As this Blog has detailed, the tort known as fraud is a robust legal flavor enhancer that produces all kinds of powerful legal remedies and benefits. For example, fraudulent conduct can give rise to rather remarkable remedies, like completely undoing a legal transaction—i.e., “rescission” for fraudulent inducement. Establishing the tort of fraud can warrant the award of punitive damages, where the fraudulent conduct is egregious enough. Attempts to discharge debts in bankruptcy can be thwarted by intentional fraudulent misconduct. Another huge benefit of alleging fraud is the legal life-extending or resuscitating of causes of action that would otherwise be time-barred under applicable statute of limitations.
Fraud’s Special Statute of Limitations
For the cause of action for “actual fraud” itself, New York gives an extended period of time to assert the claim: 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.”
I have written about some of the more dicey issues concerning the statute of limitations for fraud, such as the courts’ confusion over the limitations period for asserting actual fraud and constructive fraud or negligent misrepresentation – which have different periods. I have also commented upon when the fraud claim actually “accrues” or is deemed to have started to run – when the clock starts clicking to bring the claim. I have also addressed another issue that is not always treated clearly or consistently by the courts—whether a claim for fraud accrues simply when the alleged fraud is “committed” or when an injury that the fraud has caused occurs (if that could arguably have happened some time after the fraudulent misrepresentation was conveyed).
Another juicy legal flavor enhancer is fraud’s ability to extend the statute of limitations period for other causes of action—when they are based upon fraudulent conduct. A recent decision of the Appellate Division, Second Department, provides an instructive example.
Extending Statutes of Limitations for Other Claims
In Star Auto Sales of Queens, LLC v Filardo, 2022 NY Slip Op 01476 (2d Dep’t Decided March 9, 2022), the plaintiff was a car dealership suing one of its employees for stealing customer cash deposits and diverting payments to third parties by exaggerating invoices and pocketing the excess charges. Plaintiff alleged a number of causes of action against the defendant employee, including breach of fiduciary duties, conversion and fraud. The lower court granted defendant’s motion to dismiss several of the causes of action, ruling that the statute of limitations ran on all of them. The Second Department reversed, and reinstated the causes of action.
The Second Department first laid out the standard for determining a defense based upon the statute of limitations:
“In moving to dismiss a complaint pursuant to CPLR 3211(a)(5) as barred by the applicable statute of limitations, a moving defendant must establish, prima facie, that the time within which to commence the action has expired” (Franklin v Hafftka, 140 AD3d 922, 924; see Farro v Schochet, 190 AD3d 698, 698-699). “The burden then shifts to the plaintiff to raise a question of fact as to whether the statute of limitations was tolled or was otherwise inapplicable, or whether the action was actually commenced within the applicable limitations period” (Franklin v Hafftka, 140 AD3d at 924).
On the breach of fiduciary duties claim, the Second Department held that since such claims do not accrue until the fiduciary repudiates its duties, the claim there was timely because the defendant’s relationship with plaintiff “was not terminated until November 2017, and there is no allegation that [defendant] openly repudiated his employment obligations prior to that time.”
The Second Department then ruled that the conversion claim enjoyed the benefit of an extended statute of limitations because of the defendant’s fraudulent conduct. The Second Department explained:
A cause of action alleging conversion typically must be commenced within three years of the alleged conversion (see CPLR 214). However, when the allegations of fraud are essential to a cause of action alleging conversion based upon actual fraud, the cause of action is governed by the limitations period for fraud set forth in CPLR 213(8). That statute provides that, in 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” (see Monteleone v Monteleone, 162 AD3d 761, 762; see generally IDT Corp. v Morgan Stanley Dean Witter & Co., 12 NY3d 132, 139). Here, the fifth cause of action, alleging conversion, was based on an alleged actual fraud. Specifically, the amended complaint alleged, among other things, that [defendant] Filardo owed a fiduciary duty to the plaintiff, and that he engaged in a fraudulent scheme by making material omissions of fact and fraudulently concealed from the plaintiff the fact that he was diverting monies from it. The amended complaint also alleged that Filardo intended that the plaintiff rely on those misrepresentations and omissions and would not discover the misappropriation, that the plaintiff reasonably relied on those misrepresentations and omissions, and that plaintiff was damaged thereby. Since the fifth cause of action, alleging conversion, is based upon fraud, it is governed by the statute of limitations period for fraud set forth in CPLR 213(8) (see Loeuis v Grushin, 126 AD3d at 765; see also Monteleone v Monteleone, 162 AD3d at 762).
The Second Department was careful to point out, correctly, that the “fraud” required to extend the statute for the additional two-year period must be “actual” fraud as opposed to constructive fraud or negligent misrepresentation, which do not get the benefit the of two-year discovery period.
The cause of action for fraud has its own favorable statute of limitations based upon the notion that a party who commits fraud should not benefit from hiding its own fraudulent conduct, and thereby prevent the victim from knowing it has a right to sue. Thus, the statute has a built-in extender for the period in which the fraud was not discovered or capable of being discovered. These protections are further applied to other causes of action that are impacted by the fraudulent conduct.