The Absence of a Single Statute of Limitations for Breach of Fiduciary Duty Claims
Print Article- Posted on: Jan 22 2025
By: Jeffrey M. Haber
In New York, litigants often grapple with the appropriate limitation period to apply to breach of fiduciary claims. There is no single statute of limitations that the courts and the parties can look to. “Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks.”[1] “Where the remedy sought is purely monetary in nature, courts construe the suit as alleging ‘injury to property’ within the meaning of CPLR 214 (4), which has a three-year limitations period.”[2] “Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213 (1) applies.”[3] Moreover, “where an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213 (8).”[4]
In considering the appropriate limitations period, the courts are careful not to elevate form over substance. Thus, for example, where a plaintiff uses “the term ‘disgorgement’ instead of other equally applicable terms such as repayment, recoupment, refund, or reimbursement,” it
“should not be permitted to distort the nature of the claim so as to expand the applicable limitations period from three years to six.”[5]
Regardless of whether the three-year limitations period or the six-year limitations period applies, the period may be tolled under the continuous wrong doctrine. Under the doctrine, “[w]here there is a series of continuing wrongs,” the statute of limitations is tolled “until the date of the commission of the last wrongful act.”[6] “The doctrine ‘may only be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct. The distinction is between a single wrong that has continuing effects and a series of independent, distinct wrongs.’”[7] “The doctrine is[, therefore,] inapplicable where there is one tortious act complained of since the cause of action accrues in those cases at the time that the wrongful act first injured plaintiff and it does not change as a result of ‘continuing consequential damages.’”[8]
[Eds. Note: This Blog has examined statutes of limitations involving breach of fiduciary duty claims and the continuing wrong doctrine on many occasions. See, e.g., here, here, here, here, here, here, here, and here.]
The initial burden of establishing that the limitations period bars the challenged claim is on the movant.[9] “To meet its burden, the defendant must establish, inter alia, when the plaintiff’s cause of action accrued.”[10] “A breach of fiduciary duty claim accrues where the fiduciary openly repudiates his or her obligation – i.e., once damages are sustained.”[11] Importantly, “[t]o determine timeliness, [the court] consider[s] whether [the] plaintiff’s complaint must, as a matter of law, be read to allege damages suffered so early as to render the claim time-barred.”[12]
As readers might expect, the determination of whether a fiduciary duty claim is equitable or monetary, or whether the claim is dependent on fraudulent and deceitful conduct, is not always easy. Not surprisingly, the reporters are brimming with cases in which the courts have to decide the appropriate statute of limitations to apply to a breach of fiduciary duty claim. One such case was recently decided by Justice Andrea Masley of the New York Supreme Court, New York County, Commercial Division. Dixie v. Scheer, 2025 N.Y. Slip Op. 30167(U) (Sup. Ct., N.Y. County Jan. 11, 2025 (here).
Dixie involved an individual and shareholder derivative action brought by plaintiff on behalf of New Amsterdam Distributors, LLC (“NAD”) and Terriodiol Ohio LLC (“TO”). Plaintiff alleged that he was a founding member of NAD, which through NYCI Holding, LLC (“NYCI”) owned a 50% interest in nonparty NYCANNA LLC. NYCI is solely owned by NAD. Plaintiff possessed a 13% ownership interest in NAD.
In May 2015, NAD and nonparty EPMMNY, LLC discussed the formation of a partnership to jointly pursue a medical cannabis license. NAD retained defendants to provide legal services, including the formation of NYCANNA for the purpose of pursuing the license.
On November 20, 2016, defendants sent NAD’s principals notice that NYCANNA was merging with nonparty NY Medicinal Research and Caring, LLC (“NYMRC”). The merger allegedly diluted plaintiff’s equity interest as it substantially divested NAD’s members of their ownership interests. Specifically, Plaintiff alleged that defendants conspired with the incoming investors to, among other things, divest NAD of its interest in NYCANNA.
In May 2017, the New York State Department of Health awarded a medical marijuana license to NYCANNA. Thereafter, defendants introduced plaintiff to an individual who had an existing relationship with one of the defendants. At defendants’ recommendation, the individual became a member and manager of NAD (the “Manager”). Plaintiff alleged that he was sidelined as defendants and the Manager essentially seized control of NAD.
In May 2018, NYCI sold its fifty percent interest in NYCANNA to nonparty High Street Capital Partners (“High Street”).[13] Plaintiff alleged that defendants structured the transaction so that High Street acquired all of NYCANNA’s equity. NAD’s officers, including plaintiff were removed as NYCANNA’s management, leaving it a mere shell company.
According the complaint, the transaction came about after the Manager met with representatives from High Street. Following the meeting, plaintiff was informed that there was going to be a $2 million cash call, and that if he did not meet the call by investing the necessary cash, his percentage ownership in NYCANNA would be reduced. Plaintiff was also allegedly presented an alternative to the cash call—selling NYCANNA to High Street. According to plaintiff, the transaction needed to be approved by the NYCANNA shareholders within eight hours. Plaintiff was allegedly told that the value of the transaction would be approximately $40 million based on the stock valuation. The consideration for the sale of NYCI’s interest in NYCANNA to High Street was cash and stock in High Street. Plaintiff and the other NAD members approved the transaction allegedly based upon defendants’ representations.
Plaintiff alleged that defendant violated his fiduciary duty to the NAD members by falsely advising that the transaction was favorable to NYCANNA, NYCI and NAD, and immediate approval was necessary, thereby depriving them of the opportunity to conduct a proper due diligence investigation of the proposed transaction.
On September 25, 2018, High Street that announced it would go public in Canada by performing a reverse takeover of a publicly traded entity, nonparty Applied Inventions Management Corp. As a part of the transaction, a 6-month lockup period governed High Street’s shares.
On November 15, 2018, High Street went public, starting the lockup period. The lockup period had three phases, ending on May 15, 2019. Defendant estimated that High Street’s stock would be worth about $24 per share during the course of the redemption period. However, immediately before the first tranche of stock was eligible for release, defendants informed the NAD members that their shares were not going to be released, attributing the failure on some NAD members to sign additional necessary paperwork. Plaintiff maintained that those members signed the additional documents but delays still occurred.
On March 25, 2019, NYCI’s board of managers held a special meeting to authorize the transfer of 20% of High Street’s shares from NYCI to NAD. They also authorized the transfer of all High Street shares due to the Manager (through an entity) from NYCI to the entity’s name. After further delay, on April 16, 2019, defendant emailed High Street, seeking transfer of the shares to the NAD members.
High Street responded that more than a letter was needed before a transfer of shares could be approved. On April 25, 2019, defendant sent an email to NYCI’s board of managers stating that the initial NYCI authorization to transfer shares did not meet High Street’s requirements, and that that the NYCI Board of Directors needed to specifically approve the distribution directly from NYCI to the NAD members.
Plaintiff alleged further delay in the transfer, which caused him to miss the opportunity to sell his shares during a High Street stock rally in April 2019. The stock reached a high of $24.13 per share, but it was not until September 2019 that Plaintiff received 50% of his shares; the stock value at that point was around $2 a share. According to the complaint, only in March 2022 did Plaintiff receive the balance of his stock transfer at barely over penny stock value.
Plaintiff alleged that defendants engaged in similar conduct with respect to a venture in Ohio. Plaintiff claimed that he was also a founding member of TO, which was formed in 2018, to apply for a medical marijuana license in Ohio. According to plaintiff, defendants brought in the Manager to run TO. Plaintiff claimed that, without his knowledge, the Manager arranged a sale of TO’s pending license to another company for $20 million. The deal fell through. Thereafter, TO entered into a new deal with another company. Plaintiff alleged that he was not aware of the proposed transaction for approximately one year.
Plaintiff asserted claims for breach of fiduciary duty, a derivative claim on behalf of NAD pursuant to Business Corporation Law (“BCL”) § 626 for legal malpractice, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and fraud against defendants, as well as a derivative claim on behalf of TO pursuant to BCL § 626 for breach of fiduciary duty and negligence against defendants.
Defendants moved to dismiss the fiduciary duty claim concerning the alleged delay in transferring the High Street stock, claiming, among other things, that the claim was time barred. Defendants maintained that the three-year limitations period applied; plaintiff argued that the six-year limitations period applied because his claim was based on unjust enrichment, which is equitable in nature.
The Court found that the plaintiff only sought monetary relief.[14] To underscore the point, the Court noted that plaintiff advised that he would be seeking disgorgement of profits and legal fees as the result of the breach, though he had not yet amended his complaint to include such relief.
The Court rejected plaintiff’s “assertion that the breach of fiduciary claim [was] rooted in fraud.”[15] The Court noted that the breach of fiduciary duty claim was based on two alleged actions – “failing to diligently pursue the necessary process for transferring the [Hight Street] shares” and giving “erroneous tax advice.”[16] “Although [plaintiff] argue[d] … that [defendants] induced [him] to authorize and sign off on the mergers without informing him of the terms or conditions of such, that conduct[, said the Court,] is not alleged in connection with the breach of fiduciary duty claim.”[17] “The conduct that is alleged,” explained the Court, “involve[d] ‘allegedly impaired professional judgment;’ this claim as plead is not essentially a fraud claim.”[18]
The Court also rejected the argument that plaintiff’s fraud claim expanded the limitations period to six years.[19] The Court explained that since plaintiff failed to plead justifiable reliance, the fraud claim could not aid in expanding the statute of limitations to six years.[20]
Having determined that the three-year statute of limitations applied, the Court found that the claim had accrued well before the complaint was filed—i.e., on May 15, 2019, when the lockup period ended:
In the complaint, [plaintiff] alleges that, by September 2019, only 50% of the [High Street] stock had been released to him and remaining 50% was released in March 2022. He alleges that [defendant’s] delay caused [plaintiff] to miss the opportunity to sell the [High Street] stock while it was at a high at the end of April 2019, but he also alleges that, when his shares were finally released to him in September 2019 and March 2022, they were worth around $2 and “barely over penny stock value,” respectively. Thus, based on the allegations in the complaint, [plaintiff] first sustained damages when he did not have his shares once the lockup period ended on May 15, 2019.[21]
Finally, the Court rejected the argument that the continuing wrong doctrine tolled the statute of limitations: “Here, there is one alleged tortious act – [defendant’s] delay in transferring the stock to [plaintiff] – which first occurred at the end of the lockup on May 15, 2019.”[22] “Although the single alleged action of delay may have caused a continuing increase in damages,” said the Court, “the continuing wrong doctrine does not apply.”[23]
_______________________________________
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] IDT Corp. v. Morgan Stanley Dean Witter & Co., 12 N.Y.3d 132, 139 (2009) (citations omitted).
[2] Id.; see also VA Mgt., LP v. Estate of Valvani, 192 A.D.3d 615, 615 (1st Dept. 2021).
[3] Id.
[4] Id.
[5] Access Point Med., LLC v. Mandell, 106 A.D.3d 40, 44 (1st Dept. 2013); see also VA Mgt., 192 A.D.3d at 615 (stating that “[p]laintiff’s characterization of that relief as ‘disgorgement’ of [the defendant’s] compensation does not convert it into a claim for equitable relief to which the six-year statute of limitations would apply”) (citations omitted)).
[6] Palmeri v. Willkie Farr & Gallagher LLP, 156 A.D.3d 564, 568 (1st Dept. 2017) (citations omitted).
[7] Henry v. Bank of Am., 147 A.D.3d 599, 601 (1st Dept. 2017) (citations omitted).
[8] Id. (citations omitted) and id. at 601-602 (“where a plaintiff asserts a single breach—with damages increasing as the breach continued—the continuing wrong theory does not apply.” (citations omitted)).
[9] Lebedev v. Blavatnik, 144 A.D.3d 24, 28 (1st Dept. 2016) (internal quotation marks and citations omitted).
[10] Id.
[11] Id.
[12] IDT, 12 N.Y.3d at 140.
[13] High Street officially changed its name to Acreage Holdings, Inc. on November 14, 2018.
[14] Slip Op. at *7.
[15] Id.
[16] Id.
[17] Id.
[18] Id. at *7-*8 (citing Access Point Med., 106 A.D.3d at 44 (citation omitted)).
[19] Id. at *8.
[20] Id.
[21] Id. at *9.
[22] Id.
[23] Id. at *9-*10.