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Statute of Limitations, The Continuing Wrong Doctrine and an Alleged Fraudulent Insurance Scheme

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  • Posted on: Jan 27 2020

Statutes of limitations limit the duration of a defendant’s liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitation period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run can be an important topic of discussion between a lawyer and her client.

The statute of limitations for a fraudulent inducement claim is the greater of (a) six years from the date when the cause of action accrued or (b) two years from the time plaintiff discovered the fraud or could with reasonable diligence have discovered the fraud. CPLR § 213(8). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” (Carbon Capital Mgmt., LLC v. Am. Express Co., 88 A.D.3d 933, 939 (2d Dept. 2011) (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).

The two-year discovery rule requires an inquiry into “whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred.” Kaufman v. Cohen, 307 A.D.2d 113, 123 (1st Dept. 2003) (internal quotation marks and citation omitted); see also 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. Eberle, 3 N.Y.2d at 326. “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 she has been defrauded, a duty of inquiry arises, and if she fails to undertake that inquiry when she would have developed the truth, and shut her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to 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, 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 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).

The same rules apply to a claim for negligent misrepresentation. 14 Bruckner LLC v. 14 Bruckner Blvd. Realty Corp., 78 A.D.3d 431 (1st Dept. 2010).

The statute of limitations for a breach of contract clam is six years. CPLR 213(2). The “statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury.” ACE Sec. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581, 594 (2015).

There are exceptions to the foregoing rules. One exception is the continuing wrong doctrine.

Under the doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am., 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id. (internal quotation marks and citation omitted).

The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id. It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id. (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc., 22 N.Y.3d 1024, 1032 (2013).

In contract actions, the doctrine is applied to extend the statute of limitations when the contract imposes a continuing duty on the breaching party. Bulova Watch Co. v. Celotex Corp., 46 N.Y.2d 606, 611 (1979); King v. 870 Riverside Dr. Hous. Dev. Fund Corp., 74 A.D.3d 494, 496 (1st Dept. 2010). Thus, where a plaintiff asserts a single breach – with damages increasing as the breach continues – the continuing wrong theory does not apply. Henry, 147 A.D.3d at 601-02.

In National Health Care Assoc., Inc. v Liberty Mut. Ins. Co., 2020 N.Y. Slip Op. 30149(U) (Sup. Ct., N.Y. County Jan. 6, 2020) (here), a case involving an alleged widespread and “elaborate” fraudulent insurance scheme (Slip Op. at *1), Justice Andrea Masley of the New York County Supreme Court, Commercial Division, dismissed plaintiffs’ fraud, negligent misrepresentation and breach of contract claims on statute of limitations grounds, holding that the claims were time barred and could not be saved by the discovery rule or any theory of tolling, such as the continuing wrong doctrine.

National Health Care Associates, Inc. v. Liberty Mutual Insurance Co.

Background

Plaintiffs, National Health Care Associates, Inc. (“NHA”), a health care management company, and its 26 corporate nursing home affiliates, brought suit against Liberty Mutual Insurance Company (“Liberty”), Arch Insurance Company (“Arch”), Prism Consultants, LLC (“Prism”), Asher Schoor and Ettie Schoor (“Schoors”; principals of “Prism”), Arlington Insurance Company, Ltd. (“Arlington”), Woodbury CC, LLC (“Woodbury”), Comp Control Insurance Company SPC (“CCIC”) and Comp Control, LLC (“Comp Control”), alleging that the defendants “orchestrated an elaborate, unlawful and fraudulent insurance scheme against” them. Slip Op. at *1.

Plaintiffs alleged that defendants engaged in a willful scheme to subvert the insurance laws of New York, Connecticut, Vermont and New Jersey by requiring them to enter into unapproved agreements and letters of credit that substantially altered the rates in plaintiffs’ regulator- approved insurance policies. Plaintiffs alleged that “defendants sold to plaintiffs unapproved workers’ compensation insurance policies masquerading as approved guaranteed cost policies” (“GC Policies”). Id.

The Particulars of the Alleged Wrongdoing

In 2003, plaintiffs engaged Prism to assist them with their search for workers’ compensation insurance. According to plaintiffs, the Schoors informed them about programs that “utilized a potentially beneficial captive reinsurance structure” (“Programs”), saving plaintiffs money as plaintiffs “would acquire profit-sharing interests in the captive and its underlying segregated cells.” Plaintiffs informed the Schoors that they “would only be interested in the Programs if Plaintiffs were the only insured policyholders, so that Plaintiffs would not be paying for losses at facilities they did not own or manage.” Id.

[Ed. Note: As explained by the Court in a footnote (Slip Op. at *3 n.3), “a captive reinsurance structure ‘allows a business to participate in the reinsurance of its liability insurance, thereby sharing in underwriting profits or losses. This structure may involve the creation of a reinsurance company or of a cell in an existing reinsurer … in which the insured business has an ownership interest.’” “A captive cell, often referred to as a ‘segregated cell’ or ‘segregated account,’ agrees to ‘reinsure a portion of the liability assumed by the business’ insurance. If the insurance is profitable, the business shares in those profits. If not, the business shares in the losses.’” “‘[T]he assets and liabilities of the captive cell are legally separated from those in the reinsurer’s general account and other cells.’”]

In November 2004, the Schoors presented NHA with Liberty’s Programs, which included Liberty’s GC Policies and the captive reinsurance program. The proposal described Liberty’s Programs which included the establishment of Comp Control, purportedly to be owned solely by NHA’s affiliates, to serve as the participant in a segregated cell in Arlington, a captive offshore reinsurer. Relying on the Schoors representations, plaintiffs alleged that they agreed to enter into the Liberty Programs.

That same month, Liberty issued GC Policies to plaintiffs under which they paid at least $18 million in premiums to Liberty (2004 to 2008) and at least $59 million in premiums to Arch (2008 to 2015). Liberty conditioned the sale of the GC Policies upon plaintiffs’ entry into the Programs whereby a portion of the risks and premiums were ceded to offshore reinsurers, defendants Arlington (Bermuda) and CCIC (Cayman Island), to write insurance policies without being subject to regulatory review and approval. In turn, Woodbury and Comp Control, the participants of segregated cells in Arlington and CCIC, would become responsible to pay workers’ compensation claims up to the final aggregate premium. To ensure that Woodbury and Comp Control would have enough funds to pay such claims, Liberty required plaintiffs to (1) sign extrinsic documents (“Liberty Extrinsic Agreements”) by which they agreed to Arlington and CCIC reinsuring Liberty’s liabilities, and (2) provide letters of credit (“Liberty LOC”) as collateral for the liabilities of Arlington and CCIC. Plaintiffs posted at least $2.5 million in the Liberty LOC. Starting in 2016, at least $1.09 million had been drawn from the Liberty LOC.

On November 24, 2004, the Schoors sent plaintiffs a draft operating and collateral agreement for Comp Control (“Comp Control Operating Agreement”) and represented that plaintiffs would be the sole members in the final agreement. The Schoors also created Woodbury and Comp Control to serve as participants of the segregated cells in Arlington and CCIC, respectively, and executed reinsurance agreements with Liberty on behalf of Comp Control, CCIC, Arlington or Woodbury. However, plaintiffs claimed, the Schoors never implemented plaintiffs’ membership in these entities, and never provided plaintiffs with a fully executed copy of the Comp Control Operating Agreement.

In late 2008, the Schoors presented the Arch’s Programs to plaintiffs and stated that the Arch Programs would mirror the Liberty Programs, including the “reinsurance structure, ownership interests and profitability”. Like Liberty, Arch conditioned the sale of the GC Policies upon plaintiffs’ entry into the Programs, whereby a portion of the risks and premiums were ceded to Arlington and CCIC to write insurance policies without being subject to regulatory review and approval. Woodbury and Comp Control would become responsible to pay workers’ compensation claims up to the final aggregate premium. Again, to ensure that Woodbury and Comp Control would have enough funds to pay such claims, Arch required plaintiffs to enter into (1) terms and conditions documents (“Arch TC Agreements”), (2) provide letters of credit (“Arch LOC”), and (3) corporate guarantees (“Arch Guarantees”). Plaintiffs posted at least $7.4 million in the Arch LOC. Starting in 2017, Arch had drawn at least $3.09 million from the Arch LOC.

On behalf of Arch, the Schoors presented the Arch TC Agreements to plaintiffs, which set forth the details and requirements of the Arch Programs, including the Arch LOC and Arch Guarantees. Plaintiffs claimed that based on the Schoors’ representations, they entered into the Arch Programs, and the Schoors executed reinsurance agreements with Arch on behalf of Comp Control and CCIC.

The Liberty LOC and the Arch LOC were automatically renewed and extended each year, by increasing the face value, though no draws on the LOCs were made at that point. However, plaintiffs said, in October 2015, on behalf of Liberty and Comp Control, Prism demanded additional monies from plaintiffs to pay for losses under the Liberty Programs and threatened to draw on the Liberty LOC, which led plaintiffs to make additional payments to prevent drawing on the Liberty LOC. In November 2015, plaintiffs obtained “loss runs,” which suggested that the Liberty LOC might be used to pay claims at unaffiliated facilities, and when the Schoors were inquired about such loss runs, Asher Schoor denied that Prism billed plaintiffs to pay claims by unaffiliated facilities and told plaintiffs that “National is paying for their own claims.”

On March 15, 2016, plaintiffs alleged that they were informed “for the first time” that they neither held any equity/right to receive any net profits in Woodbury and Comp Control, nor in Arlington and CCIC. The Liberty LOC and Arch LOC had been drawn down, and Arch had threatened that it would demand payment under the Arch Guarantees, despite that plaintiffs were “never made participants of the relevant segregated cells of the reinsurance captives.”

On April 27, 2018, plaintiffs filed a complaint seeking recovery from defendants based upon their alleged breach of contract, fraudulent representations and violations of state insurance and consumer fraud statutes.

Defendants moved to dismiss the claims against them on various grounds, including that the claims were time-barred under applicable statute of limitations.

The Court agreed with defendants.

The Court’s Decision

With regard to the Liberty/ Arlington transactions and related issues, the Court held that plaintiffs were on notice of their claims at least as early as November 2015. The Court explained that such notice was evident from the complaint itself and an affidavit that NHA’s president in a related federal action.

First, the Complaint specifically states that, in November 2015, the loss runs showed that, “as of August 2015, Comp Control had paid at least $766,000 related to more than $1,278,000 of incurred losses related to inquires in 2007 and 2008 of 18 employees at three facilities not affiliated with Plaintiffs ….”  Thus, by November 2015, plaintiffs possessed definitive and sufficient knowledge of the fraud or misrepresentation, which constituted more than a “mere suspicion.” Further, in the Federal Action, … NHA’s president, submitted an affidavit which states, in relevant part, “[a]fter NHA confronted Prism and the Schoors with the LMIC loss runs on November 23, 2015, Asher Schoor continued to incorrectly insist – in spite of this glaring evidence to the contrary- that ‘National is paying for their own claims.’ This statement contradicts plaintiffs’ current assertions.

Slip Op. at **9-10.

The Court rejected plaintiffs’ attempt “to bring their claims within in the applicable limitations period” by arguing that “the fraud and misrepresentation claims did not accrue until the last extension prior to when plaintiffs learned of the fraud because the irrevocable Liberty LOCs [were] deemed to be automatically extended each year unless the issuing bank [chose] not to renew.” Id. at *10. Stated differently, the Court rejected plaintiffs’ argument that their fraud and negligence claims were timely under the continuing wrong doctrine (the claims accrued “each time” the Schoors repeated the misrepresentations in each of their annual meetings with plaintiffs, and when additional premiums were paid in the form of Liberty LOC drawdowns as recently as August 2018). Id. The Court held that the automatic renewals and the drawdowns were not a continuing unlawful act; rather the consequence of the alleged fraud or misrepresentation committed in 2004-2008. Id. at **10-11.

For the same reasons as the Liberty/Arlington transactions, the Court dismissed the fraud and negligent misrepresentation claims with regard to the Arch transactions and related issues and the Prism group transactions and related issues. Id. at **12-13.

With regard to the breach of contract claims, the Court applied the same analysis and found the claims to be time-barred. Id. at **14-16. Plaintiffs maintained that their breach of contract claims were not time barred because (1) a new breach accrued when the Liberty LOCs were automatically extended; and (2) Liberty’s continuing wrong delayed the accrual of the claim until their final wrong in August 2018 (the recent drawdown on the Liberty LOCs). The Court noted that the automatic renewal/extension of the Liberty LOCs and their drawdowns in 2015-2018 did not renew the running of the statute of limitations because neither the extension/renewal nor the subsequent drawdowns constituted new or independent wrongs that would restart the running of the statute. Id. at *15. The Court explained that this finding was consistent with the holding of the Court of Appeals in which the Court held that the discovery rule does not apply to the statutes of limitations in contract actions. Id. (quoting ACE Sec. Corp. v. DB Structured Prods., Inc., 25 N.Y.3d 581, 594 (2015)).

Takeaway

The continuing wrong doctrine is based on the continuation of unlawful acts; it is not based on the continuing effects of earlier unlawful conduct. The distinction, therefore, is between a single wrong that has continuing effects and a series of independent, distinct wrongs. Henry v. Bank of Am., 147 A.D.3d 599, 601 (1st Dept. 2017) (citation and internal quotation marks omitted). National Health Care makes clear that plaintiffs will not be able to toll the statute of limitations when application of the doctrine is dependent upon the continuing harm incurred by the alleged wrongdoing.

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