Discovery Rule Can’t Save Trustee’s Fraud Suit – No ‘Continuing’ Violation Where Insurance Rep Misstates Premium Amount – IL Court

Gensberg v. Guardian, 2017 IL App (1st) 153443-U, examines the discovery rule in the context of common law and consumer fraud as well as when the “continuing wrong” doctrine can extend a statute of limitations.

Plaintiffs bought life insurance from agent in 1991 based in part on the agent’s representation that premiums would “vanish” in 2003 (for a description of vanishing premiums scenario, see here).  When the premium bills didn’t stop in 2003, plaintiff complained and the agent informed it that premiums would cease in 2006.

Plaintiff complained again in 2006 when it continued receiving premium bills.  This time, the agent informed plaintiff the premium end date would be 2013. It was also in this 2006 conversation that the agent, for the first time, informed plaintiff that whether premiums would vanish is dependent on the policy dividend interest rate remaining constant.

When the premiums still hadn’t stopped by 2013, plaintiff had seen (or heard enough) and sued the next year.  In its common law and consumer fraud counts, plaintiff alleged it was defrauded by the insurance agent and lured into paying premiums for multiple years as a result of the agent’s misstatements.

The Court dismissed the plaintiffs’ suit on the grounds that plaintiff’s fraud claims were time barred under the five-year and three-year statutes of limitation for common law and statutory fraud.

Held: Dismissal Affirmed.

Rules/reasons:

The statute of limitations for common law fraud and consumer fraud is five years and three years, respectively. 735 ILCS 5/13-205, 805 ILCS 505/10a(e). Here, plaintiff sued in 2014.  So normally, its fraud claims had to have accrued in 2009 (common law fraud) and 2011 (consumer fraud) at the earliest for the claims to be timely.  But the plaintiff claimed it didn’t learn it was injured until 2013 under the discovery rule.

The discovery rule, which can forestall the start of the limitations period, posits that the statute doesn’t begin to run until a party knows or reasonably should know (1) of an injury and that (2) the injury was wrongfully caused. ‘Wrongfully caused’ under the discovery rule means there is enough facts for a reasonable person would be put on inquiry notice that he/she may have a cause of action. The party relying on the discovery rule to file suit after a statute of limitations runs has the burden of proving the date of discovery. (¶ 23)

The plaintiff alleged that it wasn’t until 2013 that it first learned that defendant misrepresented the vanishing date for the insurance premiums.
The Court rejected this argument based on the allegations of the plaintiff’s complaint. It held that the plaintiff knew or should have known it was injured no later than 2006 when the agent failed to adhere to his second promised deadline (the first was in 2003 – the original premium end date) for premiums to cease.

Plaintiff stated it complained to the insurance agent in 2003 and again in 2006 that it shouldn’t be continuing to get billed.  The court found that the agent’s failure to comply with multiple promised deadlines for premiums to stop should have put plaintiff on notice that he was injured in 2003 at the earliest and 2006 at the latest. Since plaintiff didn’t sue until 2014 – eight years later – both fraud claims were filed too late.

Grasping at a proverbial straw, the plaintiff argued its suit was saved by the “continuing violation” rule.  This rule can revive a time-barred claim where a tort involves repeated harmful behavior.  In such a case, the statute of limitations doesn’t run until (1) the date of the last injury or (2) when the harmful acts stop. But, where there is a single overt act which happens to spawn repetitive damages, the limitations period is measured from the date of the overt act. (¶ 26).

The court in this case found there was but a single harmful event – the agent’s failure to disclose, until 2006, that whether premiums would ultimately vanish was contingent on dividend interest rates remaining static. As a result, plaintiff knew or should have known it was harmed in 2006 and could not take advantage of the continuing violation rule to lengthen its time to sue.

Take-aways:

1/ Fraud claims are subject to a five-year (common law fraud) and three-year (consumer fraud) limitations period;

2/ The discovery rule can extend the time to sue but will not apply where a reasonable person is put on inquiry notice that he may have suffered an actionable wrong;

3/  “Continuing wrong” doctrine doesn’t govern where there is a single harmful event that has ongoing ramifications. The plaintiff’s time to sue will be measured from the date of the tortious occurrence and not from when damages happen to end.

‘Inquiry Notice’ Element of Discovery Rule Dooms Plaintiff’s Fraud in Inducement Claim – IL First Dist.

The First District recently discussed the reach of the discovery rule in the course of dismissing a plaintiff’s fraud claims on statute of limitations grounds.

The plaintiff in Cox v. Jed Capital, LLC, 2016 IL App (1st) 153397-U, brought a slew of business tort claims when he claimed his former employer understated its value in an earlier buy-out of the plaintiff’s LLC interest.

Plaintiff’s 2007 lawsuit settled a year later and was the culmination of settlement discussions in which the defendants (the former employer’s owner and manager) produced conflicting financial statements.  The plaintiff went forward with the settlement anyway and released the defendants for a $15,000 payment.

In 2014, after reading a Wall Street Journal article that featured his former firm, plaintiff learned the company was possibly worth much more than was previously disclosed to him.  Plaintiff sued in 2015 for fraud in the inducement, breach of fiduciary duty and breach of contract.

The trial court dismissed the claims on the basis they were time-barred by the five-year limitations period and the plaintiff appealed.  He argued that the discovery rule tolled the limitations period and saved his claims since he didn’t learn the full extent of his injuries until he read the 2014 article.

Result: Dismissal of plaintiff’s claims affirmed.

Q: Why?

A: A fraud claim is subject to Illinois’ five-year statute of limitations codified at Section 13-205 of the Code of Civil Procedure.  Since the underlying financial documents were provided to the plaintiff in 2008 and plaintiff sued seven years later in 2015.  As a result, plaintiff’s claim was time-barred unless the discovery rule applies.

In Illinois, the discovery rule stops the limitations period from running until the injured party knows or reasonably should know he has been injured and that his injury was wrongfully caused.

A plaintiff who learns he has suffered from a wrongfully caused injury has a duty to investigate further concerning any cause of action he may have.  The limitations period starts running once a plaintiff is put on “inquiry notice” of his claim.  Inquiry notice means a party knows or reasonably should know both that (a) an injury has occurred and (b) it (the injury) was wrongfully caused.  (¶ 34)

Fraud in the inducement occurs where a defendant makes a false statement, with knowledge of or belief in its falsity, with the intent to induce the plaintiff to act or refrain from acting on the falsity of the statement, plaintiff reasonably relied on the false statement and plaintiff suffered damages from that reliance.

Plaintiff alleged the defendants furnished flawed financial statements to induce plaintiff’s consent to settle an earlier lawsuit for a fraction of what he would have demanded had he known his ex-employer’s true value.  The Court held that since the plaintiff received the conflicting financial reports from defendants in 2008 and waited seven years to sue, his fraud in the inducement claim was untimely and properly dismissed.

Afterwords:

This case paints a vivid portrait of the unforgiving nature of statutes of limitation.  A plaintiff has the burden of establishing that the discovery rule preserves otherwise stale claims.  If a plaintiff is put on inquiry notice that it may have been harmed (or lied to as the plaintiff said here), it has a duty to investigate and file suit as quickly as possible.  Otherwise, a plaintiff risks having the court reject its claims as too late.

Lawyer’s Breach of Fiduciary Duty and Constructive Trust Claim Against Ex Law Partner Barred By 5-Year Statute of Limitations

untitled

 

Jimmy Connors is one of my all-time favorite tennis players and professional athletes.  Not just because he was such a fiery competitor who seemed to literally spill his blood and guts every time he took the court.  But because of his racket.

In an era dominated by space-age racket technologies like Kevlar, ceramics and various graphite-fiberglass amalgams, Connors stuck with his trusty Wilson T2000 – a primitive piece of steel with a wrap-around string aesthetic and microscopic sweet spot.  

There was just something about seeing the consummate throwback Connors, and his anachronistic Tool of his Trade,  continually vanquish a parade of younger adversaries with their ultra-modern tennis accoutrements that resonated with the purist in me.

That’s why Brennan v Constance, 2014 IL App (5th) 110555-U (2014), a lawsuit involving two former law partners fighting over legal fees owed by the tennis legend, naturally piqued my interest.

Facts:

The plaintiff and defendant was ere law partners in a three-person firm (the Firm).  Connors was a long-time Firm client.  

When the Firm disbanded, a major sticking point was fees owed the Firm by Connors for previous services.  Defendant believed the fees were his (since Connors was originally his client) while the other Firm members viewed the Connors fees owed to the Firm.

After more than a decade of litigation, Connors paid nearly $11 million to the Firm.  Defendant received nearly $7 million, while a former Firm partner got about $4M.

Plaintiff sued to impose a constructive trust over a portion of the $7 million in fees recovered by defendant because plaintiff believed defendant misled him concerning the amounts owed from the tennis great.

After a three-week bench trial, the Court entered judgment in plaintiff’s favor and imposed a constructive trust on the fees and awarded plaintiff more than $1.64 million – an amount equal to 25% of the Connors fees paid to defendanT.

Held: trial court reversed.  Plaintiff’s suit is time-barred.

Rules/Reasoning:

Plaintiff’s suit was barred by the five-year statute of limitations governing breach of fiduciary duty claims. 

Code Section 13-205’s five-year limitations period governs constructive trust and fiduciary duty claims.  ¶ 60, 735 ILCS 5/13-205.  A statute of limitations starts running when the cause of action accrues (when facts exist which authorize bringing the action).  

The “discovery rule” tolls (stops) the running of a limitations period until an injured plaintiff knows or should know he has been injured. 

Fraudulent concealment of a claim also tolls the limitations period.  ¶ 61.  In “passive” concealment cases, the plaintiff must show that defendant concealed a material fact that he was under a duty to disclose.  ¶ 63.   However, a plaintiff who knows he has been injured has a duty to investigate further and the limitations period will run when the plaintiff is put on “inquiry notice.”  A plaintiff doesn’t have to know the full extent of his injuries before the statutory clocks start ticking.

In reversing the plaintiff’s judgment, the 5th District found the plaintiff was on inquiry notice as early as 2004 (when he admittedly first learned of an aborted stock transfer that would have netted the Firm millions) but didn’t sue until 2010.  Since plaintiff missed the five-year limitations period, his suit was too late.

The Court also rejected plaintiff’s fiduciary duty argument: that since defendant owed plaintiff a fiduciary duty as a former law partner, it relaxed the limitations period.  The Court disagreed.  It held that while a fiduciary relationship may excuse an initial failure to investigate, it won’t lengthen the time to sue where a plaintiff knows of possible wrongdoing and fails to act on it.  ¶¶ 70-71.

Afterwords: This case illustrates the harsh results for  litigants who sits on their rights.  While a fiduciary relationship can bolster a fraudulent concealment argument and toll a limitations period, if facts exist that should put a reasonable person on inquiry notice of a wrongful act, the limitations period will run from the date of that notice.