Dismissing Fraud Claims on Statute of Limitations Grounds—They Better Know the Facts
August 06, 2020
Attorneys do a lot for their clients. They offer counsel, provide legal advice, and work hard to advocate for their client. But one thing they shouldn’t do, is assist their client perpetrate millions of dollars of fraud and then assert a flawed statute of limitations defense in a desperate attempt to avoid liability. Unfortunately that’s exactly what is alleged against the defendant-attorney, Adam Chodos, in the recent New York Commercial Division matter, Sabourin v Chodos.
The facts of Sabourin involve a lawyer’s complicity in a complex fraudulent scheme with his client and non-party William Jack Frost (“Frost”), an investor in a fashion and lifestyle magazine known as Z!NK, on its founders, Isabelle Sabourin (“Sabourin”) and Sheriff Ishak (“Ishak”) (collectively the “Plaintiffs”). Though the underlying acts of fraud date back to 2008, the facts surrounding the Defendant’s involvement are alleged to have been unknown until evidence and testimony was adduced as part of Arbitration against Frost in 2013-2014 (the “2013-2014 Arbitration”). In this action, where the Plaintiff’s brought claims against Frost’s attorney, Justice Andrew Borrok denied the Defendant’s motion for summary judgment, finding issues of fact as to when exactly the Plaintiffs learned of the attorney’s fraudulent conduct for the purposes of the statute of limitations.
In 2007, Frost invested 8 million in Z!NK Magazine in exchange for 25% equity in a new joint venture called I.T. Global Media, LLC (“ITGM”). Frost defaulted on his initial funding obligations within the first 30 days—foreshadowing the tumultuous business relationship to come. After coming up with the funds to revive the deal, Frost, with the help of the Defendant, spent the next few years fraudulently wresting control of the Z!NK business and looting its assets.
Some of the duo’s fraudulent highlights include:
- Misrepresenting that Frost would open an account for ITGM to deposit a $6 million check, never opening such an account, and instead producing forged account statements to Plaintiffs to show a false balance of $6 million;
- Drafting a fraudulent resignation letter on behalf of Ishak, and as a result, taking over ITGM, terminating its employees and closing all of its bank accounts;
- Forwarding the forged resignation letter to any bank where Ishak attempted to open a new bank account for Z!NK and demanding that those accounts be frozen;
- Filing papers with the U.S. Patent and Trademark Office purporting to assign all the rights, title, and interest in the Z!NK trademark to a company solely owned by Frost;
- Accusing Ishak of financial improprieties in order to dissuade Ishak from retaining an outside accountant (which would have likely exposed their fraudulent acts);
- Drafting and notarizing several promissory notes and security agreements for the purpose of evidencing fictitious debts of approximately $4 million and causing ITGM’s accountants to file false tax returns acknowledging the fraudulent debts and a Schedule K-1 Form that one of Z!NK’s founding companies received $4 million in distributions; and
- Making false statements to the FBI, the NY County District Attorney’s office, the IRS, and other authorities.
Plaintiffs claim that they were unaware of the Defendant’s involvement the above fraudulent acts because in 2008 Frost made multiple trips to Z!NK’s headquarters, where he pilfered all of Z!NK’s office documents which would expose the fraudulent scheme. Each time he packed files upon files of evidence into a large black suitcase, flew them to his home, and had his executive assistant scan them all into his personal computer. By taking everything out of the office, Frost effectively shuddered the company and prevented it from operating.
Z!NK filed a lawsuit against Frost in January of 2010. By September 2012, the matter was sent to arbitration. Through the evidence and testimony adduced at the 2013-2014 Arbitration, the Plaintiffs allege that they learned, for the first time, the true underlying facts of what had transpired and became aware of the Defendant’s involvement.
At the conclusion of the 2013-2014 Arbitration, the arbitrator found in favor of the plaintiff and in February of 2015, Plaintiffs entered judgment against Frost in the amount of $62,380,605.50. But by the time the judgment was entered, Frost had disappeared.
Based on the newly discovered information, Plaintiffs brought suit against the Defendant, asserting claims for fraud, aiding and abetting fraud, unjust enrichment, civil conspiracy to commit conversion, aiding and abetting breach of fiduciary duty, and tortious interference with economic advantage. The subject of Justice Borrok’s recent decision is a motion for summary judgment filed by the Defendant seeking to dismiss the complaint, arguing (i) the statute of limitations has run; (ii) he should not be liable for his client’s actions; and (iii) the damages were not ascertainable.
The Defendant argued that Ishak knew of the fraud since 2008 based on prior testimony (see Harty v Lenci). If this was so, it would preclude Plaintiff’s fraud claims, which must be commenced within six years of the fraud or within two years of the fraud being discovered (CPLR § 213 ; Saphir Intl SA v UBS PaineWebber Inc.). The Defendant was relying on the fact that Ishak had previously responded, “Yes, I believe so” and “Absolutely” when asked if at certain times in 2008 he came to the conclusion or believed that the Defendant was complicit in Frost’s fraud.
The Court was not persuaded that Ishak’s testimony established the Plaintiffs knew of the Defendants involvement in the fraudulent scheme. The Court found nothing in Ishak testimony established “the facts” known by Plaintiffs, or that they knew, or had reason to know of Defendant’s involvement prior to 2013-2014 Arbitration. The Court accepted Ishak’s argument that what he meant by his testimony was that “he now believes” the Defendant was involved in fraud as early as 2008. The Court found this explanation to be consistent with the fact that the Plaintiffs did not refer to the Defendant at all in their 2011 complaint against Frost. The Court further reasoned that Plaintiffs couldn’t have known of the Defendant’s involvement because they were cut-off from the records that may have revealed Defendant’s involvement.
Of course, the Court could not pass up the moment to comment on Rule 1.2 of the Rules of Professional Conduct, stating the Defendants conduct in preparing fraudulent instruments raises issues of his obligation as a lawyer to reveal fraud or resign from the matter and not continue to assist. The Defendant argued that he could not be liable for Frost’s fraud because he performed his services in a lawful manner. Once again, the Court disagreed, finding that Plaintiffs are suing Defendant for his individual fraudulent conduct and that the documentary evidence showed he played an instrumental role in the alleged fraud.
Ultimately, the court found the following issues of fact precluding summary judgment (i) the relationship of the Defendant and Frost; (ii) the likelihood that the Defendant knew, should have known, or maybe played a role in assisting Frost in forging the documents or stealing all the business records; (iii) the reasons for the delay in the 2013-2014 Arbitration and whether it really took Plaintiffs until the 2013-2014 Arbitration to have the facts to satisfy CPLR § 3016(b); and (iv) how Defendant’s alleged ethical breaches may have further altered Plaintiff’s ability to learn the facts. Accordingly, Defendant’s motion for summary judgment was denied.
Upshot: For the purposes of determining whether the statute of limitations applies, courts will not only look to previous testimony to determine when the plaintiff learned of the fraud, but the facts as a whole.