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Posted: May 1, 2021

Continuing Wrong Doctrine Saves Claim From Dismissal on Statute of Limitations Grounds

On April 27, 2021, the First Department issued a decision in CWCapital Cobalt VR Ltd. v. CWCapital Invs. LLC, 2021 NY Slip Op. 02487, holding that the continuing wrong doctrine saved a claim from dismissal on statute of limitations grounds, explaining:

Cobalt argues on appeal that the court erred in failing to apply the continuing obligations doctrine because defendants’ alleged misfeasance gave rise to more than one claim. Generally speaking, a claim accrues for statute of limitations purposes when all of the factual circumstances necessary to establish a right of action have occurred, so that the plaintiff would be entitled to relief. However, the mere fact that a claim has accrued and the time to bring an action on it has commenced to run does not mean that a new claim, with a new limitations period, may not arise out of a new set of facts that forms part of a series with the original wrong. Cobalt maintains that the allegations against CWCI comprise such a series of individual wrongs. Thus, it relies on cases such as Bulova Watch Co. v Celotex Corp. (46 NY2d 606 [1979]). There, a new claim, with a new limitations period, was held to have accrued each time the plaintiff, the obligee under a bond that guaranteed that the defendant roofer would make repairs necessary to ensure the watertightness of the plaintiff’s roof over the 20-year life of the bond, asked the defendant, to no avail, to repair a leak. Accordingly, the plaintiff’s failure to commence suit within the limitations period based on the initial leak did not bar the action. Cobalt further cites Matter of Yin Shin Leung Charitable Found. v Seng (177 AD3d 463 [1st Dept 2019]), where this Court held that the continuing wrong doctrine applied to the respondents’ alleged unauthorized use of certain corporate funds, since each unauthorized use required a separate exercise of judgment and authority.

Defendants, and the dissent, contend that cases such as Henry v Bank of Am. (147 AD3d 599 [1st Dept 2017]) are more apposite. There, the plaintiff was unwittingly subscribed to a bank’s credit protection program, which automatically charged him fees on a monthly basis. The plaintiff argued that each month’s billing of fees to his account constituted a new wrong that gave rise to a new limitations period. This Court disagreed, finding that there was no breach of a recurring duty, and that the monthly charges represented the consequences of the wrongful acts in the form of continuing damages, not the wrongs themselves. Defendants and the dissent also compare this case to Kahn v Kohlberg, Kravis, Roberts & Co. (970 F2d 1030 [2d Cir 1992], cert denied 506 US 986 [1992]), in which the plaintiff sought rescission of an investment advisory agreement where the defendant had failed to register as an investment advisor. The Court held that the continuing wrong doctrine did not apply, rejecting the plaintiff’s position that each time the defendant exercised its advisory function without being registered, it caused a distinct violation of the Investment Advisors Act of 1940. Defendants and the dissent additionally cite to Welwart v Dataware Elecs. Corp. (277 AD2d 372 [2d Dept 2000]), in which the Court held that the defendant’s failure to pay periodic dividends to the plaintiff did not create individual claims, since the true gravamen of the action was the defendant’s single failure ever to issue the stock that would have given rise to the dividends.

Guided by these precedents, we must determine whether CWCI’s management of Cobalt’s holdings through its designee CWCA constituted a single wrong as in Henry, Kahn and Welwart or a continuous series of wrongs as in Bulova and Matter of Yin Shin Leung Charitable Found., so that Cobalt had a timely claim when it commenced this action. Defendants argue that each of the alleged wrongs happened only once: when CWCI failed to terminate CWCA for not arranging to share its fees, for using CW REDS and for failing to exercise the FVP Options for Cobalt’s benefit. Cobalt, on the other hand, argues that each time CWCA failed to exercise an option, or negotiated a fee-sharing arrangement with a trust, or used CW REDS to generate a kickback, CWCI breached the CMA by not doing everything in its power to stop the activity and protect the interests of Cobalt.

We find that the continuing wrong doctrine does apply to this case. The explicit language of the CMA conferred on CWCI a continuing duty to manage Cobalt’s investment. Cobalt alleges that, with respect to special servicers like CWCA, this responsibility included wielding the power not only to appoint and terminate, but also to ensure that all services being performed by the special servicer were done only to benefit the CDO investors. Essentially, the allegations describe an arrangement by which CWCI acted as Cobalt’s eyes and ears with respect to the CMBS trusts and had a responsibility to do everything in its power to prevent any activities that could possibly be to Cobalt’s detriment. Thus, while certainly a claim accrued the first time CWCI failed to act upon CWCA’s engagement in behavior that allegedly diminished the value of its investment, there is no basis for the argument that each subsequent time CWCI failed to act did not constitute a separate, actionable, wrong. It is analogous to the scenario presented by Bulova. The first time the plaintiff in that case asked the defendant to repair a leak in its roof pursuant to the terms of the bond and the defendant did not act, a claim arose. The next time the plaintiff discovered a leak and again the defendant did not act, another claim arose. Here, the first time CWCA became entitled to a fee and did not arrange to share it with Cobalt, or appointed CW REDS to increase its fees, and CWCI failed to intervene, a claim arose. Each subsequent time a loan or property went into special servicing, this activity gave rise to a new claim. The dissent, in characterizing the limitations trigger in this case as a one-time decision, on a specific contract date, to delegate management to CWCI, effectively ignores the fact that CWCI had a contractual obligation to manage the CMBS trust assets on an ongoing basis, with reasonable care and in good faith. The dissent’s narrow approach would unfairly shield CWCI from its responsibility to act in Cobalt’s best interests on an ongoing basis and would frustrate the purposes for which Cobalt retained CWCI to act as controlling class representative.

In Henry, Kahn and Welwart, cases on which defendants and the dissent rely, the party invoking the statute of limitations owed no similar ongoing duty to the plaintiff once it had committed the actionable wrongs at issue. In Henry, the alleged wrongful activity of enrolling the plaintiff in a service he did not ask for happened once. In Kahn, the violative act of lacking registration as an investment advisor was a singular condition that could not be repeated. And in Welwart, the failure to issue stock to the plaintiff was also a single event that amounted to a single claim. Defendants argue that it would be an absurd result if the hundreds of transactions involving CWCA and CW REDS each gave rise to a different cause of action with its own limitations period, but they fail to explain why that should limit Cobalt to only one solitary claim. We note that defendants’ concern is tempered by the fact that application of the continuing wrong doctrine only avails Cobalt of claims that arose within six years of the commencement of the action. It does not toll the statute of limitations for any claims outside of that time period. We further note that nothing in the record compels us to find, as defendants urge, that equitable considerations mandate that Cobalt forfeited its right to assert its claims because it sat on its hands for too long after first becoming knowledgeable of defendants’ conduct.

(Internal quotations and citations omitted) (emphasis added).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether claims are barred by the statute of limitations.

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