| Gutkin v Siegal |
| 2011 NY Slip Op 05629 [85 AD3d 687] |
| June 30, 2011 |
| Appellate Division, First Department |
| Bruce Gutkin, Appellant, v Richard D. Siegal et al.,Defendants. |
—[*1] Rosenfeld & Kaplan, LLP, New York (Steven M. Kaplan of counsel), forrespondents.
Order, Supreme Court, New York County (Richard B. Lowe, III, J.), entered September 30,2010, as amended by order, same court and Justice, entered October 4, 2010, which, to the extentappealed from as limited by the briefs, granted the motion of defendants Richard D. Siegal andPalace Exploration Company to dismiss the first cause of action, unanimously affirmed, withcosts.
In his first cause of action, for fraud, plaintiff alleges that defendants Siegal and Palace failedto disclose to him that the oil and gas drilling partnerships in which he invested between 1999and 2002 would receive only a small portion of the generated revenue. Plaintiff alleges that heunderstood language in the prospect agreements to mean that the partnerships would receive 60%of the net drilling revenue. Plaintiff further alleges that he could not have discovered the frauduntil he received deficiency notices in January 2008 concerning tax deductions he took as a resultof the investments. In this regard, plaintiff asserts that in 2005, when he inquired as to whyrevenues were not what he expected, he was informed that drilling had not been very successfuland that Siegal was perhaps not as adept in the oil and gas business as anticipated. Plaintiffcommenced this action in January 2010.
An action based upon fraud must be commenced within the greater of six years from the datethe cause of action accrued or two years from the time plaintiff discovered or, with reasonablediligence, could have discovered the fraud (CPLR 213 [8]). Here, plaintiff's claim was more thansix years old at the time it was filed, and therefore time-barred, unless he did not discover or,with reasonable diligence, could not have discovered it before January 2008.
"The test as to when fraud should with reasonable diligence have been discovered is anobjective one" (Armstrong v McAlpin, 699 F2d 79, 88 [2d Cir 1983]). " '[W]here thecircumstances are such as to suggest to a person of ordinary intelligence the probability that hehas been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would havedeveloped the truth, and shuts his eyes to the facts which call for investigation, knowledge of thefraud will be imputed to him' " (id., quoting Higgins v Crouse, 147 NY 411, 416[1895]).[*2]
The motion court correctly determined that plaintiff couldhave, with reasonable diligence, discovered the alleged fraud before January 2008. Indeed,accepting plaintiff's allegations as true, as one must on a motion to dismiss, plaintiff hadconstructive knowledge of the alleged fraud in 2005, when he recognized that his investmentreturns were significantly less than expected. At that point, a reasonable investor who had lostmillions of dollars would have investigated further, rather than accept the cursory explanationplaintiff allegedly received.
Moreover, beginning in the first year after his investment, plaintiff received quarterly drillingreports which reflected the exact percentage of net drilling revenue each partnership receivedfrom each well. Thus, if plaintiff believed that each partnership was entitled to receive 60% ofthe net revenue, the quarterly reports put him on notice that he was either in error or had beendefrauded. By his own account, plaintiff never sought clarification of the quarterly reports. Thelanguage in the prospect agreements, which plaintiff contends contradicted the quarterly reports,is ambiguous, and plaintiff does not claim to have sought clarification prior to or after investingin the partnerships. He also does not deny that he signed subscription agreements in which heacknowledged that he had received all information he desired prior to making his investments.Accordingly, the motion court properly dismissed the first cause of action as time-barred (seeSheth v New York Life Ins. Co., 308 AD2d 387, 387 [2003], lv denied 1 NY3d 505[2003]). Concur—Tom, J.P., Saxe, Catterson, Moskowitz and Acosta, JJ.