“Single Breach” vs. “Continuing Wrong”; the Continuing Wrong Doctrine Prevails, Saving Plaintiff’s Claim from Dismissal

Farrell Fritz, P.C.
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A cause of action accrues, triggering the commencement of the statute of limitations period, when “all of the factual circumstances necessary to establish a right of action have occurred, so that the plaintiff would be entitled to relief” (Gaidon v. Guardian Life Ins. Co. of Am.).  The “continuing wrong” doctrine is an exception to the general rule that is usually employed “where there is a series of continuing wrongs and serves to toll the running of a period of limitations to the date of the commission of the last wrongful act” (Henry v. Bank of Am.).

The First Department in CWCapital Cobalt VR Ltd. v. CWCapaital Invs. LLC recently examined the “continuing wrong” doctrine as compared to a single breach in the context of the statute of limitations.

By way of background, in CWCapital Cobalt VR Ltd., plaintiff placed its investors’ money in 50 different trusts holding commercial mortgage-backed securities (CMBS). The investors received collateralized debt obligations (CDOs) – the collateral being the certificates issued to plaintiff by the CMBS trusts, which are structured as a series of classes (the most senior class having the first claim on revenues generated by the commercial loan).

Plaintiff entered into a collateral management agreement (“CMA”) with defendant CWCapital Investments LLC (“CWCI”) to act as controlling class representative with respect to the trusts in which plaintiff had control rights.  Under the CMA, CWCI was obligated to, inter alia, act with reasonable care and in good faith ensure that the value of plaintiff’s assets is maximized. CWCI was also responsible for appointing a special servicer, who would direct and supervise the disposition of loans to mitigate the losses suffered by the trust when the loans fail and do not generate principal and interest payments.

Plaintiff’s complaint alleges that CWCI breached the CMA and the common-law fiduciary duty it owed to plaintiff in its capacity as collateral manager.  CWCI’s purported wrongdoings included the actions of CWCI’s affiliate, CWCapital Asset Management LLC (CWCA), a special servicer appointed by CWCI on plaintiff’s behalf.

Underlying plaintiff’s claims for breach of contract, breach of fiduciary duty, and unjust enrichment are the following three types of alleged misconduct by defendants. First, plaintiff alleged that CWCA, as special servicer, failed to share the significant fees with plaintiff that are generated with every loan workout, which was allegedly the market standard since as far back as 2011. Second, plaintiff alleged that instead of hiring third-party vendors when its special servicing required the use of brokers and auction websites, CWCA “spun off” from itself a new entity called CWFS-REDS, LLC. CWFS-REDS, LLC negotiated with these vendors and insisted that the vendors pay it a “kickback,” thus harming plaintiff and its investors by inflating asset disposition costs. Third, plaintiff alleged that CWCI and CWCA failed to exercise fair value price options (“FVP Options”) to plaintiff and instead usurped these options, exercising them for their own benefit.

Defendants moved to dismiss the complaint in its entirety because, among other things, plaintiff’s complaint was time-barred by the statute of limitations.  Defendants argued that CWCA “had already begun to commit the acts involving fee sharing and FVP Options more than six years before the commencement of the action in 2018, thus placing the claims based on those acts outside of the limitations periods for both breach of fiduciary duty and breach of contract claims.”  Plaintiff, on the other hand, argued that defendants had a continuing duty to act in accordance with the CMA and not to breach their fiduciary duty. Plaintiff’s argument relied on the assumption that defendants’ activities “amounted to a series of wrongs, each of which gave rise to its own limitations period.”

In dismissing certain claims as untimely, Justice Andrea Masley held that certain of the claims alleged a “single breach” and held that the “continuing wrong” doctrine “may only be predicated on continuing unlawful acts and not the “continuing effects” of earlier unlawful conduct.”   In dismissing certain claims as untimely, the court held that “CWCI’s alleged failure to take appropriate action with respect to the special servicer did not renew the limitations period each time CWCA negotiated a transaction without a revenue sharing agreement, since each transaction after the breach first occurred only increased [plaintiff’s] potential damages.”

On appeal, plaintiff argued that the trial court erred in failing to apply the continuing wrong doctrine as defendant’s purported misfeasance gave rise to more than one claim. Plaintiff further argued that the allegations against CWCI constitute a series of individual wrongs, each subject to a new limitations period.  Defendants, on the other hand, argued that the “continuing wrong” doctrine is inapplicable because the alleged wrongs only occurred once, i.e., when CWCI failed to terminate CWCA for not arranging to share its fees, for using CWFS REDS LLC, and for failing to exercise the FVP Options for plaintiff’s benefit.

The First Department ultimately concluded that the continuing doctrine does apply. The majority reasoned that “[t]he explicit language of the CMA conferred on CWCI a continuing duty to manage [plaintiff’s] investment” and to prevent activities that could harm plaintiff. The Court opined that while “a claim accrued the first time CWCI failed to act upon CWCA’s engagement in behavior that allegedly diminished the value of its investment, there is no basis for the argument that each subsequent time CWCI failed to act did not constitute a separate, actionable, wrong.”  The Court relied on the New York Court of Appeals’ decision in Bulova Watch Co. v. Celotex Corp., where the Court concluded that a new claim, with a new limitations period, accrued each time the roofing material supplier failed to honor its promise to repair the roof.

In a 3-2 decision, Justice Saliann Scarpulla dissented from the majority.  In her dissent, Justice Scarpulla stated that plaintiff’s complaint alleged a single breach of the CMA due to “CSCI’s failure to terminate CWCA, which failure had continuing effects, i.e., increasing damages as a result of CWCA’s continued work as special servicer.” Justice Scarpulla reasoned that where, as here, “there was a one-time decision, on a specific contract date, to delegate management to CWCI, and [plaintiff’s] numerous claims concerning CWCI’s special services all arise from that one-time decision,” the continuing breach doctrine is inapplicable. Justice Scarpulla relied on the Second Circuit’s decision in Kahn v Kohlberg, Kravis, Roberts, & Co., where the court rejected plaintiff’s position that each time the defendant exercised its advisory function without being registered, it created a distinct claim for the violation of the Investment Advisors Act of 1940, in opining that where parties enter into a single, discrete contract, claims regarding performance under that contract only impact damages and do not create new claims.

Practice Tip 

When considering the applicability of the statute of limitations defense, you must first determine whether the wrongdoings constitute a single wrong or a continuous serious of wrongs.  This analysis will be instrumental in determining whether your client has a timely claim at the commencement of the litigation or whether your client can move to dismiss on statute of limitations grounds.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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