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Paul Millus Writes, “Will Your Fiduciary Duty Claim be Timely When the Statute of Limitations Is No Longer Tolled?”

All attorneys should be aware that, pursuant to Governor Cuomo’s Executive Order 202.8 issued on March 20, 2020, the expiration of the applicable statute of limitations (“SOL”) on any claim has been tolled equal to the amount of the time left on the applicable SOL, without such tolling, until April 19, 2020.  We all should know as well that this tolling period has been extended several times-now until July 6, 2020.  So what better time than to get your ducks in a row on your breach of fiduciary duty claim?

To help in that regard, I refer you to a First Department decision on May 28, 2020 in the case of Habberstad, et al. v. Revere Sec. LLC, et al., 2020 NY Slip Op. 03071 which has reminded me  that a refresher may be in order regarding the SOL for a breach of fiduciary duty claim.

In this case, plaintiffs were thoroughly banished by the court for a number of reasons including, but not limited to, the fact that their breach of fiduciary claim was barred by a relevant trust agreement’s exculpatory clause which expressly relieved the defendant Trustees of liability for acts and omissions other than willful misconduct. (Duh- but to be fair, plaintiffs had an argument to escape this conundrum, it just did not carry the day!).  Nevertheless, the court brings to the fore the various issues regarding the applicable SOL in a breach of fiduciary duty claim.

Starting with the basics, the applicable statute of limitations for a breach of fiduciary duty depends on the substantive remedies sought.  Such that where the relief sought is equitable in nature (i.e., an accounting) the six-year limitations period of CPLR 213(1) applies.  However, if the claim is for monetary relief (which is often the case), a three-year statute of limitations alleging injury to property applies.  See Kaufman v. Cohen, 307 A.D.2d 113 (1st Dep’t 2003).

There are certain exceptions, however.  A cause of action for breach of fiduciary duty based upon allegations of fraud is subject to a six-year period or more if the doctrine of equitable estoppel or the fraud discovery accrual rule applies, but I digress.  Nevertheless, as is often the case, there are exceptions to the exception. One such exception to the rule I just cited is when the fraud allegation is merely “incidental” to the claim asserted, such that the allegation of fraud is not essential to the cause of action pleaded except as an answer to an anticipated defense of statute of limitations.  As per Kaufman, the courts “look for the reality, and the essence of the action and not its mere name.”  Id. at 119. The Courts, of course, want to prevent the revival of otherwise stale claims.

So what does that mean to be “incidental” to the fraud claim?  In Marketxt Holdings Corp. v. Engel & Reiman, P.C., 693 F.Supp.2d 387 (S.D.N.Y. 2010), plaintiffs claimed that the defendants knowingly assisted in devising and implementing a fraudulent scheme to deprive plaintiffs of certain stock and to convert the proceeds of that stock to their own benefit. Plaintiff identifies two distinct transactions in which, it was alleged, the defendants aided and abetted fraud, breach of fiduciary duty, and conversion and that they participated in a conspiracy to effectuate a fraudulent conveyance.  Defendants argued that the plaintiff’s allegations of fraud were merely incidental to its conversion claims and that the shorter statute of limitations for conversion applied, thereby barring all of the plaintiff’s claims for accessorial liability.  On a motion to dismiss, the court held that the fraud claims were indeed incidental to the claim of conversion, reasoning that the gravamen of plaintiff’s amended complaint was that the defendants helped steal assets properly belonging to plaintiffs, yet all of the alleged fraudulent conduct was in furtherance of this scheme to divert corporate assets and that this conduct did not cause cognizable damage to plaintiff independent of that conversion.   From my review of the case law, this is a complicated issue which will require a well thought-out and drafted complaint

In Habberstad, the court also found the claims of fraud incidental to the fiduciary duty claims, stating that the plaintiff’s accusations against one of the defendants was not that he actively participated in the alleged fraud but that he “endorsed it rather than opposed it.”

If this was not enough, I have one further note to remember.  As noted by the court, in a breach of fiduciary duty action seeking equitable relief, under the Open Repudiation Toll Doctrine, if the defendants openly repudiate all of the fiduciary duties that are alleged to have been breached, the six-year period runs from the date of that “open repudiation.”  Finally, the Open Repudiation Toll Doctrine does not apply to claims asserted for monetary damages.

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