shareholder stock fraud claims
The fraud statute of limitations governing minority shareholder stock fraud claims.
Fraud Statute of Limitations
The fraud statute of limitations is four years, as is the breach of fiduciary duty statute of limitations. In cases of shareholder fraud, there is rarely a question of when the fraudulent transaction occured or how long the limitations period is. The hard question is always when does the limitations period begin to run because a minority shareholder may not realize for many years that she old her shares based on false or incomplete information. The general rule is that the statute of limitations begins to run when the plaintiff discovers that a fraud occurred or, in the exercise of reasonable diligence, should have discovered the fraud. However, in the context of the corporation's fiduciary duties to the minority shareholder, the general rule operates differently.
Applicability of Discovery Rule to the Fraud Statute of Limitations
Generally, a cause of action accrues, and the statute of limitations begins to run, when facts come into existence that authorize a claimant to seek a judicial remedy. The discovery rule is a limited exception which tolls the accrual of a cause of action which applies if, “the nature of the injury incurred is inherently undiscoverable and the evidence of injury is objectively verifiable.”
However, actions between fiduciaries present a special class of injuries. In Computer Associates Int’l, Inc. v. Altai, Inc., the Texas Supreme Court held that, because fiduciaries have a duty to disclose upon which the beneficiary is entitled to rely, breach of fiduciary duty is inherently undiscoverable as a matter of law.“Fiduciaries are presumed to possess superior knowledge, meaning the injured party, the client, is presumed to possess less information than the fiduciary. Consequently, in the fiduciary context, it may be said that the nature of the injury is presumed to be inherently undiscoverable, although a person owed a fiduciary duty has some responsibility to ascertain when an injury occurs.
“In Willis v Maverick, the Texas Supreme Court held that the discovery rule applies to legal malpractice actions because of the fiduciary relationship between lawyer and client: “The special relationship between an attorney and client further justifies imposition of the discovery rule. A fiduciary relationship exists between attorney and client. As a fiduciary, an attorney is obligated to render a full and fair disclosure of facts material to the client's representation. … [B]reach of the duty to disclose is tantamount to concealment.”
Relaxed Diligence Standard on the Fraud Statute of Limitations
The general statement of the discovery rule is that fraud statute of limitations begins to run when the cause of action is discovered or, by the exercise of reasonable diligence should have been discovered. The existence of a fiduciary relationship does not change the rule that diligence in discovering the breach of fiduciary duty or fraud is required, but the existence of a fiduciary relationship affects the application of the rule. However, while plaintiffs may not ignore the obvious, when a fiduciary obligation of disclosure is involved, diligence on the part of a defrauded party does not require as prompt or as searching an inquiry into the conduct of the other as when the parties are strangers or are dealing at arm’s length. A "different and more lenient standard is applied to one who has been defrauded where a fiduciary relationship exists between the parties." The plaintiffs' duty of reasonable diligence is balanced against the defendants' duty of full disclosure. "By entering into fiduciary relations, the parties consent as a matter of law to have their conduct measured by the standards of the finer loyalties exacted by courts of equity."
Near Actual Knowledge Required
"The mere fact that the defrauded party has the opportunity or power to investigate the fraud, is not sufficient to charge him with notice of the fraud, so as to start the running of the statute of limitations." For example, while parties are ordinarily charged with knowledge of facts reflected in the public record, this is generally not the case in a fiduciary relationship. The plaintiffs have no legal duty to investigate at least until they have actual knowledge of facts sufficient to excite inquiry. The fraud statute of limitations does not start to run in a fiduciary relationship until the level of knowledge possessed by the plaintiff approaches actual notice.
The existence of the fiduciary duty to make full disclosure can create a fact issue as to whether the plaintiffs should have discovered their cause of action in the exercise of reasonable diligence. "Where, as here, a party is guilty of an affirmative fraudulent misrepresentation of a fact, he should not be permitted to urge that the defrauded party could have discovered the truth had he diligently made an investigation.” Nevertheless, the plaintiff is not completely excused from the duty of reasonable diligence. “Therefore, the existence of a fiduciary relationship is one of the circumstances to be considered in determining whether a breach of a duty or fraud might have been discovered by the exercise of reasonable diligence. In other words, one in a relationship of trust and confidence is not always justified as a matter of law in neglecting every precaution until something occurs to arouse his suspicions. Each case must rest on its own facts.”
Application of the Fraud Statute of Limitations in the Context of Stock
Applying the foregoing rule to a transaction between the corporation and a shareholder regarding the shareholder's stock adds a significant additional diminsion. The Texas Supreme Court in Yeaman v. Galveston City Co. ruled that a “shareholder is entitled to rely upon [the corporation] not attempting to impair his interest. He is chargeable with no vigilance to preserve his stock or its fruits from appropriation by the corporation, but may confide in its protection for their security.” Therefore, “statutes of limitation have no application until there is a clear and unequivocal disavowal of the trust, and notice of it brought to the cestui que trust.” The shareholder
must have notice of overt conduct by the corporation denying or repudiating his interests. One court noted: “Given that repudiation triggered accrual, it was conceivable that situations could arise, when dealing with
dividends or preemptive rights, where the corporation did nothing to repudiate them and the shareholder did nothing to secure them. Should that circumstance have occurred, then limitations would never have begun. . . . Had that occurred, limitations would never have begun, and the corporation would have been perpetually liable.” Similarly, when the corporation has repurchased minority stock but has failed to make full disclosure, the shareholder should be able to rely on the corporation's duty to protect his interests, at least until the corporation clearly repudiates that duty.