Statute of Limitations In Arizona Securities Cases

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The purpose of a statute of limitations is to protect defendants and courts from stale claims where plaintiffs have slept on their rights. Doe v. Roe, 191 Ariz. 313, 955 P.2d 951 (1998). Chapter 5 of Title 12 of the Arizona Revised Statutes sets out the general limitations provisions which govern most civil actions. 2 Ariz. Prac., Civil Trial Practice Sec. 14.3 (2d ed.)(2005). Because a defense based upon the statute of limitations is generally disfavored, the longer of two periods is generally used if there is a question about which statute to apply. Id. A defendant who raises a statute of limitations defense has the burden of establishing that the claim is barred by the statute. Kiley v. Jennings, Strouss & Salmon, 187 Ariz. 136, 927 P.2d 796 (App. 1996). Once the defendant has made a prima facie showing that the plaintiffSec.s claim is untimely, the burden shifts to the plaintiff to establish that the "discovery rule" operates to delay commencement of the running of the statute, or that the running of the statute was otherwise tolled[1]. 2 Ariz. Prac., Civil Trial Practice Sec. 14.5 (2d ed.)(2005). It should further be noted that under A.R.S Sec. 12-550, actions other than for recovery of real property for which no limitation is otherwise prescribed shall be brought within four years after the cause of action accrues, and not afterward.

Further, the one-year statute of limitations in A.R.S. Sec. 12-541(5) for liabilities created by statute applies only where a cause of action would not exist but for a statute. Andrews ex rel. Woodard v. EddieSec.s Place, 199 Ariz. 240, 16 P.3d 801 (App. 2000). If a tort cause of action and liability existed at common law, then the applicable statute of limitations is the two-year statute under A.R.S. Sec. 12-541(1), even if the cause of action has been codified in a statute. Id.

The statute of limitations for securities fraud claims provides that such a claim is barred "unless brought within two years after discovery of the fraudulent action on which the liability is based, or after the discovery should have been made by the exercise of reasonable diligence." A.R.S. 44-2204(B), Limitation of Civil Actions. The only thing that needs to be discovered, to commence running of the limitations period for a securities fraud claim, is the fraudulent practice, and there is no requirement that the plaintiff discover he or she was damaged. Aaron v. Fromkin, 196 Ariz. 224, 994 P.2d 1039 (App. 2000). See also Washington Nat. Corp. v. Thomas, 117 Ariz. 95, 570 P.2d 1268 (Div. 2 1977) (cause of action for alleged security violations and alleged misrepresentations, arising out of claimed unauthorized sale of trust beneficiary's stock and purchase of mutual funds from proceeds, did not accrue until beneficiary's stock was sold thus alerting his widow, rather than at time original trust agreements were executed and alleged misrepresentations made). Also possibly noteworthy, the 1977 amendment substituted "two years" for "one year" in subsec. B, and deleted "and in no event shall such action be brought more than three years after the fraudulent practice occurred" at the end of the subsection, possibly showing intent in favor of enlarging, rather than diminishing, the statute of limitations in securities fraud period.

III. A.R.S. Sec. 44-1522 - Consumer Fraud: Unlawful practices; intended interpretation of provisions.

A. The act, use or employment by any person of any deception, deceptive act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice.

Case law reveals that an action commenced alleging liability created by the Consumer Fraud statute must be brought within one year. Murry v. Western American Mortg. Co., 124 Ariz. 387, 604 P.2d 651 (Div. 2 1979). See also, Alaface v. National Inv. Co., 181 Ariz. 586, 892 P.2d 1375 (Div. 1 1994), review and cross review denied (consumer fraud claim accrued when purchasers knew that real estate agent's representations were not true and that they had been damaged by reliance on representations, and thus their claim was barred by one-year statute of limitations) [emphasis added]; London v. Green Acres Trust, 159 Ariz. 136, 765 P.2d 538 (Div. 1 1988). However, note that in London v. Green Acres Trust, 159 Ariz. 136, 765 P.2d 538 (Div. 1 1988), the one year statute of limitations was tolled by the defendantsSec. concealment of the facts that would have alerted plaintiffs to the fraud.

There shall be commenced and prosecuted within three years after the cause of action accrues, and not afterward, the following actions: [emphasis added]

3. For relief on the ground of fraud or mistake, which cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud or mistake.

Consider also constructive fraud, wherein the running of the statute of limitations may be tolled where the plaintiff presents evidence that the defendant concealed the facts giving rise to the cause of action and thereby prevented the plaintiff from filing the claim in a timely manner. Walk v. Ring, 202 Ariz. 310, 44 P.3d 990 (2002); Mohave Electric Cooperative, Inc. v. Byers, 189 Ariz. 292, 942 P.2d 451 (App. 1997). In addition, constructive fraud is sufficient to toll the running of the statute of limitations until the plaintiff either knows, or through the exercise of due diligence should have known, of the fraud. Lasley v. Helms, 179 Ariz. 589, 880 P.2d 1135 (App. 1994). Constructive fraud requires the existence of a confidential relationship, but does not require a showing of either intent to deceive or dishonesty of purpose. Id.

Further still, consider fraudulent concealment wherein the plaintiff is relieved of the duty of diligent investigation required by the discovery rule and the statute of limitations is tolled until the concealment is discovered. Walk v. Ring, 202 Ariz. 310, 44 P.3d 990 (2002).

Negligence claims carry a two-year statute of limitation. A.R.S. Sec.Sec. 12-541-542; Sato v. Van Denburgh, 123 Ariz. 225, 599 P.2d 181 (1979); Hatch v. Reliance Ins. Co., 758 F.2d 40 (9^th Cir. 1985) cert. denied 474 U.S. 1021, 106 S.Ct. 571. Further, accrual of a negligence claim, for limitations purposes, requires not only negligence but also damage. Commercial Union Inc. Co. v. Lewis and Roca, 183 Ariz. 250, 902 P.2d 1354 (Div. 1 1995) reconsideration denied, review denied; Owens v. City of Phoenix, 180 Ariz. 402, 884 P.2d 1100 (Div. 1 1994).

A.R.S. Sec. 12-542 indicates that Sec.there shall be commenced and prosecuted within two years after the cause of action accrues, and not afterwardSec.. Case law interprets breach of fiduciary duty claims to fall under the purview of A.R.S. Sec. 12-542 and requires actual or constructive knowledge of damages. See Mohave Elec. Co-op, Inc. v. Byers, 189 Ariz. 292, 942 P.2d 451 (Div. 1 1997) (holding that for notice to be sufficient to begin statute of limitations, plaintiff must have knowledge of both what and who caused its damage; further, wrongful concealment typically tolls the statute of limitation); CDT, Inc. v. Addison, Roberts & Ludwig, C.P.A., P.C., 198 Ariz. 173, 7 P.3d 979 (Div. 2 2000) (holding that the two-year statute of limitations applies to actions for, among others, breach of fiduciary duty, and requires notice of actual or constructive damages).

The right to sue for breach of a verbal/oral contract is subject to the three-year statute of limitations provided for in A.R.S. Sec. 12-543 and requires damages. Kain v. Arizona Copper Co., 14 Ariz. 566, 133 P. 412 (1913); Kersten v. Continental Bank, 129 Ariz. 44, 628 P.2d 592 (Div. 1 1981).

The applicable statute of limitations for actions of written contracts is six years for contracts executed within Arizona [and four years for contracts executed outside the state]. A.R.S Sec.Sec. 12-548, 12-544(3)[2]. Further, the Arizona Supreme Court held that the "discovery rule" should be applied to contract actions. Gust Rosenfeld & Henderson v. Prudential Insurance Co. of America, 182 Ariz. 586, 898 P.2d 964 (1995). In contract actions, as in tort actions, the statute of limitations will not commence to run until the plaintiff knows or in the exercise of reasonable diligence should have known that it has suffered injury as a consequence of a breach of contract[3]. Id.

While the statutory limitations period for actions arising out of a written contract is six years, clauses in contracts which specify when an action under the contract must be brought are enforceable, even if they specify an earlier date. Decca Design Build, Inc. v. American Automobile Insurance Company, 206 Ariz. 301, 77 P.3d 1251 (App. 2003).

The statute of limitations for a claim of negligent misrepresentation is the two-year statute set forth in A.R.S. Sec. 12-542. See also, Hullett v. Cousin, 204 Ariz. 292, 63 P.3d 1029 (2003).

[1] The "discovery rule" requires only the discovery of the facts which give rise to a cause of action rather than discovery of the legal significance of those facts. Doe v. Roe, 191 Ariz. 313, 955 P.2d 951 (1998). For the statute to commence to run, it is not necessary that the claimant know all the facts; all that is required is that the claimant know enough facts as would prompt a reasonable person to investigate and discover the full extent of the claim. Id. Under the discovery rule, for the statute of limitations to commence to run, the plaintiff must have also sustained actual, appreciable and non-speculative damages, rather than the threat of future harm. CDT, Inc. v. Addison, Roberts & Ludwig, C.P.A., P.C., 198 Ariz. 173, 7 P.3d 979 (Div. 2 2000).

[2] An action for negligent performance of a contract, which sounds exclusively in tort, is not one "based on a contract" for purposes of determining the appropriate statute of limitations to apply. FrySec.s Food Stores v. Mather and Associates, Inc., 183 Ariz. 89, 900 P.2d 1225 (App. 1995).

[3] Note, however, that an action for negligent performance of a contract, which sounds exclusively in tort, is not one "based on a contract" for purposes of determining the appropriate statute of limitations to apply. Id.

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Copyright 2010 MITCHELL & ASSOCIATES, P.C.