Plaintiff on Notice of Fraud Claim Notwithstanding Defendant’s Denials

On May 23, 2023, Justice Reed of the New York County Commercial Division issued a decision in Harbinger Capital Partners II, LP v. Apollo Global Mgt., LLC, 2023 NY Slip Op. 50503(U), holding that a plaintiff was on inquiry notice of a fraud claim notwithstanding the defendant’s denials, explaining:

Under CPLR 213(8), a cause of action for fraud must be commenced within the greater of six years from the date the cause of action accrued or two years from the time the plaintiff discovered the fraud or could with reasonable diligence have discovered it. On a motion to dismiss a fraud claim based on the two-year discovery rule, a defendant must make a prima facie case that a plaintiff was on inquiry notice of its fraud claims more than two years before it commenced the action. The burden then shifts to the plaintiff to establish that even if it had exercised reasonable diligence, it could not have discovered the basis for its claims before that date.

Here, it is undisputed that the alleged fraudulent conduct occurred between 2004 and 2010 when plaintiffs acquired the Apollo Funds’ interest in Sky Terra. Plaintiffs commenced this action more than six years after the cause of action for fraud accrued. As such, to be timely, the action must have been brought within two years from the time plaintiffs discovered the alleged fraud, or from when they could have discovered it in the exercise of reasonable diligence.

The test as to when fraud should with reasonable diligence have been discovered is an objective one. Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.

On this motion, it is initially noted that the complaint itself acknowledges that plaintiffs were aware of the existence of the OOBR interference issue by mid to late 2010, when the GPS industry made the concern public. Further, by February 15, 2012, at the latest, plaintiffs were aware that the issue would render them unable to implement the planned network inasmuch as the FCC issued a formal public notice indicating that it would suspend the approval of the network indefinitely due to Sky Terra’s inability to address such concerns. While losses that a plaintiff sustains may put it on notice of possible fraud, such knowledge alone does not automatically trigger the duty to inquire. However, this knowledge, in combination with other evidence submitted by the Apollo defendants establishes that plaintiffs were on inquiry notice by late 2011.

In this regard, the Apollo defendants submit email correspondence between plaintiffs’ managing director, Phillip Falcone, and Sky Terra’s former CEO, defendant Alex Good, dated from May 2011 to November 2011. In these emails, Falcone questions Good on May 6, 2011 about what testing Sky Terra conducted four or five years earlier . . . .

The email correspondence establishes that the circumstances were such as to impose a duty of inquiry more than two years before plaintiffs commenced this action. Good insists in one of his emails that appropriate disclosures were made by the Skyterra team directly to the Harbinger team prior to plaintiffs’ acquisition of Sky Terra. Knowing that such disclosures were not, in fact, made, would have prompted a reasonable investor who had lost almost $2 billion, to investigate further. Since plaintiffs fail to allege any facts demonstrating that they thereafter engaged in the exercise of reasonable diligence, the emails conclusively establish a defense to plaintiffs’ fraud claims against the Apollo defendants as a matter of law.

Contrary to plaintiffs’ contention, the emails may be considered documentary evidence for the purpose of this motion. There is no blanket rule by which email is to be excluded from consideration as documentary evidence under. In our electronic age, emails can qualify as documentary evidence if they meet the essentially undeniable test. The emails here pass the test inasmuch as they flatly refute plaintiffs’ allegation that they had no reason to believe they were defrauded by the Apollo defendants with regard to the OOBR interference issue until late 2015. The emails render it essentially undeniable that by 2011, circumstances were such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, prompting a duty of inquiry.

(Internal quotations and citations omitted).

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