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Fraud claim, discovery rule legal

Bringing a Fraud Claim: Is Time on Your Side?

The statute of limitations on your fraud claim may depend on when you knew (or learned) about the fraud.

When did you know?

If you are an (alleged) victim of fraud, this question will come up. A smart attorney will ask this question very early on.

A smart defendant will present you with conflicting and overlapping interrogatories and depositions. They’ll question you about what you knew and when. They’ll push you to admit that you knew as early as possible that the defendant deceived you.

Why?

It’s due to a legal doctrine known as the “discovery rule.”

 

Act Quickly: Fraud Claims Are Time-Sensitive

Claims for fraud—like any other civil action—are subject to statutes of limitations. These vary in length and substance from state to state.

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

Statutes of limitation typically begin to run—that is, the time period during which you must file suit begins to be counted—from accrual.

Typically, a claim accrues “when facts exist that authorize the bringing of a cause of action.” Khan v. Deutsche Bank AG, 2012 IL 112219 ¶ 20 (I’m quoting Illinois law because that’s where I practice, though it cannot be said enough: for statutes of limitations every state is different).

For some types of claims, it is easy to determine when a claim accrues. 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 accrue.

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

 

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

But fraud is not a car accident. What if you invest money annually 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. 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 very quickly: do facts exist even if you don’t know about them?

In Illinois, at least for statute of limitations purposes, the answer is “no.”

Illinois has a “discovery rule” that “postpone[s] the start of the period of limitations until the injured party knows or reasonably should know if the injury, and knows or reasonably should know that [it] was wrongfully caused.” Khan 2012 IL 112219 ¶ 20.

Thus, in determining when a fraud claim accrues, what the plaintiff knew and when become paramount.

In Khan, the Illinois Supreme Court agreed with the plaintiff, who argued that he could not have reasonably discovered the defendants’ fraud as it was occurring. Rather, the court agreed with him that the alleged fraud—relating to the improper use of tax shelters—was not discoverable until the IRS sent the plaintiff a tax deficiency notice some 8 or 9 years later. See Khan 2012 IL 112219 ¶ 45.

 

These Simple Answers Might Decide Your Fraud Case

The Khan court’s analysis was fact-intensive, as “the question of when a party knew or reasonably should have known both of an injury and its wrongful cause is one of fact.” Khan. 2012 IL 112219 ¶ 21.

Note the phrase “reasonably should have known.” For lawyers, the word “reasonable” and its variations mean an objective standard, as contrasted with a subjective one.

In other words, it will not be enough for a plaintiff to swear that he didn’t know he was being defrauded until he saw his financial advisor take a perp walk on the 6:00 news. Under an objective standard, plaintiffs have to show that a reasonable person could not have known or learned of the fraud.

If, for example, your financial advisor regularly called you from Caribbean countries to ask you about your secret illegal account, and regularly paid your stock dividends in rolls of $100 bills, you might have a hard time convincing a judge that a reasonable person would not have known that some sort of fraud was going on.

“When did you know?”

“When reasonably should you have known?”

The answers to these simple questions might decide your fraud case.

 


This website and its contributors are not providing legal advice and this website does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.


 

About Adam Hirsch

Adam represents a wide variety of clients, ranging from individuals to small business owners to large corporations. He has a particular focus on business and investment disputes, and has experience litigating such disputes in numerous state and federal courts. He has also represented business clients in arbitration and mediation proceedings. Adam also represents employees in…

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