Court Rejects Claim That Defendants Should Be Estopped from Asserting Statute of Limitations

In an Opinion, dated March 3, 2022, in First Equity Realty v. Harmony Grp. II, 2022 N.Y. Slip. Op. 30674(U), Justice Joel M. Cohen rejected plaintiff’s argument that defendants were estopped from asserting a defense of statute of limitations. The Court explained:

Absent grounds for tolling the running of the six-year period, FER may not recover on Count I for any misallocated section 4.3 distributions paid to MAIP's members before January 31, 2009 (i.e., six years prior to bringing this action). As a result, FER's claims with respect to improperly allocated distributions from 2003 through 2008 are barred unless FER can establish that the limitations period was tolled. FER argues that Defendants are equitably estopped from asserting a statute of limitations defense.

"Our courts have long had the power, both at law and equity, to bar the assertion of the affirmative defense of the Statute of Limitations where it is the defendant's affirmative wrongdoing . . . which produced the long delay between the accrual of the cause of action and the institution of the legal proceeding" (Gen. Stencils, Inc. v Chiappa, 18 NY2d 125, 128, 219 N.E.2d 169, 272 N.Y.S.2d 337 [1966]). There are "two distinct theories of equitable estoppel": the first theory "precludes a party from asserting the statute of limitations as a defense where the party commencing the action or proceeding was 'induced by fraud, misrepresentations or deception to refrain from filing a timely [suit]"' and the second theory provides that, where "a fiduciary relationship exists and there are colorable allegations of concealment, the doctrine of equitable estoppel may apply to toll the statute of limitations" (Matter of Thomas, 124 AD3d 1235, 1240-41, 1 N.Y.S.3d 598 [4th Dept 2015] [citations omitted]). "Where the defendant has a fiduciary duty to the plaintiff, the doctrine of equitable estoppel may be invoked based on the defendant's failure to disclose facts underlying the claim" (N. Coast Outfitters, Ltd. v. Darling, 134 AD3d 998, 999, 24 N.Y.S.3d 92 [2d Dept 2015]; see also Zumpano v Quinn, 6 NY3d 666, 675, 849 N.E.2d 926, 816 N.Y.S.2d 703 [2006] ["Where concealment without actual misrepresentation is claimed to have prevented a plaintiff from commencing a timely action, the plaintiff must demonstrate a fiduciary relationship . . . which gave the defendant an obligation to inform him or her of facts underlying the claim"] [alteration in original] [quoting Gleason v Spota, 194 AD2d 764, 765, 599 N.Y.S.2d 297 [2d Dept 1993]]).

The post-divorce legal relationship between FER and the Defendants defies easy categorization. On the one hand, FER is correct that Harmony (as manager of MAIP) owes FER fiduciary duties under the MAIP Operating Agreement, which does not by its terms opt out of Delaware's default rule with respect to fiduciary duties. Moreover, as the Court previously found, the disclaimer of fiduciary duties in the Letter Agreement does not clearly and unequivocally apply to Harmony's continued stewardship of the legacy pre-divorce businesses (NYSCEF 811 at 12). Indeed, the most natural reading of the disclaimer language is that it applied only to the forward-looking Bryco and Ronco businesses, and not to the legacy businesses. Accordingly, the Court rejects Defendants' contention that the Letter Agreement extinguished all fiduciary obligations with respect to Harmony's operation of MAIP and related entities.

On the other hand, FER and Mr. Dickerman are far from unsophisticated wards entitled to blind reliance on Mr. Gordon without looking after their own interests. At an operational level, Mr. Dickerman ran MAIP and its related businesses for years. He knew, as well as Mr. Gordon if not better, the specific investments and the records that would be needed to keep track of them and any associated distributions. That experience no doubt informed the terms of the Letter Agreement, which lay out in detail the information to which FER and Mr. Dickerman were entitled to receive to monitor their ongoing interests in MAIP and which gives FER the right to conduct an audit if anything was perceived to be amiss. In addition, Mr. Dickerman was well acquainted with the MAIP accounting staff, and was able to reach out to them to obtain information or ask questions.

The evidentiary record in this case might be significantly different if Mr. Dickerman had exercised reasonable diligence in tracking MAIP's financial performance, as it was his contractual right to do. As it stands, Plaintiff's expert felt limited to relying mainly of MAIP's tax returns rather than contemporaneous records supporting each challenged distribution. And indeed, even assuming the expert's analysis of tax returns could have been sufficient to establish a claim for breach of contract, the tax returns for the years in which material under-distributions are alleged (2002-2006) were readily available to Mr. Dickerman well before the statute of limitations expired.

Finally, Plaintiffs' reliance on Mr. Gordon's subsequent decision — in 2007 or 2008 — to suspend all distributions to FER is unavailing to trigger equitable estoppel for claims asserted with respect to the challenged distributions in prior years. First, the nature of the conduct that began in 2009 was qualitatively different than what is alleged for the prior years. Second, the same basic tax information that could have given rise to claims before and after 2009 was readily available to Mr. Dickerman throughout the entire period, and each breach triggered the running of a new limitations period

The attorneys at Schlam Stone & Dolan frequently litigate issues related to statutes of limitation. Please contact the Commercial Division Blog editors at commercialdivisionblog@schlamstone.com if you or a client have questions concerning such issues.