The Duty to Inquire and Limitation of Actions

Tennessee court holds that publicly available information triggered the duty to inquire and claim being barred by the statute of limitations.

The Facts

In First Community Bank, N.A. v. First Tennessee Bank, N.A., No. E2022-00954-COA-R3-CV (Tenn. Ct. App. Feb. 13, 2024), plaintiff bank purchased “approximately $135 million in asset-backed securities in the form of 11 notes issued by several collateralized debt obligations and a collateralized mortgage obligation,” including some purchased from defendant. All purchases were completed by 2007. By May 2008, plaintiff knew that the securities had lost significant value. The investment experienced continued losses, defaults, and downgrades in 2008 and 2009. Plaintiff eventually sold the securities, incurring an approximately $100 million loss.

Plaintiff’s lawsuit against defendant (and others) asserted claims of fraud, constructive fraud, misrepresentation, and civil conspiracy. It was filed on September 15, 2011.  Defendant bank claimed it was filed too late, and sought summary judgment to shut down the case.

Because plaintiff’s claims all related to injuries to personal property (the value of the securities), a three-year statute of limitations applied under Tenn. Code Ann. § 28-3-105. If the claims accrued before September 15, 2008, summary judgment based on the limitations period was proper.  The question for the court was when did the statute of limitations deadline begin to run on plaintiff’s claims.  More specifically, the court was required to explore whether the publicly available facts triggered the duty to inquire and, if so, whether the discovery rule barred plaintiff’s claims under Tennessee’s statute of limitations.

Trial court dismisses the case under the discovery rule.

Under Tennessee’s discovery rule, a “plaintiff is deemed to have discovered the right of action if he is aware of facts sufficient to put a reasonable person on notice that he has suffered an injury as a result of wrongful conduct.” (internal citation omitted).

The trial judge found plaintiff new the investments were losing significant value by July 2008. That was sufficient to satisfy the “injury” component of the discovery rule. (Click on the link to find a car wreck case where the discovery rule was applied to bar the claim.)

But one must show more than injury to trigger the duty to inquire and application of discovery rule.  It is also necessary to demonstrate that plaintiff was aware of facts sufficient to put a reasonable person on notice that the injury arose from wrongful conduct.  In Tennessee, this has been explained as “inquiry notice,” i.e. was there information that triggered the duty to inquire.

The trial judge found that information was publicly available that should have put plaintiff on notice of these possible tort claims, finding that “the problems surrounding the issuer-pays model was a matter of public debate” beginning in 2006. In September 2007, there were public hearings in the U.S. Senate regarding the types of securities plaintiff purchased. The trial judge found  that government agencies were performing investigations well before September 2008, and plaintiff’s complaint even cited a July 2008 SEC report detailing issues with rating agency conflicts.

Thus, the trial judge found that the discovery rule was triggered before September 15, 2008, meaning that the complaint filed September 15, 2011 was untimely and dismissed the case.

The Court of Appeals finds Plaintiff had the duty to inquire.

Although plaintiff asserted that there was a question of fact regarding whether it had inquiry notice of its claims prior to September 2008, the Court of Appeals rejected this argument. The Court explained:

The information publicly available to Plaintiff prior to September 15, 2008, considered along with the sharp decline in value of its own securities and the negative rating actions taken on such securities, was more than enough to provide Plaintiff with actual knowledge of facts sufficient to put a reasonable investor on notice that it had suffered an injury as a result of wrongful conduct. A reasonable and prompt investigation into the injury would have alerted Plaintiff to the obvious source of its injury, Defendant, i.e., the entity responsible for structuring, marketing, and selling the investments at issue. With all of the above considerations in mind, we uphold the trial court’s finding that Plaintiff was placed on inquiry notice prior to September 15, 2008, thereby rendering Plaintiff’s common law claims untimely filed beyond the applicable statute of limitations.


This is one of the rare Tennessee cases where public available information triggered the application of the discovery rule.  One might argue there was a jury issue on  whether the defendant actually knew about the publicly available information, but based on the record the Court of Appeals hard little difficulty that plaintiff had (or should be deemed to have had) that knowledge.

Author’s Note:

This opinion was released six months after oral arguments in this case.

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