People ex rel. Schneiderman v. Credit Suisse Securities (USA) LLC

Order, Supreme Court, New York County (Marcy S. Friedman, J.), entered December 24, 2014, which, insofar as appealed from, denied the motion of defendants Credit Suisse Securities (USA) LLC, formerly known as Credit Suisse First Boston LLC, DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corporation, Asset Backed Securities Corporation and Credit Suisse Mortgage Acceptance Corporation (collectively, Credit Suisse) to dismiss the complaint pursuant to CPLR 3211 (a) (5), affirmed, with costs.

The motion court correctly found that the Attorney General’s claims are not time-barred. Credit Suisse was involved in the creation and sale of residential mortgage-backed securities (RMBS) in 2006 and 2007. As of March 21, 2012, the parties entered into a tolling agreement stating that the Attorney General was investigating Credit Suisse’s business practices, and that the parties agreed to toll the applicable limitations period for any potential claim by the Attorney General. The tolling period began on March 8, 2012 and ended three years from the agreement’s execution date.

On November 20, 2012, the Attorney General commenced this action, interposing causes of action for securities fraud under the Martin Act (General Business Law, art 23-A, § 352 et seq.) and for persistent fraud or illegality under Executive Law § 63 (12). In this complaint, the Attorney General alleges that Credit Suisse failed to abide by its representations that it was taking a variety of steps to ensure the quality of the loans underlying its RMBS. Specifically, the Attorney General alleges, Credit Suisse’s actual due diligence process was very different from its public representations about the quality of its due diligence, in that it falsely represented to investors that it had conducted a thorough examination of loans pursuant to a philosophy of ensuring the borrowers’ ability to repay. Further, the Attorney General alleges that while Credit Suisse acknowledged internally the bad quality of the loans that the origina

General Business Law § 353 (1) states, “Whenever the attorney-general shall believe . . . that any person . . . has engaged in . . . fraudulent practices, he may bring an action ... to enjoin such person . . . from continuing such fraudulent practices.” Moreover, section 353 (3) provides, “Upon a showing by the attorney general that a fraudulent practice . . . has occurred, he may include ... an application to direct restitution of any moneys or property obtained ... by any such fraudulent practice.”

In turn, Executive Law § 63 (12) states, in relevant part, “Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on ... of business, the attorney general may apply . . . for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, [and] directing restitution and damages.”

As originally enacted, however, section 63 (12) provided no definition of the term “fraud” (see L 1956, ch 592, § 1). Rather, the section’s definition of that term was added in 1965 (see L 1965, ch 666, § 1)—specifically, “any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretence, [or] false promise.”

As this Court previously held in State of New York v Bronxville Glen I Assoc. ( 181 AD2d 516 , 516 [1st Dept 1992]), the statute of limitations for an action brought by the Attorney General under the Martin Act alleging investor fraud “is six years pursuant to CPLR 213 (8), and not three years pursuant to CPLR 214” (see also Podraza v Carriero, 212 AD2d 331 , 340 [4th Dept 1995], lv dismissed 86 NY2d 885 [1995]; Loengard v Santa Fe Indus., Inc., 573 F Supp 1355 , 1359 [SD NY 1983]). More recently in Matter of People v Trump Entrepreneur Initiative LLC ( 137 AD3d 409 [1st Dept 2016], lv granted 2016 NY Slip Op 73667 [U] [May 17, 2016] [Trump]) we analyzed the issue of the statute of limitations for claims brought under

We adhere to that determination here. The conduct targeted under section 63 (12) parallels the conduct covered under the Martin Act’s definition of fraud in that both the Martin Act and section 63 (12) target wrongs that existed before the statutes’ enactment, as opposed to targeting wrongs that were not legally cognizable before enactment. Accordingly, section 63 (12) is not subject to the three-year statute of limitations under CPLR 214 (see Aetna Life & Cas. Co. v Nelson, 67 NY2d 169 , 174 [1986]).

The dissent maintains that the complaint is based on statutory violations encompassing a larger range of claims than were legally cognizable before section 63 (12)’s enactment. But, as noted above, and as we noted in Trump, the conduct at issue in this action was, in fact, always subject to granting of relief under the courts’ equitable powers (see e.g. People v Federated Radio Corp., 244 NY 33 , 38-39 [1926]).

Further, CPLR 213 (1), rather than CPLR 214 (2), is applicable to an Executive Law § 63 (12) claim based on a scheme to obtain ownership of distressed properties by means of fraudulent misrepresentations (Cortelle Corp., 38 NY2d 83 ).

The argument that Bronxville Glen I Assoc, and Cortelle Corp. have been superseded by Gaidon v Guardian Life Ins. Co. of Am. ( 96 NY2d 201 [2001]), is unavailing (see Trump, 137 AD3d at 418 ). In Gaidon, which applied CPLR 214 (2) to a General Business Law § 349 (h) claim, the Court stated that “General Business Law § 349, as invoked in this case, falls in the . . . category” of “claims which, although akin to common-

Contrary to the dissent’s conclusion, the complaint sets forth the elements of common-law fraud, including scienter or intent, reliance, and damages. The allegations in the complaint describe a specific scheme whereby Credit Suisse “benefit [ed] [itself] at the expense of investors.” As the trial court correctly found, “these claims seek to impose liability on [Credit Suisse] based on the classic, longstanding common-law tort of investor fraud,” thus invoking a six-year statute of limitations. Concur— Moskowitz, Kapnick and Webber, JJ.

Friedman, J.P., and Andrias, J., dissent in a memorandum by Andrias, J., as follows: In November 2012, the State Attorney General commenced this action alleging that defendants violated the Martin Act (General Business Law § 352 et seq.) and Executive Law § 63 (12) by committing multiple fraudulent and deceptive acts in connection with the promotion and sale of residential mortgage-backed securities (RMBS) through the end of 2007. The majority affirms the denial of defendants’ motion to dismiss the complaint as time-barred, finding that the Martin Act and Executive Law § 63 (12) claims are governed by the six-year limitation periods of CPLR 213 (8) and CPLR 213 (1), respectively. Because I believe that the three-year statute of limitations of CPLR 214 (2) applies to the Attorney General’s claims, as pleaded in this action, I respectfully dissent.

Neither the Martin Act nor Executive Law § 63 (12) contain its own statute of limitations. Thus, to determine the applicable statute of limitations, we must examine the complaint to identify “the gravamen or essence of the cause [s] of action” (Western Elec. Co. v Brenner, 41 NY2d 291 , 293 [1977]).

Where claims are “to recover upon a liability . . . created or imposed by statute” (CPLR 214 [2]), and the liability, although akin to common-law causes, “would not exist but for [the] statute” (Aetna Life & Cas. Co. v Nelson, 67 NY2d 169 , 174 [1986]), the three-year statute of limitations of CPLR 214 (2) applies (see Gaidon v Guardian Life Ins. Co. of Am., 96 NY2d 201 , 208 [2001] [Gaidon //]). In contrast, where a statute “merely codifies and affords new remedies for what in essence is a common-law . . . claim [,]” CPLR 214 (2) does not apply and “the Statute of Limitations for the statutory claim is that for the common-law cause of action which the statute codified or implemented” (id. at 208).

In the complaint, the Attorney General alleges, inter alia,

In the second cause of action, labeled “Persistent Fraud or Illegality—Executive Law § 63 (12),” the Attorney General alleges that “[t]he acts and practices alleged herein constitute conduct proscribed by § 63 (12) of the Executive Law, in that Defendants engaged in repeated fraudulent or illegal acts (in violation of, inter alia, the Martin Act) or otherwise demonstrated persistent fraud or illegality in the carrying on, conducting or transaction of business.”

These claims, as pleaded, fall within the category of claims that would not exist but for the statutes, creating a new basis for liability, not a new remedy, and the three-year statute of limitations of CPLR 214 (2) applies (see Gaidon II, 96 NY2d at 208-209 ; State of New York v Daicel Chem. Indus., Ltd., 42 AD3d 301 , 303 [1st Dept 2007]).

In Gaidon II, the Court of Appeals applied the three-year limitations period of CPLR 214 (2) to a General Business Law § 349 claim on the ground that misrepresentations in promotional materials used in selling vanishing premium insurance policies “did not rise to the level necessary to establish a common-law fraud claim,” but were actionable under section 349, “a creature of statute based on broad consumer-protection concerns” (Gaidon II at 209 [internal quotation marks omitted]). The Court reasoned that while section 349 “may cover conduct ‘akin’ to common-law fraud, it encompasses” misrepresentations that the Court did not consider sufficiently material to be common-law fraud but nevertheless could deceive the

This rationale applies equally to the General Business Law § 352 securities fraud claim that the Attorney General has pleaded herein.

General Business Law §§ 352 and 353 authorize “the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State” (Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, 12 NY3d 236 , 243 [2009] [citations omitted]). General Business Law § 352 (1) defines “fraudulent practice” in relevant part as: “any device, scheme or artifice to defraud or for obtaining money or property by means of any false pretense, representation or promise, or . . . any deception, misrepresentation, concealment, suppression, fraud, false pretense or false promise, or . . . any practice or transaction or course of business relating to the purchase, exchange, investment advice or sale of securities or commodities which is fraudulent or in violation of law and which has operated or which would operate as a fraud upon the purchaser . . . .”

Because the purpose of the law is to prevent all kinds of fraud in connection with the sale of securities and commodities, “the terms ‘fraud’ and ‘fraudulent practices’ [are] to be given a wide meaning so as to embrace all deceitful practices contrary to the plain rules of common honesty, including all acts, even though not originating in any actual evil design to perpetrate fraud or injury upon others, which do tend to deceive

To hold that the six-year limitations period of CPLR 213 (8) applies, the majority relies on State of New York v Bronxville Glen I Assoc. ( 181 AD2d 516 [1st Dept 1992]), which predates Gaidon II. In Bronxville, this Court held that a six-year limitations period under CPLR 213 (8) applied because “[liability for investor fraud was not created by the Martin Act, but is recognized in case law predating that legislation” ( 181 AD2d at 516 ). The Court reasoned that liability was considered to be created by statute if the state established a unique species of liability entirely unknown at common law. Because liability for investor fraud was not created by the Martin Act, but was recognized in case law predating its legislation, the Court held that CPLR 214 (2) did not apply. However, as defendants argue, under Gaidon II, it is not sufficient for a statutory claim to be merely “recognized” in case law for the common-law statute of limitations to be applied. Rather, Gaidon II requires a more searching analysis and reaffirms that a statutory claim “akin to” but sufficiently different from a common-law claim is governed by CPLR 214 (2)’s three-year statute of limitations (Gaidon II, 96 NY2d at 208-210 ; see also United States ex rel. Bilotta v Novartis Pharms. Corp., 50 F Supp 3d 497 , 549-550 [SD NY 2014] [“While it may be true that these statutes ‘incorporate () already existing standards applied to fraudulent behavior always recognized as such,’ this factor is not disposi-tive, because these statutes ‘may in part expand the definition of fraud so as to create a new liability in some instances,’ such that C.P.L.R. § 213 applies instead” (emphasis omitted)]).

Furthermore, Bronxville relied on Reusens v Gerard ( 160 App Div 625 , 627 [1st Dept 1914]), where this Court held that the complaint at issue alleged “all the essentials of an action for fraud and deceit, i.e., a representation by acts for the public, and, therefore, for the plaintiffs, to act upon, falsity, scienter, deception and injury” (see also Liberty Mut. Ins. Co. v. Excel Imaging, PC., 879 F Supp 2d 243 , 267 [ED NY 2012] [comparing a 1975 case on which Bronxville relied, which had stated that the Martin Act “incorporates already existing standards applied to fraudulent behavior always recognized as such,” with Gaidon II, which “explained that the liabilities imposed by (the consumer fraud statute) were different from common-law fraud in several critical ways, since the statute did not require proof of scienter and outlawed conduct that did not necessarily rise to the level of fraud” and holding that CPLR 214 (2) applied to insurers’ claims under New York’s no-fault laws (emphasis omitted)]).

Relying on this Court’s recent decision in Matter of People v Trump Entrepreneur Initiative LLC ( 137 AD3d 409 , 417-418 [1st Dept 2016]), the majority disagrees and holds that a six-year limitations period applies. In Trump, which dealt with the issue of whether the Attorney General could bring a standalone fraud claim under Executive Law § 63 (12), the panel recognized that fraud under section 63 (12) may be established without proof of scienter or reliance, that the Attorney General need not limit itself to a claim for common-law fraud only, and that the section defines the conduct that it prohibits and authorizes the Attorney General to commence an action or proceeding to foreclose that conduct. Nevertheless, the panel applied a six-year limitations period, on the ground that section 63 (12) “does not create any liability nonexistent at common law, at least under the court’s equitable powers . . . [and] does not encompass a significantly wider range of fraudulent activities than were legally cognizable before the section’s enactment” (id. at 418). However, in light of the holding in Gaidon II, which remains the controlling precedent, and our decision in Daicel, I do not believe that a six-year limitations period always applies to Martin Act and Executive Law § 63 (12) claims, where, as here, the complaint does not plead scienter and reliance or is otherwise based on statutory violations that encompass a greater range of claims than was legally cognizable before the statute’s enactment.

Nor does State of New York v Cortelle Corp. ( 38 NY2d 83 , 88-89 [1975]), cited by the majority on which Trump relied, hold that claims brought under section 63 (12) are always governed by a six-year limitation period. In Cortelle, plaintiff alleged that defendants had induced distressed owners of residences whose mortgages were about to be foreclosed to enter into sale-leaseback agreements by making “representations [that] were willfully false and part of a scheme to obtain the permanent ownership of distressed properties by fraud” (id. at 85-86, 89). Although the Cortelle Court applied a six-year limitation period, it did so after analyzing the nature of plaintiff’s claim and concluding that it was based on longstand

Accordingly, as the Attorney General is seeking relief under a broader definition of fraud created by the statutes, defendants’ motion to dismiss the Martin Act and Executive Law § 63 (12) claims as time-barred under CPLR 214 (2) should be granted.

Motion to file supplemental briefs granted.