Court Holds The McCoys Were On Inquiry Notice of Defendants’ Alleged Fraud

• Posted on: Nov 25 2020

Hang on Sloopy was a hit song in the mid-1960s. Years later, the band that performed and recorded the song – the McCoys – claimed that they were cheated out of substantial sums of money due to fraud. That claim, however, was time-barred, held the Court in Derringer v F.G.G. Prods. Inc., 2020 N.Y. Slip Op. 33854(U) (Sup. Ct., N.Y. County Nov. 18, 2020) (here).

Fraud claims 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.” CPLR § 213(8). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni, 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie, 41 A.D.3d 701, 705 (2d Dept. 2007)).

“[W]here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein, 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand, 83 A.D.3d 893, 894 (2d Dept. 2011). 

The question of whether a plaintiff had inquiry notice of fraud is appropriate for determination on a motion to dismiss only if it conclusively appears on the face of the complaint that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred. Epiphany Community Nursery School v. Levey, 171 A.D.3d 1 (1st Dept. 2019). The alleged failure by a defendant to make a required payment is often sufficient to put a plaintiff on inquiry notice that a fraud has occurred. See Cusimano v. Shurr, 137 A.D.2d 527 (1st Dept. 2016) (plaintiffs were on inquiry notice of fraud when defendants did not pay them in accordance with alleged obligations to do so); Stern v. Barney, 129 A.D.3d 619 (1st Dept. 2015) (plaintiffs were on inquiry notice of investment firm’s alleged fraud that took place 10 years prior where they either received monthly account statements, or, if no such statements were received, failed to inquire). 

As discussed below, plaintiffs’ silence for more than five decades in the face of defendants’ failure to pay them for the work performing Hang on Sloopy, among other recordings, was fatal to their claims because such nonpayment put them on inquiry notice of the alleged fraud.

Derringer v F.G.G. Prods. Inc.

Background

In July 1965, plaintiffs recorded Hang on Sloopy. At the time plaintiffs recorded the song, Rick Derringer was 17, Randy Zehringer was 15, and Ronnie Brandon was 19.

In early August 1965, plaintiffs and Zehringer’s parents met Gerald Goldstein for the purpose of inducing plaintiffs to sign a recording contract with FGG Productions, Inc. (“FGG”) so that FGG could release Hang on Sloopy. According to plaintiffs, at the meeting, Goldstein referred them to Julie Rifkind, who Goldstein described as “a ‘great’ lawyer” who could “represent and advise them.” At the time, Rifkind worked for Bang Records, the record label that was to promote, release, sell and distribute the sound recording of Hang on Sloopy. Bang Records maintained offices in the same office building and on the same floor as FGG’s offices.

Goldstein took plaintiffs, Zehringer’s Parents, and Randy Hobbs to Rifkind’s office. Rifkind reviewed a document prepared by FGG, which Rifkind “stated … [in] effect … was a ‘good contract’” (the “1965 Document”). Rifkind gave the 1965 Document to Zehringer’s parents and advised them to sign it. Zehringer’s parents signed the 1965 Document on behalf of Derringer and Zehringer. Brandon and Hobbs were not asked to sign the 1965 Document and did not sign it.

Neither Zehringer’s parents nor any of the plaintiffs were given a copy of the 1965 Document. Instead, Rifkind told plaintiffs and Zehringer’s parents that the 1965 Document should be left in his possession for safekeeping, as he was their “attorney.” On June 26, 2018, plaintiffs learned that Rifkind was never an attorney licensed to practice in New York State.

After Zehringer’s parents signed the 1965 Document, at FGG’s request, plaintiffs performed and recorded 20 additional songs (together with the sound recording for “Hang on Sloopy,” the “recordings”) as The McCoys. FGG subsequently assigned by agreement any and all rights it had in and to the recordings to Bang Records. Through a series of purchases, transfers, and corporate and business consolidations, Sony Music Entertainment currently owns whatever rights Bang Records held in the recordings.

Plaintiffs alleged that defendants have continuously exploited the recordings since 1965 and have received substantial income therefrom. Plaintiffs have received no payments, statements, or documents, from defendants concerning the recordings in the 53 years prior to commencing the action. Plaintiffs claimed that they never consented to defendants’ use of their names, photographs and likenesses for any commercial purposes in connection with the recordings.

On June 28, 2018, Derringer commenced the action. FGG answered the complaint on August 8, 2018.

On November 18, 2018, plaintiffs filed an amended complaint. Although the amendment was procedurally improper (it was filed more than 20 days after FGG answered), none of the defendants rejected or otherwise objected to the filing. 

The amended complaint asserted nine causes of action. Among the claims alleged were rescission of the 1965 Document as against all defendants based on the fraudulent misrepresentation that Rifkind was an attorney representing plaintiffs and Zehringer’s parents and fraud against the FGG defendants for the same alleged conduct.

Defendants moved to dismiss the amended complaint. In seeking dismissal, defendants principally argued that plaintiffs were barred from bringing the action due to the expiration of the statutes of limitations governing their claims. 

The Court agreed, granting the motion with regard to the fraud claims.

The Court’s Decision

The Court held that plaintiffs were on inquiry notice of the alleged fraud “long before June 28, 2016”, when they filed the action. Slip Op. at *12. The Court observed that there were “several facts alleged in the amended complaint [that] would have raised clear red flags to a reasonable person in the plaintiffs’ position.” Id. For example, the Court noted that plaintiffs and Zehringer’s parents only met with Rifkind once “and apparently ha[d] never communicated with [him] again.” Id. Moreover, said the Court, Rifkind was “recommended by FGG, their contractually adverse party, and worked for the company that would distribute the plaintiffs’ recordings.” Id. “More significantly,” explained the Court, “plaintiffs allege[d] that they ha[d] received no payment for the exploitation of the recordings since 1965, in spite of Rifkind’s representations to them that they were signing a ‘good contract.’” Id.

Even according plaintiffs the benefit of their youth and lack of sophistication in the industry at the time of the 1965 Document, they “did not remain unsophisticated teenage musicians over the five decades that have elapsed since the exploitation allegedly began,” said the Court. Id. at *13. Derringer was, for instance, an accomplished, Grammy award winning artist. Id. Thus, “[e]ven if the circumstances immediately surrounding the execution of the 1965 Document were not independently sufficient to put the plaintiffs on notice of any alleged fraud, over 50 consecutive years of unpaid payments and unsent statements should have prompted someone of Derringer’s sophistication to look further into the matter.” Id. 

The Court rejected plaintiffs’ argument that the lack of payment merely put them on notice of a breach of contract, rather than fraud or misrepresentation. Id. The Court observed that plaintiffs’ argument was “belied by the fact that the crux of their fraud-based claims, and the primary motivation for the plaintiffs’ commencing th[e] action, [was] their assertion that they [were] entitled to some payment or accounting for the exploitation of the recordings beginning in 1965.” Id. “Put differently,” said the Court, “plaintiffs point to lack of payment as evidence that they were defrauded. Their contention that the same lack of payment could not or should not have put them on notice of fraud is inconsistent.” Id.

The Court noted that plaintiffs did not “explain why none of them, …, questioned or inquired as to why they never received payments for recording Hang on Sloopy after it successfully climbed the pop charts. Nor [did] they proffer any reason why they failed to make any such inquiries after they recorded 20 additional songs for FGG, which launched their music career and have been released on numerous albums since.” Id. at *14-*15.

The Court found the case similar to Baiul v. William Morris Agency, LLC, 2014 WL 1804526 (S.D.N.Y. May 6, 2014). Id. at *15.  In Baiul, the court dismissed Oksana Baiul’s fraud claims pursuant to CPLR 213(8). Baiul alleged that as a 16-year-old Ukrainian-born figure skater, she was fraudulently induced into signing numerous contracts in English, a language she did not fully understand, in connection with various performances and undertakings. Baiul stated that she failed to receive any compensation for certain undertakings and was deprived of millions of dollars in royalties for her performances. The court dismissed Baiul’s fraudulent inducement and other related claims, reasoning that even in the face of Baiul’s age and language barrier, Baiul’s silence for 12 years in the face of the defendant’s failure to pay her for the numerous performances she claimed entitled her to significant compensation was fatal to her claims. In short, noted the court, nonpayment was deemed sufficient to put Baiul on inquiry notice of any potential fraud.

Finally, the Court noted that “in reaching its conclusion,” it was advancing the “policy considerations underlying statutes of limitations.” Id. at *16-*17 (citations omitted). The Court noted that the “plaintiffs’ fraud-based claims raise[d] precisely the sort of concerns against which statutes of limitations are meant to protect.” Id. at *17-*18.

Takeaway

In in William Shakespeare’s play Hamlet, upon learning that Claudius had plotted to kill him, Hamlet determined that the best way to respond was by letting Claudius be “Hoist with his own petard”. See Act 3, Scene 4. That idiom perhaps best describes the Court’s analysis in Derringer – plaintiffs’ claim that they did not receive any payments for their records was the reason why they were on inquiry notice of the alleged fraud. 

Aside from being on inquiry notice, Derringer highlights the policy reasons for statutes of limitations: “A defendant … ought not to be called on to resist a claim where the evidence has been lost, memories have faded, and witnesses have disappeared.” Flanagan v. Mount Eden Gen. Hosp., 66 N.Y.2d 473, 476 (1985) (citation omitted; internal quotation marks omitted). That was precisely the facts in Derringer: 

Over 50 years ha[d] passed since the events at the center of the plaintiffs’ claims transpired. Key witnesses to the events, including Rifkind and Hobbs, have passed away. Those witnesses that are still alive may understandably be unable to recall specific details about events that took place half a century ago with a high degree of accuracy.” 

Slip Op. at *17-*18.