Whether prosecuting or defending a commercial fraud claim, calculating the applicable statute of limitations is often a threshold issue. But that calculation can be trickier than one might think. Though many states have statutes of limitations for fraud claims that may be extended by a defendant’s concealment, the limitations period might not apply. Asking a few questions about the specifics of the facts alleged in a fraud complaint could open the door to other limitations periods.
Is a Fiduciary Relationship Involved?
Business partners in a closely held entity are considered to have a fiduciary relationship in many states. Courts in some jurisdictions have held that the statute of limitations on a fraud claim cannot begin to run until this fiduciary relationship is terminated. In Bennett v. Anson Bank & Tr. Co., 143 S.E. 2d 312, 318 (N.C. 1965), the North Carolina Supreme Court reversed the dismissal on statute of limitations grounds of fraud claims brought by the administrator of a decedent’s estate against the heir of his former business partner. The court reasoned, “Where a confidential relationship exists between the parties, failure to discover the facts constituting fraud may be excused. In such a case, so long as the relationship continues unrepudiated, there is nothing to put the injured party on inquiry, and he cannot be said to have failed to use due diligence in detecting the fraud.” Although some courts allow the statute to begin to run on actual notice of fraud between fiduciaries, constructive notice is frequently insufficient. The continuation of a fiduciary relationship could allow a fraud claim to survive many years after the fraudulent act or omission.
Is the Defendant a Professional Services Provider?
States often have specific statutes governing claims against certain regulated professionals, such as doctors, lawyers, and accountants. Some lawyers attempt to plead around the limitations in these statutes with creative drafting of fraud claims, but a comprehensive professional services statute may still be fatal to the claim. For example, the Alabama Legal Services Liability Act, Ala. Code § 6-5-570, et seq., applies to all claims arising from legal advice, regardless of whether claims are pleaded as fraud, negligence, or legal malpractice. The act provides a two-year basic statute of limitations but allows a claim to be filed six months after discovery if it could not have reasonably been discovered within two years. Critically, though, the act includes a four-year statute of repose with no exceptions. This statute of repose supersedes Alabama’s more forgiving statute of limitations for fraud.
Illinois law imposes a similar framework for any claims brought against public accountants in the performance of their professional services: a two-year statute of limitations from the time of constructive notice. 735 Ill. Comp. Stat. Ann. 5/13-214.2. The statute requires all claims, however, to be brought within five years—the only exception here is that for a delayed criminal prosecution or tax assessment against the plaintiff with no exception related to concealment or notice.
Is the Fraud Claim Actually a Fraud Claim?
Even where a fraud claim is nominally pleaded and not subject to a professional liability statute, the typical fraud statute of limitations might not apply. In LaSalle Nat. Bank v. Ernst & Young LLP, 285 A.D.2d 101, 103, 729 N.Y.S.2d 671, 672 (2001), a lender sued its borrower’s accountant for fraud. A New York appellate court reversed the denial of the accountant’s motion to dismiss in part by finding that the lender’s fraud claim was essentially a claim for negligence. The substance of the claim governed analysis over its nomenclature. Where courts can be convinced to disregard creative drafting over the substance of a claim, a more restrictive statute of limitations may govern.
In analyzing a commercial fraud claim, lawyers should always consider how specific facts could remove a claim from a jurisdiction’s basic statute of limitations and impose a stricter limitations period. These considerations could be critical to a claim’s survival or dismissal.
Cason M. Kirby is a partner at Campbell Partners, LLC in Birmingham, Alabama.
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