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Fraud Claim Dismissed On Statute Of Limitations Grounds Because Plaintiff Could Not Avail Itself of the Discovery Rule

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  • Posted on: Feb 10 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 

While the foregoing statement of the law seems simple enough, its application is more complicated. Determining when accrual occurs is not easy and often contested.

Also, hotly contested 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 she has been defrauded, a duty of inquiry arises, and if she fails to undertake that inquiry when it would have developed the truth, and shuts her eyes to the facts which call for an investigation, knowledge of the fraud will be imputed to 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 

In Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2022 N.Y. Slip Op. 00805 (1st Dept. Feb. 8, 2022) (here), the Appellate Division, First Department, dismissed the plaintiff’s fraud claims as time-barred because it was on inquiry notice of said claims.

Ambac was an action that Ambac Assurance Corporation (“Ambac” or “Plaintiff”) commenced in July 2015. It involved five policies issued by Ambac in 2005 to insure residential mortgage-backed securities (“RMBS”) transactions that securitized “pools” of “negative amortization” mortgage loans originated by defendant Countrywide Home Loans, Inc. (“Countrywide” or “Defendant”). Ambac alleged that, as of October 31, 2014, it had paid, accrued, or expected to pay more than $350 million in policy claims resulting from Countrywide’s alleged misrepresentations about the underlying loans in five RMBS transactions (the “Transactions”).

On November 21, 2011, Ambac and Countrywide entered into a tolling agreement, which, as amended, tolled the running of the statute of limitations on unexpired claims related to the Transactions through December 31, 2014. The parties did not dispute that the action was not timely under New York’s six-year limitations period. Instead, the dispute centered on whether Ambac commenced the action within two years from the time it discovered the alleged fraud, or with reasonable diligence would have discovered it.

The Court held that Countrywide demonstrated “that Ambac was on inquiry notice of its fraud claims before November 21, 2009, i.e., two years before the parties entered the tolling agreement, based on media reports about Countrywide’s fraudulent loan practices, highly publicized litigation between 2006 and early 2009 involving substantially similar claims, and the downgrade of the certificates in the transactions from AAA to junk status by February 2009.”11

The Court noted that Ambac was aware of Countrywide’s possible fraud as early as 2008: “Ambac does not deny that before 2009 it was aware of Countrywide’s possible fraud in connection with the transactions, as now alleged in this action.”12 “Indeed,” explained the Court, “Ambac publicly announced in 2008 that it would investigate ‘all areas of fraudulent activity’ and attributed losses on the RMBS in its portfolio to the possibility of ‘poorly underwritten’ and ‘fraudulent loans … bundled in the transactions.’”13 

The Court found “unavailing” Ambac’s argument “that … a triable issue exist[ed] as to whether it could have sustained a viable fraud action in 2009 when it was not in possession of the relevant loan files and had not yet suffered any losses.”14 In that regard, the Court explained:

First, Ambac’s claim that it needed loan-level allegations to file a fraud action is undermined by the complaint itself, which makes scant reference to loan-level allegations and focuses primarily on Countrywide’s systemic wrongdoing, as revealed in media reports, litigation, and government investigations prior to 2009. Second, Ambac failed to show that it could not assert a fraud claim without making loan-level allegations or that the belief that loan-level allegations were required motivated its failure to timely bring an action. The record indicates that Ambac did not make any efforts to investigate possible fraud in relation to the transactions, thus casting this argument as nothing more than a post hoc rationalization. Third, there was no requirement that Ambac plead precise damages but only that it alleges sufficient damages “from which damages attributable to the defendant’s breach may be reasonably inferred.”15 

Takeaway

Ambac highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. 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 or she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his or her rights when the facts indicate that a wrong has been done.


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) (“The two-year period begins to run when the circumstances reasonably would suggest to the plaintiff that he or she may have been defrauded, so as to trigger a duty to inquire on his or her part”) (citation omitted) (affirming dismissal because “the defendants established, prima facie, that the plaintiffs possessed information regarding the questionable authenticity of the decedent’s signature on the Amendment more than two years before they filed the complaint.”).
  10. Celestin v. Simpson, 153 A.D.3d 656, 657 (2d Dept. 2017).
  11. Slip Op. at *1 (citation omitted).
  12. Id.
  13. Id.
  14. Id.
  15. Id. at *1-*2 (citation omitted).
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