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Breach of Fiduciary Duty Claim Against Investment Banker Was Held Subject to Three-Year Statute of Limitations

In IDT Corp. Morgan Stanley Dean Witter & Co., et al., __ N.Y.3d __, __N.E.2d__ (2009), the Court of Appeals reversed the lower court and dismissed plaintiff's claims as either time barred or having failed to state a claim.

In August, 1999, plaintiff and another telecommunications company, Telefonica International, S.A. ("Telefonica"), entered into an agreement concerning an underwater fiber optic cable network that Telefonica was building. Under the agreement, plaintiff would buy a 10% equity share in a holding company and would have the right to buy capacity in the network.

In June, 2000, Telefonica sought to amend the terms of the agreement offering plaintiff a 5% share in a different company. Plaintiff alleged that Telefonica's investment banker, Morgan Stanley Dean Witter & Co ("Morgan Stanley"), advised plaintiff that the value of the 5% interest in the larger company "was far greater than that of the 10% interest" in the original holding company. Notably, Morgan Stanley had previously acted on plaintiff's behalf in connection with a different, but similar, investment. Plaintiff was unpersuaded by Morgan Stanley's representation and broke off negotiations with Telefonica in October, 2000.

Plaintiff commenced an arbitration against Telefonica in May, 2001, alleging breach of the agreement and seeking damages in the amount of $3.15 billion. The panel found that Telefonica had breached the agreement and awarded plaintiff damages in the amount of $16,883,817. Telefonica ultimately paid plaintiff $21.6 million in damages and interest.

Thereafter, plaintiff filed suit against Morgan Stanley alleging five causes of action (i) breach of fiduciary duty; (ii) intentional interference with existing contract; (iii) intentional interference with prospective business relations; (iv) misappropriation of confidential and proprietary business information; and (v) unjust enrichment.

Morgan Stanley moved to dismiss asserting, among other defenses, the statute of limitations. The trial court dismissed the third cause of action and otherwise denied Morgan Stanley's motion. On appeal, the Appellate Division affirmed, holding the claims were not barred by the statute of limitations. The Court of Appeals, Pigott, J., held that plaintiff's first, second and fourth causes of action were time barred and that plaintiff's unjust enrichment cause of action failed to state a claim.

Plaintiff argued that its breach of fiduciary duty claim was governed by a six year statute of limitations. Morgan Stanley contended that it was governed by a three year statute. The Court noted that New York law does not provide a single statute of limitations for a breach of fiduciary duty cause of action. Rather, the applicable limitations period depends on the substantive remedy the plaintiff seeks. When the remedy sought is purely monetary in nature, courts construe the suit as alleging injury to property within CPLR 214(4)'s three year statute of limitations. Where the relief sought is equitable, the six year limitations period found in CPLR 213(1) applies.

While plaintiff did seek equitable relief, the Court held that such relief was incidental to the money damages plaintiff sought. "Thus, looking to the reality, rather than the form" of the complaint, the Court applied the three year statute of limitations. The Court then turned to accrual and stated that the breach of fiduciary duty claim accrues as soon as it becomes enforceable. According to plaintiff's complaint, it first suffered loss as a result of Morgan Stanley's conduct after Telefonica refused to comply with the agreement. The Court determined that this alleged loss must have occurred prior to plaintiff's May, 2001 commencement of arbitration. More than three years had passed sine the commencement of the litigation against Morgan Stanley rendering plaintiff's claim untimely.

Regarding plaintiff's second and fourth causes of action, the parties did not dispute that CPLR 214(4)'s three year limitations period applied. The Court held that those claims accrued at the same time as plaintiff's breach of fiduciary duty claim, rendering them untimely as well.

Finally, the Court rejected plaintiff's unjust enrichment claim holding that "[w]here the parties executed a valid and enforceable written contract" recovery on a theory of unjust enrichment is ordinarily precluded. Here, because plaintiff based its claim on a fee that arose from services Morgan Stanley rendered in connection with a written engagement letter, unjust enrichment was inapplicable. Moreover, plaintiff could not disgorge funds received by Morgan Stanley in connection with its services for Telefonica because plaintiff did not pay those fees. Therefore, Morgan Stanley was not enriched at plaintiff's expense.

Sean C. McPhee, Esq.

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This page contains a single entry from the blog posted on May 6, 2009 2:24 PM.

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