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Posted: August 2, 2018

Fraud Claim Held Untimely Even Under Two-Year Discovery Rule

On July 23, 2018, Justice Platkin of the Albany County Commercial Division issued a decision in Essepian v. United Group of Companies, Inc., 2018 NY Slip Op. 51153(U), holding that a fraud claim was untimely even under New York’s two year discovery rule, explaining:

Dismissal is warranted under CPLR 3211(a) (5) where the movant establishes that a claim may not be maintained due to the expiration of the statute of limitations. The movant bears the initial burden of supporting the motion with an affidavit or other competent proof sufficient, if uncontroverted, to establish the statute of limitations defense as a matter of law. Upon such proof, the burden shifts to the party opposing the motion to aver evidentiary facts sufficient to defeat the statute of limitations defense, or at least raise factual questions concerning the defense.

. . .

Under New York law, an action to recover damages for fraud must be commenced within the greater of six years from the date the cause of action accrued or two years from the time the plaintiff discovered the fraud, or could with reasonable diligence have discovered it. Plaintiff’s causes of action for breach of fiduciary duty, aiding and abetting, and negligent misrepresentation all sound in actual fraud and, therefore, are subject to the same limitations period as his fraud claim.

The Subscription Agreements provide that the Investor’s obligation shall be complete and binding upon execution and delivery of the Subscription Agreements, and the investor will be admitted as a member of the Fund upon acceptance of the subscription by Management II on behalf of the Fund. There is no dispute that plaintiff executed and delivered the Subscription Agreements, and Management II accepted them, on June 18, 2010. Thus, for purposes of the six-year limitations period, the fraud-based claims accrued on June 18, 2010, at which point plaintiff became legally bound to the Income Fund in alleged reliance on the United Defendants’ fraudulent misrepresentations and concealments. As such, there can be no serious dispute that the fraud-based claims are untimely under the six-year limitations period.

The issue then becomes whether the fraud claims are timely under CPLR 213(8)’s two-year discovery rule. For the purposes of the discovery rule, a plaintiff’s cause of action accrues at the time the plaintiff possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.

The inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was possessed of knowledge of facts from which the fraud could be reasonably inferred. Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he or she has been defrauded, a duty of inquiry arises, and if he or she omits that inquiry when it would have developed the truth, and shuts one’s eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him or her.

The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception. While New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, it is proper under New York law to dismiss a fraud claim on a motion to dismiss pursuant to the two-year discovery rule when the alleged facts or documentary evidence establish that a duty of inquiry existed and that an inquiry was not pursued.

Plaintiff concedes that following his June 18, 2010 investment in the Income Fund, he received statements, letters and other correspondence regarding his investment, including the Fund’s 2012 and 2013 Audited Financial Statements. For the reasons that follow, the Court agrees with Judge Sharpe that the Fund’s 2012 and 2013 financial statements plainly raised red flags that would have made a reasonable investor of ordinary intelligence aware of the probability that he or she had been defrauded.

The 2013 Financial Statement, which plaintiff admittedly received no later than May 30, 2014, advised plaintiff that the student housing projects at SUNY Plattsburgh, Brockport and Cortland continue to have occupancy issues and informed him that the lender commenced a foreclosure action against the projects.

The 2013 Financial Statement, which included the report of the Fund’s independent auditor, also cautioned plaintiff in several places that the Fund is substantially invested in debt investments with an entity that is in foreclosure proceedings. The outcome of these proceedings is unknown; however, the proceedings raise substantial doubt about the Fund’s ability to continue as a going concern.

In addition, the 2013 Financial Statement advised plaintiff that debt investments make up 55% of the Income Fund’s total assets. And both the 2012 and 2013 statements alerted investors that the Fund had invested in classes of assets that plaintiff believes to have been improper and contrary to the representations made to him to induce his execution of the Subscription Agreements.

These disclosures go to the heart of plaintiff’s fraud-based allegations regarding the struggling SUNY housing projects and the manner in which the Fund invested the capital it had raised from plaintiff and other investors. In fact, plaintiff admits in his Complaint that the 2012 and 2013 financial statements created uncertainty regarding the Income Fund’s ability to continue as a going concern and affected the debt instruments of student housing projects developed by UGOC and represented as the primary investments to be financed using the assets of the Fund. In other words, the knowledge gleaned from the information contained within the 2012 and 2013 Financial Statements was completely at odds with the representations that plaintiff allegedly relied upon in deciding to invest in the Income Fund.

. . .

The Court therefore concludes that the Financial Statements for 2012 and 2013 placed an objective investor in the Fund on notice of the substantial prospect that he or she had been defrauded. Plaintiff does not allege in his Complaint that he made any inquiry in response to the financial statements to determine whether he had been defrauded. Nor does plaintiff submit proof in opposition to the motion demonstrating any such inquiry. Accordingly, knowledge of the fraud must be imputed to plaintiff as of the date the duty to investigate arose, which occurred no later than May 30, 2014, by which time plaintiff had received both the 2012 and 2013 Financial Statements.

As plaintiff failed to commence this action within two years of being put on inquiry notice, plaintiff’s fraud-based claims are not saved by application of the discovery rule.

(Internal quotations and citations omitted).

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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