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New York Court of Appeals Finds Martin Act Claims Are Subject to a Three-Year Statute of Limitations

By John Nowak, Anthony Antonelli & Inna Coleman

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 court’s decision significantly reduces the time in which Martin Act claims may be brought by the NYAG, potentially placing greater pressure on the Attorney General to pursue violations more quickly and aggressively.

Statutory Background

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.

In recent years, the Martin Act has become a favored enforcement tool of the NYAG and, unlike common law fraud, the statute does not require the Attorney General to prove scienter or reliance.

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.”

Although there is a real debate as to whether the Executive Law affords the NYAG with a separate cause of action, or whether it simply authorizes the NYAG to pursue other fraud claims under other statutes or at common law on a “look through” basis, it is undisputed that the Executive Law gives the Attorney General standing to redress other liabilities recognized elsewhere in New York law.

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Factual Background

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 reversed in a 4-1 decision.

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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.

The Court of Appeals specifically noted that the Martin Act broadly defines “fraudulent practices” to include conduct that was not prohibited or recognized under common law, and that it dispenses with the need for the NYAG to prove scienter or reliance.

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As a result, the Martin Act creates liability imposed by statute, and it does not merely codify the prohibitions that existed in common law.

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.

Practical Implications

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

—is a welcome result. It provides those facing potential Martin Act claims with a powerful statute of limitations defense, and it can provide more timely closure for those involved in a lingering investigation. However, it also may cause the NYAG to pursue potential Martin Act violations more quickly and aggressively and will undoubtedly also lead the NYAG to request tolling agreements earlier in the investigative process. In fact, requests for tolling agreements may become routine and surface even before a limitations period is a real concern.

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.

As a result, even though Martin Act claims are subject to a three-year statute of limitations, Executive Law claims (presented as equitable fraud) may be subject to a lengthier limitations period. And perhaps more importantly, such claims would not require proof of scienter.

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   People v. Credit Suisse Sec. (USA) LLC, 2018 NY Slip Op 04272, 2018 N.Y. LEXIS 1451, at *1 (June 12, 2018).

   People v. Credit Suisse Sec. (USA) LLC, 451802/2012, 2014 N.Y. Misc. LEXIS 5796, at *20–21 (Sup. Ct. N.Y. Cnty. Dec. 24, 2014).

  People v. Greenberg, No. 401720/05, 2010 N.Y. Misc. LEXIS 5575, at *27 (Sup. Ct. N.Y. Cnty. Oct. 21, 2010).

  Credit Suisse Sec., 2018 N.Y. LEXIS 1451, at *13-14.

   Id. at *1–3.

  Judge Jenny Rivera dissented arguing, among other things, that the majority’s decision was contrary to the Legislature’s intent and would have “potentially devastating consequences” for New York and markets that “depend on New York as a global financial center.” Id. at *57–58.

  Id. at *11–13.

Id. at *11–12.

  Id. at *21–27.

   See, e.g., People v. Credit Suisse Sec. (USA) LLC, 145 A.D.3d 533, 534, 47 N.Y.S.3d 236, 237 (1st Dep’t 2016); Podraza v. Carriero, 212 A.D.2d 331, 340, 630 N.Y.S.2d 163, 169 (4th Dep’t 1995); State v. Bronxville Glen I Assocs., 181 A.D.2d 516, 516, 581 N.Y.S.2d 189, 190 (1st Dep’t 1992).

  Credit Suisse Sec., 2018 N.Y. LEXIS at *20–24.