New York Court of Appeals Finds Martin Act Claims Are Subject to a Three-Year Statute of Limitations
In a recent landmark decision, the New York Court of Appeals held that claims brought pursuant to the Martin Act—a powerful anti-fraud tool used by the New York Attorney General (“NYAG” or “Attorney General”) to police securities and commodities transactions—are governed by a three-year statute of limitations and not, as the NYAG argued, a six-year limitations period. The court further held that claims under Executive Law § 63(12), a statute that the NYAG often relies upon in parallel with Martin Act claims, are also subject to a three-year limitations period if those claims are premised upon Martin Act violations.
The Martin Act is one of the country’s most powerful blue sky laws, and provides the NYAG with expansive powers to investigate and charge allegations of fraudulent practices in the purchase or sale of securities and commodities within or from New York.
When the NYAG files an enforcement action, it often will charge Executive Law § 63(12) along with Martin Act claims. Executive Law § 63(12) authorizes the NYAG “to bring a claim against any person or entity that engages in repeated or persistent fraudulent or illegal acts in the carrying on of the transaction of business.”
In November 2012, the NYAG filed a complaint against a bank for alleged violations of the Martin Act and Executive Law § 63(12) arising from the bank’s creation and sale of residential mortgage-backed securities (“RMBS”). The bank moved to dismiss the complaint arguing, among other things, that the action was time-barred because the claims were governed by the three-year statute of limitations under CPLR 214(2), which applies to actions to recover upon a liability “created or imposed by statute.” The NYAG opposed the motion arguing that the claims were governed by the six-year limitations period under CPLR 213(8), which governs an “action based upon fraud,” or alternatively CPLR 213(1), a residuary provision applicable to “an action for which no limitation is specifically prescribed by law.” The Supreme Court denied defendants’ motion and the First Department affirmed, finding Martin Act claims are governed by a six-year statute of limitations and the complaint pleaded elements of common law fraud.
The Court of Appeals’ Opinion
Martin Act Claim
As to the Martin Act claim, the Court of Appeals explained that, because the Martin Act imposes numerous liabilities that did not exist at common law, the three-year statute of limitations under CPLR 214(2)—applicable to any liability created or imposed by statute (as opposed to common law)—governs Martin Act claims.
Executive Law Claim
Because Executive Law § 63(12) provides the NYAG with standing to redress liabilities recognized elsewhere in the law, including the common law, the Court of Appeals noted that a court must “look through” the Executive Law claim and “apply the statute of limitations applicable to the underlying liability.” Because the lower court did not undertake that analysis, the Court of Appeals remanded the Executive Law § 63(12) claim to the Supreme Court to examine whether the “conduct underlying” the claim was based in statute or common law. If the conduct ultimately amounts to the “type of fraud” recognized in common law then a six-year statute of limitations would apply; however, if the claim is based in statute or on conduct not prohibited in common law (e.g., a Martin Act violation), the claim would be subject to a three-year limitations period.
The Court of Appeals’ decision—which overturned a string of lower court decisions finding that claims under the Martin Act were subject to a six-year limitations period
In addition, the decision may cause the NYAG to recharacterize untimely Martin Act claims as “equitable fraud” in an effort to avail itself of the lengthier statute of limitations. As Justice Feinman suggested in the concurring opinion to the Court of Appeals decision, claims of equitable fraud require proof of only two elements—a material misrepresentation of fact and justifiable reliance—and he noted that such claims would fall within the six-year statute of limitations period.