Re: Breach of Fiduciary Duty and Fraud Causes of Action—Application of the “Repudiation Rule” and the “Discovery Rule” to the Statute of Limitations Explained

Plaintiff (a governmental agency charged with administering the workers’ compensation system) brought this action against workers’ compensation trusts alleging the trusts became insolvent because of defendants’ misconduct. Plaintiff alleged breach of fiduciary duty, fraud, breach of contract and sought common law indemnification. The bulk of the decision is devoted to determining the timeliness of the actions. The decision addressed the “repudiation rule” and the “discovery rule” in fraud actions, as well as many other issues not summarized here:

…[T]he repudiation rule, which provides that “the applicable statutory period . . . does not begin to run until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated” … . The Court of Appeals has instructed that, under the repudiation rule, “the time starts running when a successor [fiduciary] is put in place” … . After the fiduciary “has yielded . . . to a successor, . . . [t]he running of the statute [of limitations] then begins, and only actual or intentional fraud will be effective to suspend it” … . * * * … [T]he repudiation rule acts as a toll of the limitations period for all misconduct committed by the fiduciary prior to repudiation of its obligation or termination of the relationship. In other words, all of the alleged misconduct prior to the severance date is included in the actionable portion of the claim. * * *

…[A] portion of plaintiff’s breach of fiduciary duty claim is grounded in its allegations that the … defendants breached their fiduciary duties to the trusts by fraudulently concealing or misrepresenting the financial condition of the trusts, the danger of operating deficits and issues associated with underwriting deficiencies, and that [defendants] did so as part of a scheme to increase membership and thereby increase its own commissions. These are fraud allegations, and they are essential to this portion of the fiduciary duty claim. That is, the relevant portion of the claim is “based on fraud” and “there would be no injury but for the fraud” … . As such, that portion of the fiduciary duty claim is subject to a six-year limitations period … . * * *

The “discovery rule” is found in CPLR 213 (8), which provides that claims based on fraud “must be commenced [within] the greater of six years from the date the cause of action accrued or two years from the time [a] plaintiff . . . discovered the fraud, or could with reasonable diligence have discovered it.” It is settled that “[t]he inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was possessed of knowledge of facts from which [the fraud] could be reasonably inferred” … . New York State Workers’ Compensation Bd v Consolidated Risk Servs Inc, 2015 NY Slip Op 01699, 3rd Dept 2-26-15