On June 12, 2018, a 4-1 majority of the New York Court of Appeals held that claims under New York's Martin Act are not governed by the six-year statute of limitations generally applicable to common law fraud claims, but rather by the three-year limitations period applicable to actions to recover based on liabilities created by statute. People v. Credit Suisse Securities (USA) LLC, 2018 WL 2899299, 2018 N.Y. Slip. Op. 04272 (Ct. App. June 12, 2018). The Martin Act, which authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds, and other securities in New York, does not contain a provision explicitly stating its statute of limitations.
Although the Act is almost a century old, the Court considered for the first time, in this case, which statute of limitations applies to it. The Court held that the Martin Act imposes numerous "liabilities" that did not exist at common law, and is therefore governed by the three-year statute of limitations. The suit, commenced in 2012 by the New York Attorney General, alleged that a financial institution and affiliated entities violated the Martin Act in 2006 and 2007 by committing fraudulent and deceptive acts in connection with the creation and sale of residential mortgage-backed securities. Defendants argued that the lawsuit, brought in 2012, was filed after the statute of limitations had expired. At the trial level, the Supreme Court, New York County, denied defendants' motion to dismiss, concluding that Martin Act cases based on investor fraud were governed by the six-year limitations period that applies to common-law fraud claims. The Appellate Division affirmed, holding that the Martin Act targets wrongs that existed before the statute's enactment and that the complaint set forth the elements of common-law fraud, and concluding that the six-year limitations period applied.
The Court of Appeals disagreed. In an opinion written by Chief Judge DiFiore for the majority, the Court considered whether Martin Act claims are governed by a three-year statute of limitations, under CPLR 214(2) (which applies to "an action to recover upon a liability, penalty or forfeiture created or imposed by statute") or a six-year limitations period, under CPLR 213(8) (for actions "based upon fraud") or 213(1) (for actions "for which no limitation is specifically prescribed by law"). The Court acknowledged its holding in Gaidon II that CPLR 214(2) applies only where liability "would not exist but for a statute" and thus does not apply to liabilities already existing at common law which have been recognized or implemented by statute. Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201, 208 (2001). For statutory liabilities that exist at common law, the statute of limitations for the statutory claim is the same as would apply to the common law cause of action. To determine whether the Martin Act creates liabilities that did not exist at common law, the Court analyzed the evolution of the Martin Act through statutory amendments and case law. The Court found that, because the scope of "fraudulent practices" covered by the Act is broad, and the Act dispenses with requirements such as scienter or justifiable reliance, the Act created liabilities beyond common law fraud. The Court concluded that CPLR 214(2)'s three-year limitations period applies to claims brought under the Act. The Court accordingly held that the Martin Act claims in this case were time-barred.
The Court next turned to another question raised in the case, about the limitations period applicable to the Attorney General's Executive Law § 63(12) claim. Executive Law § 63(12) allows the Attorney General to enjoin or seek restitution and damages for fraudulent activity. The Court concluded that because Executive Law § 63(12) gives the Attorney General standing to redress liabilities recognized elsewhere in the law, thereby expanding the scope of available remedies, courts must "look through" the law and apply the statute of limitations applicable to the underlying liability. The Court stated that it was necessary to examine whether the conduct underlying the claim here amounts to a type of fraud recognized in the common law in order to determine whether the Executive Law § 63(12) claim is governed by a six-year statute of limitations. Noting that these issues were not fully addressed below, the Court remitted the case to Supreme Court for further consideration.
Judge Feinman wrote a concurring opinion and Judge Rivera issued a dissent.
Over the past twenty years, the Martin Act, once largely dormant, has been repeatedly used by New York Attorneys General in a wide variety of actions brought against corporations, financial institutions and executives. As the Court of Appeals noted here, the New York Attorney General's enforcement powers under the Act are broad. It is too soon to say whether this decision may limit the number of Martin Act investigations undertaken and actions brought by the New York Attorney General's Office, but the Office will need to develop any potential cases more quickly and efficiently.
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