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Specific Jurisdiction and the Statute of Limitations for Fraud

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  • Posted on: Feb 25 2019

As readers of this Blog know, we cover a broad range of issues that fall under the umbrella of commercial and business litigation. Two issues that often receive treatment from this Blog are the application of the statute of limitations to fraud-based claims, and the court’s ability to exercise jurisdiction over a defendant. Recently, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, issued an opinion that involves both of these issues. Magomedov v. Lebedev, 2019 N.Y. Slip Op. 30378(U) (Sup. Ct. N.Y. County Feb. 19, 2019) (here).

The Applicable New York Law

Statute of Limitations for Fraud

Under CPLR § 213(8), an action 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.”

Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “[t]he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis, 44 A.D.3d 1033, 1034 (2d Dept. 2007). Accord Berman v. Holland & Knight, LLP, 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc., 137 A.D.3d 685, 689 (1st Dept. 2016).

“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). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957).

This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman, 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id. See also Sargiss v Magarelli, 12 N.Y.3d 527, 532 (2009).

[Ed. Note: This Blog recently addressed the statute of limitations for fraud here.]

Equitable Estoppel Tolling

In New York, the courts will equitably estop the assertion of a statute of limitations defense when the defendant affirmatively takes action such that it creates a “long delay between the accrual of the cause of action and the institution of the legal proceeding.” General Stencils v. Chiappa, 18 N.Y.2d 125, 128 (1966); see also Zumpano v. Quinn, 6 N.Y.3d 666, 674 (2006); Matter of Steyer, 70 N.Y.2d 990, 993 (1988). Claims of fraudulent inducement, misrepresentation or deception are sufficient to invoke the equitable estoppel doctrine.  Zumpano, 6 N.Y.3d at 674 (quoting Simcuski v. Saeli, 44 N.Y.2d 442, 449 (1978)); Putter v. North Shore Univ. Hosp., 7 N.Y.3d 548, 552-553 (2006); MBI Intern. Holdings Inc. v. Barclays Bank PLC, 151 A.D.3d 108, 116-17 (1st Dept. 2017).

Importantly, the plaintiff must demonstrate reasonable reliance on the defendant’s misrepresentations to invoke the doctrine. Simcuski, 44 N.Y.2d at 449. In this regard, the plaintiff must use “the means available to him,” by the “exercise of ordinary intelligence,” to ascertain “the truth or the real quality of the subject of the representation.” Centro Empresarial Cempresa S.A. v. American Movil, S.A.B de C.V., 17 N.Y.2d 269, 268 (2011). The failure to make such a showing will result in the application of the statute of limitations. Gleason v. Spota, 194 A.D.2d 764, 765 (2d Dept. 1993) (“Equitable estoppel will not toll a limitations statute, however, where a plaintiff possesses “‘timely knowledge’ sufficient to place him or her under a duty to make inquiry and ascertain all the relevant facts prior to the expiration of the applicable Statute of Limitations.”) (quoting McIvor v. Di Benedetto, 121 A.D.2d 519, 520 (2d Dept. 1986)).

Finally, when the plaintiff bases his/her claim of equitable estoppel on concealment, instead of fraud, misrepresentation or deception, “the plaintiff must demonstrate a fiduciary relationship … which gave the defendant an obligation to inform him or her of facts underlying the claim.” Gleason, 194 A.D.2d at 765.

[Ed. Note: This Blog recently wrote about equitable estoppel tolling here.]

Specific Jurisdiction

Under CPLR § 302(a)(1), a court can exercise specific personal jurisdiction over a non-domiciliary who “transacts any business within the state.” CPLR § 302(a)(1). To satisfy CPLR § 302(a)(1), a plaintiff must satisfy a two-part test. First, the defendant must have “transacted business” in New York. McGowan v. Smith, 52 N.Y.2d 268, 271 (1981). Second, the plaintiff must demonstrate “some articulable nexus between the business transacted and the cause of action sued upon.” Id. at 272.

CPLR § 302(a)(1) is a “single act statute,” whereby “proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.” Deutsche Bank Secs., Inc. v. Mont. Bd. of Invs., 7 N.Y.3d 65, 71 (2006). “Purposeful activities are those with which a defendant, through volitional acts, ‘avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.”’ Fischbarg v. Doucet, 9 N.Y.3d 375, 380 (2007) (quoting McKee Elec. Co. v. Rauland–Borg Corp., 20 N.Y.2d 377, 382 (1967)). Whether a non-domiciliary has engaged in sufficient purposeful activity to confer jurisdiction requires an examination of the totality of the circumstances. Id. (quoting Farkas v. Farkas, 36 A.D.3d 852, 853 (2d Dept. 2007)). The quality of a defendant’s contacts is the “primary consideration” in establishing jurisdiction. Id.

As to the required nexus, the courts require “a relatedness between the transaction and the legal claim such that the latter is not completely unmoored from the former, regardless of the ultimate merits of the claim.” Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 20 N.Y.3d 327, 339 (2012) “[W]here at least one element arises from the New York contacts, the relationship between the business transaction and the claim asserted supports specific jurisdiction under the statute” Id. at 341.

Magomedov v. Lebedev

Background

Magomedov involved a dispute over an alleged joint venture between the plaintiffs, Magomed Magomedov (“Magomedov”) and Akhmed Bilalov (“Bilalov”) and the defendants, Leonard Blavatnik (“Blavatnik”) and Viktor Vekselberg (“Vekselberg”), and the sale of a Russian oil company, OJSC Tyumenskaya Neftyanaya Kompaniya (“TNK”), for more than one billion dollars.

In 1997, the Russia Federation placed 40% of TNK up for public auction. Blavatnik and Vekselberg purchased that interest, but the sale was allegedly conditioned on Blavatnik and Vekselberg later obtaining a controlling interest in a Russian oil company, OJSC Nizhnevartovskneftgaz (“NNG”), which was owned by plaintiffs and defendant, Leonid Lebedev (“Lebedev”).

Plaintiffs and Lebedev allegedly provided Blavatnik and Vekselberg with the majority control in NNG that they sought. According to the complaint, in connection with the transaction, plaintiffs and Lebedev agreed to act jointly in all matters related to their respective NNG shares, to share in the profits and losses of the venture, and not sell or take unilateral action regarding their respective shares in NNG without unanimous consent (“1997 Joint Venture”).

Two years later, in 1999, plaintiffs sold their interest in NNG to Oleg Kim, a Russian businessman. Plaintiffs alleged that, prior to the sale of their NNG shares, Vekselberg and Blavatnik secretly approached Lebedev to sell his NNG shares to them. According to the complaint, in violation of the 1997 Joint Venture, Lebedev agreed to sell his interest in NNG in exchange for a stake in a different joint venture with Vekselberg and Blavatnik (“Defendants’ Joint Venture”). Plaintiffs further alleged that, in violation of the 1997 Joint Venture, Lebedev failed to disclose the sale of his NNG shares to Vekselberg and Blavatnik, as well as his conflict of interest in negotiating the sale of plaintiffs’ NNG shares. Blavatnik and Vekselberg eventually purchased the NNG shares that plaintiffs sold.

Defendants’ Joint Venture is the subject of another action before Justice Scarpulla, Lebedev v. Blavatnik (the “Lebedev Action”).

In the Lebedev Action, Lebedev alleged that he negotiated the terms of Defendants’ Joint Venture in New York in 2001. Lebedev further alleged that in October 2012, TNK was sold to a Russian state-owned conglomerate. Blavatnik and Vekselberg allegedly received $13.8 billion from that sale, and Lebedev sought $2.07 billion as part of his stake in Defendants’ Joint Venture.

Plaintiffs alleged that neither knew of defendants’ misconduct until the Lebedev Action was filed in February 2014. According to plaintiffs, Lebedev met with Magomedov in 2014, at which time he disclosed his prior dealings with Blavatnik and Vekselberg. Lebedev allegedly reaffirmed the 1997 Joint Venture and discussed entering into a new agreement, whereby Lebedev would split any recovery from the Lebedev Action in exchange for Magomedov’s assistance in the Lebedev Action (“2014 Agreement”).

Magomedov subsequently memorialized the 2014 Agreement and started to assist Lebedev in the Lebedev Action. However, throughout 2014, 2015, and January 2016, the parties were unable to finalize and execute a written agreement. According to the complaint, once plaintiffs realized that Lebedev had no intention of fulfilling the terms of the 2014 Agreement, they commenced the Magomedev action in February 2017.

In their amended complaint, plaintiffs alleged, among other things, fraud and breach of fiduciary duty against Lebedev. Lebedev moved to dismiss on statute of limitations grounds, lack of personal jurisdiction and for failure to state a claim.

The Court’s Decision

Statute of Limitations

In seeking dismissal of the tort-based claims (e.g., fraud and breach of fiduciary duty) on statute of limitations grounds, Lebedev argued that the complaint was untimely and barred by the statute of limitations. Lebedev maintained that regardless of whether a three-year or six-year statute of limitation period applied, the statute of limitations expired as to each of the claims connected to the 1997 Joint Venture. Lebedev further argued that neither the two-year discovery rule nor equitable estoppel applied to save plaintiffs’ claims against him.

The Court held that the tort-based claims connected to the alleged 1997 Joint Venture had accrued decades ago, when plaintiffs sold their shares of NNG. Thus, those claims were untimely under the six-year statute of limitations.

The Court held, however, that Lebedev had met his burden of showing that the two-year discovery rule did not apply, thereby shifting the burden to plaintiffs to provide an evidentiary basis to raise “a question of fact as to why Lebedev should be equitably estopped from asserting the statute of limitations.” Slip op. at *9. Based on the record before it, the Court found that plaintiffs did not diligently act to file their fraud claims within two years of the discovery of the alleged fraud and, therefore, could not avail themselves of equitable estoppel to toll the two-year period.

The Court noted that plaintiffs admittedly “discovered the essential elements of their claims against Lebedev in 2014” and, therefore, “could have commenced the action at that time.” Id. Instead, “[t]hey voluntarily chose … to try and collaborate with Lebedev in exchange for a part of any compensation Lebedev received in the Lebedev Action.” Id. The “protracted delay in executing the 2014 Agreement”, said the Court, “[a]t a minimum … should have caused plaintiffs to proceed with diligence before January 2016.”  Id. at *10.

The Court concluded that plaintiffs, “who are sophisticated business people and have been represented by counsel since 2014,” did not “reasonably investigate their claims. Instead, for reasons not alleged in the complaint or on th[e] motion, plaintiffs waited another year, until February 2017, before commencing th[e] action.” Id.

Based on the foregoing, the Court found that plaintiffs failed to raise an issue of fact sufficient to withstand Lebedev’s statute of limitations challenge. Consequently, the Court dismissed the tort-based claims against Lebedev.

Specific Jurisdiction

Lebedev, a non-domiciliary of New York, argued that the Court lacked personal jurisdiction over him. Plaintiffs disagreed, arguing that they satisfied CPLR § 302(a)(1) and that Lebedev had waived any objection to jurisdiction by selecting a New York state court to litigate the Lebedev Action.

In particular, plaintiffs maintained that Lebedev was subject to personal jurisdiction under CPLR §302(a)(1), because their claims against him arose from the 2014 agreement, which specifically reaffirmed the 1997 Joint Venture.

The Court agreed with plaintiffs.

The Court found that to pursue the Lebedev Action, Lebedev transacted business in New York by hiring a New York lawyer. Moreover, the Court noted that because 2014 Agreement was the subject of the lawsuit, it was directly related to Lebedev’s activities in New York and, therefore, sufficient to confer jurisdiction over him.

The Court also held that Lebedev had waived any jurisdictional defense he had by selecting New York to litigate the Lebedev Action. The Court noted that a contrary result would be inequitable. See New Media Holding Co., LLC v. Kagalovsky, 118 A.D.3d 68, 77 (1st Dept. 2014) (“[Defendants] waived the right to challenge personal jurisdiction by freely using the protections of the New York courts when pursuing rights related to the partnership … [by] filing the first lawsuit against [plaintiff] in the Southern District of New York”).

Consequently, the Court denied the jurisdictional challenge advanced by Lebedev.

Takeaway

Magomedeov highlights the factual nature of motions to dismiss on statute of limitations and jurisdictional grounds. It also highlights the difficulty sophisticated parties have demonstrating that they acted with diligence to protect their rights. Magomedov therefore is a good reminder of how courts will take a fact-based approach to deciding these motions.

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