Martin Act Claims are Subject to Three-Year Statute of Limitations

On June 12, 2018, the Court of Appeals issued a decision in People v. Credit Suisse Sec. (USA) LLC, 2018 NY Slip Op. 04272, holding that Martin Act claims have a three year statute of limitations, explaining:

The first issue before us is whether Martin Act claims are governed by CPLR 214(2), imposing a three-year statute of limitations, or the six-year limitations period in CPLR 213(1) or 213(8). CPLR 214(2) generally imposes a three-year limitation period for "an action to recover upon a liability, penalty or forfeiture created or imposed by statute." "An action based upon fraud" receives a six-year statute of limitations pursuant to CPLR 213(8). CPLR 213(1) is a residuary provision applicable to "an action for which no limitation is specifically prescribed by law."

The test for determining the applicability of CPLR 214(2) is well-settled. As explained in Gaidon II:

CPLR 214(2) does not automatically apply to all causes of action in which a statutory remedy is sought, but only where liability would not exist but for a statute. Thus, CPLR 214(2) does not apply to liabilities existing at common law which have been recognized or implemented by statute. When this is the case, the Statute of Limitations for the statutory claim is that for the common-law cause of action which the statute codified or implemented.

When interpreting CPLR 214(2), we have contrasted (1) claims which, although provided for in a statute, merely codify or implement an existing common-law liability with (2) claims which, although akin to common-law causes, would not exist but for the statute in which case CPLR 214(2) applies. For example, we recently held that CPLR 214(2) applies to disputes against a self-insurer with respect to the payment of No-Fault benefits, noting that the obligation to make such payments would not exist but for the No-Fault Law itself.

The Martin Act, codified at General Business Law article 23-A, authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State. Expansive definitions of the fraudulent practices covered by the article appear in General Business Law §§ 352 and 352-c but prohibitions against fraud, misrepresentation and material omission are found throughout the statutory scheme. Section 353 grants the Attorney General broad authority to investigate, to secure a permanent injunction against any person or entity that has engaged in fraudulent practices and to obtain restitution of money or property wrongfully obtained. Despite the scope and detail of the statutory scheme, there is no provision stating the applicable statute of limitations and, although the Martin Act is nearly a century old, we have never had occasion to consider the issue.

To determine whether the Martin Act creates liabilities that did not exist at common law within the meaning of CPLR 214(2), we start with the statutory scheme — which has evolved significantly over time. The initial version of the Martin Act was adopted in 1921. Five years later, we decided People v Federated Radio Corp. (244 NY 33, 38-39 [1926]), concluding the terms fraud and fraudulent practices — which were not yet defined — should be given a wide meaning so as to include all acts, although not originating in any actual evil design or contrivance to perpetrate fraud or injury upon others, which do by their tendency to deceive or mislead the purchasing public come within the purpose of the law." After noting that the Penal Law prohibited certain fraudulent practices involving the flotation of worthless securities, we stated:

If the intent of the defendants in engaging in the practice complained of is to sell securities which are in fact worthless or worth substantially less than the asking price, intentional misstatements, as in an action at law to recover damages for fraud and deceit . . . need not be alleged. Material misrepresentations intended to influence the bargain, on which an action might be maintained in equity to rescind a consummated transaction are enough

The Attorney General significantly relies on Federated Radio in asserting that the Martin Act merely codified liabilities existing at common law.

Of course, there have been many material alterations to the Martin Act since 1926, all of which broaden its reach. The statute was amended to incorporate concepts found in the federal Blue Sky statutes, which imposed registration requirements on sellers of securities — requirements unknown to the common law. In 1955, the Martin Act was amended to define fraudulent practices to include any deception, misrepresentation, concealment, suppression, fraud, false pretense or false promise. At the same time, a new section 352-c was added permitting the Attorney General to seek criminal sanctions for conduct violating the Martin Act. Section 352-c, while echoing the new fraudulent practices language, also clarified that the act prohibits any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances as well as any representation or statement which is false, where the person who made such representation or statement: (i) knew the truth; or (ii) with reasonable effort could have known the truth; or (iii) made no reasonable effort to ascertain the truth; or (iv) did not have knowledge concerning the representation or statement made.

The definition of fraudulent practices was expanded again in 1959 when the Legislature added General Business Law § 359-e imposing new registration requirements on dealers and brokers. Section 359-e(14)(l) provides: A violation of this subdivision shall constitute a fraudulent practice as that term is used in this article and a specific reference to section 359-e was added to section 352. In 1960, the law was amended to add section 352-e creating registration and disclosure requirements specifically relating to the sale of security interests in cooperative apartments and condominiums — a provision that has spawned civil enforcement actions by the Attorney General under section 353. We have recognized that section 352-e dramatically altered the common-law rule.

In Rachmani Corp. (71 NY2d 718), an action arising from alleged violations of section 352-e brought under the antifraud provisions of the Martin Act, we addressed what constituted a material omission sufficient to support an injunction under section 353 and Executive Law § 63(12). We answered that question by looking, not to our own common law, but to decisions of the federal courts construing federal securities laws, which are referenced in the Martin Act. We adopted the federal objective test, concluding that an omitted fact is material for purposes of liability under the Martin Act if there is a substantial likelihood that a reasonable investor would consider it important in light of the total mix of information available. We also reaffirmed that the Attorney General need not prove scienter or intentional fraud in a Martin Act enforcement proceeding. It is undisputed that the Attorney General need not prove reliance on the part of any investor.

We have repeatedly held that the Martin Act does not create a private right of action in favor of parties injured by prohibited fraudulent practices and that a private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute. The premise of such a holding is, of course, that the Martin Act covers some fraudulent practices not prohibited elsewhere in statutory or common law. That the Martin Act expands upon, rather than codifies, the common law of fraud was further reinforced by our decision in Assured Guaranty, in which we held that the Martin Act does not preempt common law causes of action possessed by injured parties, except where predicated on violations of the Martin Act itself or its implementing regulations.

In sum, the Martin Act imposes numerous obligations — or liabilities — that did not exist at common law, justifying the imposition of a three-year statute of limitations under CPLR 214(2). The broad definition of fraudulent practices, as repeatedly amended by the Legislature and interpreted by the courts, encompasses wrongs not cognizable under the common law and dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors. In this respect, the Martin Act is comparable to a claim brought under General Business Law § 349(h), the statute prohibiting deceptive practices in consumer-oriented marketing and sales, which we addressed in Gaidon II. To be sure, there are distinctions between the Martin Act and General Business Law § 349. Unlike the Martin Act, and in addition to permitting enforcement by the Attorney General, the Legislature specifically authorized a private right of action under section 349 by adding subsection (h) permitting suit by parties injured by deceptive practices. Moreover, the term "deceptive practices" has never been defined by the Legislature. But the term deceptive practices has been interpreted broadly to encompass wrongful conduct not previously actionable on a common law fraud. In Gaidon II, we held that a General Business Law § 349 action is governed by CPLR 214(2), emphasizing the distinctions between such a claim and common law fraud, including that section 349 broadly covers deceptive practices, not just fraudulent marketing and sales practices previously condemned by the courts. The same principles apply here with respect to fraudulent practices claims under the Martin Act. We therefore conclude the three-year statute of limitations in CPLR 241(2) — applicable to a liability, penalty or forfeiture created or imposed by statute — governs Martin Act claims.

(Internal quotations and citations omitted).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by the statute of limitations.