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Fraud Claim Dismissed on Statute of Limitations Due To Inquiry Notice

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  • Posted on: Mar 16 2022

By: Jeffrey M. Haber

Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater.1 The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”,2 “even though the injured party may be ignorant of the existence of the wrong or injury.”3 

Determining when accrual occurs is not easy and often contested. So too is the determination of when the plaintiff discovered or could have discovered the fraud. 

In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.”4 “[M]ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud.5 “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.”6 

Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that s/he has been defrauded, a duty of inquiry arises, and if s/he fails to undertake that inquiry when it would have developed the truth and shuts his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him/her.7 The test as to when fraud should with reasonable diligence have been discovered is an objective one.8 Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued.9 “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.”10 

[Ed. Note: This Blog examined the discovery rule and inquiry notice here and here.]

In Mizrahi v. YMZ Realty LLC, 2022 N.Y. Slip Op. 01741 (1st Dept. Mar. 15, 2022) (here), the Appellate Division, First Department, dismissed plaintiff’s fraud claims as time-barred because plaintiff was on inquiry notice of said claims.

Mizrahi involved the sale of property by two brothers. The brothers held an interest in Cornelia Commercial Holding Corp. (“CCHC”). Pursuant to their agreement, plaintiff would be CCHC’s sole shareholder of record, while defendant would have a 40% beneficial ownership interest in CCHC, such that in the event that CCHC was sold, the net proceeds would be divided 60% to plaintiff and 40% to defendant.

Plaintiff alleged that in 2013, defendant approached plaintiff with a potential purchaser for the commercial unit owned by CCHC. The purchase price for the unit was $13 million. To effectuate the sale, and at the instruction of defendant, the parties entered into a stock purchase agreement in February 2013, whereby plaintiff transferred his 100% stock ownership interest in CCHC to defendant’s newly formed entity, defendant YMZ Realty (“YMZ”), in exchange for $6 million, 60% of plaintiff’s equity share based on the anticipated $13 million sale proceeds.

CCHC’s stock was sold in April 2013 for $16.5 million. The sale was recorded on New York City’s online “Automated City Register Information System” (“ACRIS”). Plaintiff alleged that he did not know that the ultimate sale was for $3.5 million more than was contemplated by the parties’ stock purchase agreement. Plaintiff maintained that defendant defrauded him and concealed the fraud until May 2019, when plaintiff’s accountant received a notice from the New York State Department of Taxation and Finance, Income/Franchise Tax Field Audit Bureau, concerning a 2013 audit. Plaintiff commenced the action seeking damages for, inter alia, fraud.

The motion court dismissed the action on the ground that it was barred by the statute of limitations. The court held that the “sale price was always a matter of public record on ACRIS.” The court noted that plaintiff “could have, in minutes from the comfort of his home, verified the sale price on the ACRIS website.” However, explained the court, plaintiff “took no measures whatsoever to verify the sale price within six years.” “The most minimal efforts would have revealed the alleged fraud,” concluded the motion court. 

The motion court also noted that plaintiff failed to take any action to protect himself or ascertain the truthfulness of the represented sales price. The court explained that plaintiff never asked to see the contract of sale or the closing statement to verify the final price. “Had his brother refused to share that information,” observed the court, “surely plaintiff would have had reason to know something was amiss.” “Because plaintiff, with reasonable diligence, could have easily discovered any fraud,” the motion court dismissed his fraud claim as time barred.

On appeal, the First Department agreed.

The Court held that the ACRIS report showed that the property was sold on April 10, 2013, for $16.5 million, not $13 million, as represented in the stock purchase agreement. As a result, said the Court, “publicly available information was sufficient to put him on inquiry notice of possible fraud.”11 The Court explained that plaintiff “fail[ed] to assert, and plaintiff [did] not dispute, that the alleged fraud could have been discovered with due diligence, such that the two-year discovery rule tolling causes of action for fraud would not apply.”12 

The Court also held that the motion court correctly dismissed the remaining claims in the complaint. “Absent a fraud toll, plaintiff’s remaining claims for aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment — are also time-barred,” said the Court.13 

Takeaway

Mizrahi highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of a fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. This is especially true when, as in Mizrahi, the facts are publicly available, and some degree of diligence would reveal the truth. Thus, even though the discovery rule allows the victim of fraud to bring suit when the very nature of the fraud prevents him/her from knowing that he/she was defrauded, or when the defendant conceals those facts from the victim of fraud, the courthouse doors will, nevertheless, close on the litigant who sits on his/her rights. 


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice. 

Footnotes

  1. CPLR § 213(8). See also Sargiss v. Magarelli, 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co., 88 A.D.3d 933, 939 (2d Dept. 2011).
  2. Carbon Capital Mgmt., 88 A.D.3d at 939 (citation and alterations omitted).
  3. Schmidt v. Merchants Despatch Transp. Co., 270 N.Y. 287, 300 (1936).
  4. Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957).
  5. Id.
  6. Trepuk v. Frank, 44 N.Y.2d 723, 725 (1978).
  7. Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011).  
  8. Id. (citation and internal quotation marks omitted).
  9. See Shalik v. Hewlett Assocs., L.P., 93 A.D.3d 777, 778 (2d Dept. 2012). 
  10. Celestin v. Simpson, 153 A.D. 3d 656, 657 (2d Dept. 2017).
  11. Slip Op. at *1.
  12.  Id. (citation omitted).
  13.  Id. (citations omitted).
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