Statute of Limitations for Fraud Claims and Conclusory vs. Particularized Allegations

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Posted on: Apr 29 2024

In Lane’s Floor Coverings & Interiors, Inc. v. DiLalla, 2024 N.Y. Slip Op. 02257 (1st Dept. Apr. 25, 2024) (here), the Appellate Division, First Department considered an alleged scheme to defraud plaintiff by using checks that were fake or missing endorsements. As discussed below, the Court modified the motion court’s order dismissing the action to deny defendants’ motion as to the fraud claims asserted against Defendant Anthony DiLalla, the branch manager of Defendant Valley National Bank, to the extent predicated on checks drawn on or after July 10, 2012, and plaintiff’s first cause of action as against defendant Valley National Bank to the extent predicated on checks identified in plaintiff’s original complaint.

Plaintiff’s claims arose out of its former financial controller’s passing of fraudulent checks. The controller’s scheme was revealed, according to plaintiff, upon its investigation following the controller’s abandonment of his position on December 23, 2013.

In the original complaint, plaintiff sought recovery for five allegedly fraudulently negotiated checks between September 16, 2013, and December 12, 2013, the total of which amounted to approximately $60,000. By motion dated July 10, 2018, plaintiff amended the complaint to set forth 60 additional allegedly fraudulent checks from October 9, 2009 to September 16, 2013, totaling approximately $850,000. With respect to the checks added in the amended complaint, plaintiff alleged that it realized the full impact of the former controller and defendants’ misconduct after conducting its own internal review of records in 2017 following a meeting with the New York County District Attorney’s Office in 2016.

Upon defendants’ motion to dismiss, the motion court granted the motion in its entirety. Plaintiff appealed.

To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.”[1] The claim must pleaded with particularity.[2] Conclusory allegations will not suffice.[3] Neither will allegations based on information and belief.[4] If “sufficient factual allegations of even a single element are lacking,” then the claim must be dismissed.[5]

The requirement that a fraud claim be pleaded with particularity can be found in Section 3016(b) of the Civil Practice Law and Rules (“CPLR”). Under CPLR 3016 (b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.”[6] To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud.

Notwithstanding, in Pludeman v.Northern Leasing Systems, Inc., the Court of Appeals held that CPLR 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.”[7] Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.”[8] Thus, as noted, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct.[9]

In Lane’s Floor Coverings, the Court held that plaintiff satisfied the particularity requirement with respect to the fraud claim against DiLalla but failed to do so with respect to the fraud claim against the Bank.[10] The Court noted that, with respect to DilLalla, plaintiff sufficiently “allege[d], among other things, that defendant DiLalla was an active participant in the scheme, that he oversaw and signed off on the fraudulent checks, and that he shared in the checks’ proceeds.”[11] With respect to the Bank, however, the Court found that plaintiff merely “allege[d], in conclusory terms, that it helped the scheme and “provided a safe haven” to DiLalla.[12]

The Court also held that certain aspects of the fraud claims were time-barred under the applicable statute of limitations due to inquiry notice.

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.[13] The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”,[14] “even though the injured party may be ignorant of the existence of the wrong or injury.”[15]

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.”[16] “[M]ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud.[17] “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.”[18]

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.[19] The test as to when fraud should with reasonable diligence have been discovered is an objective one.[20] 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.[21] “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.”[22]

In Lane’s Floor Coverings, the Court held that “plaintiff was on inquiry notice of the alleged fraud in December 2013 when it conducted its initial investigation concerning the controller’s abandonment of his employment.[23] “Thus,” said the Court, “plaintiff’s reliance on the District Attorney’s 2016 investigation and its own 2017 examination to extend the time of its inquiry notice for the earlier checks [was] unavailing.”[24] “Accordingly,” concluded the Court, “plaintiff’s fraud claim [was] timely under the applicable six-year statute of limitations … only to the extent based on checks drawn on or after July 10, 2012.”[25]

Finally, the Court held that plaintiff’s first cause of action against the Bank should be reinstated to the extent it was based on the checks asserted in the original complaint.[26] The Court explained that since defendants had “previously acknowledged that the five checks referenced in plaintiff’s original complaint were timely identified,” it was error to dismiss them with respect to the Amended Complaint.[27]

_____________________________

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.

[1] Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996).

[2] Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009).

[3] Id.

[4] See Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”).

[5] RKA Film Fin., LLC v. Kavanaugh, 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC, 244 A.D.2d 39, 46 (1st Dept. 1998)). See also Gregor v. Rossi, 120 A.D.3d 447 (1st Dept. 2014).

[6] Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008) (citation omitted).

[7] Id. at 491 (internal quotation marks and citation omitted).

[8] Id. at 492.

[9] Id.

[10] Slip Op. at *1-*2.

[11] Id. at *1.

[12] Id. at *1-*2 (citing CPLR 3016(b); Friedman v. Anderson, 23 A.D.3d 163, 166 (1st Dept. 2005); and Prudential-Bache Sec. v. Citibank, 73 N.Y.2d 263, 276-277 (1989) (well-pleaded claim of commercial bad faith permitted where supported by factual allegations concerning, among other things, the frequency of deposits and cash withdrawals at a single bank branch, the branch’s failure to complete required currency transaction reports, and conversations with and between a number of branch employees, such that the defendant bank’s actual knowledge could not be ruled out upon motion to dismiss)).

[13] 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).

[14] Carbon Capital Mgmt., 88 A.D.3d at 939 (citation and alterations omitted).

[15] Schmidt v. Merchants Despatch Transp. Co., 270 N.Y. 287, 300 (1936).

[16] Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957).

[17] Id.

[18] Trepuk v. Frank, 44 N.Y.2d 723, 725 (1978).

[19] Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011).

[20] Id. (citation and internal quotation marks omitted).

[21] See Shalik v. Hewlett Assocs., L.P., 93 A.D.3d 777, 778 (2d Dept. 2012).

[22] Celestin v. Simpson, 153 A.D. 3d 656, 657 (2d Dept. 2017).

[23] Slip Op. at *2 (citing Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc., 137 A.D.3d 685, 689-690 (1st Dept. 2016); Ghandour v. Shearson Lehman Bros. Inc., 213 A.D.2d 304, 305-306 (1st Dept. 1995)).

[24] Id.

[25] Id. (citing CPLR 213(8)).

[26] Id.

[27] Id.