It is not uncommon for litigants to sit on their rights and, after years have passed, argue that they are entitled to delayed accrual of their claims under the discovery rule. This was the key issue in a recent decision by Westchester Commercial Division Justice Linda S. Jamieson in Gelaj v. Gelaj, et al., Index No. 68512/2019.
Plaintiff Pashko Gelaj is the nephew of defendant Miter Gelaj (“Miter”). Plaintiff alleged that in 2009, he and his father, non-party Ndue Gelaj (“Ndue”), were equal owners of 111 East Mosholu Corp. (“Company”). Miter, however, always claimed that he was a half-owner of the Company with Ndue and Plaintiff had no interest. Critically, in 2015, Miter commenced an action concerning that issue, in which Plaintiff was a defendant.
In July 2009, the Company sold a piece of property. Plaintiff alleged that it was sold “with the expectation that half of the proceeds from the Property’s sale would be invested on [Plaintiff’s] behalf,” but alleged nothing more concerning his “expectation.” The Complaint further alleged that the proceeds were split between Ndue and Miter. Defendant Rocco Adonna, a financial advisor working for defendant AFM Advisor Group, allegedly helped both Ndue and Miter invest the proceeds of the sale.
According to Plaintiff, in April 2018 – nine years after the sale – he “inquired” about the status of his share and learned that his alleged half of the proceeds went to Miter. The Complaint was silent about the details of Plaintiff’s inquiry. Eighteen months later, Plaintiff brought four claims against Miter: fraud, constructive trust, conversion and unjust enrichment. The defendants moved to dismiss each of these claims as time-barred.
It is well settled that “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 discovered the fraud … or could with reasonable diligence have discovered it.” Monteleone v. Monteleone, 162 A.D.3d 761, 762, 78 N.Y.S.3d 247, 248-249 (2d Dep’t 2018). Further, “[a] cause of action based upon fraud accrues, for statute of limitation purposes, at the time the plaintiff possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.” Id.
In that regard, “[t]he test as to when fraud should with reasonable diligence have been discovered is an objective one.” Gutkin v. Siegal, 85 A.D. 3d 687, 688, 926 N.Y.S.2d 485, 486 (1st Dep’t 2011). “Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Id.
Here, the transaction that gave rise to Plaintiff’s claim occurred in 2009, so the six years expired in 2015. But Plaintiff relied on the two-year discovery rule, arguing that he had no reason to distrust his uncle and doubt that he would invest the proceeds on his behalf. Justice Jamieson, citing Gutkin, supra, disagreed:
This narrative removes from plaintiff all responsibility for ensuring that the substantial proceeds were invested on his behalf. Rather, it paints a vision of a harmonious family in which plaintiff’s wishes would be carried out by Miter without question. This picture, however, is not reality. In 2015 … Miter commenced a litigation against both plaintiff and his father, among others, asserting that he – and not plaintiff- owned half of the company. Even if plaintiff was excused from not inquiring about the status of his alleged investment in 2009 or for six years thereafter, there is simply no excuse for not inquiring once he learned that Miter claimed an ownership right in the company to his exclusion. That should have been the red flag to plaintiff that caused him to inquire about the 2009 investment. [Emphasis added].
Accordingly, Plaintiff’s fraud claim was dismissed.
Constructive Trust, Unjust Enrichment, and Conversion
For a constructive trust claim, the six-year statute of limitations starts to run “upon the occurrence of the wrongful act giving rise to a duty of restitution and not from the time the facts constituting fraud are discovered.” Auffermann v. Distl, 56 A.D.3d 502, 502, 867 N.Y.S.2d 527, 528 (2d Dep’t 2008). Despite being unaware of the exact date, Plaintiff argued the wrongful act occurred when Miter withdrew the funds out of his personal investment account and used them. Justice Jamieson rejected this argument, finding that the complaint plainly stated that the wrongful act occurred at the time of the July 2009 sale when Miter deposited the proceeds into his own account. “The alleged wrong occurred when Miter put the money in his own account ‘rather than for the benefit of the plaintiff,’ not when he later took the money out of the account and used it.” Thus, the six-year statute of limitations had expired in 2015.
An unjust enrichment claim also has a six-year statute of limitations, which runs upon the occurrence of the wrongful act. Coombs v. Jervier, 74 A.D.3d 724, 724, 906 N.Y.S.2d 267, 269 (2d Dep’t 2010). Again, as the wrongful act occurred at the time of the July 2009 sale, this claim was time-barred as well.
Finally, for a conversion claim, “a three-year statute of limitation applies and runs from the date that the conversion took place, not from the discovery of the theft.” Torrance Const., Inc. v. Jacques, 127 A.D.3d 1261, 1265, 8 N.Y.S.3d 441, 446 (2d Dept. 2015). As the statute of limitations expired three years after the 2009 sale, this claim was time-barred.
Takeaway: Plaintiffs should not sit on their rights and then rely on the discovery rule to save a fraud claim.
George Krikorian, a law student at Elisabeth Haub School of Law at Pace University, assisted with the preparation of this post.