COMMITTEE ON CIVIL PRACTICE LAW AND RULES

REPORT NO. 99 July 15, 1997

A. 5093-C By: M of A Koon

Assembly Committee: Codes

Effective Date: Immediately

AN ACT to amend the civil practice law and rules, in relation to addressing the issue of investment fraud restitution

LAW AND SECTIONS REFERRED TO: CPLR 214

REPORT PREPARED BY THE COMMITTEE ON CIVIL PRACTICE LAW AND RULES (#33)

THE BILL IS DISAPPROVED

This bill adds a new CPLR 214-e applicable only to actions for fraud arising from the purchase of real property or investment securities relating to real property arising from purchases made between 1985 and 1990. As to such actions, the new CPLR 214-e will (a) revive the statute of limitations for two years after the effective date of the amendment and (b) preclude the New York courts from applying the doctrines of res judicata and collateral estoppel arising from a prior federal court decision.

The bill would provide extraordinary relief to litigants who may well have had ample opportunity to pursue their claims under existing New York law and instruct New York courts to ignore the prior judgments of Federal Courts in defiance of the Federal Constitution. For these reasons it is disapproved.

DISCUSSION

The sponsor's memorandum for an earlier version of this bill states that it is intended to provide a remedy for investors in New York, and particularly in Broome County and Monroe County who invested in fraudulent real estate schemes offering interests in cooperatives, condominiums and timeshares in Tennessee, Kentucky and Missouri in the last half of the 1980's.

As drafted, the bill would make these remedial benefits available to all purchasers of real estate in the 1985-90 period, not merely those that were victims of the particular schemes of concern to the sponsors.

The memorandum does not explain why CPLR 213(8), which permits the commencement of an action for fraud up to six years after the discovery of the fraud, is not a sufficient remedy for the victims of these particular schemes. If an additional two years is necessary to provide a remedy to these victims, they will have had a total of at least eight years after discovery of the fraud in which to bring an action, an extraordinarily generous extension of the period of limitations. While New York has in recent years adopted revival statutes for particular classes of plaintiffs whose claims were time barred, e.g., action for exposure to agent orange commenced within two years of discovery of injury, CPLR 214-b; action for latent effects of exposure to toxic substances, CPLR 214-c(2), these were applicable only to situations in which the plaintiff was unaware of the injury until after the statute of limitations had run. There is no precedent for a revival statute for the benefit of a class that has already had six years after discovery in which the action might have been brought. The enactment of such relief would seriously impair the two core objectives of the statute of limitations; to avoid the litigation of stale claims after the evidence is no longer reliable or even available, and to provide certainty in human affairs by putting an end to latent claims, see Flanagan v. Mt. Eden General Hospital, 24 N.Y. 2d 427, 429 (1969), without the compelling circumstances of plaintiffs in the agent orange and toxic substance cases who in the absence of the revival statute would never have had a remedy.

The bill's requirement that the courts of New York ignore prior and presumably adverse decisions of the federal courts which would otherwise require dismissal under the doctrines of res judicata or collateral estoppel mandates violation of the full faith and credit clause of the United States Constitution, Article IV, Section 1, and its statutory derivative, 28 U.S.C. 1738, which require the courts of New York to recognize the judgments of courts of sister states and the federal courts. Garvin v. Garvin, 302 N.Y. 96, 103 (1951); See Siegel, New York Practice Sec. 471 (2d ed. 1991).

It may be that the bill is intended to be a response to the unfortunate aftermath of the decision of the United States Supreme Court in Lampf v. Gilbertson, 501 U.S. 350, 111 S. Ct. 2773 (1991) and James B. Beam Distilling Co. v. Georgia, 510 U.S. 529, 111 S. Ct. 2439 (1991). Decided the same day, the former declared the statute of limitations of the Securities Act of 1934 of one year from discovery or three years from occurrence to be the appropriate period for federal securities fraud claims rather than longer analogous state statutes of limitation and the latter held that the new rule must be applied to all pending cases, therefore causing the dismissal of numerous federal securities fraud actions thought to have been timely brought. In the same year Congress passed Section 27A of the Securities Act of 1934, providing that pre-Lampf cases timely commenced by pre-Lampf law would be regarded as timely commenced. Four years later, in Plaut v. Spendthrift Farm Inc., 115 S. Ct. 1447 (1995), the Supreme Court found that Section 27A was an unconstitutional infringement of the separation of powers to the extent that it required the federal courts to vacate dismissals entered under Lampf. Thus a pre-Lampf plaintiff who had prudently relied upon Section 27A to save his claim from the Scylla of Lampf could very well find that it had foundered on the Charybdis of Plaut, but not until the statute of limitations for New York State fraud claims, generous as it is, had expired. Such a pre-Lampf plaintiff may indeed present a sympathetic case for remedial action such as a revival statute.

However, the remedy provided by the bill is both too narrow and too broad at the same time. There is no reason to limit such a remedy to Lampf victims whose claims relate to Midwest land frauds; all plaintiffs in this situation are equally deserving of the benefit of the remedy. On the other hand, the benefits of this bill will be available to any plaintiff whose action was dismissed for whatever reason, regardless of whether such plaintiff had in fact been a victim of Lampf, Beam and Plaut, whether such dismissal was based on the statute of limitations, or whether the dismissal was based on the merits. If it was the intent of the sponsors to aid plaintiffs dismissed under Lampf, the bill must be redrafted so as to aid them but not those who did not suffer from the Lampf trilogy of cases. As drafted, the bill, if it passes constitutional muster, would permit a plaintiff whose suit was dismissed for failure to make out a claim to have a second chance to sue the defendant, res judicata notwithstanding.

At least in some circumstances, the bill's ban on res judicata appears to be not only unconstitutional but unnecessary. If the unsuccessful plaintiffs the bill is intended to benefit had brought state law fraud claims under the federal court's pendent jurisdiction, their state law claims were not affected by dismissal of the federal claim unless there is a clear indication that dismissal of the state claims was on the merits. Lamontagne v. Board of Trustees of United Wire Metal and Pension Fund , 183 A.D. 2d 424, 426, 583 N.Y. S. 2d 838, 840 (1st Dept. 1992). In any event, because the New York legislature has no power to prevent the application of res judicata to the judgment of a federal court, inserting such a provision in the bill can only complicate the attempts of the intended beneficiaries of the bill in obtaining any relief.

Persons who prepared the report: James N. Blair and Robert P. Knapp III, Esqs.

Chair of the Committee: Paul H. Aloe, Esq.