Two-Year Discovery Rule Does Not Save Fraud Claim From Dismissal

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Posted on: Jul 5 2024

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 Blizniak v. Fences By Precision, LLC, 2024 N.Y. Slip Op. 03639 (4th Dept. July 3, 2024) (here), the Appellate Division, Fourth Department, reversed the order of the motion court denying defendants’ motion to dismiss plaintiff’s fraud claims as time barred because plaintiff was on inquiry notice of said claims.

Plaintiff commenced the action on May 19, 2023, asserting, inter alia, a fraud cause of action against defendants after the sale of certain fencing to plaintiff and the installation thereof.

In December 2014, plaintiff entered into a contract with defendants, a limited liability company and its sole member, to purchase and install sections of six-foot-tall and four-foot-tall “Country Estate” brand fencing. On June 11, 2015, plaintiff entered into a second contract with defendants to purchase and install, among other products, an additional section of four-foot-tall fencing. Plaintiff alleged that “at the time [he] entered into the [s]econd [c]ontract, [he] understood that he was again purchasing ‘Country Estate’ brand fencing, of the same kind and quality as provided in the [f]irst [c]ontract.”

On February 1, 2020, plaintiff contacted defendants after noticing that the fencing installed under the second contract was beginning to fade, while the fencing installed under the first contract was not. Plaintiff asked whether the fencing installed under the second contract was manufactured by Country Estate. On March 2, 2020, plaintiff again contacted defendants by text message, noting that the invoice for the fencing installed under the first contract reflected that it was Country Estate brand, but the invoice under the second contract did not. By February 24, 2021, plaintiff had retained counsel, who sent a letter to defendants threatening to commence an action against them absent a satisfactory resolution within 15 days. Plaintiff contacted Country Estate Fence for the first time on June 15, 2021 and, the following day, that company’s representative confirmed that they did not manufacture the fading fencing at issue.

Defendants moved to dismiss the complaint, arguing that the statute of limitations for plaintiff’s fraud cause of action had run by May 19, 2023. Specifically, defendants argued that the alleged fraud accrued when the fence was installed in June 2015. Under the six-year statute of limitations for fraud, argued defendants, the claim had accrued almost two years before plaintiff filed his complaint.

Defendants also argued that plaintiff’s fraud claim was untimely under the two-year discovery rule. Defendants maintained that plaintiff had ample time, evidence, and resources to discover the alleged fraud in February 2020, when plaintiff noticed the fence installed pursuant to the second contract between the parties was fading in color. In fact, said defendants, plaintiff began to investigate the issue in February 2020 and March 2020. Moreover, defendants contended that plaintiff was on notice of the alleged fraud as late as February 2021, when plaintiff retained an attorney, who threatened a lawsuit against defendants.

The motion court denied the motion. Defendants appealed. The Fourth Department unanimously reversed.

As an initial matter, the Court confirmed that the six-year statute of limitations had run, thereby shifting the burden to show timeliness onto plaintiff: “Here, it is undisputed that defendants established that the action was not commenced within six years. Thus, the burden shifted to plaintiff to show that the two-year discovery exception applies.”[11]

The Court held that plaintiff failed to meet his burden.[12]

Plaintiff failed to do so. The Court found that the “record established that plaintiff had knowledge of facts from which the fraud could reasonably be inferred as early as February 2020 when the four-foot fencing began to fade while the six-foot fencing did not … and, at the latest, by February 2021 when plaintiff’s counsel threatened to commence an action against defendants.”[13] Thus, concluded the Court, “[t]he statute of limitations … ran, at the latest, in February 2023, and plaintiff’s complaint filed nearly three months thereafter was not timely and the remaining fraud cause of action must therefore be dismissed.”[14]

Finally, the Court rejected plaintiff’s “alternative ground for affirmance” that defendants “misled him to believe that they were pursuing a warranty claim on his behalf.”[15] The Court “conclude[d] that plaintiff failed ‘to establish that subsequent and specific actions by defendants somehow kept [him] from timely bringing suit.’”[16]

Takeaway

Blizniak 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. 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 *2 (citation omitted).

[12] Id.

[13] Id. (citation omitted).

[14] Id.

[15] Id.

[16] Id. (quoting Zumpano v. Quinn, 6 N.Y.3d 666, 674 (2006)).