In State of New York v. Trump Entrepreneur Initiative LLC, New York’s Appellate Division recently denied a motion by Donald Trump’ organization to dismiss a fraud claim brought by the New York Attorney General (“AG”) under Executive Law § 63(12). Aside from the fame, or perhaps notoriety, of the respondents, Trump is noteworthy in two other respects. First, the Court’s interpretation of Executive Law § 63(12) suggests that it is easier for the AG to establish a violation of that law than a common law fraud claim (although the Court concluded that the two claims should be treated alike for statute of limitations purposes). Second, in reaching its conclusion, the Appellate Division flatly overruled one of its own decisions – an extreme rarity.

In 2004, Trump University LLC, began offering seminars and mentoring programs on real estate investing. In early 2005, the New York State Department of Education (“SED”) notified Trump and company that their “university” violated the Education Law because it was not licensed to offer instruction in New York and called itself a “university” without being chartered as one. Trump University responded that it would move its business organization out of New York and cease to run live programs in state.  In 2010, after it allegedly failed to take either of these steps, the SED sent it a new cease-and-desist letter. Subsequently, Trump Entrepreneur Initiative LLC, the successor to Trump University, ceased operations, but in early 2011 the AG began an investigation and sued the entity in 2013.

The AG’s pleading alleged that the respondents misled more than 5,000 students nationwide, including over 600 in New York, into paying as much as $35,000 each to participate in live seminars and mentor programs that the students thought were part of a licensed university. The ads represented that students would be instructed by “Donald Trump’s handpicked experts” on the secrets of successful real estate investment, but in reality the instructors allegedly were unqualified and were not handpicked by Trump, and he had nothing to do with designing the curriculum. Further, the AG alleged that the program was a “bait and switch,” offering free and inexpensive seminars at first, but then inducing students to enroll in increasingly expensive seminars to learn purported essentials not included in the initial package. Based on these allegations, the AG claimed the respondents had violated several statutes, including Executive Law § 63(12), which provides that “[w]henever any person shall engage in repeated fraudulent or illegal acts . . . in the . . . transaction of business,” the AG may sue such person for injunctive relief, restitution and damages.

The respondents moved to dismiss this claim as untimely under CPLR 214(2), which provides a three year limitations period for claims “created or imposed by statute.” The motion court dismissed the claim holding, based on People v. Charles Schwab & Co., that Executive Law § 63(12) does not provide a standalone cause of action for fraud (for which there is a six year limitations period). The Appellate Division reversed this holding, finding the six year limitations period applied.  In doing so, the court had to “address an apparent anomaly in [its] case law”: the Schwab decision. After reviewing the statutory language and extensive precedent, including decisions by the Court of Appeals and other Appellate Division panels, the court concluded, in a rare instance of a Department overruling itself,  that Schwab “does not comport with prevailing authority, and in fact, acts to limit the power that the Attorney General has long been exercising under § 63(12).” Having disavowed the Schwab holding that § 63(12) does not authorize the AG to bring a cause of action for fraud, the court went on to hold that the limitations period for such a claim is the six year period provided for common law fraud under CPLR 213(1), rather than the three year period for purely statutory causes of action under CPLR 214(2). The court reasoned that a § 63(12) claim “does not create any liability nonexistent at common law, at least under the court’s equitable powers,” and therefore should be subject to the six year limitations period for common law fraud. At the same time, however, the court explicitly noted that the elements of a § 63(12) claim do differ from those of a common law fraud claim, in that the statutory claim does not require “proof of scienter or reliance.” Thus, the AG gets the benefit of the longer limitations period, while also getting the benefit of having to establish fewer elements to prevail on its cause of action.

Trump will bear watching for further developments (any appeal could only be taken by permission of the Court of Appeals) as the parties address the fact issues that, according to the Appellate Division, precluded a grant of summary judgment to the AG on the fraud claim.