Courts are becoming increasingly aggressive in dismissing fraud claims where the plaintiff has not acted promptly to assert the claims in court after notice of potential fraudulent activity. Parties are forewarned to be diligent in not only investigating any suspicion of fraud, but to institute an action promptly upon notice of nefarious activity.
The Appellate Division First Department’s decision in MBI Intl. Holdings Inc. v Barclays Bank PLC, 2017 NY Slip Op 04381 (1st Dep’t Decided on June 1, 2017) is the latest example.
Statute of Limitations for Fraud
Fraud claims have a special statute of limitations. The statute of limitations for fraud is six years from the time of the fraud or within two years from the time the fraud was discovered or, with reasonable diligence, could have been discovered. CPLR 213(8); Sargiss v Magarelli, 12 NY3d 527, 532 (2009).
In MBI Intl. Holdings, the First Department rendered an informative and comprehensive decision analyzing the type of diligence required to investigate potential fraud, affirming the order of the Commercial Division (Ramos, J.) dismissing the entire complaint for failure to bring the action within the two-year discovery statute of limitations period.
Plaintiff in MBI Intl. Holdings was a Saudi Arabian residential real estate developer that alleged it was defrauded out of hundreds of millions of dollars owed to it by the Saudi government.
Plaintiff constructed two luxury residential compounds in Saudi Arabia. Plaintiff and the Saudi government entered into direct lease agreements for the compounds under which Plaintiff was entitled to annual lease payments for an 18-year term through 2017, totaling in excess of $2 billion. Plaintiff then obtained financing under which the lender bank syndicate spearheaded by Barclays had the right to assume control of the borrower and its bank accounts, and had the right to enforce the Saudi government’s payment obligations under the lease. In an event of default, the bank syndicate was also entitled to collect such sums under the lease and distribute them in the following order of priority; first, to the bank syndicate in their relevant proportions; and then any additional amount recovered would go to Plaintiff’s benefit. The Saudi government then defaulted on the lease, and the bank syndicate assumed control over the claims against the bank.
It turned out that Barclays was trying to get a banking license in Saudi Arabia, and it was accused of making payoffs to a Saudi prince to get a license. At about the same time, Barclays allegedly orchestrated a settlement of the claims against the Saudi government, and obtained its license. In the settlement, the bank syndicate obtained all of the proceeds, and there was nothing left to pay the Plaintiff. Without the Saudi government lease, Plaintiff took a huge loss on its property.
The settlement with the Saudi government occurred in 2006, and the parties did not dispute that the alleged fraud occurred in or around July 2006, the date of that settlement, more than six years prior to the commencement of Plaintiff’s action. Plaintiff claimed, however, that it was not until May 2013 that it became aware of the alleged fraud from articles in the Financial Times, reporting on an investigation of Barclays relating to the above payoffs and license.
Both the Lower Court and First Department Find Plaintiff Had Sufficient Notice Earlier
The Commercial Division granted defendants’ motion to dismiss the fraud claims as time barred under the discovery rule of the statute of limitations. The First Department affirmed.
Most damning to the Plaintiff were the allegations of its own complaint, which traced the alleged fraudulent conduct back earlier than the 2013 date it claimed to have first gotten wind of it. The essence of the First Department’s analysis is as follows:
[A]s persuasively argued by defendant, plaintiffs’ own complaint establishes that they were on inquiry notice by at least 2008. The following facts are of particular importance to reaching this conclusion: first, by 2003, plaintiffs knew that Barclays voluntarily withdrew from a lawsuit against the Saudi government in the Southern District of New York, a lawsuit in which their complaint contends they “should have prevailed on a claim worth more than $1.25 billion, resulting in the return of a surplus worth hundreds of millions to Plaintiffs.”[FN3] Around the same time, according to plaintiffs’ complaint, it was public knowledge that the Saudi government was “contemplating the grant of a license to a Western financial institution to conduct banking activity within Saudi Arabia for the first time in decades.” By as early as 2007, plaintiffs learned that Barclays had entered into an undisclosed settlement with the Saudi government around July 2006, which entirely extinguished plaintiffs’ right to any surplus amount under the Term Facility Agreement.
Notably, while plaintiffs allege in their complaint that Barclays became their fiduciary after taking over [the borrower entity], they admit that Barclays entered the 2006 settlement agreement without ever consulting with them, that Barclays then later “actively concealed” the settlement, and “rebuff[ed] all inquiries for further information” between 2006 and 2008. With the realization that plaintiffs were out hundreds of millions of dollars, in 2007, plaintiffs sued the Saudi government in Saudi Arabia seeking to compel its performance under the Lease Agreements. However, again as set forth by plaintiffs’ complaint, the Saudi court ruled in 2008 that because Barclays had settled plaintiffs’ claims, they “no longer had any right to recovery from Saudi Arabia.” Thus, by at least 2008, plaintiffs were fully aware that Barclays and the Saudi government had settled [borrower’]’s claims, and that they would receive no money. By 2009, it became public knowledge that Barclays obtained a Saudi banking license. Yet, the last inquiry plaintiffs alleged to have made to Barclays was in 2008, and plaintiffs fail to allege any investigation they undertook in the years leading up to this action. Plaintiffs’ own allegations, which we must accept as true on a motion to dismiss, establish that plaintiffs were apprised of facts from which fraud could have been reasonably inferred by at least 2008. Accordingly, by at least 2008, New York law imposed on plaintiffs a duty to inquire, and plaintiffs’ subsequent failure to pursue a reasonable investigation triggered the running of the statute of limitations at that time (see Koch v Christie’s Intl. PLC, 699 F3d 141, 155 [2d Cir 2012] [“New York law recognizes . . . that a plaintiff may be put on inquiry notice, which can trigger the running of the statute of limitations if the plaintiff does not pursue a reasonable investigation.”]; see also, e.g., Aozora Bank, Ltd. v Deutsche Bank Sec. Inc., 137 AD3d 685, 689 [1st Dept 2016] [“Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.”] [citations omitted]).
This is yet another example of the essential need to hire counsel as soon as suspected activity arises. This activity must be investigated promptly. And no time should be wasted in asserting claims of fraud once there is notice of the potential fraud. In turn, however, courts should recognize that fraud claims may need to be further investigated in discovery once the claim is brought, given the need to institute an action so promptly.