Court Opinion

ID: 4310113
Source: CourtListenerOpinion
Date Created: 2018-09-06 15:00:26.193451+00
Date Added: 2024-06-11T14:43:34.972103
License: Public Domain

17-3513
Ayers et al. v. Piaker & Lyons et al.

                                        UNITED STATES COURT OF APPEALS
                                           FOR THE SECOND CIRCUIT

                                              SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.

        At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
6th day of September, two thousand eighteen.

PRESENT:
                     GERARD E. LYNCH,
                     SUSAN L. CARNEY,
                     CHRISTOPHER F. DRONEY,
                                 Circuit Judges.
_________________________________________

DEANNA M. AYERS, ET AL.,

                     Plaintiffs-Appellants,

                               v.                                           Nos. 17-3513
                                                                                 18-716
PIAKER & LYONS, P.C., RONALD SIMONS, TIMOTHY N. PAVENTI,

           Defendants-Appellees.
_________________________________________

FOR APPELLANTS:                                          EDWARD T. KANG, Kang, Haggerty &
                                                         Fetbroyt LLC, Philadelphia, PA.

FOR APPELLEES:                                           BRENDAN M. SHEEHAN, Bond,
                                                         Schoeneck & King PLLC, Syracuse, NY
                                                         (Bradley Hoppe, Charles C. Swanekamp,
                                                         Bond, Schoeneck & King PLLC,
                                                         Buffalo, NY, on the brief).
Appeal from a judgment of the United States District Court for the Northern District of
New York (McAvoy, J.).

UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment entered on October 11, 2017, is
AFFIRMED.

       Beginning in about 2004 and continuing through about 2009, plaintiffs made
investments in various funds and trusts offered by a set of firms operating in the Albany,
NY, area. These firms included McGinn, Smith & Co., Inc., McGinn Smith Advisors, LLC,
and McGinn Smith Capital Holdings Corp. (collectively, “McGinn Smith” or “the McGinn
Smith companies”). Defendants Piaker & Lyons, Ronald Simons, and Timothy Paventi
(together, the “auditor defendants”) served as outside auditors and accountants for the
McGinn Smith companies, as well as for the McGinn Smith principals, Timothy McGinn
and David Smith. As part of their duties, from 1992 through at least 2008, defendants
performed audits, prepared tax returns for the McGinn Smith companies, and reviewed
McGinn Smith’s books and records to support their issuance of unqualified audit opinions
for the entities. In April 2010, however, the SEC brought an emergency enforcement action
charging that McGinn Smith had defrauded its investors by running a Ponzi scheme in
violation of multiple federal securities laws. Over the following years, in civil and criminal
proceedings, the SEC and the government proved these charges.

       On September 11, 2014, plaintiffs—residents of Pennsylvania, Delaware, New Jersey,
and Florida during the period from 2004 through 2009—sued the auditor defendants in the
United States District Court for the District of New Jersey, based on diversity jurisdiction.
The case was later transferred to the United States District Court for the Northern District
of New York. Plaintiffs alleged in various related state law counts that the auditor defendants
aided and abetted McGinn Smith in perpetrating the fraud. Over time, the case was whittled
down to an aiding and abetting claim, charging that defendant auditors materially assisted

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McGinn Smith in conducting the fraud. Defendants countered with a motion for summary
judgment on statute of limitations grounds.

        The parties agree that the applicable statutes of limitations, if applied mechanically
and triggered by the date of plaintiffs’ acquisition of the interests in the funds and trusts,
would bar their claims. Plaintiffs assert, however, that the statutes should be tolled because
they “were not in . . . possession” of the actionable information regarding the auditor
defendants until January 2014, Appellants’ Br. at 8, when an SEC accountant testified in a
related enforcement action that Piaker & Lyons prepared balance sheets for some McGinn
Smith funds that included “values for loans . . . that weren’t accurate,” App. at 1708. Only
then, they argue, could they have filed a complaint detailed enough to survive a motion to
dismiss. The District Court concluded, however, that plaintiffs were on inquiry notice of
their claims as of April 2010 when the SEC brought its enforcement action. Because
plaintiffs did nothing to investigate their claims in the period of over four years between
April 2010 and September 2014, when they filed their suit, the court ruled that their suit was
time-barred. 1

        We assume the parties’ familiarity with the additional underlying facts, the procedural
history of the case, and the issues on appeal, to which we refer only as necessary to explain
our decision to affirm the District Court’s award of summary judgment for defendants.

        We review a district court’s grant of summary judgment de novo, “examining the
evidence in the light most favorable to, and drawing all inferences in favor of, the non-
movant.” Huebner v. Midland Credit Mgmt., Inc., 897 F.3d 42, 50 (2d Cir. 2018). To assess the
timeliness of plaintiffs’ claims, we look to the statute of limitations under New York law, as
the forum state, as well as the limitations periods of the plaintiffs’ states of residence—
Pennsylvania, Delaware, New Jersey, and Florida. See N.Y. C.P.L.R. § 202; Global Fin. Corp. v.
Triarc Corp., 93 N.Y.2d 525, 528 (1999) (“When a nonresident sues on a cause of action

1 The District Court permitted the claims of only three plaintiffs to proceed. The District Court entered
judgment pursuant to Fed. R. Civ. P. 54(b) in favor of the defendants on all claims dismissed by the Court’s
September 27, 2016 decision. The three plaintiffs whose claims were permitted to proceed have since
voluntarily dismissed their claims.

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accruing outside New York, CPLR 202 requires the cause of action to be timely under the
limitation periods of both New York and the jurisdiction where the cause of action
accrued.”).

       The statutes of limitations for fraud in New York, Pennsylvania, Delaware, New
Jersey, and Florida all incorporate a variation of the discovery rule, keying the statute of
limitations trigger to the date when plaintiffs knew or should have known they have been
defrauded. See N.Y. C.P.L.R. § 213(8); 42 Pa. Const. Stat. § 5524(7); Coleman v.
Pricewaterhousecoopers, LLC, 854 A.2d 838, 842 (Del. 2004); Lopez v. Swyer; 62 N.J. 267, 275 n.2
(N.J. 1973); Fla. Stat. § 95.031(2)(a). Invoking our decision in City of Pontiac Gen. Employees’
Retirement Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir. 2011), plaintiffs argue that they should be
charged with knowledge sufficient to trigger the statute only when the discoverable facts
would enable them to describe defendants’ involvement in a pleading “with sufficient detail
and particularity to survive a 12(b)(6) motion to dismiss.” Appellants’ Br. at 20 (quoting City
of Pontiac, 637 F.3d at 175). This argument, while plausible, has no traction here. We
explained in Koch v. Christie’s International PLC, 699 F.3d 141, 150 (2d Cir. 2012), that the
standard announced in City of Pontiac does not apply outside the context of actions pursued
under Section 10(b) of the federal securities law, 15 U.S.C. § 78j(b), and that is so because we
were construing a particular federal statute of limitations, 28 U.S.C. § 1658(b). Accordingly,
we reject plaintiffs’ suggestion that we apply the rule articulated in City of Pontiac to this case.

       The common-law discovery rule is what governs here, and it rests, instead, on the
concept of inquiry notice. As we noted in Koch, a potential plaintiff’s common-law duty to
inquire arises “when the circumstances would suggest to an investor of ordinary intelligence
the probability that she has been defrauded.” 699 F.3d at 151 (internal quotation marks
omitted). Courts may impute such knowledge in two ways: “(i) if the investor makes no
inquiry once the duty arises, knowledge will be imputed as of the date the duty arose; and
(ii) if some inquiry is made, we will impute knowledge of what an investor in the exercise of
reasonable diligence should have discovered concerning the fraud, and in such cases the
limitations period begins to run from the date such inquiry should have revealed the fraud.”
Id. (internal quotation marks and alterations omitted); see also Gleason v. Borough of Moosic, 609

                                                  4
Pa. 353, 362 (2011) (explaining that inquiry notice is tied to “actual or constructive
knowledge of at least some form of significant harm and of a factual cause linked to
another’s conduct, without the necessity of notice of the full extent of the injury . . . or
precise cause”); Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004)
(Delaware statute of limitations begins to run “upon the discovery of facts constituting the
basis of the cause of action or the existence of facts sufficient to put a person of ordinary
intelligence and prudence on inquiry which, if pursued, would lead to the discovery of such
facts.”); Lopez, 62 N.J. at 275 n.2 (explaining that in New Jersey, “in case of fraud the period
of limitation, in equity, begins to run only from the discovery of the fraud or the time when,
by reasonable diligence, it could have been discovered”); Hearndon v. Graham, 767 So.2d
1179, 1184 (Fla. 2000) (explaining that Florida limitations period accrues when plaintiff
“either knows or reasonably should know of the tortious act giving rise to the cause of
action”).

       Plaintiffs learned they had been defrauded by McGinn Smith in April 2010, and yet,
as the District Court found, they have adduced no evidence showing that at any time before
2014 they exercised due diligence to investigate the wrong and discover related wrongdoers.
In their brief on appeal, they refer only in passing to their “reasonable due diligence,”
Appellants’ Br. at 2, but point to no record facts in support of that reference. Indeed, their
argument rests largely on their assertions that they simply possessed no such information
about the auditors and that, because they did not have subpoena power, they had no means
of acquiring adequate information to proceed in good faith with a suit.

       We agree with the District Court that in these circumstances knowledge of the fraud
could be imputed to plaintiffs as of April 2010, when the SEC announced its enforcement
action against McGinn Smith. In light of the nature of the fraud and the details of the SEC
action—all publicly announced—plaintiffs had ample reason to begin investigations into
McGinn Smith’s auditors beginning in that month. Case after case has demonstrated that a
Ponzi scheme perpetrated over an extended time often depends on some kind of
involvement by the firm auditors, and the involvement plaintiffs now allege could have been
investigated earlier. And, further demonstrating that plaintiffs had a duty of inquiry as of

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April 2010, we note that the allegations that they bring in their amended complaint do not
rely exclusively on the SEC accountant’s testimony in 2014: indeed, many of their allegations
rest on material that was in the public record well before then and on inferences gleaned
from the public record, such as defendants’ having falsely rendered “clean” audits for
McGinn Smith. See, e.g., Am. Compl. ¶¶ 13–15, 98, 100, 103, 108, 109, 112.

          Thus, analyzing the timeliness of the aiding and abetting fraud claims under the New
York statute of limitations, as well as the limitations period of each plaintiff’s state of
residence, we conclude that the District Court correctly held that plaintiffs’ claims were time-
barred.

                                              * * *

          We have considered plaintiffs’ remaining arguments and conclude that they are
without merit. Accordingly, the judgment of the District Court is AFFIRMED.

                                                      FOR THE COURT:
                                                      Catherine O’Hagan Wolfe, Clerk of Court

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