Frank v. Linkner
Docket No. 151888
Trial Lawyers’ Bottom Line: if statute counts from when claim accrued, it is a statute of limitations and can be tolled by fraudulent concealment; statute of repose cannot be tolled.
The company ePrize specialized in online sweepstakes and interactive promotions. The plaintiffs were former employees of ePrize, who had acquired ownership interests in the company. They said the defendants, a number of owners including founder of ePrize Joshua Linkner, had promised them that their ownership interests would never be diluted or subordinated.
In 2007, ePrize was in trouble and needed to raise some money, so it borrowed $28M in loans in the form of “B Notes,” from various investors and members of ePrize—but not the plaintiffs. Two years later, the company needed to raise more money, so it offered “Series C Units” to those who had obtained B Notes in exchange for further capital contributions, guaranteeing a portion of a $14.5M bank loan, and converting their B Notes into “Series B Units.”
In March 2009, the company executed a new operating agreement that prioritized the investors holding the Series-C and Series-B units over the common units held by other investors—namely the plaintiffs. The agreement also said that investors holding Series-C units would receive the first $68.25M if the company were ever sold. In 2012, the company sold for $100M in net proceeds, all of which went to the holders of Series-C and Series-B units. The plaintiffs received nothing.
The plaintiffs sued for various claims, including LLC member oppression, breach of contract, and breach of fiduciary duty. The trial court granted summary judgment for the defendants, however, because the plaintiffs’ claims were untimely. The Court of Appeals reversed.
The Court, in its unanimous opinion by Justice Markman, first decided whether MCL 450.4515(1)(3), part of the Limited Liability Company Act, constituted a statute of limitations or a statute of repose. The significance of the distinction is that a statute of repose cannot be tolled in accordance with the fraudulent-concealment statute, MCL 600.5855.
The Court explained: a statute of limitations is a law that establishes a time limit—based on the date when the claim accrued—for suing in a civil case. In contrast, a statute of repose bars any suit brought after a specified time “since the defendant acted.” Therefore, a statute of limitations is measured from the date a claim accrues, while a statute of repose is measured from some other particular event, such as the date of the last culpable act. The easiest way to think of the difference is in a products-liability context. Assume the time limit is three years. If it’s a statute of limitations, the purchaser will have three years to sue from the date that they are injured by the product. If it’s a statute of repose, the purchaser will have three years to sue from the date of purchase; if the purchaser is injured by the product 4 years later, they cannot sue. Again, the relevant significance here was whether the statute is tolled by the fraudulent-concealment statute—yes for limitations, no for repose.
The Court seemed to focus on whether or not the statute mentioned accrual. The opinion quoted MCL 450.4515(1)(e), which said that the action seeking damages must be commenced within three years after the cause of action “has accrued.” The Court said that because the time runs from the date of accrual, the statute is one of limitations, not repose.
In addition, the statute requires a plaintiff to bring a claim within three years of accrual or two years after discovery of the cause of action, whichever occurs first. Defendants argued that this made the three-year limitation a statute of repose, because otherwise the three-year limitation would be surplusage, since the two-year timeline, admittedly a statute of limitations, would always occur first.
The Court said the problem with this argument is that the common-law discovery rule does not apply to the three-year limitation period. The common-law discovery rule says that “a claim does not accrue until a plaintiff knows, or objectively should know, that he has a cause of action and can allege it in a proper complaint.” If this rule applied to the three-year limitation, then it would function the same as the two-year limitation, which (under the statute) commences when a plaintiff “discovers or reasonably should have discovered the cause of action under this section.”
But the common-law discovery rule does not apply to the three-year limitation, the Court held. Instead, MCL 600.5827 says that a claim generally accrues “at the time the wrong upon which the claim is based was done.” And the Court’s precedent says the “wrong” is “the date on which the defendant’s breach harmed the plaintiff, as opposed to the date on which defendant breached his duty.” Furthermore, MCL 600.5855 says that a statutory period of limitations is tolled by the fraudulent-concealment statute.
The Court summarized the distinction: “[W]hile the two-year limitation period does not commence until a plaintiff discovered or reasonably should have discovered the cause of action, the running of the three-year limitation period can only be tolled if a plaintiff did not discover and reasonably would not have discovered the cause of action and the plaintiff can ‘prove that the defendant committed affirmative acts or misrepresentation that were designed to prevent subsequent discovery.’”
After the Court settled the issue of repose versus limitations, it moved on to determine when the plaintiffs’ causes of action accrued, that is, when the breach harmed the plaintiff. Turning to the causes of action, the Court said the “harm” that is actionable under MCL 450.4515 is the “substantial interference with the interests of the member as a member.” And the “actionable harm” occurred in 2009 when the plaintiffs’ shares were subordinated by the new operating agreement—instead of in 2012 when the plaintiffs incurred a financial injury.
Ultimately, because the plaintiffs’ actions accrued in 2009, the three-year limitation had expired. The Court remanded to the trial court to determine whether the plaintiffs are entitled to tolling for fraudulent concealment.
Full opinion here.