Tolling and The Continuing Wrong Doctrine

• Posted on: Jul 18 2022

 By: Jeffrey M. Haber

A recurring question that courts and litigants often encounter is how to apply the continuing wrong doctrine to a statute of limitations. 

Statutes of limitations restrict the time within which a defendant can be held liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitations period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run is an important issue for a lawyer and client to discuss.

[Ed. Note: This Blog has examined the continuing wrong doctrine on many occasions. See, e.g.,  here, here, here, and here.]

In today’s article, we examine 333 E. 91st St. Owners Corp. v. 1765 First Ave. Associates, LLC, 2022 N.Y. Slip Op. 32189(U) (Sup. Ct., N.Y. County July 7, 2022) (here), a case involving the statute of limitations for a breach of contract cause of action and the application of the continuing wrong doctrine.  

In New York, the statute of limitations for a breach of contract claim is six years.¹ It begins to run (i.e., accrue) from the date of the breach. The claim does not accrue from the date of discovery.² As the Court of Appeals explained, a contrary rule “would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules that have long governed this aspect of commercial repose.”³

Statutes of limitation can be tolled – that is extended. One doctrine that allows for tolling is the continuing wrong doctrine.

“The continuous wrong doctrine is an exception to the general rule that the statute of limitations runs from the time of the breach though no damage occurs until later.”⁴ Where applicable, the doctrine “serves to toll the running of a period of limitations to the date of the commission of the last wrongful act” and “may only be predicated on continuing, unlawful acts and not on the continuing effects of earlier unlawful conduct.”⁵ “The distinction is between a single wrong that has continuing effects and a series of independent, distinct wrongs.”⁶ Thus, the doctrine does not apply where the subsequent wrongs are consequences of the original, time-barred wrongful act.⁷

The distinction between the consequences of a wrongful act and the wrongs themselves was discussed by the Appellate Division, First Department in Henry, a case involving a plaintiff who was enrolled in two credit card programs without his consent and billed monthly for those programs.⁸ The First Department held that the doctrine did not toll the limitations period for two reasons: first, the absence of a breach of a recurring duty, and second, the wrongful acts – automatic monthly credit card fee charges – “represent the consequences of those wrongful acts in the form of continuing damages, not the wrongs themselves.…”⁹

The same result was rendered by the First Department in Matter of Yin Shin Leung Charitable Foundation v. Seng (Matter of Yin Shin), 177 A.D.3d 463 (1st Dept. 2019), where the Court held that the doctrine did not toll the plaintiffs’ claim because “[t]he loss of corporate income was merely a continuing effect of the initial decision” from which the claim arose.¹⁰ 

Recently, the First Department had the opportunity to further discuss the applicability of the doctrine.

In CWCapital Cobalt VR Ltd. v. CWCapital Investment LLC (Cobalt), 195 A.D.3d 12, 13-16 (1st Dept. 2021), the plaintiff asserted a breach of contract claim against the defendant CWCapital Investment, LLC (“CWCI”) for CWCl’s failure to manage certain commercial mortgage-backed securities (“CMBS”) based on their agreement. The agreement required CWCI to, in pertinent part, appoint a special servicer to “direct and supervise the disposition of nonperforming and underperforming loans that are held by a particular CMBS trust so as to mitigate the losses suffered by the trust.” The parties’ arrangement also required CWCI “to ensure that the value of [plaintiff’s] assets is maximized.” The plaintiff alleged that CWCI breached the agreement in three distinct ways, each category of wrongdoing dealing “with the actions of the special servicer CWCI selected on [plaintiff’s] behalf”. CWCI moved to dismiss the complaint in its entirety, arguing that the plaintiff’s causes of action were time-barred. 

The First Department held that the continuing wrong doctrine applied to toll the statute of limitations as to the last wrongful act because “[t]he explicit language of the [agreement] conferred on CWCI a continuing duty to manage [plaintiff’s] investment.” Cobalt alleged that, “with respect to special servicers like CWCA, this responsibility included wielding the power not only to appoint and terminate, but also to ensure that all services being performed by the special servicer were done only to benefit the COO investors.” “Essentially,” noted the Court, “the allegations describe an arrangement by which CWCI acted as [plaintiff’s] eyes and ears with respect to the CMBS trusts and had a responsibility to do everything in its power to prevent any activities that could possibly be to [plaintiff’s] detriment.” “Thus,” concluded the Court, “while certainly a claim accrued the first time CWCI failed to act upon CWCA’s engagement in behavior that allegedly diminished the value of its investment, there [was] no basis for the argument that each subsequent time CWCI failed to act did not constitute a separate, actionable, wrong.”¹¹

The First Department placed heavy emphasis on the parties’ agreement, which conferred a “contractual obligation to manage the CMBS trust assets on an ongoing basis, with ‘reasonable care and in good faith.’”¹² Therefore, the defendants’ subsequent breaches were based on new failures or omissions of the ongoing, recurring duty.

In Marcal Finance SAA v. Middlegate Securities Ltd., 203 A.D.3d 467 (1st Dept. 2022), the plaintiff contracted with defendant Middlegate Securities Ltd. to “manage [plaintiffs’] inheritance for their benefit.” Plaintiffs sued defendant in October 2015 for breaching their agreement by misappropriating the funds in 2011. The First Department held that the plaintiffs sufficiently alleged a “series of unauthorized transfers” whereby the “continuing wrong doctrine tolled the running of the statute of limitations until the last such transfer was made.”¹³ 

Similarly, in Manipal Education Americas, LLC v. Taufiq, 203 A.D.3d 662 (1st Dept. 2022), the defendant, who was the plaintiff’s former director of marketing, repeatedly contracted with the company, Exit Editorial, Inc., for video editing services. The plaintiff brought suit, asserting that the defendant “falsely represented to it that he negotiated with Exit at arm’s length and that Exit’s prices were reasonable, when in fact its prices were well above market rate, he had an ownership interest in Exit, and he received a cash finder’s fee for each contract with Exit.” The First Department found that “a separate exercise of judgment, and thus a separate wrong, was committed each time Exit was hired, thereby enabling the application of the continuing wrong doctrine.”¹⁴ 

With these decisions in mind, the 333 E. 91st St. Owners court held that the continuing wrong doctrine did not toll the statute of limitations for plaintiff’s breach of contract claims.

333 E. 91st St. Owners concerned defendant’s alleged failure to transfer a residential manager unit (“RM Unit”) to plaintiff, the owner of the subject residential cooperative building, in contravention of the offering plan (“Offering Plan”).

The Offering Plan required defendant to transfer ownership of the unit to plaintiff for a fixed price. The Offering Plan further required defendant to sell the unit “within three (3) months of the First Closing.” Between the three-month period of the First Closing and transfer of ownership, defendant had the right to not to sell an apartment to plaintiff for a period of up to three months following the date of the First Closing during which period defendant would rent the unit occupied by the Resident Manager to defendant. In that event, plaintiff agreed to pay defendant’s rent of $5,675 per month until the Resident Manager’s apartment was conveyed to plaintiff. 

Once the three-month rental period expired, plaintiff alleged that defendant was “to apply payments received from purchasing shareholders against the balance of the Purchase Price for the RM Unit” and “had the right to make a loan whose principal and interest would be reduced as shareholders purchased and made their RM Unit Contributions, but no such loan was ever memorialized.”

The plaintiff alleged that the First Closing occurred as early as May 24, 2010; however, the plaintiff did not learn of this closing until March 2020, after records were supplied to its counsel. 

The plaintiff contended that the first closing was disclosed on September 8, 2010, as evidenced in the eighteenth amendment to the Offering Plan. The plaintiff claimed that the defendant was obligated to transfer ownership of the RM Unit by September 2010, three months after the May 2010 closing or at the latest, December 2010, three months following the September 2010 closing. The defendant did not transfer the RM Unit until September 2020. 

Plaintiff alleged that defendant breached the Offering Plan by improperly charging plaintiff rent for the RM Unit for nearly ten years until the RM Unit was finally transferred. Plaintiff also alleged that defendant breached a proprietary lease by failing to pay maintenance due on the RM Unit for April, May, June, July, August, and September 2020. Plaintiff also sought damages for breach of the covenant of good faith and fair duty, alleging that defendant “maintained control of the Board of Directors of [] [plaintiff] until at least June 2017,” which caused defendant’s “appointed directors to elevate [defendant’s] interests … over those of [] [plaintiff] and cause[] [plaintiff] to make unauthorized rent payments to the [defendant],” and by its control, “prevent[ed] its appointed directs [sic] from demanding the timely transfer of the RM Unit.”

Defendant sought dismissal of plaintiff’s claims as time-barred under the applicable statute of limitations. In opposition, plaintiff invoked the continuing wrong doctrine, arguing that the obligation to transfer the RM Unit was a continuing one and each overpayment of monthly rent constituted a new breach in a series of continuing wrongs.

The Court agreed with defendants and dismissed the complaint.

The Court found that defendant breached its obligation under the Offering Plan to timely transfer the RM Unit as early as September 2010, and as late as December 2010. “And, because, the transfer was allegedly never made on time,” noted the Court, “the alleged rent payments – over the three-month period permitted – occurred because of the initial alleged breach in 2010.”¹⁵ “It was [defendant’s] single failure to transfer on time that gave rise to the excessive rent payments and other contributions, and without a contractual obligation imposing a recurring duty and no breach of a recurring duty thereof, the monthly rent payments are consequences of the alleged failure to timely transfer the RM Unit”, said the Court.¹⁶ Thus, concluded the Court, “the doctrine will not toll the statute of limitations period. The applicable limitations period accrued in December 2010 at the latest and the limitations period expired in December 2016.”¹⁷

In denying application of the continuing wrong doctrine, the Court rejected plaintiff’s contention that “each monthly overpayment of rent constituted a new breach in a series of continuing wrongs”.¹⁸ The Court held that the “monthly overpayment of rent [was] more aptly analogous to the ‘consequences of wrongful acts,’ as [plaintiff’s] overpayment of monthly rent, following the permissible three-month period of rent payments, flowed from the alleged breach of [the] parties’ contractual obligation to transfer the RM Unit within the three months of the First Closing.”¹⁹

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. 333 E. 91st St. Owners 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 a singular wrong.

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.

Footnotes

1. CPLR § 213(2).
2. ACE Sec. Corp., Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prods., Inc., 25 N.Y.3d 581, 594 (2015).
3. Id. (citations and internal quotation marks omitted).
4. Henry v. Bank of Am., 147 A.D.3d 599, 601 (1st Dept. 2017) (citation omitted).
5. Id.
6. Id. (internal quotation marks and citation omitted).
7. Id. at 602.
8. Id.
9. Id.
10. Id. at 464.
11. 195 A.D.3d at 19-20.
12. Id. at 20.
13. 203 A.D.3d at 468.
14. 203 A.D.3d at 663.
15. Slip Op. at *9.
16. Id.
17. Id.
18. Id. at *10.
19. Id.