Determining the start date for any statute of limitations can be difficult. This is particularly true in cases of alleged financial exploitation or fraud. In such cases, the damages themselves can often be difficult to determine, let alone pinpointing the moment in time when they began. In the recentKhan v. Deutsche Bank AG decision, the Supreme Court of Illinois provides some guidance in determining the start of the limitations period for matters in which the damages come in the form of tax penalties or unexpected increased tax liabilities.
Statute of Limitations and the Discovery Rule
Illinois law has several specific statutes that limit the time a plaintiff has to bring a claim, and these statutes vary according to the cause of action. There is also a catch-all statute setting a five-year limitation for any otherwise unaddressed causes of action to recover for the damage or conversion of personal or real property . This period begins to run from the date of the tortious action at issue .
However, the discovery rule protects parties who may not learn of their injury until well after it occurred. The discovery rule prevents the clock from running until the plaintiff knows or reasonably should know of the injury and the fact that it was wrongfully caused . In a discovery rule analysis, “wrongfully caused” is not a term of art . It is not necessary that a plaintiff knows exactly how the injury happened, or what cause of action he or she may have against the defendant. Simply knowing that an injury was wrongfully caused is enough to start the period of limitations running, and establishing the plaintiff’s obligation to investigate both the nature of the injury and any potential causes of action he or she might have.
Factual and Procedural Background
In 1999 and 2000, the Khan plaintiffs believed they were participating in investment opportunities that would turn a profit, while also generating virtual losses that would legally reduce the plaintiffs’ state and federal income tax liability. Not surprisingly, this turned out to be too good to be true. The investments did not turn a profit for the plaintiffs, and the virtual losses they did generate were rejected by the IRS. In 2003, the IRS gave notice to the plaintiffs that their 1999 and 2000 federal income tax returns would be audited, and plaintiffs retained new attorneys in this matter. In 2008, the IRS sent a notice of deficiency to the plaintiffs.
In July of 2009, the plaintiffs filed an 11-count lawsuit against the accountants, advisors, and lawyers running the investment programs and those who advised the plaintiffs as to the effect these designed losses would have on their tax liability. The trial court granted the defendants’ motion to dismiss the complaint based on the statute of limitations. The judge found that the plaintiffs were first injured by paying fees to participate in the investment schemes in 1999 and 2000. The judge further determined that the retention of new counsel in 2003 should have put the plaintiffs on notice of their injury. Due diligence on the part of their attorney would have discovered at that time that the tax shelters were illegal. The Illinois Fourth Appellate Court reversed and remanded, finding that the limitations period would not have started running until the IRS made a formal assessment of tax liability, or the plaintiffs had agreed to pay additional taxes, penalties, or interest.
Illinois Supreme Court Ruling
The Illinois Supreme Court affirmed the decision of the appellate court, but in providing greater clarification, it actually changed the analysis for determining the start of the limitations period. The ruling agreed with the appellate court’s determination that the IRS audit notice was not enough to start the running of the statute of limitations. It was merely a warning of possible tax liability, not notice of actual liability. On the other hand, the ruling pulled back from the appellate court’s determination that a formal assessment of taxes and penalties (or a settlement agreement between the plaintiffs and the IRS) was needed to start the clock. While the plaintiffs would not know the full extent of their injury until one of those two events, as is discussed above, they need not have that level of understanding of their injury in order to trigger the start of the limitations period. Instead, the Supreme Court set the date that the plaintiffs received the IRS notice of deficiency as the start of the limitations period. The notice of deficiency was just enough to let the plaintiffs know that they had been injured, and given what they already knew or should have known about the tax shelters, it can be assumed they knew the injury was wrongfully caused. This both started the limitation period, and triggered their obligation to investigate the full extent of their injuries.
Words of Warning
The dicta in this decision is full of reasons to be cautious when applying this ruling to other cases. First, the Court made it clear that it was making a decision that runs contrary to the analysis and rationale used in many other jurisdictions, including federal courts in Illinois. Second, this is a fact-intensive analysis, and many of the examples cited by either side in this argument went one way or another based on very specific facts. Finally, this was the analysis of a ruling on a motion for summary judgment; where all well-pleaded facts must be viewed in the light most favorable to the plaintiffs. At trial, evidence of earlier, actual knowledge of a wrongfully caused injury might change the analysis and outcome.