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Fraud Claim Dismissed on Statute of Limitations Grounds: Plaintiff Unable to Use The Discovery Rule to Save His Claims

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  • Posted on: Aug 6 2018

Fraud Claim Dismissed on Statute of Limitations Grounds: Plaintiff Unable to Use The Discovery Rule to Save His Claims

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. C.P.L.R. § 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 Dep’t 2011). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” (Carbon Capital Mgmt., 88 A.D.3d at 939 (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co., 270 N.Y. 287, 300 (1936).

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.” Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957). “[M]ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Id. “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.” Trepuk v. Frank, 44 N.Y.2d 723, 725 (1978).

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.  Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011).  The test as to when fraud should with reasonable diligence have been discovered is an objective one. Id. (citation and internal quotation marks omitted). 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. 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.”). “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.” Celestin v. Simpson, 153 A.D. 3d 656, 657 (2d Dept. 2017).

On July 23, 2018, Justice Platkin of the New York Supreme Court, Albany County, Commercial Division, issued a decision in Essepian v. United Group of Companies, Inc., 2018 N.Y. Slip Op. 51153(U) (here), in which he dismissed fraud-based claims on the grounds that they were untimely under CPLR 213(8), even under the two-year discovery rule.

The plaintiff, John P. Essepian (“Plaintiff” or Essepian”) brought suit to recover for injuries allegedly sustained as a result of investments he made in the DCG/UGOC Income Fund, LLC (“Income Fund” or “Fund”). The Income Fund was established, managed and operated to secure financing for various projects undertaken by defendant United Group of Companies, Inc. (“UGOC”). Among the initiatives undertaken by UGOC was the 2008 development of student housing projects near State University of New York (“SUNY”) campuses in Plattsburgh, Brockport and Cortland.

Because of the 2008 financial crisis, UGOC had difficulty raising the necessary bank financing to build the student housing projects. UGOC eventually secured $50 million in financing from TIAA-CREF, but the loan was conditioned upon UGOC raising $18 million in equity. The United Defendants established the Income Fund in August 2008 as a vehicle to raise such funds from individual investors and issued a private placement memorandum (“PPM”) for the sale of $20 million in membership interests in the Fund.

On the recommendation of his investment advisor, Edgar Page (“Page”), the chief executive of PageOne, an SEC-registered investment advisory firm, Plaintiff made two investments of $375,000 in the Income Fund in July 2010. Prior to making the recommendation, Page was aware that the United Defendants were investing the Income Fund’s assets into student housing projects that faced significant problems, rendering the investments highly risky. Various construction and occupancy issues associated with the projects, which were not disclosed to potential investors by the United Defendants in any communications associated with the Income Fund, eventually caused the projects to default and become subject to foreclosure and/or bankruptcy proceedings.

In soliciting Essepian’s investment, Page represented that student housing projects “were a sound and conservative investment which would generate an internal rate of return of investment of not less than 9% annually and as much as 20-25% or more.” Page also claimed that “the United Defendants guaranteed that [plaintiff] would generate a return on investment of not less than 9% each year.”

Relying on Page’s advice, Essepian executed subscription agreements for the purchase of membership interests in the Fund. Simultaneously therewith, Essepian executed the operating agreement for the Fund and paid $750,000. By the time these transactions took place, defendant MCM refrained from “performing compliance and supervisory activity regarding sale of securities in the Income Fund.”

In August 2014, the SEC initiated proceedings against Page and PageOne and issued an Order Making Findings (“SEC Order”) in March 2015. The SEC found that Page and his firm had “willfully violated” the Investment Advisers Act of 1940. The SEC Order found that Page had failed to disclose an arrangement with UGOC to clients – UGOC had agreed to purchase PageOne in exchange for Page’s commitment to buy $18.3 million worth of UGOC preferred stock using the assets of PageOne’s clients. The SEC also found that Page knew that UGOC “did not have sufficient liquidity . . . to complete the acquisition of PageOne” and was “selling personal assets to keep [UGOC’s] business going.” The SEC ultimately concluded that PageOne’s clients “invested between approximately $13 and $15 million” and that UGOC had paid Page approximately $2.7 million during the same period.

Essepian commenced the action on July 12, 2016. Essepian allegeed causes of action for common law fraud, breach of fiduciary duty and/or aiding and abetting in a breach of fiduciary duty, negligent misrepresentation and unjust enrichment against the United Defendants, as well as a claim of aiding and abetting against the MCM Defendants.

Essepian alleged that the United Defendants, together with Page as their agent, made factual misrepresentations in soliciting his investments. Specifically, Essepian alleged that the United Defendants falsely claimed that the Fund would invest in secured debt instruments backed by real estate assets that could quickly be converted to cash and would generate a high annual rate of return for investors, whereas the United Defendants allegedly knew that the troubled student-housing projects faced significant problems that made these returns highly unlikely and created a substantial risk of default. Plaintiff also alleged that the United Defendants misrepresented UGOC’s financial problems and its history of poor performance on similar projects.  Essepian further alleged that the United Defendants and Page failed to disclose facts that were material to his decision to invest in the Income Fund.

On September 19, 2016, the United Defendants and MCM Defendants moved to dismiss the complaint for, among other things, failure to state a claim. After the motion was fully briefed, the moving defendants discovered that the complaint contained a material irregularity bearing on the timeliness of Essepian’s claims.

The complaint alleged that Essepian entered into subscription agreements for the purchase of interests in the Income Fund on July 13, 2010 and July 14, 2010, respectively. However, review of the actual subscription agreements showed that Essepian signed the documents on June 18, 2010. Upon making the discovery, the moving defendants alerted Essepian’s counsel and asserted that all of his claims were time-barred.

In response, Essepian’s counsel confirmed that the allegations of the complaint were incorrect and that Plaintiff had “signed the Subscription Agreements reflecting his interest in the Income Fund on June 18, 2010.” Counsel further indicated that a similar statute-of-limitations issue was pending in a virtually identical case brought by a group of Fund investors against the same defendants in the U.S. District Court for the Northern District of New York in Grasso v. United Group of Companies, Inc., Case No. 1:16-cv-00965-GLS-CFH (N.D.N.Y.) (“Grasso”). On February 16, 2017, the parties agreed to stay the action pending a ruling on the statute-of-limitations issue in Grasso.

On March 26, 2018, the court issued a decision and order in Grasso that dismissed the majority of the plaintiffs’ claims as time-barred. Grasso v. United Group of Companies, Inc., No. 1:16-cv-965 (GLS/CFH), 2018 WL 1472579 (N.D.N.Y. Mar. 26, 2018), opinion amended and superseded, No. 1:16-cv-965 (GLS/CFH), 2018 WL 1737619 (N.D.N.Y. Apr. 9, 2018).

The Court granted the moving defendants’ motion.

Since the subscription agreements were signed in June 2010, a fact to which there was no dispute, the Court easily found that the six-year statute of limitations had run.

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.

Citations omitted.

Turning to the two-year discovery rule, the Court found that Essepian was on notice of the claim as early as 2012, when he received “statements, letters and other correspondence” regarding his investment, including the Fund’s 2012 and 2013 Audited Financial Statements. The Court agreed with the Grasso court “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.’” Quoting Grasso, 2018 WL 1737619 at *8.

The Court observed that the 2013 Financial Statement, which Essepian received no later than May 30, 2014, advised investors 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 project[s].”  The same financial statement, which included the report of the Fund’s independent auditor, also cautioned investors “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, noted the Court, the 2013 Financial Statement advised investors that “‘debt investments make up 55% of the [Income] Fund’s total assets.’” Both the 2012 and 2013 financial statements alerted investors that the Fund had invested in classes of assets that Essepian believed to have been improper and contrary to the representations made to him to induce his execution of the subscription agreements.

The Court held that “[t]hese 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,” said the Court, “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].’”  Thus, concluded the Court, “‘the knowledge gleaned from the information contained within the 2012 and 2013 [F]inancial [S]tatements [was] completely at odds with the representations that plaintiff[] allegedly relied upon’ in deciding to invest in the Income Fund.” Quoting Grasso, 2018 WL 1737619 at *8.

The Court rejected Essepian’s argument that the financial statements were themselves materially false, and therefore “no duty of inquiry arose in 2014,” because the 2012 and 2013 Financial Statements informed investors that the Fund’s performance was improving year after year. Citing to the Court’s decision in Grasso, Justice Platkin noted that “the issue is not whether the 2012 and 2013 financial statements revealed the full and complete extent of the Moving Defendants’ alleged fraud, but rather whether the circumstances disclosed in the financial statements reasonably suggested that plaintiff may have been defrauded, so as to trigger a duty to inquire.” (Citations and quotation marks omitted).  For that reason, Essepian “misse[d] the mark.” Quoting Grasso, 2018 WL 1737619 at *8.

In light of the auditor’s warning that the Fund’s major investments were in default and/or foreclosure and that there were substantial doubts about the Fund’s ability to continue as a going concern, the fact that the Fund’s management offered a vague reassurance regarding a ‘plan’ for increasing student occupancy is not the type of reassurance that would — or should — put a reasonable investor’s mind at ease. In other words: [N]o reasonable investor would look at the serious warnings set out by the auditor — warnings that the Income Fund’s future was in jeopardy — and rely on vague, unspecified hopes for a turnaround. Instead, the financial statements raised red flags that would have made a reasonable investor of ordinary intelligence aware of the probability that he [or she] had been defrauded.

Citations omitted.

The Court concluded 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.” Accordingly, the Court imputed knowledge of the fraud to Essepian 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.

Thus, since Essepian “failed to commence th[e] action within two years of being put on inquiry notice, [his] fraud-based claims are not saved by application of the discovery rule. Accordingly, the fraud-based claims must be dismissed as barred by the expiration of the statute of limitations.”


Essepian 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. 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, the courthouse doors will, nevertheless, close on the litigant who sits on his/her rights when the facts indicate that a wrong has be done.

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