Introduction

The recent Second Circuit decision in IKB Deutsche Industriebank AG v. McGraw Hill Financial, Inc. et al.,[1] which affirmed the dismissal of a complaint against Standard & Poor’s concerning credit ratings it provided for a structured investment vehicle tied to the performance of mortgage-backed securities, underscores the importance of accounting for New York’s borrowing statute when analyzing the timeliness of claims involving out-of-state or foreign litigants.

Factual and Procedural Background

Plaintiff‐appellant IKB Deutsche Industriebank AG (“IKB”), a German commercial bank, brought fraud, negligent misrepresentation, and civil conspiracy claims against Standard & Poor’s Financial Services and its parent company (together, “S&P”) concerning credit ratings issued by S&P in connection with a structured investment vehicle called Rhinebridge.[2] In addition to its traditional role of providing credit ratings, S&P allegedly had an active role in the creation and operation of Rhinebridge.[3] The complaint alleged that for its work S&P received triple its customary fee, a portion of which was contingent upon the Rhinebridge transaction closing with “Top Ratings.”[4] According to IKB, this arrangement provided S&P with a “powerful economic incentive” to issue inflated ratings.[5]

When Rhinebridge launched in June 2007, S&P issued what were characterized as “high” credit ratings for Rhinebridge’s overall structure and several of its debt securities.[6] IKB immediately invested $149 million in Rhinebridge and, over the next two months, as S&P reaffirmed its ratings, IKB invested an additional $425 million.[7] By October 2007, however, Rhinebridge had defaulted and its notes were downgraded to junk status.[8] IKB and several other institutional investors allegedly lost hundreds of millions of dollars, including investor King County, Washington (“King County”).[9]

In 2009, King County filed a complaint against both IKB and S&P in federal court. King County alleged that S&P issued inflated ratings based upon various publicly available documents, including press reports, congressional testimony, and statements by S&P employees and officers.[10] IKB, in contrast, did not file its complaint against S&P until May 12, 2014, approximately one year after having entered into a statute of limitations tolling agreement with S&P.[11] Although IKB’s claims were timely under New York’s six-year statute of limitations, the district court dismissed IKB’s complaint as untimely under Germany’s shorter three-year statute of limitations period.[12] The district court applied Germany’s shorter limitations period because of New York’s borrowing statute (C.P.L.R. § 202), which provides that a non-resident plaintiff must sue “within the shorter of either: 1) the New York statute of limitations; or 2) the statute of limitations in the jurisdiction in which the claim accrued.”[13]

The Second Circuit Decision

In affirming the dismissal of IKB’s complaint, the Second Circuit first observed that IKB’s claim accrued in Germany rather than New York because, as a German-based commercial bank, Germany was where IKB sustained the economic impact of its alleged losses.[14] Accordingly, under German law, IKB’s claims were subject to a three-year limitations period, triggered “at the end of the calendar year in which 1) the claim arose and 2) the plaintiff either has knowledge of the circumstances giving rise to the claim and the identity of the defendant, or would have had such knowledge but for gross negligence.”[15] To satisfy the knowledge element under the German statute, IKB needed “knowledge of the facts necessary to commence an action in Germany with an ‘expectation of success’ or ‘some prospect of success,’ though not without risk and even if the prospects of success are uncertain.”[16] In this regard, IKB argued that King County’s 2009 complaint was insufficient to put IKB on notice of its claim against S&P because the complaint contained “unsubstantiated allegations” rather than facts.[17]

The Second Circuit disagreed. In affirming the district court’s dismissal, the Second Circuit determined that “the facts available to IKB in 2009—including those cited in King County’s complaint—triggered Germany’s three‐year limitations period because they created a sufficient ‘prospect of success’ for a fraud action against S&P.”[18] The Court specifically noted that the King County complaint “documented communications by several S&P employees that suggested a systemic and conscious disregard of risk in rating financial instruments” and also “described S&P’s role in designing Rhinebridge[,] and [S&P’s] clear economic incentive to rate the instrument highly.”[19] The Court held that these facts, along with Rhinebridge’s “dramatic collapse,” constituted “significant evidentiary support for a fraud claim against S&P—particularly because plaintiffs usually must rely on such circumstantial evidence to establish fraudulent scienter.”[20]

Ramifications

The IKB decision serves as an important reminder that New York’s borrowing statute can be an effective weapon in defending against claims brought by out-of-state or foreign litigants. Defendants in particular should always be cognizant of foreign statute of limitations periods when potential litigation by non-New York resident entities or individuals is on the horizon. In many instances, the jurisdiction where the claim accrued may provide a shorter limitations period, effectively barring an out-of-state or foreign plaintiff’s claim that would otherwise be timely under the relevant New York limitations period. Accordingly, when confronted with the prospect of a potential lawsuit or tolling agreement with a non-resident plaintiff, defendants should analyze in what jurisdiction the plaintiff’s claim accrued, which jurisdiction’s statute of limitations may apply under the borrowing statute, and when the limitations period is first triggered. This analysis should include a careful review of information that was available in the public domain, including allegations made in similar lawsuits that may have put a plaintiff on notice of its claims.