The Failure to Exercise Reasonable Diligence Dooms Application of 2-Year Discovery Rule
Print Article- Posted on: Jul 5 2025
By: Jeffrey M. Haber
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.[1] The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”,[2] “even though the injured party may be ignorant of the existence of the wrong or injury.”[3]
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.”[4] “[M]ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud.[5] “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.”[6]
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 it would have developed the truth, and shuts her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to her.[7] The test as to when fraud should with reasonable diligence have been discovered is an objective one.[8] 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.[9] “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.”[10]
In Milne Travel Agency, Inc. v. Altour Del., LLC,2025 N.Y. Slip Op. 32294(U) (Sup. Ct., N.Y. County June 25, 2025) (here), the Supreme Court, New York County, Commercial Division, dismissed a fraud claim on statute of limitations grounds, finding that, inter alia, plaintiff could have discovered the alleged fraud with the exercise of diligence. The court also dismissed the fraud cause of action because plaintiffs failed to plead the justifiable reliance element of their fraud claim.
In Milne, plaintiffs Scott Milne (“Milne”) and his company, Milne Travel Agency, Inc. (“MTA”, and together with Milne, “plaintiffs”) brought an action against defendants ALTOUR Delaware LLC (“ALTOUR”) and Travel Leaders Group Holdings, LLC, d/b/a Internova Travel Group (“Internova” and together with ALTOUR, defendants) relating to non-party ALTOUR Milne LLC (ALTOUR Milne), of which MTA and ALTOUR were members. In the Amended Complaint, plaintiffs asserted causes of action for breach of contract, breach of the covenant of good faith and fair dealing, fraud, fraudulent concealment, breach of fiduciary duty, accounting, and intentional interference with contract. In today’s article, we examine the fraud claims.
MTA is a family-run travel services business started by plaintiff’s mother in 1975. In March 2016, MTA sold the majority of its assets to defendant ALTOUR pursuant to a joint venture agreement (“JV Agreement”) and an operating agreement (“Operating Agreement”, and together the JV Agreement, the “Agreements”). In connection with the transaction, ALTOUR formed a new company, non-party ALTOUR Milne. ALTOUR held the majority interest in ALTOUR Milne. MTA was a minority member with Milne as the sole Manager.
Among other things, the Agreements granted MTA a “Tag Along” right, which allowed ALTOUR to sell “all or substantially all” of its equity or assets to a third party, which would then trigger MTA’s right to have that third party purchase MTA’s interest in ALTOUR on the same terms.
In August 2017, ALTOUR “directly or indirectly sold ‘all or substantially all of its equity and/or assets’” to defendant Internova (the “2017 Transaction”). As a result of the sale, ALTOUR was “directly or indirectly” wholly owned by Internova.
Plaintiffs alleged that the 2017 Transaction triggered MTA’s Tag Along Right. Plaintiffs maintained that defendants took steps to prevent plaintiffs from exercising that right. First, said plaintiffs, ALTOUR did not alert MTA about the 2017 Transaction when it occurred. Second, when plaintiffs learned about the transaction in December 2017, ALTOUR’s CFO allegedly told Milne that the transaction did not trigger the Tag Along Right because a “‘different ALTOUR’ entity” was sold, not ALTOUR itself. Plaintiffs claimed that Milne “expressed skepticism” at this assertion.
On December 11, 2017, Milne emailed the then-CFO of ALTOUR, stating that the notion that the 2017 Transaction did not activate the Tag Along Right did not “really pass [the] straight face test.” Plaintiffs alleged that defendants overcame Milne’s skepticism by misrepresenting that there was “no change of control at ALTOUR” as evidenced by the fact that “Milne would continue to interface with the same ALTOUR personnel.”
From 2017 through December 2023, ALTOUR Milne operated “business as usual without interference from Internova.” In that connection, Milne continued to interact with the same ALTOUR personnel as before the 2017 Transaction. Plaintiffs alleged that the continued interaction with the same ALTOUR personnel led them to believe ALTOUR’s representation that it had not been sold.
Plaintiffs claimed that they eventually learned the truth in late 2023. Plaintiffs alleged that when ALTOUR’s CEO stepped down, Milne learned that “Internova was now fully in charge of ALTOUR’s business.” With the resignation, Milne allegedly believed that the sale of ALTOUR to Internova had occurred, “thereby triggering MTA’s Tag Along Right.” Plaintiffs maintained that they only learned the full truth on December 13, 2023, when during a virtual meeting, Internova’s CEO, CFO, and General Counsel informed Milne that the 2017 Transaction did involve a sale of ALTOUR and that plaintiffs missed their chance to exercise the Tag Along Right by over six years.
Defendants moved to dismiss the Amended Complaint.
Regarding the fraud claim, defendants argued that the cause of action was barred by the statute of limitations. Defendants maintained that plaintiffs filed the action on August 26, 2024, but the alleged fraud was based on misrepresentations made in December 2017, more than six years earlier.
In response, plaintiffs argued that they should benefit from the two-year discovery rule because defendants first told plaintiffs in December 2023 that the 2017 Transaction triggered the Tag Along Rights.
Defendants countered plaintiffs’ invocation of the discovery rule, arguing that plaintiffs could have discovered the truth given Milne’s skepticism about ALTOUR’s representations that the 2017 Transaction did not trigger the Tag Along Rights, especially since Milne had legal counsel to advise on the effects of the 2017 Transaction. Further, argued defendants, it was not believable that Milne, who was ALTOUR Milne’s manager for six years, did not notice the truth about the 2017 Transaction. Defendants maintained that it was unreasonable for plaintiffs to believe that a sale had not occurred “simply because the same CEO remained at ALTOUR,” especially given Milne’s lengthy experience of 50 years in the business.
The court agreed with defendants.
The court held that plaintiffs “could have discovered the fraud at the time it occurred with reasonable diligence.”[11] The court found that “plaintiffs were on notice of the 2017 Transaction in December 2017.”[12] The court explained that email correspondence submitted by defendants showed that “Milne did not think defendants’ argument – that the sale did not trigger the Tag Along Right because it involved a different entity – ‘passe[d] the straight face test.’”[13] As a result, noted the court, “Milne had consulted his attorney on this matter as evidenced by his emails of December 11, 2017.”[14] The court concluded from these facts that “[p]laintiffs were … aware of the transaction and had enough information to make a quasi-legal conclusion that they could activate their Tag Along Rights – all the information they needed at the time to assert those rights and avoid the fraud.”[15]
The court rejected plaintiffs’ argument that they were merely “skeptical” of defendants’ statements but were nevertheless deceived by ALTOUR’s subsequent representation that “there was ‘no change of control’ because plaintiffs would continue to work with the same personnel.”[16] The court explained that “[t]he mere continuity of personnel [was] not evidence that a company was not sold, particularly if, as asserted by defendants, an ‘upstream’ entity was sold.”[17] The court reasoned that the “emails filed by defendants show[ed that] plaintiffs had a lawyer who could have explained this” to plaintiffs.[18]
The court also found that plaintiffs were sophisticated in business and, therefore, had an affirmative duty to protect themselves from the alleged fraud: “Plaintiffs are also not so unsophisticated that their credulity can be overlooked – MTA’s business, family-owned or otherwise, operated for 50 years and engaged in … sophisticated corporate transactions as recently as 2016.”[19] Adding to their sophistication, said the court, plaintiffs “had legal counsel on the 2017 [T]ransaction and the Tag Along Right.”[20] Thus, concluded the court, “even if plaintiffs’ fraud claim were timely, it would fail because plaintiffs [did] not plead justifiable reliance.”[21]
Accordingly, the court dismissed the fraud claim “in its entirety”.[22]
Takeaway
Milne highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of fraud.[23] The failure to bring a lawsuit when the facts suggest fraud will result in dismissal. Thus, even though the discovery rule allows the victim of fraud to bring a lawsuit when the very nature of the fraud prevents him/her from knowing that he or she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his or her rights when the facts indicate that a wrong has been done.
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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] 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).
[2] Carbon Capital Mgmt., 88 A.D.3d at 939 (citation and alterations omitted).
[3] Schmidt v. Merchants Despatch Transp. Co., 270 N.Y. 287, 300 (1936).
[4] Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957).
[5] Id.
[6] Trepuk v. Frank, 44 N.Y.2d 723, 725 (1978).
[7] Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011).
[8] Id. (citation and internal quotation marks omitted).
[9] 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.”).
[10] Celestin v. Simpson, 153 A.D.3d 656, 657 (2d Dept. 2017).
[11] Slip Op. at *9.
[12] Id.
[13] Id.
[14] Id. at *10.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id. (citing Globalx, Inc. v. Hogwarts Capital, LLC, 226 A.D.3d 535, 536 (1st Dept. 2024)).
[22] Id.
[23] To find articles related to fraud, fraudulent inducement, the statute of limitations for fraud, the discovery rule, and justifiable reliance, visit the “Blog” tile on our website and enter the search terms “fraud”, “fraudulent inducement”, the “statute of limitations for fraud”, the “discovery rule”, and “justifiable reliance” or any other related search term in the “search” box.
