statute of limitations

The Donald J. Trump Foundation, a private foundation incorporated in 1987, was formed “exclusively for charitable, religious, scientific, literary or educational purposes”,  and as stated in the Certificate of Incorporation, shall not be for propaganda or participating or intervening in “any political campaign.”  The Foundation’s president and founder, is Donald J. Trump.

Donald J. Trump Foundation logo.pngThe Attorney General of the State of New York filed suit against the Foundation, Mr. Trump and the Board members, alleging breaches of fiduciary duty, waste, wrongful party transactions and dissolution of the Foundation.  The basis?  The petition claims that the Foundation and Board members engaged in illegal and abusive transactions over the years, violated corporate and statutory rules for fiduciaries, and misuse of charitable assets including self-dealing.  Significantly, the petition alleges that Mr. Trump used donated money to purchase personal items, advance his presidential election campaign and settle certain legal obligations.  The petition attaches many emails, photos, contribution lists and other supporting documentation.

Respondents moved to dismiss the petition in its entirety, alleging a variety of defenses, ranging from lack of jurisdiction under the Supremacy Clause of the U.S. Constitution, statute of limitations,  and failure to state a claim.  Justice Saliann Scarpulla, in a well-reasoned decision, denied the motion to dismiss all of the claims, except for the sixth cause of action seeking injunctive relief.  As to that claim, the court held that the injunctive relief sought was moot in light of the Respondent’s attempt to voluntarily dissolve the Foundation.

A key ruling was on statute of limitations, specifically, Respondents argued that the transactions at issue occurred more than six years ago.  They also argued that inquiry into any of the transactions occurring more than three years before the petition was filed is barred since the relief sought for those was primarily monetary.  Noting that movant on a motion to dismiss bears the initial burden of establishing untimeliness,  that burden then shifts to plaintiff to establish timeliness or an applicable tolling.  Here, Justice Scarpulla found that since the claims arose out of a fiduciary relationship, the limitations period is tolled until the fiduciary “opening repudiated his or her obligation or the relationship has been otherwise terminated.”   The court also applied the “continuing wrong doctrine“, noting that it applies in many types of cases, namely, breach of contract, breach of fiduciary duty and statutory violations.  The petition itself alleges continuing, pervasive failure to manage and operate in accordance with applicable rules and law.  That, coupled with the mixed relief sought — injunctive and monetary — led the court to apply the six-year statute of limitations, finding that the conduct at issue was not barred “as a matter of law” at this threshold stage of the case.

When wrongs occur over a substantial period of time — like those alleged here — a detailed pleading, demonstrating the continuity, relatedness and pervasiveness is essential to survive dismissal.  The petition here lays out in detailed fashion a continuous timeline.  Such careful pleading makes it very difficult for a defendant to overcome the “continuing wrong” doctrine.  It remains to be seen, however, after discovery and a likely motion for summary judgment, whether the alleged acts of misconduct are indeed “continuous”  and sufficient to overcome the statute of limitations defense.  The court here made it clear in denying the dismissal motion based on statute of limitations that the Respondents could not demonstrate untimeliness “at this pre-answer stage of the proceedings.”  Stay tuned for future developments!

For more practice tips in New York Courts, subscribe to the New York Commercial Division Practice Blog.

Although we generally report on recent Commercial Division decisions, and sometimes commercial cases coming out of the Appellate Divisions, this time we go all the way to the top:  the Court of Appeals.  Not often do we see commercial cases with a procedural twist coming out of our High Court (of NY).  However, last week, the Court rendered a decision in Deutsche Bank Nat’l Bank Trust Co. v. Flagstar Capital Mkts, addressing a thorny statute of limitations issue in a breach of representations and warranties claim arising out of a residential mortgage-backed securities contract.  Even more interesting is that the decision was only a 4-2 vote, drawing two separate dissents from Judges Rivera and Wilson.  Judge Garcia took no part.

The case arose out of a series of mortgage loans originated by defendant Quicken Loans, Inc. that were initially sold to Morgan Stanley Mortgage Capital, Inc. and eventually sold to a trust for the purpose of issuing residential mortgage-backed securities. The document at issue, the Second Amended and Restated Mortgage Loan Purchase and Warranties Agreement (“MLPWA”), contained two provisions at issue. The first, the “Sole Remedy” provision, stated that the purchaser’s only remedy was seller’s obligation to sure or repurchase the nonconforming loan. The second, the so-called “accrual clause” provided that “[a]ny cause of action against the Seller . . . shall accrue . . . upon (i) discovery of such breach . . . (ii) failure by the Seller to cure such breach . . . and (iii) demand upon the Seller by the Purchaser for compliance.”

Against this backdrop, seven years after the loans were originated, plaintiff claimed breach. Defendants immediately moved to dismiss on statute of limitations grounds, relying on the Court of Appeals’ decision in ACE Sec. Corp. v. DB Structural Prods., Inc., which held that a cause of action for breach of representations and warranties accrues when the contract was executed.

The case was dismissed at the trial court level, on the statute of limitations defense. Affirmed by the Appellate Division, First Judicial Department (143 AD2d 15), the Court of Appeals granted leave to consider whether the statute of limitations could be extended beyond the Court’s decision in ACE.

In a split decision, the Court held that the “accrual clause” did not create a substantive condition precedent. In addition, the Court held that the accrual period could not be used to extend the statute of limitations. Rather, the Court distinguished NY General Obligations Law 17-103, which allows parties to extend a statute of limitation after the cause of action accrues. In rejecting plaintiff’s claims of “freedom of contract” the Court held that “[w]hen the public policy favoring freedom to contract and the public policy prohibiting extensions of the limitations period before accrual of the cause of action come into conflict, however, the latter must prevail.”

The dissents were strong. Judge Rivera, criticizing the majority for “misconstru[ing] decisional law” by departing from “our longstanding recognition of the freedom to contract,” found no statute or public policy to be a bar to the enforcement of the accrual. Judge Wilson, agreeing with Judge Rivera’s dissent, in even stronger language concludes the Court “created bad law” and “fundamentally misinterpreted the structure of RMBS agreements.”

The takeaway? Not sure, but at least for now, the drafters of agreements that contain clauses seeking to extend the period within which to assert a claim for breach of a representation and warranty — particularly in the RMBS arena — must take care in ensuring the “accrual” of the claim is not postponed, but rather the period within which to sue is extended.

Can substitution of a new plaintiff who has proper standing cause “surprise or prejudice” to a defendant after the statute of limitations would have expired, such that leave to file an amended complaint should be denied? Not if the two plaintiffs are the same person switching from their individual to representative capacity, held the Second Department on August 15, 2018 in D’Angelo v Kujawski.

Plaintiff, “as proposed Administrator [sic]” of her deceased son’s estate, retained Defendants, comprising a law firm, to commence an action against the U.S. Department of Veterans Affairs (“VA”) based on medical malpractice that allegedly resulted in her son’s wrongful death. According to Plaintiff’s complaint, in 2011 Defendants filed a Notice of Claim with the VA’s Office of Regional Counsel, but the Notice of Claim negligently failed to reference the VA’s administration of contraindicated medications. After Defendants withdrew from the representation on December 20, 2013, Plaintiff commenced an action with new counsel that was ultimately dismissed by the US District Court for the Eastern District of New York for failure to timely exhaust administrative remedies. Specifically, the court found that Plaintiff had possessed “vital information bearing on the existence of her claim” that was wrongfully excluded from the Notice of Claim.

On December 15, 2016, five days before the statute of limitations would have expired, Plaintiff commenced an action for legal malpractice against Defendants. However, Plaintiff mistakenly named herself individually as the plaintiff, instead of as Administratrix of the Estate. Defendants moved to dismiss the complaint for lack of an attorney-client relationship with the individual Plaintiff. In response, Plaintiff cross-moved for leave to file an amended complaint, thus setting the stage for the court to determine the applicability of CPLR §§ 305 and 3025 to a request to substitute plaintiffs, as well as whether Plaintiff’s delay in seeking leave past expiration of the statute of limitations would “prejudice or surprise” Defendants.

Relying on Caffaro v Trayna, a 1974 Court of Appeals decision purportedly allowing substitution of plaintiffs and subsequent interposition of time-barred claims in an amended pleading, Commercial Division Justice James Hudson held that Defendants would suffer no prejudice because the original complaint adequately put Defendants on notice of the nature of the claims and allowed the amendment. However, Justice Hudson did not analyze or discuss whether CPLR §§ 305 and 3025 authorized a party without standing to substitute an otherwise time-barred party. Nor did Caffaro, which substituted the estate’s Executrix for the decedent in the decedent’s pending medical malpractice action.

The Second Department affirmed:

“[A]n amendment which would shift a claim from a party without standing to another party who could have asserted that claim in the first instance is proper since such an amendment, by its nature, does not result in surprise or prejudice to the defendants who had prior knowledge of the claim and an opportunity to prepare a proper defense” (JCD Farms v Juul-Nielsen, 300 AD2d 446, 446 [internal quotation marks omitted]; see United Fairness, Inc. v Town of Woodbury, 113 AD3d 754, 755; Matter of Highland Hall Apts., LLC v New York State Div. of Hous. & Community Renewal, 66 AD3d 678, 682; Plotkin v New York City Tr. Auth., 220 AD2d 653, 654).

The Second Department appeared primarily concerned with protecting Defendants from new allegations or claims, rather than whether the “relation back” doctrine codified in CPLR § 203(f) applied in actions commenced by a party without standing. The Second Department did not address authority from the Court of Appeals and other Departments of the Appellate Division that appeared to hold otherwise, such as Nomura Asset Acceptance Corp. v Nomura Credit and Capital, Inc., 139 AD3d 519 (1st Dept 2016). There, the First Department held that an untimely claim could not relate back to a defective summons issued by a plaintiff without standing, “because no valid action was commenced by the filing of that summons.” The Fourth Department held the same in Truty v Fed. Bakers Supply Corp., 217 AD 2d 951 (4th Dept 1995). Both decisions cited Goldberg v Camp Mikan-Recro, 42 NY2d 1029 [1977], in which the Court of Appeals distinguished Caffaro based on the original plaintiff having standing to commence the action.

Practitioners are thus cautioned that between the First and Fourth Departments, on the one hand, and the Second Department, on the other, there appears to be a split as to whether an untimely amended pleading may “relate back” to an earlier action brought by a plaintiff who lacks standing.

Ian Pai was an early participant in the Blue Man Group (“BMG”).  Between 1989 and 1991, he met and began collaborating with the founders of BMG, namely, Chris Wink, Phillip Stanton and Matt Goldman.  Pai claims to have made significant contributions to BMG’s creative and musical aspects over the decades-long relationship he had with the group, having ultimately assumed the duties of Music Director and Conductor.   In 2014, Pai’s royalty checks were abruptly cut in half without explanation.  Ultimately, Pai filed a  complaint against BMG and its founders, claiming breach of fiduciary duty, breach of contract, accounting, quantum meruit and unjust enrichment.  Following discovery, defendants moved for summary judgment on all counts.  Justice Barry Ostrager denied the motion in part, but granted summary judgment dismissing the two counts premised upon the existence of a fiduciary duty:  breach of fiduciary duty and accounting.  The remaining claims survived the motion, and trial is now scheduled for April 9, 2018.

Pai concedes that his fiduciary duty and accounting claims are not based upon a “formal” fiduciary relationship, but rather on his decades-old personal relationship with the three founders, and the founders’ alleged representations that they would “take care” of him.   In sum, his fiduciary duty claims were based solely upon the close relationship they developed over the years.  The defendants denied a fiduciary relationship ever existed, but did admit they had a long close-knit relationship with Pai.

So, can a mere close personal relationship create a fiduciary duty?   Maybe!  Indeed, as the Court recognized, citing Kohan v. Nehmadi, a fiduciary relationship can be found to exist between close friends under certain circumstances.   Here, the Court considered that “Pai’s age, lack of financial experience, and trust in the Individual Defendants to look out for him” may very well have given rise to a fiduciary relationship.  However, fatal to Pai’s claims was applicable six-year statute of limitations which barred any claims he may have had in the 1990s.  The Court reasoned that since 2009, Pai has been represented by counsel, negotiating agreements between Pai and BMG, all at arms-length.  The result is that the contract-based claims survive for trial, but the fiduciary relationship-based do not.

The concept of a close personal relationship giving rise to fiduciary duty is not new.    Whether a fiduciary relationship exists is, of course, a very fact-intensive inquiry.  The Court in the Pai case recognized this and, in the end, did not have to decide whether the early relationship in fact gave rise to a fiduciary one since it was time barred.  A good overview of this very issue — how New York courts determine the existence of a fiduciary duty — is found in an EDNY case, St. John’s Univ. v. Bolton (Garaufis, J., 2010) (“a fiduciary relationship embraces not only those the law has long adopted . . . but also more informal relationships where it can be readily seen that one party reasonably trusted another”).  The starting point (and maybe the ending one too) is whether there is an agreement between the parties governing their rights and obligations.  In the absence of such, a close personal relationship intertwined with a business one can very well create at least issues of fact whether a fiduciary relationship exists between them.

In a thorough opinion last week by Justice Marcy Friedman in Bank of N.Y. Mellon v WMC Mtge., LLC, the New York County Supreme Court upheld the timeliness of “Failure to Notify” claims arising from subprime mortgage-backed securities formed into a trust in 2007. To put it mildly, the mortgages were problematic (go see The Big Short if you have not already done so). The primary issue the court examined was the accrual date of causes of action asserting that the securitizer (Morgan Stanley) had breached its contractual duty to notify the Trustee of any breaches of representations and warranties that it discovered after closing. (Separate causes of action directly asserting breaches of the representations and warranties were previously dismissed as time-barred.)

Did these “Failure to Notify” claims accrue upon the closing of the securitization? Or did the claims accrue when Morgan Stanley discovered the breaches?

The issue was complicated by the Court of Appeals’ landmark decision in ACE Securities Corp. v. DB Structured Products Inc., 25 N.Y.3d 581 (2015), which held that a plaintiff cannot avoid the statute of limitations on a claim for breach of representations and warranties by pleading a separate claim based on the defendant’s failure to repurchase materially breaching loans. The Court in ACE reasoned that the repurchase provision in the parties’ contract was more akin to a remedy for the breach of representations and warranties, rather than a separate and continuing obligation. In addition, the Court in ACE was concerned by the prospect of “accrual dates that cannot be ascertained with any degree of certainty,” especially cumbersome in mortgage-backed securities cases involving representations and warranties relating to thousands of loans per securitization.

Justice Friedman also gave pause to consider New York’s policy against applying the “discovery rule” to statutes of limitations in contract actions. For example, in Deutsche Bank National Trust Co. v. Flagstar Capital Markets Corp., 143 A.D.3d 15 (1st Dept 2016), the First Department held an accrual clause in the governing agreement unenforceable as against public policy, where the clause purported to delay the accrual of claims until three conditions were satisfied: (i) discovery of a breach, (ii) failure to cure or repurchase, and (iii) demand upon the defendant for compliance with the agreement. The First Department held that such a clause “creates an imprecisely ascertainable accrual date—possibly occurring decades in the future, since some of the loans extend for 30 years.”

The court found these policy arguments “compelling,” but ultimately held that it could not impose the same accrual date as the underlying breach of warranty claims, because in Nomura Home Equity Loan, Inc. v. Nomura Credit & Capital, Inc., 133 A.D.3d 96 (1st Dep’t 2015), Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital Holdings LLC, 143 A.D.3d 1 (1st Dep’t 2016), and Bank of NY Mellon v. WMC Mtge., LLC, 151 A.D.3d 72 (1st Dept 2017), the First Department held that a “duty to notify” accrued independent of the securitizers’ obligations with respect to representations and warranties and therefore gave rise to a separate cause of action for damages. Unlike in ACE, this duty to notify could not be characterized as a remedy for the breach, because it was entirely an obligation of the securitizer and did not depend on any prior action by the trustee.

The court limited its holding to only allow “Failure to Notify” claims involving breaches first discovered by Morgan Stanley within the six-year statute of limitations. In other words, Morgan Stanley had no “continuing obligation” to notify past the date of first discovery that would otherwise extend the statute of limitations indefinitely. Nonetheless, the possibility of revising otherwise time-barred claims makes it worthwhile for parties asserting claims based on breaches of representations and warranties in a securitization to carefully read the agreements to evaluate an independent duty to notify post closing.

So your client wants you to file a declaratory judgment action, but you are unsure of whether the applicable statute of limitations has expired.  But what is the applicable statute of limitations in a declaratory judgment action?  Since there is no limitations period specifically addressed to the declaratory judgment action, it generally falls under the “catch-all” provision of CPLR 213[1] and gets six years as “an action for which no limitation is specifically prescribed by law.”  That being the case, you assume your declaratory judgment cause of action is timely so long as it is filed within six years of its accrual.  Think again.

Declaratory judgment actions are unique, in that the Court will actually examine the substantive nature of the claims and the relief sought to determine which limitations period applies.  If the Court determines that the underlying dispute could have been resolved through another proceeding for which a specific limitations period is statutorily provided, the Court will apply that limitations period – even if it is much shorter than six years.

The Appellate Division, Second Department recently addressed this point in Save the View Now v Brooklyn Bridge Park Corp., 156 AD3d 928 (2d Dept 2017).

Save the View Now involved a challenge to the development of a hotel, restaurant, and residential units upland of Pier 1 in Brooklyn Bridge Park (the “Park”).  The overall plan and structure for the Park were set forth in a general project plan (“GPP”) first adopted by Defendants Brooklyn Bridge Park Development Corporation (“BBPDC”) and the Empire State Development Corporation (“ESD”) in July 2005.  The general project plan, as modified (“MGPP”), stated that “[t]he residential and hotel uses would be located in two buildings, one of approximately 55 feet and one of approximately 100 feet in height.”

Construction began in July 2013 and, on September 10, 2014, the northern hotel building had already reached its maximum height.  By this time, members of the community began objecting that the height of the northern hotel building violated the MGPP and was obstructing the view of the roadbed of the Brooklyn Bridge from the Brooklyn Promenade.

In April 2015, Plaintiffs, a group comprised of local members of the community, commenced an action against BBPDC and others seeking, among other things, a declaration that the buildings were being constructed in excess of their height limitation in violation of the MGPP.  The Kings County Supreme Court (Knipel, J.) granted Defendants’ motion to dismiss on the ground that the action was untimely.

The Second Department affirmed.  The Court noted that while an action for a declaratory judgment is generally governed by a six-year statute of limitations (see CPLR 213[1]), the applicable statute of limitations in a declaratory judgment action is determined by the substantive nature of the claim.  Thus, “where a declaratory judgment action involves claims that could have been made in another proceeding for which a specific limitation period is provided, the action is subject to the shorter limitations period.”

Because Plaintiffs’ declaratory judgment action could have been brought as an Article 78 proceeding (and indeed should have, since it involved a challenge to governmental conduct), the four-month statute of limitations governing Article 78 proceedings – rather than the six-year statute of limitations under CPLR 213[1] – applied.

So what’s the takeaway?  The nature of the relief sought in a declaratory judgment action dictates the applicable limitations period.  Thus, prior to relying on the catch-all provision in CPLR 213[1], a careful lawyer should analyze the substance of a complaint to determine if a shorter limitations period may apply.  However, a lawyer may not use a declaratory judgment action as a vehicle to circumvent the statute of limitations that applies to the substance of a complaint.

 

The doctrine of equitable recoupment, which is codified in CPLR 203(d) permits a defendant to assert an otherwise untimely defense or counterclaim. The Appellate Division, First Department recently applied the doctrine in California Capital Equity, LLC v. IJKG, LLC, and highlighted a few caveats that a litigator should bear in mind when relying upon the doctrine.   Importantly, one must keep in mind that the doctrine of equitable recoupment is to be used as a shield, not a sword.

Plaintiff California Capital Equity, LLC (“CalCap”) commenced an action against defendants IJKG, LLC (“IJKG”) and Vivek Garipalli (“Garipalli”)¹ (collectively, “Defendants”) asserting claims of breach of contract, fraud, and breaches of fiduciary duty arising out of, among other things, Defendants’ failure to make interest payments to CalCap pursuant to a Note Agreement.   In response, IJKG asserted counterclaims for tortious interference with contract, breach of implied covenant of good faith and fair dealing, and unjust enrichment.

CalCap moved to dismiss IJKG’s counterclaims for tortious interference with contract and unjust enrichment on the ground that these counterclaims were barred by New York’s three-year statute of limitations.   Justice Ramos of the New York County Commercial Division denied CalCap’s motion, finding that the doctrine of equitable recoupment permitted IJKG to assert its otherwise time-barred counterclaims.

The First Department affirmed Justice Ramos’ ruling. The Court explained that the doctrine of equitable recoupment, which is codified in CPLR 203(d), permits a defendant to seek equitable recoupment in an otherwise untimely defense or counterclaim.   However, there are two main caveats with respect to the doctrine: (1) the defense or counterclaim must arise from the same transaction, occurrence, or series of transactions or occurrences as alleged in the complaint; and (2) the doctrine may only be asserted to offset any damage award or deficiency judgment that a plaintiff may obtain in its favor against a defendant.   In other words, the doctrine of equitable recoupment may only be used defensively as a shield for recoupment purposes, and not as a sword for a defendant to obtain affirmative relief on an otherwise stale counterclaim.

Applying these principles, the First Department concluded that IJKG’s tortious interference of with contract counterclaim, if proved, could be used defensively for recoupment purposes, but that IJKG could not obtain any relief from the counterclaims, such as disgorgement. Accordingly, the Court permitted IJKG to assert its counterclaim for tortious interference with contract solely to offset any damage award or deficiency that CalCap may obtain in its favor.

¹  Although Garipalli was named as a defendant in the lawsuit, all claims against him have been dismissed.