AUTHOR’S UPDATE: Please see my December 2019 Post: “New York’s New Voidable Transactions Act Entirely Replaces its Fraudulent Conveyance Law.”

The New York CPLR has a fairly straightforward provision setting forth the statute of limitations for “fraud.”  The case law, however, adds significant embellishments.  Thus, the CPLR cannot be taken literally on its face. I explain below.

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.”

There are various causes of action in the nature of fraud that do not require actual intent to defraud.  See,e.g., my posts. These are generally known as constructive fraud or negligent misrepresentation.  The cases reveal that the generous statute of limitations in CPLR 213(8), allowing for an extended period of two years from the actual or with reasonable diligence discovery of the fraud, does not apply to these other fraud claims that do not require actual intent to defraud.

A new Appellate Division First Department decision notes this distinction and analyzes the issues under CPLR 213(8) as to whether the plaintiff could have discovered the alleged actual fraud within two years of bringing the case – Berman v Holland & Knight, LLP, 2017 NY Slip Op 08489 (1st Dep’t Decided on December 5, 2017).

Constructive Fraud Statute of Limitations

The First Department in Berman was not particularly informative in laying out the relevant facts, but it did set out the law fairly succinctly.  As to the statute of limitations pertaining to constructive fraud claims, the Court stated:

The [Commercial Division] court properly dismissed the second cause of action (constructive fraud) as time-barred. “[T]he two-year discovery provision [of CPLR 213(8)] . . . does not apply to constructive fraud” (Monaco v New York Univ. Med. Ctr., 213 AD2d 167, 168 [1st Dept 1995], lv dismissed in part and denied in part 86 NY2d 882 [1995]). The alleged fraud occurred, at the latest, on January 22, 2004, but plaintiffs did not sue until July 13, 2015.

Thus, the straight six-year statute of limitations applies to constructive fraud claims, accruing on the date of the alleged fraud — without regard to when the fraud was discovered or could have been discovered. Constructive fraud claims generally eliminate the element of “intent to defraud” applicable to actual fraud claims, and replace that with requiring some form of special relationship between the parties, such a fiduciary duty.  See my posts.

The six-year constructive fraud statute of limitations also applies to a host of causes of action under the New York Debtor and Creditor Law (DCL) alleging various permutations of fraud without actual intent.  As the Second Department explained in Metzger Jr. v.. Yuenger Woodworking Corp., 33 A.D.3d 678 (2d Dep’t 2006):

Claims based on constructive fraud, such as those recognized by Debtor and Creditor Law §§ 273 and 273-a, are governed by the six-year statute of limitations set forth in CPLR 213 (1), and such claims arise at the time of the fraud or conveyance (see Wall St. Assoc. v Brodsky, 257 A.D.2d 526, 530 [1999]; Avalon LLC v Coronet Props. Co., 306 A.D.2d 62 [2003]). Where actual fraud is alleged, such as that recognized under Debtor and Creditor Law § 276, the statute of limitations is six years from the fraudulent transfer or two years from the time the fraud was discovered or could have been discovered (see Island Holding v O’Brien, 6 A.D.3d 498 [2004]; CPLR 203 [g]), whichever is later (see Miller v Polow, 14 A.D.3d 368 [2005]; Liberty Co. v Boyle, 272 A.D.2d 380, 381 [2000]).

Thus, claims under the five “constructive fraud” provisions of the DCL (DCL 273 (conveyances by insolvent), DCL 273-a (conveyance by a defendant), DCL 274 (conveyances by person in business), DCL 275 (conveyance by person about to incur debts), DCL 277 (conveyance of partnership property) do not get the benefit of the extended two-year discovery period in CPLR 213(8).  In these cases, the limitations period is six years from the date of the alleged wrong.

Actual Fraud Discovery Analysis

The First Department in Berman then analyzed the discovery rules for the cause of action for actual fraud.  In doing so, it distinguished an earlier decision it rendered in an interesting and informative case (Aozora Bank, Ltd. v Deutsche Bank Sec. Inc., 2016 NY Slip Op 02511 [137 AD3d 685] (1st Dep’t 2016)), which was the subject of one of my posts.  It appears plaintiff was suing its own attorney for fraud in Berman, but without revealing the facts in any more detail, the Court set forth its determination of the discovery rules as follows:

The two-year discovery provision does apply to actual fraud (first cause of action). “[T]he issue of when a plaintiff, acting with reasonable diligence, could have discovered an alleged fraud . . . involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds. Instead, the question is one for the trier-of-fact” (Saphir Intl., S.A. v UBS PaineWebber Inc., 25 AD3d 315, 315-316 [1st Dept 2006] [internal quotation marks omitted]). One cannot say, as a matter of law, that the Internal Revenue Service’s July 2007 deficiency notice, which mentioned only nonparty Derivium, placed plaintiffs on inquiry notice of defendant’s alleged fraud (see id. at 316). Plaintiffs plausibly allege that, until defendant produced its file on January 8, 2015 in response to a motion to compel in Tax Court, they had no inkling of its purported fraud (see CSAM Capital, Inc. v Lauder, 67 AD3d 149, 157 [1st Dept 2009]). Unlike the subprime crisis in Aozora Bank, Ltd. v Deutsche Bank Sec. Inc. (137 AD3d 685 [1st Dept 2016]) (cited by defendant), Derivium’s fraud was not common knowledge.

It is true that plaintiffs sued Derivium’s clearing broker-dealers in March 2010 (see Berman v Morgan Keenan & Co., 2011 WL 1002683, 2011 US Dist LEXIS 27867 [SD NY, March 14, 2011, No. 10 Civ. 6866(PKC)], affd 455 Fed Appx 92 [2d Cir 2012]). However, plaintiffs would have had far more reason to suspect Derivium’s brokers than their own attorneys. Plaintiffs were entitled to place “ultimate trust and confidence” in defendant, who represented them (Johnson v Proskauer Rose LLP, 129 AD3d 59, 72 [1st Dept 2015] [internal quotation marks omitted]).

These issues are discussed further in numerous of my posts and can be found under the “Topics” for “Constructive Fraud” and “Statute of Limitations” as well as by using the robust search tool in this blog.