Plaintiffs’ firms can sometimes appear to be vampiric. This thought comes to mind as we read of the recent successes of Milberg, LLP, recently named to the National Law Journal’s eighth annual Plaintiffs’ Hot List. Michael Moline, 2009 Plaintiffs’ Hot List:  The Firms to Watch in 2009, Law.com, Oct. 6, 2009.

Readers will doubtless recall that on June 18, 2008, Milberg’s predecessor, Milberg, Weiss, Bershad, Hynes & Lerach, pled guilty to federal criminal charges involving the payment of kickbacks to named plaintiffs in class actions in which the firm served as counsel and agreed to pay a fine of $75 million. Four of its named partners also pleaded guilty to criminal charges—Melvyn Weiss, William Lerach, Steven Schulman, and David Bershad. All four received prison sentences. Lerach, however, could not even feign contrition. He remarked, “Paying plaintiffs was an industry practice.” Jonathan D. Glatzer, Big Penalty Set for Law Firm, But Not at Trial, NY Times, June 17, 2008; see also Joe Nocera, Serving Time, But Lacking Remorse, NY Times, June 7, 2008.

Now, to add insult to injury, the federal district court has ruled that the New York statute of limitations bars Milberg LLP’s professional liability insurers’ rescission action. Certain Underwriters at Lloyd’s v. Milberg LLP, 2009 WL 3241489 (S.D.N.Y. 2009). Lloyd’s, Zurich, and Illinois Union provided Milberg, its predecessor firm, and its partners (including Weiss, Lerach, Bershad, and Schulman) with primary and excess professional liability insurance for the period January 31, 2001, to January 31, 2004. The insurers paid $4.8 million for defense and indemnity expenses related to the criminal investigations.

The insurers’ rescission action is premised on Milberg’s material misrepresentations in its November 16, 1998 applications for this insurance. At the time of the application, Milberg was engaged in its kickback scheme, which spanned the period 1979 through 2005. 2009 WL 3241489, at *1. Nonetheless, in the applications for the policies, Bershad, on behalf of Milberg, declared that no attorney at the firm was aware of “any circumstances . . . which may result in a claim being made against” the firm. Id.

Under New York law, a claim for rescission based on actual fraud is governed by the statute of limitations for claims based on fraud. 2009 WL 3241489, at *5. The limitations period for fraud is “six years from the commission of the fraud or two years from the time plaintiff discovered, or could, with reasonable diligence, have discovered, the fraud, whichever is later.” Id. And where a plaintiff alleges fraud in the inducement to purchase an insurance policy, the six-year limitations period begins to run on the date the policy is purchased. Id. The district court held that the insurers’ rescission claim was subject to the six-year limitations period for fraud because the complaint alleges actual fraud in the inducement. Id.

The insurers advanced three arguments against the application of the statute of limitations. First, the insurers argued that Milberg was equitably estopped from invoking the statute of limitations; second, that no limitations period applied to their rescission claim; third, that if a limitations period does apply, it did not begin to run until Milberg pleaded guilty in June 2008. The district court found none of these contentions persuasive. 2009 WL 3241489, at *3.

First, the district court rejected the insurers’ invocation of equitable estoppel, finding that the insurers had not shown reasonable reliance on Milberg’s protestations of innocence. The district court cited the fact that on January 11, 2002, “less than one year after having obtained the London policies, Milberg informed the London Insurers of the government investigation and the contents of the subpoenas.” 2009 WL 3241489, at *3. What is more, in a May 2002 letter to the London Insurers, Milberg explicitly detailed the nature of the investigation and noted in particular the “‘widely available’ newspaper reports discussing it.” Id. The district court found material the fact that the insurers did not claim that they inquired into whether these reported allegations were true. Id.

The district court further found material the fact that the parties had not entered into a tolling agreement. “Rather, Plaintiffs have merely made the unilateral decision to defer their actions to a later date.” 2009 WL 3241489, at *4. The district court pointedly remarked, “Plaintiffs’ conduct is precisely what statutes of limitations are meant to restrict.” Id.

Second, the district court rejected the insurers’ argument that rescission of a contract that was allegedly void at its inception is subject to no statute of limitations. The district court distinguished New York case law recognizing an exception to the application of limitations period where the contract concerns an illegal agreement. “Plaintiffs’ claim concerns not an illegal agreement, but rather an illegal act by one of the parties during contract formation.” 2009 WL 3241489, at *6. “The London Insurers missed the distinction between a contract that is void from its inception . . . and a contract that is voidable for fraud, like the one at issue in this case.” Id.

Third, the district court rejected the insurers’ argument that New York law tolls the limitations period where a liability insurer defends its insured under a reservation of rights. The district court observed, “Plaintiffs . . . offered no authority holding that an insurer’s defense of its insured is inconsistent with its investigating the validity of its contractual duty to defend.” 2009 WL 3241489, at *7. The district court remarked, “Rather than awaiting the results of the government’s prosecution of Milberg, the London Insurers should have conducted their own inquiry into whether Milberg might have committed fraud in obtaining the London Policies.” 2009 WL 3241489, at *7.

Fourth, the district court determined that the six-year limitations period on the insurers’ rescission claim began running on the date the London Policies took effect, January 31, 2001. 2009 WL 3241489, at *8. That period ended on January 31, 2007, “well before the London Insurers filed the present action” on August 28, 2008. Id. The Insurers’ rescission claim was not saved by the two-year discovery rule because the insurers knew or should have known about the alleged fraud “well before” August 26, 2006. Id. 

The district court concluded that the Insurers’ duty of inquiry was trigged both by notice of the government investigation and by media coverage of the government’s investigation. 2009 WL 3241489, at *9. In this regard, the district court found material both that Milberg had reported the investigation to the insurers less than one year after the insurers had issued the policies and that the insurers had acknowledged receipt of notice of government subpoenas to Milberg on January 25, 2002. Id. “Thus, the only reasonable inference the record permits is that the London Insurers were on notice of the alleged fraud in either January 2002 or May 2002.” Id.

The district court pointedly explained, “The law does not protect the plaintiff who turns a blind eye to such information.” 2009 WL 3241489, at *10. “The benefit of the discovery rule comes with a corresponding ‘duty of inquiry.’” Id. “Neither the Complaint nor the London Insurers’ Brief . . . provides any reasonable basis for the court to infer that the London Insurers undertook an inquiry into the validity of the London Policies upon learning of the government’s investigation.” Id.

The district court remarked “[t]he most striking example of Plaintiffs’ willful ignorance of their potential rescission claim” was the insurers’ “failure to have made any inquiry after Milberg was indicted” on July 14, 2006. Id. “In sum, a prudent insurer, upon giving the indictment even a cursory review, should have known in July 2006 that it may have had a claim against Defendants for rescission of the London Policies.” Id.