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California, Fraud, Statute Of Limitations, And Delayed Discovery

On Behalf of | Feb 23, 2013 | Firm News

Under Code of Civil Procedure § 338, a defrauded person has 3 years–after the occurrence of the fraud–to file a civil action against the defrauding party; otherwise, the defrauded person will be barred from any recovery under California’s statute of limitations.

Nonetheless, California law has an exception to the 3-year rule, known as delayed discovery rule. Under this exception,

The injured party may bring an action based on fraud or mistake more than 3 years after the transaction if the party is able to show that he or she did not discover the facts, and could not with reasonable diligence have discovered them, prior to 3 years before the action. (5 Witkin, Cal. Proc. 5th (2008) Plead, § 929, p. 344.)

Furthermore, the defrauded party has “the burden of . . . proving that [he or she] did not make the discovery until within three years prior to the filing of [the] complaint.” (Samuels v. Mix (1999) 22 Cal.4th 1, 14 [internal citation omitted].) “[I]t is blackletter law that the statute of limitations commences to run after one has knowledge of facts sufficient to make a reasonably prudent person suspicious of fraud, thus putting him on inquiry.” (Sun’n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 701.)

Moreover, a plaintiff need not be aware of the specific ‘facts’ necessary to establish the claim. (Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1111-1112; see also Fox v. Ethicon Endo–Surgery, Inc. (2005) 35 Cal.4th 797, 807, [“[W]e look to whether the plaintiffs have reason to at least suspect that a type of wrongdoing has injured them.”]) Instead, a plaintiff must show that, once on notice, he or she “took adequate steps then to investigate the matter.” (Jolly v. Eli Lilly & Co., supra, 44 Cal.3d at p. 1112.) “Once the plaintiff has a suspicion of wrongdoing, and therefore an incentive to sue, she must decide whether to file suit or sit on her rights.” (Id., at pp. 1111-1112.) “So long as a suspicion exists, it is clear that the plaintiff must go find the facts; she cannot wait for the facts to find her.” (Id.) Moreover, subjective suspicion is not required. (Mangini v. Aerojet-General Corp. (1991) 230 Cal. App.3d 1125, 1150.)

Therefore, the day the defrauded party has “reasonable cause to suspect wrongdoing” is when the 3 year mark begins, regardless of whether he or she knew the “particulars” of the fraud claim. (Kline v. Turner (2001) 87 Cal.App.4th 1369, 1374.) Also, “ignorance concerning the specific causes of action arising from the wrong” is not a defense. (Id.) Thus, “[r]ather than examining whether the plaintiffs suspect facts supporting each specific legal element of a particular cause of action, [Courts] look to whether the plaintiffs have reason to at least suspect that a type of wrongdoing has injured them.” (Cypress Semiconductor Corp. v. Superior Court (2008) 163 Cal.App.4th 575, 586.) Wrong and wrongdoing in this context are understood in their lay and not legal senses. (Id.)

For example, in Miller v. Bechtel Corp. (1983) 33 Cal.3d 868, the California Supreme Court held that plaintiff’s fraud claim was timed barred, even though she filed suit soon after she “discovered” facts establishing that her former husband had concealed the true worth of his assets during dissolution negotiations. (Id.) When the plaintiff was signing the dissolution agreement, the plaintiff and her attorney had doubts as to the actual value of her husband’s stock. (Id. at p. 875.) More than three years after plaintiff’s doubts, when the stock was sold for an amount well beyond that stated during the dissolution discussions, plaintiff asserted a claim for fraud, claiming delayed discovery. (Id. at pp. 871-872.) The Court held that plaintiff’s early suspicion and doubt put her on inquiry notice of the potential wrongdoing, thus beginning the statue of limitations and barring the action. (Id. at p. 875.)

What is more, in Norgart v. Upjohn Co. (1999) 87 Cal.Rptr.2d 453, 461-462 the California Supreme Court explained the rationale of the statute of limitations as follows:

[The statute of limitation] has as a purpose to protect defendants from the stale claims of dilatory plaintiffs. It has as a related purpose to stimulate plaintiffs to assert fresh claims against defendants in a diligent fashion. Inasmuch as it “necessarily fix[es]” a “definite period[] of time”, it operates conclusively across the board, and not flexibly on a case-by-case basis. That is to say, a cause of action brought by a plaintiff within the limitations period applicable thereto is not barred, even if, in fact, the former is stale and the latter dilatory; contrariwise, a cause of action brought by a plaintiff outside such period is barred, even if, in fact, the former is fresh and the latter diligent. The statute of limitations operates in an action as an affirmative defense. Most often, the affirmative defense based on the statute of limitations has been approved by courts as “favored”. That is because, in accord with “public policy”, it “promote[s] repose by giving security and stability to human affairs.” (Norgart v. Upjohn Co., supra, 87 Cal.Rptr.2d at pp. 461-462 [internal citations omitted].)

At Kashfian & Kashfian, LLP, we have experience defending and asserting fraud claims, and as your counselor, we will fight vigorously on your behalf. Contact our offices to learn more about the services that we provide.

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