Extending When You Can Sue
Updated: Nov 16, 2020
A recent Delaware decision shows how the statute of limitations on fraud and related claims can be extended.
In 2015, a private equity firm bought a company that owned and operated agricultural commodity businesses. After the deal closed, the principals of the bought company continued to serve as the President and Chief Executive Officer and two of the five members of the company’s board.
At the end of fiscal 2016, the company reported total earnings to be about $43 million less than the the representation before the deal closed where they also said the company’s financial outlook was strong. After the financial results were reported, they resigned and returned their computers with deleted and unrecoverable documents and data.
In 2019, the buyer sued for fraud and breach of fiduciary duties among other things. The buyer argued the defendants deceptively induced it to enter into the deal by providing an artificially inflated financial model containing a forecast that was millions of dollars higher than the company’s actual internal model to justify the price they wanted.
The statute of limitations for the claims was three years. The defendants said the case should be dismissed because it was filed more than three years after the deal closed.
The court found the defendants took steps to conceal the fraud they allegedly committed after the deal closed while they were in charge of operations. In particular, they made statements about an artificially inflated forecast when they knew otherwise. The Court said these actions extended the limitations period when the company learned the defendants deleted the records from their computers. The court also concluded the statute of limitations was also extended under the doctrine of equitable tolling because the acts happened while the defendants continued to be fiduciaries of the company.
WHY THIS IS IMPORTANT...Discovering and understanding fraud is complicated and time consuming. This court used two doctrines to extend the time for plaintiff to sue. One theory allowed an extension because the defendants hid their activities so it was not reasonable to expect plaintiff to discover the fraud. The other theory allowed an extension when the defendants had a fiduciary obligation which they violated as part of their activities to cover up the fraud.