Opinion ID: 585254
Heading Depth: 2
Heading Rank: 2

Heading: accrual of fraud statute of limitations

Text: 12 Michigan employs a six-year statute of limitations for fraud actions. See Mich.Comp.Laws § 600.5813. The issue in this appeal deals first with the proper accrual method for measuring when West Marion's 1 claim began to run. The district court held that fraud claims accrue at the time the wrong (misrepresentation) upon which the claim is based was done regardless of the time when damage results. (citing Mich.Comp.Laws § 600.5827 and Mercer v. Jaffe, Snider, Raitt and Heuer, P.C., 713 F.Supp. 1019 (W.D.Mich.1989), aff'd, 933 F.2d 1008 (1990)). Based upon a literal reading of this statute, the court held that the lease date of the 1980 silo, when the misrepresentation occurred, initiated the running of the statute of limitations. In other words, the district court rejected the discovery accrual standard proposed by West Marion. The court noted, however, that if a defendant fraudulently conceals the existence of a claim, an action may be commenced 'at any time within 2 years after the person who is entitled to bring the action discovers, or should have discovered, the existence of the claim....'  (citing Mich.Comp.Laws § 600.5855). Judge Hackett applied a discovery accrual standard only with respect to the fraudulent concealment and RICO claims. 13 Harvestore and Smith support the district court's conclusion that the discovery accrual standard does not apply to the general six-year statute of limitations for fraud, though there is some question about their posture in the district court. In contrast, West Marion argues that, despite the statutory language, the Michigan courts have announced a discovery rule to the effect that a cause of action for fraud accrues when plaintiffs knew or should have known of the misrepresentation. (citing Fagerberg v. Leblanc, 164 Mich.App. 349, 416 N.W.2d 438, 441 (1987) and Williams v. Polgar, 391 Mich. 6, 215 N.W.2d 149, 158 (1974)). 14 We must examine this thorny issue of Michigan law to determine whether the district court applied the proper accrual standard to the six-year statute of limitations. Several early Michigan cases dealing with fraud perpetrated during the sale of bonds suggest that the discovery accrual standard does not apply to this case. See e.g., Thatcher v. Detroit Trust Co., 288 Mich. 410, 285 N.W. 2 (1939); Ramsey v. Child, Hulswit & Co., 198 Mich. 658, 165 N.W. 936 (1917). After discussing the six-year statute of limitations for fraud and the two-year provision for fraudulent concealment, the Thatcher court stated: 15 Under the two sections above quoted, a plaintiff now has, in any case, the full period of six years from the date of the fraudulent act or other act creating his cause of action, within which to institute suit, and moreover, where the defendant has fraudulently concealed from him his cause of action, he has, under any circumstances, not less than the full two years from date of discovery in which to bring his action. 16 Thatcher, 285 N.W. at 4 (citing Ramsey, 165 N.W. at 939). 17 In apparent contrast to Thatcher and Ramsey are several modern cases that have adopted the discovery accrual standard in various tort contexts. See e.g., Larson v. Johns-Manville Sales Corp., 427 Mich. 301, 399 N.W.2d 1 (1987) (applying discovery accrual rule to wrongful death actions based on asbestos exposure); Williams, 215 N.W.2d at 158 (applying discovery accrual rule to negligent misrepresentation actions); Johnson v. Caldwell, 371 Mich. 368, 123 N.W.2d 785 (1963) (applying discovery accrual rule to medical malpractice actions); Fagerberg, 416 N.W.2d at 441 (an intermediate appellate court decision, applying discovery accrual rule to fraud and misrepresentation actions). 18 Several commentators have concluded that [t]he six-year statute of limitation begins to run when the fraud occurs or the plaintiff first suffers injury as a result of the fraud, not when the fraud is discovered. E. Pappas & J. Steiger, Michigan Business Torts, at § 6.13 (---). This material discounts the Fagerberg opinion because it cited Williams v. Polgar, 391 Mich. 6, 215 N.W.2d 149 (1974), [which] ... was not a fraud case, but rather concerned a negligent misrepresentation to which the court applied the three-year statute of limitation governing most torts. Id. Though accurate, we are doubtful of this observation indicating that Fagerberg does not establish a discovery rule in the fraud and misrepresentation context. 19 The Michigan Supreme Court's analysis of accrual standards and its interpretation of Michigan statutes has changed since 1939, when it decided Thatcher, the most recent opinion rejecting the discovery accrual standard for certain fraud actions. In Larson, a recent case, the court began by noting, the claim accrues at the time the wrong upon which the claim is based was done regardless of the time when damage results. Larson, 399 N.W.2d at 4 (quoting Mich.Comp.Laws § 600.5827, the same statute relied upon by the district court and the defendants). Although this explicit language seems to preclude the application of the discovery accrual rule, the Michigan Supreme Court held in Larson that the 'wrong' which triggers the statute is not the date of the breach of the duty, but the date on which an injury results from the breach. Larson, 399 N.W.2d at 4. The court rationalized its deviation from the statute's plain meaning by noting: If the statute were interpreted as requiring accrual from the date of the breach of duty, negligence actions would be barred before they could be brought. Id. The court then analogized its interpretation of the accrual statute to the rationale of the discovery rule itself, and determined that the two were compatible. Id. Apparently, it was a short step for the Michigan court to hold that the date on which an injury results from [a] breach is really the same as the date on which the plaintiff knew or should have known of the injury. Id. In conclusion, the court stated that when the situation requires it, this Court will apply the discovery rule to determine the date of accrual. Id. 20 Unlike the early pronouncements in Thatcher and Ramsey, recent decisions such as Larson indicate that selection of the proper accrual standard depends on a case-by-case analysis, not on adherence to a static rule. This change of position results in part from the Michigan Supreme Court's interpretation of Mich.Comp.Laws § 600.5827, a statute which the court did not consider in Thatcher and Ramsey. 2 This statute, combined with its judicial gloss, which has been used by the Michigan courts to introduce the discovery accrual standard in various tort contexts, significantly reduces, if not eliminates, the precedential value of Thatcher and Ramsey. 21 We believe that given the diminished importance of these older cases, due to the interpretation of Mich.Comp.Laws § 600.5827, the discovery accrual standard applies to this fraud action. Although this is a very unclear area of the law, we find that there is persuasive evidence that the Michigan Supreme Court, if faced with this case, would invoke the discovery accrual standard as it has done in at least three different contexts over the past several decades. See In re Ryan, 851 F.2d 502 (1st Cir.1988) (stating that federal courts may deviate from state precedent when there is persuasive data that a state supreme court would not follow earlier decisions). 22 The Williams decision supports our conclusion that the discovery accrual rule applies to this matter. In that case, the plaintiff sued the defendant for negligent misrepresentation resulting from an abstracter's mistake. Williams, 215 N.W.2d at 150-51. To determine whether to apply the discovery accrual rule, the court examined the elements of the cause of action, which included injury and damage to the plaintiff. Id. at 158. The court observed that running the statute of limitations from the day the tortious force was put into motion would destroy plaintiff's cause of action before it arose because the plaintiff may not know of the damage or injury for many years. Id. The court remedied this concern by adopting the discovery accrual standard. Id. The court announced that the statute of limitations does not begin running until the point where plaintiff knows or should have known of this negligent misrepresentation. Id. 23 Although Williams dealt with negligent misrepresentation, we believe its teachings would be found relevant to this fraud cause of action. 24 While the Idaho Court adopted a fraud rationale and we a misrepresentation rationale, we agree with the court's quotation as regards the statute of limitations: 25 If the statute runs in favor of the abstractor [sic] from the delivery of the abstract, the company would be released long before the falsity of the abstract could reasonably be discovered by the purchaser. This would not be justice and ought not be the law. 26 Id. at n. 18 (citation omitted; emphasis in original). We believe that the rationale adopted in Williams applies to this case for two reasons. First, footnote 18 indicates that negligent misrepresentation and fraud are indistinguishable for purposes of when the statute of limitations accrues. Second, the sixth element of fraud is that [the plaintiff] thereby suffered injury. Kassab v. Michigan Basic Prop. Ins. Assoc., 185 Mich.App. 206, 460 N.W.2d 300, 303 (1990), appeal granted, 481 N.W.2d 341 (1991). For the same reasons stated in Williams, if the discovery accrual standard did not apply to fraud, then the statute of limitations might extinguish the cause of action before the plaintiff knows or should know it has come into being. 27 The Williams decision does not end our inquiry, however. In Larson, the Michigan Supreme Court, after examining the Williams rationale, engaged in a separate analysis to determine whether to the policies supporting statutes of limitations would be harmed by adoption of the discovery accrual rule. Larson, 399 N.W.2d at 5-7. The court identified two inviolable purposes behind statutes of limitation ...: 1) to encourage plaintiffs to pursue claims diligently, and 2) to protect defendants from having to defend against stale or fraudulent claims. Id. at 5. In the present case, we find that the discovery rule does not violate the purpose of encouraging plaintiffs to pursue claims because, like the asbestos workers in Larson or the landowner in Williams, fraud plaintiffs do not have a cause of action until they know or should have known of their injury. Similarly, application of the discovery accrual rule does not harm the purpose of preventing stale claims because the damage allegedly caused by the Harvestore silos tends to develop, rather than disappear, as time passes. Id. at 6. 28 Based upon Williams, Larson and Fagerberg, we conclude with some trepidation that the discovery accrual standard applies to West Marion's fraud cause of action. We now must decide what effect our legal conclusion has on the outcome of this dispute. 29 West Marion concedes that it does not claim damages as a result of fraud in the acquisition of the 1973 silo. Any facts raised with regard to that unit are relevant only to the extent that they indicate when West Marion knew or should have known of the alleged fraud in connection to the 1980 silo. West Marion's fraud claim is barred if it knew or should have known of the alleged fraud prior to October 1981, six years before its counterclaim against Agristor. 3 30 Smith and Harvestore argue that even if the discovery accrual standard applies, then we must nevertheless affirm the district court's grant of summary judgment because West Marion repeated[ly] admi[tted] that it knew that its Harvestore units were not performing as represented long before six years from suit. To support this claim, Smith and Harvestore cite the deposition testimony of Merle and Reginald Van Sickle. 31 Despite the urgings of Smith and Harvestore, we will not affirm the district court's grant of summary judgment on the fraud claim. To understand why this is so, we must examine Judge Hackett's opinion and some of the parties' submissions in more detail. Judge Hackett divided her discussion of Application of Limitations Periods to Facts into three separate inquiries dealing with the general six-year fraud provision, the two-year fraudulent concealment provision and the four-year RICO provision. 32 With regard to the six-year statute of limitations for fraud, Judge Hackett held: 33 Plaintiff filed this action on October 9, 1987. Undeniably, the asserted misrepresentation, and plaintiff's subsequent lease of the silo on April 22, 1980, in reliance on the misrepresentation, occurred more than six years prior to the filing. The alleged wrong, therefore, occurred outside the six-year period provided by the statute for filing fraud actions and plaintiff is barred, absent fraudulent concealment, from pursuing its fraud claim. (citation omitted) 34 The district court did not apply the discovery accrual rule to this portion of the analysis. 35 Judge Hackett followed this discussion with an examination of what West Marion knew or should have known for purposes of the fraudulent concealment and RICO provisions only. She concluded: 36 The court, in view of the record, can only conclude that plaintiff, through the Van Sickles, either knew or should have known by mid-1982 that the silos were not in fact oxygen-limiting. The number and the nature of the problems admittedly encountered strongly indicate a connection with the silos, and plaintiff's attempt to avoid the consequences of its tardiness in filing this action by claiming that its local dealer denied such a possibility is, quite frankly, of no value from an evidentiary standpoint. That is, even if the dealer made the alleged denials, the undisputed facts known to plaintiff as of 1982, respecting mold, calving problems, protein deficiencies, and the failure of the herd to yield additional milk, establish that plaintiff should have known of the alleged misrepresentation at that time. (emphasis added) 37 Although the district court limited its determination of when West Marion knew or should have known of the misrepresentation to the fraudulent concealment and RICO portions of the action, we are free to expand upon the importance of this conclusion based on our own evaluation of the record and the relevant law. 38 We accept the district court's finding that West Marion knew or should have known of the alleged misrepresentation by at least mid-1982. This conclusion comports with the evidence submitted by the parties because, although West Marion had experienced serious problems for many years, it was not until mid-1982 that the dairy herd experienced dramatic calf losses as a result of spoiled grain from the silos. We do not believe that, as a matter of law, West Marion should be held to have known or that it should have known of the alleged fraud prior to this time. West Marion submitted sufficient evidence to raise a genuine issue of material fact establishing that a reasonable person might not have connected the problems on the dairy farm to the Harvestore silos, and therefore a reasonable person might not have known of the alleged fraud prior to mid-1982. It is uncontroverted that West Marion did not have subjective knowledge of the alleged fraud until very near the filing of this suit. 39 Since there is a genuine issue of material fact with regard to whether West Marion knew or should have known of the alleged fraud prior to mid-1982, the district court erred by granting summary judgment in favor of Harvestore and Smith. For purposes of summary judgment, West Marion's fraud claim is not barred by the statute of limitations because it filed suit in October 1987, less than six years after mid-1982, the latest time at which we establish as a matter of law that West Marion knew or should have known of the alleged misrepresentation. 40 Of course, if the case proceeds to trial after remand, Harvestore and Smith will be free to present evidence to the jury to prove that West Marion knew or should have known of the alleged misrepresentation prior to October, 1981. See Hill v. A.O. Smith Corp., 801 F.2d 217 (6th Cir.1986) (indicating that when a plaintiff knew or should have known of a problem is a typically a jury matter). If there is again a conflict in the evidence at trial regarding West Marion's knowledge, then the jury is entitled to resolve that dispute. See Agristor Leasing v. Saylor, 803 F.2d 1401 (6th Cir.1986).