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Catena v. Raytheon

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In Catena v. Raytheon, No. A-4636-13T4, 2016 N.J. Super. LEXIS 112 (App. Div. Aug. 18, 2016), the Appellate Division, in a published opinion, recently addressed how New Jersey’s “discovery rule” applies to claims of common law fraud and under the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1, et seq.

There, plaintiff Richard Catena filed suit against defendants David Anderson and Wells Fargo Bank, N.A. alleging that Anderson and a Wells Fargo predecessor fraudulently concealed the facts that the Teterboro property that Catena purchased was contaminated with hazardous waste and that the defendants had done a partial clean-up of the property.  Before selling the property to Catena in 1988, defendants hired an environmental consultant to assess it to determine if there were any environmental problems on the property.  Id.at *3.  The consultant’s investigation found that high levels of hazardous substances existed in soil samples.  Id.  Following the consultant’s recommendation, defendants removed large amounts of contaminated soil to be excavated and replaced it with clean fill.  Id.  Even after the excavation, however, the consultant could not guarantee that the contaminated soil had been fully removed.  Id.

Following the partial clean-up, the defendants agreed that the property would be sold “as is”, without informing the New Jersey Department of Environmental Protection (DEP) about the cleanup.  Id. at *4.  Before the closing of the sale to Catena, the defendants submitted an affidavit stating that “on information and belief” previous occupants had not engaged in any operations that involved the handling or disposal of hazardous substances or wastes.  Id. at *5–6.  That affidavit fails to mention that contaminated soil had been found on the property just a year earlier.  Id. at *6.

Nearly a decade later, Catena sought to refinance the property.  At that time, the prospective lender hired a consultant to conduct an environmental investigation.  Id. at *7.  In multiple reports completed in the spring of 1988, that consultant documented hazardous wastes exceeding DEP standards, and so notified the Agency.  Id.  Five years later, in May 2004, another environmental consultant informed Catena that a new groundwater sampling found “a larger area of contamination on the property” and recommended that the plaintiff retain an attorney to inform the prior owners responsible for the contamination.  Id. at *9.  Catena filed suit the following year.  Id. at *10.

After discovery in the case uncovered the evidence demonstrating defendants’ fraud, defendants moved for summary judgment to dismiss the case on the basis that the plaintiff’s suit was untimely and barred by the statute of limitations.  The trial court agreed that the plaintiff should have discovered the fraud in 1998, and thus found his suit in 2005 to be untimely.

The Appellate Division disagreed.  In its opinion, the Appellate panel first summarized that the “discovery rule” is an equitable principle, which delays the commencement of the limitations period in appropriate cases until the plaintiff discovers by the exercise of reasonable diligence that he may have the basis for an actionable claim.  Id. at *11.  Not only is the rule designed to mitigate the unfairness of barring claims to unknowing parties, but as the Appellate Division explained, “[i]n fraud cases, the discovery rule is justified by an additional consideration not present in negligence cases: the victim’s lack of awareness of the fraud is the wrongdoer’s very object.  The [discovery] rule thus prevents the defendant from benefitting from his own deceit.”  Id. at *13.

Generally, the date of discovery, which commences the limitations period under the rule, is when the plaintiff learns or reasonably should learn the “existence of that state of factswhich may equate in law with a cause of action.”  Id. at *13–14 (citation omitted).  In a claim for fraud (where the plaintiff must prove that (1) the defendant materially misrepresented a present; (2) the defendant knew or believed it to be false; (3) the defendant intended the plaintiff would rely on the misrepresentation; and (4) the plaintiff relied on the misrepresentation and was damaged as a result), the Appellate Division explained that the “date of discovery” is when the fraud was or reasonably should have been discovered.  Id. at *14–15.  Inherent to that calculus is when the plaintiff discovered the defendant’s scienter or fraudulent intent: “Because the wrongdoer’s mental state is an essential element of the claim, discovery does not occur until the plaintiff is aware of the facts indicating the wrongdoer knew his statement was false, and intended the other party to rely on its falsity.”  Id. at *15 (emphasis in original) (citation omitted).  The court further explained that in applying the discovery rule, the level of diligence to discover the fraud must be reasonable because “[t]he same trust that a wrongdoer exploits to perpetrate a fraud in the first place may delay the victim’s eventual discovery of the fraud.”  Id. at *16–17.

Based on those principles, the Appellate Division concluded that the trial court was mistaken in finding that the plaintiff’s claims accrued in 1998.  Id. at *17–18.  Instead, although Catena first became aware of the contamination and the need to remediate at that time, he had no reason to suspect fraud, and had not discovered facts supporting the elements of a fraud claim.  Id. at *18.  It was not until discovery commenced in the underlying action that Catena could have discovered that the defendants had withheld information from Catena and intentionally misrepresented material facts to him as evidence of the contamination and clean-up were never reported to the DEP, and thus not available in public records.  Id. at *22.  Accordingly, the Appellate Division reversed the trial court and found the plaintiff’s claims to be timely.

The main take-away from Catena is that for the statute of limitations to commence in a fraud case, the plaintiff must know, or through the exercise of reasonable diligence discovered, the wrongdoer’s mental state.  More specifically, the plaintiff must be aware that the defrauder knew his statement (or omission) was false, and that the wrongdoer intended for the plaintiff to rely on that falsity.

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