People v. Credit Suisse Sec. (USA) LLC

• Decision Date: 12 June 2018
• Docket Number: No. 40,40
• Citation: 31 N.Y.3d 622,82 N.Y.S.3d 295,107 N.E.3d 515
• Parties: The PEOPLE of the State of New York, BY Eric T. SCHNEIDERMAN, Attorney General of the State of New York, Respondent, v. CREDIT SUISSE SECURITIES (USA) LLC, Formerly Known as Credit Suisse First Boston LLC, et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

31 N.Y.3d 622

107 N.E.3d 515

82 N.Y.S.3d 295

The PEOPLE of the State of New York, BY Eric T. SCHNEIDERMAN, Attorney General of the State of New York, Respondent,

v.CREDIT SUISSE SECURITIES (USA) LLC, Formerly Known as Credit Suisse First Boston LLC, et al., Appellants.

No. 40

Court of Appeals of New York.

June 12, 2018

Cravath, Swaine & Moore LLP, New York City (Richard W. Clary, Michael T. Reynolds and Lauren A. Moskowitz of counsel), for appellants.

Barbara D. Underwood, Attorney General, New York City (Andrew W. Amend and Steven C. Wu of counsel), for respondent.

Latham & Watkins LLP, New York City (Jonathan Lippman of counsel), Greenberg Traurig LLP, New York City (Carmen Beauchamp Ciparick of counsel), Whiteman Osterman & Hanna LLP, Albany (Howard A. Levine of counsel), and Friedman Kaplan Seiler & Adelman LLP, New York City (Robert S. Smith of counsel), for Jonathan Lippman and others, amici curiae.

OPINION OF THE COURT

Chief Judge DiFIORE.

In this action brought by the Attorney General, the primary issue is whether Martin Act (General Business Law art 23–A, § 352 et seq.) claims are governed by the three-year statute of limitations in CPLR 214(2) or the six-year limitations period in either CPLR 213(1) or (8). Because the Martin Act expands liability for "fraudulent practices" beyond that recognized under the common law, we conclude that CPLR 214(2) —covering "action[s] to recover upon a liability, penalty or forfeiture created or imposed by statute"—controls. With respect to the Attorney General's Executive Law § 63(12) claim, we remit to Supreme Court for further proceedings.

I.

After an investigation,¹ the Attorney General commenced this action in November 2012 asserting that the issuance of residential mortgage-backed securities by defendants Credit Suisse Securities (USA) LLC and affiliated entities (Credit Suisse) in 2006 and 2007 violated the Martin Act. The complaint alleges that defendants committed multiple fraudulent and deceptive acts in connection with the creation and sale of residential mortgage-backed securities (RMBS). In particular, the Attorney General claimed that defendants led investors to believe that they had "carefully evaluated—and would continue to monitor" the quality of loans underlying the RMBS. However, the complaint asserts that defendants were aware of "pervasive flaws in the screening process" for such loans but failed to disclose them to investors. Further, defendants purportedly encouraged originators to deliver defective loans based on an "incentives" program. Thus, the Attorney General contended defendants misrepresented the quality of the mortgage loans underlying the securities as well as the due diligence process. After describing the alleged misconduct in some detail, the first cause of action states that defendants' acts and practices violated Article 23–A of the General Business Law (the Martin Act). In a second cause of action incorporating by reference the same allegations, the complaint alleges defendants "engaged in repeated fraudulent or illegal acts (in violation, inter alia , of the Martin Act)," contrary to Executive Law § 63(12).

Defendants moved to dismiss the complaint pursuant to CPLR 3211(a)(5) and (7) arguing, among other things, that the action was time-barred because the operative statute of limitations is the three-year period found in CPLR 214(2). The Attorney General countered, as relevant here, that the action was timely because Martin Act and Executive Law § 63(12) claims are governed by the six-year limitations period found in CPLR 213(1) or (8). Alternatively, the Attorney General asserted that a six-year limitations period was applicable here because the complaint pleaded the elements of common law fraud.

Supreme Court denied the motion to dismiss in its entirety, concluding "that Executive Law § 63(12) and Martin Act cases based on investor fraud were governed by the six-year statute of limitations of CPLR 213" (46 Misc.3d 1211A, 2014 N.Y. Slip Op. 51912[U], *5 [Sup. Ct. 2014] ). The court reasoned "that the essence of plaintiff's claims under both Executive Law § 63(12) and the Martin Act is that defendants made false representations in order to induce investors to purchase their securities ... [and] thus seek to impose liability on defendants based on the classic, longstanding common-law tort of investor fraud" ( 2014 N.Y. Slip Op. 51912[U], *6).

The Appellate Division affirmed, insofar as appealed from, with two Justices dissenting. The Appellate Division adhered to its prior holding in State of New York v. Bronxville Glen I Assocs., 181 A.D.2d 516, 581 N.Y.S.2d 189 (1st Dept. 1992) ) applying a six-year statute of limitations to Martin Act claims, noting that the language in Executive Law § 63(12) parallels that of the Martin Act, and concluding 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" ( 145 A.D.3d 533, 535, 47 N.Y.S.3d 236 [1st Dept. 2016] ). The Court further concluded that "the complaint sets forth the elements of common-law fraud, including scienter or intent, reliance, and damages" because the allegations "describe a specific scheme whereby Credit Suisse benefited itself at the expense of investors" ( id. at 536, 47 N.Y.S.3d 236 [internal quotation marks and brackets omitted] ). The dissent would have reversed and granted defendants' motion to dismiss the Martin Act and Executive Law § 63(12) claims as time-barred, concluding the three-year statute of limitations in CPLR 214(2) applied ( 145 A.D.3d at 539–540, 47 N.Y.S.3d 236 [Andrias, J., dissenting] ). The dissent largely relied on our decision in Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201, 208, 727 N.Y.S.2d 30, 750 N.E.2d 1078 (2001) (Gaidon II ), which reasoned that CPLR 214(2) applies to claims under General Business Law § 349 because that statute both lacks a scienter requirement and encompasses a wider range of deceptive business practices than were condemned at common law. The dissent reasoned that the same was true with respect to the claims pressed by the Attorney General here, warranting the same result. The Appellate Division granted defendants leave to appeal, certifying the question whether its order was properly made.

II.

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 (8).² 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." "[A]n 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’ ( Aetna Life & Cas. Co. v. Nelson , 67 N.Y.2d 169, 174 [501 N.Y.S.2d 313, 492 N.E.2d 386] [1986] ). Thus, CPLR 214(2) ‘does not apply to liabilities existing at common law which have been recognized or implemented by statute’ ( id. ). 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" ( 96 N.Y.2d 201, 208 [727 N.Y.S.2d 30, 750 N.E.2d 1078] [internal quotation marks and citation omitted] ).

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" ( id. at 209, 727 N.Y.S.2d 30, 750 N.E.2d 1078 [emphasis in original], quoting Matter of Motor Veh. Acc. Indem. Corp. v. Aetna Cas. & Sur. Co. , 89 N.Y.2d 214, 220–221, 652 N.Y.S.2d 584, 674 N.E.2d 1349 [1996] ). 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 (see Contact Chiropractic, P.C. v. New York City Transit Auth. , 31 N.Y.3d 187, 75 N.Y.S.3d 474, 99 N.E.3d 867 [2018]; see also Aetna Life & Cas. Co. , 67 N.Y.2d 169, 501 N.Y.S.2d 313, 492 N.E.2d 386 [applying CPLR 214(2) to insurer action to recoup first-party No Fault benefits paid to its insured pursuant to a statutory lien against settlement proceeds] ).

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 (see General Business Law §§ 352, 353 )" ( Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership , 12 N.Y.3d 236, 243, 879 N.Y.S.2d 17, 906 N.E.2d 1049 [2009] ). 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 (see e.g. General Business Law § 352–e[1][b] [mandatory offering statements filed with respect to real estate syndication offerings "shall not omit any material fact or contain any untrue statement of a material fact"] ). 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...