How Important Is Timing With Your Fraud Statute of Limitations? Turns Out, Very

Is Time on Your Side?

If you are an alleged victim of fraud, and you want to sue the fraudster in civil court, there is a critical question you will have to answer to ensure that your claim is timely: When did you know? A responsible defendant will push you with motions, discovery requests, and deposition questions related to this timing. They’ll question you about what you knew and when. In general, they’ll push you to admit that you knew as early as possible that the defendant deceived you.

Why? Because when you knew or should have known about the fraud triggers the running of the statute of limitations on your fraud claim. If you knew about the fraudulent activity that happened to you five years ago but waited to bring the case to court now, it might be too late.

Act Quickly: Fraud Claims Are Time-Sensitive

As mentioned above, claims for fraud are subject to statute of limitations, as much as any other civil action. The substance and length of statutes of limitation will vary from state to state.

Statute of limitations have applied to common law for centuries. They aim to encourage plaintiffs to be diligent when bringing claims. Along with their cousins, statute of repose, statute of limitations are designed to give defendants peace of mind that they won’t face the risk of certain claims forever.

Statutes of limitation begin to run on what lawyers call the ’accrual date.’ For some types of claims, it is easy to determine the accrual date. If someone runs a red light and T-bones your car, the date of the accident is almost certainly going to be the date your claim against that driver would begin to accrue.

Similarly, if a surgeon amputates the wrong foot, determining the accrual date for the malpractice claim is not going to be hard.

In some cases, however, especially cases that involve deception, concealment, or fraud, determining the accrual date of your claim can be more difficult.

Do Facts Exist if You Don’t Know About Them?

What if you invest money with a financial advisor who’s running a Ponzi scheme?

Consider this hypothetical: you invest $100,000 a year for 10 years. In year 11, your financial advisor is indicted for running a Ponzi scheme, and you lose your entire investment. In this situation, your state has a four-year statute of limitations for fraud claims. Can you sue to recover all 10 investments or only those made within four years of the indictment?

This question becomes philosophical: do facts exist even if you don’t know about them? To help explain, we will discuss a similar case that happened in Illinois. However, the result of a case will vary depending on the state where the fraud occurred.

Case Study: Khan v. Deutsche Bank AG, 2012 IL 112219

Illinois has a discovery rule for its statutes of limitation. The ’discovery rule’ means that the limitations date for a fraud claim isn’t necessarily tied to when the fraud began or even when the plaintiff actually forked over his money based on a lie. Under the discovery rule, the limitations period may not start to run until a much later date, i.e., when the client knew or could have known when the illegal activity began.

What the plaintiff knew and when, thus becomes paramount when determining what a fraud claim accrues under the discovery rule.

In this particular case, the Illinois Supreme Court agreed with the plaintiff who argued that he could not have reasonably discovered the defendants’ fraud as it was occurring. The court agreed with him that the alleged fraud was not discoverable until the IRS sent the plaintiff a tax deficiency notice some eight or nine years later.

Later applications of this Supreme Court decision in the Illinois lower courts, however, show that the limitations analysis will be case- and fact-specific. This is not a part of the law that lends itself to bright-line rules.

These Answers to the Fraud Statute of Limitations Might Decide Your Case

When could the plaintiff reasonably have known that fraud was happening? When could the plaintiff know that he was injured? For lawyers, the term ’reasonable’ and its variations mean an objective standard.

In other words, it will not be enough for a plaintiff to swear that he didn’t know until he saw his financial advisor take a perp walk on the six o’clock news. Under an objective standard, plaintiffs are required to show that a reasonable person could not have known or learned of the fraud. Deleting social media from your phone will not extend your time to file suit.

For example, maybe your financial advisor regularly called you from Caribbean countries to ask you about your secret illegal account. Or perhaps you were paid stock dividends in rolls of $100 bills. In those cases, you might have a hard time convincing a judge that a reasonable person would not have known that something fishy was going on.

When did you know about the fraud? When reasonably should you have known? The answers to these simple questions may determine whether your fraud claim has been brought in time, or whether it is barred by a statute of limitations.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Alternative Dispute Resolution Series
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3. Understanding Risk Management Basics for Business Owners

This article was originally published on February 2, 2017 and updated February 24, 2020.]

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