If a party hires an investment advisor that goes on to allegedly systematically abuse its role by engaging in self-dealing in violation of its contractual obligations and fiduciary duties, when does the applicable statute of limitations period begin?  Does the wrongdoing give rise to a single claim with a single statute of limitations period starting at the first incident of self-dealing, or does each individual incident of self-dealing give rise to multiple new claims, each with a new statute of limitations period?  In other words, is there just one wrong, with continuing effects, or a series of wrongs?  And what is the effect of a contractual provision that imposes ongoing obligations on the statute of limitations inquiry?  These questions are not only conceptually challenging.  When that investment advisor accused of malfeasance has been managing a multi-billion dollar portfolio for many years, the consequences for when the advisee can bring a timely claim in New York State are significant.

On April 27, 2021, a split First Department panel revived the contract claims of the commercial mortgage-backed securities investment vehicle CWCapital Cobalt VR Ltd. (“Cobalt”) in its dispute with its investment advisor, CWCapital Investments (“CWCI”), related to its management of Cobalt’s $3.4 billion portfolio of commercial mortgage-backed securities (CMBS).[1] The lower court had granted the defendants’ motion to dismiss, holding that Cobalt’s claims were untimely.[2]  Cobalt appealed, arguing its action was within the statute of limitations as the “continuing wrong” or “continuing obligation” doctrine applied to its allegations. As the Court of Appeals has explained, the continuing wrong doctrine is applied in cases:

“where the harm sustained by the complaining party is not exclusively traced to the day when the original objectionable act was committed.  The rule is based on the principle that continuous injuries create separate causes of action barred only by the running of the statute of limitations against each successive trespass. The repeated offenses are treated as separate rights of action and the limitations period begins to run as to each upon its commission.”[3] 

The split First Department panel debated the doctrine in detail, with the majority applying it to find Cobalt’s claims timely. 

It is necessary to understand the details of the case to understand the First Department’s application of the doctrine.  In 2007, Cobalt, a Cayman Islands based investment vehicle, placed investors’ money in trusts holding CMBS.  The investors received collateralized debt obligations (CDOs), collateralized by the certificates issued to Cobalt by some fifty different CMBS trusts.  Cobalt invested in junior class certificates—in CMBS parlance, the “B-piece”—that carries the right to appoint the controlling class representative and ultimately to appoint and replace a special servicer.  These control rights are valuable, as they provide the holder with the right to manage how the trusts’ troubled loans are handled.  The special servicer is then charged with directing and supervising, among other things, the workout and disposition of nonperforming and underperforming loans held by the CMBS trusts in order to mitigate any losses suffered by the trusts.  For the trusts in which Cobalt had control rights, it entered into a collateral management agreement with defendant CWCI to act as the controlling class representative, ensuring that the value of Cobalt’s assets were maximized with reasonable care and good faith. 

Cobalt’s complaint, filed in 2017, alleged that CWCI abused its position to reap improper benefits.  Cobalt alleged CWCI breached the collateral management agreement and the common law fiduciary duty it owed Cobalt as collateral manager in three ways, all concerning the actions of the special servicer, a CWCI affiliate, that CWCI selected on Cobalt’s behalf.  First, the special servicer failed to share with the controlling class certificate holders fees received by the special servicer from trusts, as was allegedly the industry practice since 2011.  Second, rather than seeking discounts from brokers and auction websites used to sell distressed loans or property, the special servicer allegedly insisted these vendors pay it a kickback, which inflated the costs of asset dispositions and diminished the recoveries to the trusts.  Third, instead of allowing Cobalt to purchase defaulted mortgage loans in the trust’s portfolio at “fair value,” CWCI and the special servicer allegedly purchased such loans for their own benefit.  This is important as, according to Cobalt, B-piece holders want the ability to buy up distressed assets and would not expect that opportunity to be usurped by the special servicer.  Altogether, Cobalt alleged that these conflicts of interest cost it over $1 billion, in part related to the special servicer’s sale of the Stuyvesant Town housing development in Manhattan.

Defendants successfully moved to dismiss Cobalt’s complaint for failure to state a cause of action and as time barred.  Cobalt appealed, arguing that it had not alleged a single wrong, but a series of wrongs, and that each time CWCI allowed the special servicer to be overpaid, allowed a kickback, or usurped Cobalt’s contractual purchase options, a separate actionable wrong accrued that triggered a new limitations period.  Cobalt claimed that CWCI made new and independent decisions to repeatedly engage in misconduct, rather than a onetime breach from which the alleged misconduct irrevocably followed.  

Over a two judge dissent, the First Department found the action to be timely.  The main dispute between the majority and the dissent was whether CWCI’s management of Cobalt’s holdings through its designee constituted a single wrong or as a continuous series of wrongs. 

In support of its holding, the majority opinion, authored by Justice Mazzarelli and joined by Justices Webber and Shulman, noted that the explicit language of the collateral management agreement conferred on CWCI a continuing duty to manage Cobalt’s investment, which Cobalt alleged included ensuring that all services being performed by the special servicer were done only to benefit the investors.  The majority found that while a claim certainly accrued the first time, CWCI failed to act upon the special servicer’s actions that allegedly diminished the value of the investment, and each subsequent failure to act also constituted a separate, actionable wrong.  This is because “the allegations describe an arrangement by which CWCI acted as Cobalt’s eyes and ears with respect to the CMBS trusts and had a responsibility to do everything in its power to prevent any activities that could possibly be to Cobalt’s detriment.”[4]  The majority likened the case to another where the continuing wrong doctrine applied, Bulova Watch Co. v. Celotex Corp., in which the Court of Appeals held that a new claim with a new limitations period accrued each time the plaintiff asked the defendant roofing material supplier to repair a leak to no avail, rather than at the moment of the initial leak.[5]  It also contrasted the case with others where defendants did not owe a similar ongoing duty to the plaintiffs after committing each actionable wrong.[6]

The dissent, authored by Justice Scarpulla and joined by Justice Gonázlez, argued that the complaint alleged that there was a single breach of the collateral management agreement based on CWCI’s failure to terminate the special servicer, and that this failure had continuing effects.  “Here, there was a one-time decision, on a specific contract date, to delegate management to CWCI, and Cobalt’s numerous claims concerning CWCI’s special servicer all arise from that one-time decision. It would thus have held the action to be untimely.”[7] The majority responded by concluding that “[t]he dissent’s narrow approach would unfairly shield CWCI from its responsibility to act in Cobalt’s best interests on an ongoing basis and would frustrate the purposes for which Cobalt retained CWCI to act as controlling class representative.”[8]  It also noted that the continuing wrong doctrine only availed Cobalt of claims that arose within six years of the commencement of the action.[9]  Cobalt claimed that holding otherwise would allow an advisor to act with impunity after the three or six-year period that accrued with the initial breach expired.

The effects of this decision, which plaintiffs will likely argue expands the continuing wrong doctrine on other cases involving investment advisors, could be immense.  Advisors frequently have a “continuing duty” to monitor their clients’ investments in good faith, and this often includes being the clients’ “eyes and ears” with respect to the investment and ensuring that all services performed by any third-parties they may have hired are being done for the clients’ benefit.  Plaintiffs will argue that, based on the majority’s reasoning, a contractual obligation to manage a client’s investment “on an ongoing basis with reasonable care and in good faith” is enough for the continuing wrong doctrine to apply.  Defendants will seek to construe the holding narrowly, drawing distinctions between the contractual language at issue in the case and their own contracts, and pointing to other pragmatic considerations as to why the ruling should not apply (e.g., plaintiff was on notice of the first alleged act but refused to take any action).

Ultimately, the majority and the dissent offered very good reasons for their approach to the issue, and the decision is a nuanced application of the continuing wrong doctrine.  The consequences for how a claim is pled can be considerable, as the doctrine, if appropriately pled, can greatly lengthen the time a party has to bring a claim.  Considering the 3-2 split, there is a chance that the Court of Appeals will issue further guidance on the doctrine.  Until this happens, practitioners considering raising or attempting to overcome a statute of limitations defense should evaluate whether the allegations in the complaint have been, or could be, framed as a single wrong or a series of wrongs.