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California, Fraud, Statute of Limitations, and Delayed Discovery

On Behalf of | Feb 7, 2018 | business litigation

Sometimes, a plaintiff files an untimely lawsuit, which results in the devastating end result that the plaintiff will be barred from receiving any recovery by California’s unforgiving statute of limitations. This is especially true with fraud claims, as the statutory provisions and caselaw can be a minefield for those who are not familiar with California law.

More specifically, under Code of Civil Procedure, section 338, a defrauded person has (3) years, after the occurrence of the fraud, to file a civil lawsuit against the defrauding party. Legally speaking, California’s statute of limitations “begins to run upon the occurrence of the last element essential to the cause of action,” (Brisbane Lodging, L.P. v. Webcor Bldrs., Inc. (2013) 216 Cal.App.4th 1249, 1257 (Webcor Bldrs.)), as a cause of action invariably accrues when there is a remedy available. (Baker v. Beech Aircraft Corp. (1974) 39 Cal.App.3d 315, 321.) Thus, the defrauded person’s failure to file within the three (3) year period will prevent the defraud person from receiving any recovery–no matter how meritorious the defrauded person’s claims are and no matter how egregious the defrauder’s conduct was.

Indeed, the statute of limitations’ preclusive effects could have devastating consequences for a defrauded party, as the California Supreme Court explained the rationale of the statute of limitations unforgiving results, as follows:

“Statute of limitations” .. 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.

(Norgart v. Upjohn Co. (1999) 21 Cal.4th 383, 395 (Norgart ), internal citations omitted.)

Nonetheless, it is important to understand that California law has an exception to the three (3) year requirement, 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. Procedure (5th ed. 2008) Pleading, § 929, emphasis added.)

In sum, under the discovery rule, a cause of action accrues when the defrauded person “either (1) actually discovered his injury and its negligent cause or (2) could have discovered injury and cause through the exercise of reasonable diligence.” (Webcor Bldrs., supra216 Cal.App.4th at p. 125, emphasis added; see also, Norgart, supra, 21 Cal.4th at p. 397 [holding that the discovery rule “postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action”].)

To raise the delayed discovery exception, 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), as “the statute of limitations commences to run after [the defrauded party] 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.)

Importantly, the defrauded party need not be aware of the specific “facts” necessary to prove the claim. (Jolly v. Eli Lilly & Co. (1988) 44 Cal.3d 1103, 1111-1112 (Jolly).) Instead, courts “look to whether the [defrauded party] ha[s] reason to at least suspect that a type of wrongdoing has injured them.” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 807 (Fox), emphasis added.) The defrauded party must show that, once on notice, he or she “took adequate steps then to investigate the matter.” (Jolly, supra44 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.” (Ibid.)

Moreover, subjective suspicion is not required. (Mangini v. Aerojet-General Corp. (1991) 230 Cal.App.3d 1125, 1150 (Mangini).) Therefore, the day the defrauded party has “reasonable cause to suspect wrongdoing” is when the three (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 (Kline).) Also, “ignorance concerning the specific causes of action arising from the wrong” is not a defense. (Id.) Thus, “[r]ather than examining whether [the defrauded party] 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.)

Additionally, the defrauded party is “under a duty to reasonably investigate. A suspicion of wrongdoing, coupled with a knowledge of the harm and its cause, will commence the limitations period and those failing to act with reasonable dispatch will be barred.” (Webcor Bldrs., supra216 Cal.App.4th at p. 125.) In sum, “[t]he statute of limitations begins to run when the plaintiff has information which would put a reasonable person on inquiry.” (Kline, supra87 Cal.App.4th at p. 1374.)

To the extent that Plaintiff wants to rely on delayed discovery,

The showing of excuse for late filing must be made in the complaint. Formal averments or general conclusions to the effect that the facts were not discovered until a stated date, and that the plaintiff could not reasonably have made an earlier discovery, are useless. The complaint must set forth specifically (1) The facts of the time and manner of discovery; and (2) The circumstances which excuse the failure to have made an earlier discovery.

(Orange County Rock Products Co. v. Cook Bros. Equipment Co. (1966) 246 Cal.App.2d 698, 703; see also, Bastian v. County of San Luis Obispo (1988) 199 Cal.App.3d 520, 527 [“In order to raise the issue of belated discovery, the plaintiff must state when the discovery was made, the circumstances behind the discovery, and plead facts showing the failure to discover was reasonable, justifiable and not the result of a failure to investigate or act.”].)

Also, “[a] plaintiff whose complaint shows on its face that his claim would be barred without the benefit of the discovery rule,” as is the case here, “must specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have made earlier discovery despite reasonable diligence. (E-Fab, Inc. v. Accountants, Inc. Servs. (2007) 153 Cal.App.4th 1308, 1319.)

For example, in Miller v. Bechtel Corp. (1983) 33 Cal.3d 868 (Miller), 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 Miller court held that plaintiff’s early suspicion and doubt put her on inquiry notice of the potential wrongdoing, thus beginning the statute of limitations and barring the action. (Id. at p. 875.)

Likewise, in Turner, supra, 87 Cal.App.4th 1369 the California Court of Appeals affirmed the trial court’s order dismissing a time-barred fraud claim, on a motion for summary judgment. There, Kline, a talent agent, was owed $50,000 for his participation in mounting a musical show. In 1990, Kline sent an associate, Marion Knight, to collect the money from Turner. At Turner’s office, Knight purportedly insisted that Turner make the check out to Knight personally. When Kline confronted Knight regarding the whereabouts of the $50,000, Knight threatened him, and Kline did nothing. In 1996, a smoking gun document fell into Kline’s hands, suggesting that Turner was in cahoots with Knight in 1990. In 1999, Kline sued Turner for fraud. (Id. at pp. 1371-1372.)

The Turner court concluded that Kline’s lawsuit was untimely. A reasonable person should have suspected in 1990 that Turner, as well as Knight, was culpable for a wrong, even though the smoking gun document definitively showing a link between Turner and Knight did not show up until 1996. Discovery or an investigation would have uncovered the smoking gun and revealed the fraud. This was the only legitimate inference that could be drawn from the facts. (Turner, supra87 Cal.App.4th at p. 1374.) Kline need only have perceived a general wrong or inexplicable act in 1990, even if there was no reason to suspect fraud until a later date, and even if Kline originally believed that Turner was simply a victim of Knight. Kline’s claim accrued in 1990, and his 1999 lawsuit was time-barred. (Id. at p. 1375.)

Similarly, in Stansfield v. Starkey (1990) 220 Cal.App.3d 59 (Stansfield), the California Court of Appeals affirmed the trial court’s order sustaining of a demurrer without further leave to amend, because allegations purporting to explain delayed discovery were fundamentally inconsistent with other allegations pled in the complaint. There, the complaint alleged that the plaintiffs joined the Church of Scientology as early as 1957, some as late as 1974. (Id. at p. 74.) The complaint further alleged that plaintiffs joined the Church based on various false representations. (Id. at p. 73.) However, the complaint was not filed until December 31, 1986. (Id. at p. 63.) This was well after the three-year statute to limitations period for fraud. (Id. at p. 64.) Nevertheless, in upholding the trial court’s sustaining of the demurrer, the Stansfield court reasoned that

[A]llegations purporting to explain delayed discovery of the falsity of the representations were cloudy and inconsistent. Although it was alleged that the representations were made as early as 1957 it was not until 1987 that appellants allegedly discovered their falsity. Yet it was simultaneously alleged, without explanation, that appellants left the church in 1982, 1983, and 1984 and that much of the true information was in the public domain by July 1984.

(Stansfield, supra, 220 Cal.App.3d at p. 75.)

Likewise, in Hamilton Materials, Inc. v. Dow Chemical Corp., the Ninth Circuit, using California law, determined that a manufacturer’s fraud claim was time-barred, reasoning

Appellant argues that its fraud claim did not accrue until a deposition in 2003, when it learned of Appellees’ specific intention to deceive their customers regarding the health hazards of Calidria. . . . [I]t is not necessary that Hamilton had notice of Appellees’ specific intention to deceive before the fraud action accrued. All that is relevant is that a reasonable person — especially a sophisticated manufacturer of asbestos — would have been on notice of a potential misrepresentation. This is the date that the complaining party learns, or at least is put on notice, that a representation is false.

(Hamilton Materials, Inc. v. Dow Chemical Corp. (9th Cir. 2007) 494 F.3d 1203, 1206-07 [citations omitted].)

Lastly, being vigilant about California’s fraud statute of limitations is important, because the court’s application of the fraud three (3) year statute of limitations is not based on the defrauded person’s characterization of his or her claims against the defrauding party. (Kapner v. Meadowlark Ranch Assn. (2004) 116 Cal.App.4th 1182, 1189 (Kapner).) Instead, courts will apply California’s fraud statute of limitations if the defrauded party’s claims as alleged in his or her complaint sound in fraud. (Id.) More importantly, any party looking to file a lawsuit “must plead facts” in their lawsuit “that will establish the proper statute of limitations.” (Id.)

At Kashfian & Kashfian, LLP, we have experience in defending and asserting fraud claims, including having fraud claims asserted against our client dismissed as a result an untimely filing, (see Case Results), 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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