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Kevin Schlosser Writes, "Duty of Inquiry Looms Large in Dismissal of Actionable Fraud Claim Under Statute of Limitations"

Apr 8, 2021
As I have explained in this blog, there is a well-ingrained theme running through the civil cause of action for fraud: Those who are seeking to assert and obtain legal remedies for fraud have a duty to act reasonably to ferret out the fraudulent conduct both while it is being committed to avoid being duped into injury as well as afterwards to timely bring an action seeking legal relief. Thus, an essential element of the cause of action for fraud is reasonable or justifiable reliance. Even assuming fraudulent misrepresentations were made, the victim cannot blindly rely on that undisputedly false information. Rather, the recipient of that information must take reasonable steps to test or investigate the accuracy of the information in relying upon its truth. See the Topic Heading “Justifiable/Reasonable Reliance.” Similarly, although the cause of action for actual fraud is bestowed with an enhanced period of time in which to bring a lawsuit, there is a similar catch: In New York, CPLR 213(8) provides that for “an action based upon fraud[,]  the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.” Note the last phrase conditioning the extended two-year period from when the fraud is detected: “or could with reasonable diligence have discovered it.” (Emphasis added.) That phrase incorporates the deep-rooted theme of self-protection. The fact that information is publicly or otherwise available often plays a prominent role on the issue of whether a party claiming fraud acted reasonably in avoiding harm from fraud or bringing the claim in a timely manner. The New York Appellate Division, First Department’s recent decision in Boesky v Levine, 2021 NY Slip Op 02059 (1st Dep’t Decided April 01, 2021) underscores the duty of inquiry in discovering the targeted fraudulent conduct. The Underlying Fraud In Boesky, plaintiffs sued their accountants and lawyers in connection with a failed tax-avoidance scheme that the defendants orchestrated and convinced plaintiffs to participate in. Plaintiffs brought claims for professional malpractice and various claims of fraud many years after the relevant events. The lower court decision of the Commercial Division lays out the relevant facts and the court’s decision that the fraud claims were barred by the statute of limitations. The lower court characterized the fraud claims as follows:

Plaintiffs allege that all of the defendants knowingly made affirmative misrepresentations and omissions with the intent that plaintiffs would rely upon them in deciding to retain defendants, in entering into the tax shelter transactions, and in paying defendants’ fees. But for the intentional misrepresentations and material omissions described in the complaint, plaintiffs would have availed themselves of legitimate tax savings opportunities and would have promptly amended their returns.

Plaintiffs brought the claim many years after retaining the defendants. Trying to take advantage of the two-year discovery extension to the statute of limitations, plaintiffs claimed “they did not know, and could not have known, that defendants’ fraud occurred because of the continued concealment of the circumstances surrounding [defendants’] actions to defraud not only the IRS and the NYSDF, but their clients as well, which were unknown to plaintiffs until [defendants] were indicted in October 2016.” The lower court disagreed, citing extensive information that plaintiffs acquired concerning the questionable nature of the tax avoidance scheme and defendants’ self-dealing many years before the case was brought. First Department Affirms Dismissal of Fraud Claims: Duty of Inquiry The First Department affirmed the dismissal of the fraud claims, ruling that even though the complaint alleged viable, actionable claims of fraud that were not duplicative of the malpractice claims, they were time-barred under the statute of limitations, even with the benefit of the extended two-year period. The duty of inquiry loomed large:

While the complaint sufficiently states a cause of action for fraud, it is time barred. The statute of limitations for fraud is the greater of six years from when the cause of action accrued or two years from when the fraud was discovered or with reasonable diligence should have been discovered (CPLR 213[8]). The cause of action for fraud accrued between 2002 and 2004 when plaintiffs entered into the allegedly fraudulent transactions (Kanterakis v Kanterakis, 125 AD3d 814, 816 [2d Dept 2015]; Hamrick v Schain Leifer Guralnick, 146 AD3d 606, 607 [1st Dept 2017], affg 2015 WL 5162542, at *4 [Sup Ct, NY County 2015]). Moreover, by 2014, plaintiffs were on notice that the IRS and NYDTF [New York Department of Taxation and Finance] deemed the tax shelters in which they invested a tax avoidance scheme, that defendants Levine and Katz were self-dealing with regard to these tax shelters of questionable legitimacy that they promoted to plaintiffs, and that Levine was involved in other alleged illegal tax schemes. “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, . . . knowledge of the fraud will be imputed to him” (Aozora Bank, Ltd. v Credit Suisse Group, 144 AD3d 437, 438 [1st Dept 2016], quoting Gutkin v Siegal, 85 AD3d 687, 688 [1st Dept 2011]). Here, plaintiffs had information suggesting they had been defrauded but failed to allege any facts demonstrating that they engaged in “the exercise of reasonable diligence.” Thus, knowledge of the fraud is imputed to plaintiffs (id. at 439-440), and because they did not commence this action until more than two years later, in February 2017, the fraud claim is time-barred. Moreover, since the fraud claim is time-barred, the claim for conspiracy to commit fraud, which is not an independent cause of action in New York, is not viable (EVEMeta, LLC v Siemens Convergence Creators Corp., 173 AD3d 551, 553 [1st Dept 2019]).

Commentary As I have often explained, even in the face of egregious fraudulent conduct, a party seeking to obtain legal remedies for the fraud has significant duties of self-protection. The duty of inquiry in timely bringing suit is firmly entrenched in the law of fraud. It is imperative that timely legal advice be sought and remedies assessed as and when suspicions arise.