complaint, curing the RICO oversight, but they did not reallege a violation of Rule 10b-5. The district judge dismissed the amended complaint on the ground that proximate cause in a RICO case requires, much as in a Rule 10b-5 case, that the facts concealed or distorted were responsible for the decline in the value of the limited partnerships. The amended complaint contained no such allegation, no doubt for the same reason the plaintiffs had not amended their Rule 10b-5 count: they did not think they could prove loss causation. The dismissal this time was with prejudice, and so terminated the suit and set the stage for this appeal.

The defendants argue that having failed to include the Rule 10b-5 charge in the amended complaint, the plaintiffs have waived any challenge to the district judge's dismissal of that charge in the original complaint. We disagree. That dismissal was not an appealable order, because the dismissal of a complaint with leave to amend is not a final decision. Harris v. Milwaukee County Circuit Court, 886 F.2d 982, 984 (7th Cir.1989); 28 U.S.C. § 1291. There was no appealable order until Judge Duff dismissed the amended complaint with prejudice. When a final decision is appealed, the appeal brings up all previous rulings of the district judge adverse to the appellant. Asset Allocation & Management Co. v. Western Employers Ins. Co., 892 F.2d 566, 569 (7th Cir.1989); Disher v. Information Resources, Inc., 873 F.2d 136, 140-41 (7th Cir.1989). Otherwise there would be no way to obtain appellate review of those rulings, save for the exceptional few that were appealable regardless of finality.

It is not waiver--it is prudence and economy--for parties not to reassert a position that the trial judge has rejected. Had the plaintiffs repleaded their Rule 10b-5 charge without alleging loss causation, the judge would have dismissed the charge, not only with prejudice but with annoyance. If they had alleged loss causation, they would have abandoned their principal disagreement with Judge Duff, which is over whether such an allegation is necessary, and would indeed have exposed themselves to sanctions if, as we suspect, they have no evidence of loss causation. For if they had had sufficient evidence to satisfy Rule 11's requirement of a reasonable precomplaint inquiry, they would have amended their complaint, while reserving for appeal (should they lose in the district court) their contention that proof of loss causation is inessential.

The case is no different from one in which a district judge grants partial summary judgment for the defendant, dismissing one of the plaintiff's claims, and after a trial dismisses the rest of the claims. Except as permitted by Fed.R.Civ.P. 54(b), the plaintiff cannot appeal until all his claims have been dismissed, but when he does appeal he can bring up the grant of partial summary judgment. He need not request the district court to reexamine its earlier rulings.

We come to the merits. The plaintiffs argue that they should not be required to allege that, but for the circumstances that the fraud concealed, the investment that they were induced by the fraud to make would not have lost its value. They say it should be enough to allege that they would not have invested but for the fraud; for if they had not invested, they would not have lost their money, and the fraud was therefore the cause of their loss. They say they have no idea why their investment was wiped out and it does not matter; the defendants, being responsible for the disaster by having used fraud to induce the investment, must not be allowed to get off scot-free just because the plaintiffs do not know how the investment would have fared in the marketplace had the facts about the defendants' competence and integrity been as represented. As a fallback position the plaintiffs argue that the defendants should have the burden of proving what part (if any) of the loss would have occurred even if the defendants had been as competent and honest as represented.

Rule 10b-5 is not a complete scheme for remedying securities fraud. Indeed, it is just a declaration that securities fraud is unlawful. The right to bring a private action for damages that the rule has been held to confer is an implied right, Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 169 n. 9, 30 L.Ed.2d 128 (1971), and its dimensions and incidents are a common law growth nourished by analogies from the law of torts. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 744-49, 95 S.Ct. 1917, 1929-32, 44 L.Ed.2d 539 (1975); Mitchell v. Texas Gulf Sulphur Co., 446 F.2d 90, 97 (10th Cir.1971); Brennan v. Midwestern United Life Ins. Co., 259 F.Supp. 673, 680 (N.D.Ind.1966) (Eschbach, J.); cf. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 192-95, 84 S.Ct. 275, 283-85, 11 L.Ed.2d 237 (1963). All Rule 10b-5 does is supply the foundation upon which federal judges have built a federal common law of securities fraud. Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir.1985). It would be surprising therefore if the rules that have evolved over many years to establish the contours of common law actions for fraud and other intentional torts were entirely inapplicable to suits under Rule 10b-5, and of course they are not. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).

Indeed what securities lawyers call "loss causation" is the standard common law fraud rule (on which see Prosser and Keeton on the Law of Torts § 110, at p. 767 (5th ed. 1984)), merely borrowed for use in federal securities fraud cases. It is more fundamental still; it is an instance of the common law's universal requirement that the tort plaintiff prove causation. Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 453 (7th Cir.1982). No hurt, no tort. Heil v. Morrison Knudsen Corp., 863 F.2d 546, 550 (7th Cir.1988). Forget fraud for a moment and consider a standard medical malpractice case. The plaintiff's decedent goes to the defendant for medical treatment, receives incompetent treatment, dies. The plaintiff must allege that, had it not been for the incompetent treatment, his decedent would have lived (or lived longer). It is no answer that the plaintiff cannot be expected to know why his decedent died; it is his burden to gather enough information on the matter in advance of filing suit to comply (if the suit is in federal court) with Rule 11's requirement of a reasonable precomplaint inquiry. Even if the defendant in our hypothetical malpractice case had been a veterinarian passing himself off as a physician, the plaintiff would have to show that the defendant had failed to meet the standard of care of a physician. Prosser and Keeton on the Law of Torts, supra, § 36, at p. 226.

The plaintiffs alleged that they invested in the defendants' limited partnerships because of the defendants' misrepresentations, and that their investment was wiped out. But they suggest no reason why the investment was wiped out. They have alleged the cause of their entering into the transaction in which they lost money but not the cause of the transaction's turning out to be a losing one. It happens that 1981 was a peak year for oil prices and that those prices declined steadily in the succeeding years. U.S. Dept. of Commerce, Bureau of the Census, Statistical Abstract of the United States, 1989, at 677 (tab. 1181). When this happened the profitability of drilling for oil (and gas, which generally is produced with it) in the continental United States plummeted. The costs of obtaining oil and gas from our depleted reservoirs are far higher than the costs in other regions, and drilling for oil and gas is therefore profitable only in times when prices are very high. Suppose...

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