Fritz v. Ehrmann

Opinion

Attorney and respondent Sanford M. Ehrmann was sued by his former client, appellant Norman Fritz, for malpractice in connection with a promissory note prepared by Ehrmann in 1995. The malpractice action was filed in 2003, approximately seven months after Ehrmann was replaced as counsel in litigation that ensued over an ambiguity in the note. The court granted Ehrmann’s motion for summary judgment on statute of limitations grounds, ruling that the statute accrued and ran on the malpractice action many years before Ehrmann began to represent Fritz in the prior litigation. We conclude that the facts do not indisputably show that the statute accrued until shortly before the prior litigation commenced. We further hold that the statute was tolled while Ehrmann represented Fritz in that litigation under the continuous representation tolling provision of the attorney malpractice statute of limitations. Accordingly, it was error to rule that the statute of limitations barred the action as a matter of undisputed fact. We reverse and remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

The Underlying Malpractice Complaint

On November 20, 2003, Fritz brought suit against Ehrmann. The complaint alleged that Ehrmann committed legal malpractice in 1995, when Fritz

In his reply, Ehrmann contended that Fritz’s declaration was contradicted by a declaration he submitted in the Patel lawsuit. The referenced declaration primarily discussed the $182,474 in deferred interest, which appears to have been the focus of the Patel lawsuit. In refuting the argument that he had intended to waive payment of the deferred interest in the agreement that preceded the September 1995 note, Fritz had stated: “There would be no reason in the world for me to reduce the interest rate [in 1995] and do away with $182,474 in principal that was due to me, just to receive a prepayment penalty clause that I never received anyway. There was no tax savings to me to avoid payment in full on the NOTE in 1995 just to reduce the interest rate and give away $182,474 especially in light of the fact that the PATELS prepaid the MODIFIED NOTE anyway.”

The court granted the motion for summary judgment, stating in its order that “[t]here is no triable issue of material fact with respect to when [Fritz] suffered actual injury.” Judgment was entered, and this appeal followed.

DISCUSSION

Section 340.6 of the Code of Civil Procedure (section 340.6), the special statute of limitations for attorney malpractice actions, provides in pertinent part: “An action against an attorney for a wrongful act or omission, other than for actual fraud, arising in the performance of professional services shall be commenced within one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first. In no event shall the time for commencement of legal action exceed four years except that the period shall be tolled during the time that any of the following exist: [f] (1) The plaintiff has not sustained actual injury; [f] (2) The attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred.”

Because of the tolling provisions, it is often the case that neither the date the plaintiff acquires knowledge of wrongdoing nor the date of the wrongful act is meaningful in determining whether the statute of limitations has run.

For many years, the majority of courts believed that injury did not occur until settlement or entry of final judgment in any litigation that arose from or was related to the neglectful conduct. (See, e.g., Karno v. Biddle (1995) 36 Cal.App.4th 622 , 629 [ 42 Cal.Rptr.2d 318 ].) The Supreme Court adopted such a rule for certain types of malpractice in ITT Small Business Finance Corp. v. Niles (1994) 9 Cal.4th 245 [ 36 Cal.Rptr.2d 552 , 885 P.2d 965 ] (ITT), wherein the court held that “in transactional legal malpractice cases, when the adequacy of the documentation is the subject of dispute, an action for attorney malpractice accrues on entry of adverse judgment, settlement, or dismissal of the underlying action.” (Id. at p. 258.) However, the holding in ITT was called into question by the court’s later decision in Adams v. Paul (1995) 11 Cal.4th 583 [ 46 Cal.Rptr.2d 594 , 904 P.2d 1205 ], which held that “[i]n the ‘classic’ missed statute situation, in which the attorney negligently fails to file the underlying lawsuit within the applicable statutory period and does nothing further, the plaintiff suffers actual harm at the time the statutory period lapses because, assuming the claim was otherwise viable, the right and/or remedy of recovery on the action has been substantially impaired.” (Id. at p. 589.)

The Supreme Court recognized a discrepancy between the two holdings, and/7T was formally overruled in Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison (1998) 18 Cal.4th 739 [ 76 Cal.Rptr.2d 749 , 958 P.2d 1062 ] (Jordache). In Jordache, the Supreme Court explained that the actual injury tolling provision contained in section 340.6, subdivision (a)(1) was derived from the case of Budd v. Nixen (1971) 6 Cal.3d 195 [ 98 Cal.Rptr. 849 , 491 P.2d 433 ] (Budd), wherein the court had said: “ ‘If the allegedly negligent conduct does not cause damage, it generates no cause of action in tort. [Citation.] The mere breach of a professional duty, causing only nominal damages, speculative harm, or the threat of future harm—not yet realized— does not suffice to create a cause of action for negligence. [Citations.] Hence, until the client suffers appreciable harm as a consequence of [the] attorney’s negligence, the client cannot establish a cause of action for malpractice.’ ” (Jordache, supra, 18 Cal.4th at pp. 749-750, quoting Budd, supra, 6 Cal.3d at p. 200.)

The court in Jordache further explained that: “The ‘actual injury’ provision in section 340.6, subdivision (a)(1), effectively continues the accrual rule Budd established. Under Budd, the cause of action could not accrue until the plaintiff suffered actual loss or damage resulting from the allegedly negligent conduct. [Citation.] After sustaining damages compensable in a

The court contrasted actual injury, which causes the statute to accrue, with speculative or contingent damage, which does not: “[Speculative and contingent injuries are those that do not yet exist, as when an attorney’s error creates only a potential for harm in the future. [Citation.] An existing injury is not contingent or speculative simply because future events may affect its permanency or the amount of monetary damages eventually incurred. [Citations.]” (Jordache, supra, 18 Cal.4th at p. 754.)

The facts in Jordache illustrate the Supreme Court’s interpretation of the term “actual injury.” The client in that case (Jordache) learned of a potential mistake made by its former attorneys (Brobeck) in December 1987 when new counsel explained that Jordache should have presented a claim to its insurers in 1984 after being sued for allegedly marketing counterfeit Guess? jeans. New counsel tendered defense of the action to Jordache’s insurers in 1987. But one of the defenses raised by the insurers was untimely notice and substantial prejudice. The legal malpractice action against Brobeck was not filed until several years later, after Jordache settled the original action and received a partial reimbursement from a separate settlement with its insurers. At the time of the settlement, a ruling had been issued by the trial court stating that whether one of the insurers had been substantially prejudiced by the late notice was an issue of fact that could not be determined on summary judgment.

On these facts, Jordache argued that the statute of limitations did not accrue (or was tolled) until the insurers settled for a lesser amount than might have been obtained had the claim been presented in 1984. The Brobeck firm contended that that statute began to run in 1987, because by that time, Jordache had knowledge of the alleged mistake and had incurred actual injury in the form of monies used for defense costs in the underlying action that might otherwise have been paid by the insurers. The trial court agreed with Brobeck and entered judgment. The Court of Appeal sided with Jordache, and reversed.

The Supreme Court agreed with the trial court: “Actual injury refers only to the legally cognizable damage necessary to assert the cause of action. There is no requirement that an adjudication or settlement must first confirm a causal nexus between the attorney’s error and the asserted injury.”

The Supreme Court was clear in Jordache that “the determination of when attorney error has caused actual injury under section 340.6, subdivision (a)(1), cannot depend on facile, ‘bright line’ rules. [Citation.] Instead, the particular facts of each case must be examined in light of the wrongful act or omission the plaintiff alleges against the attorney.” (Jordache, supra, 18 Cal.4th at p. 764.) The court stated that, generally, the facts and circumstances of each case must be analyzed by the trier of fact to determine when the plaintiff sustained actual injury. (Ibid.) However, “[w]hen the material facts are undisputed, the trial court can resolve the question as a matter of law____” (Ibid.)

Applying these standards to the present case, it is apparent that there were two potential bases for injury to Fritz from Ehrmann’s negligence in drafting the second note. First, he could have been injured by the Patels’ prepayment of principal, assuming he could not thereafter reinvest the principal and obtain a similar rate of return. Second, he could have been injured by the failure to specify in the note that the deferred interest was to be repaid at the end of the term. Both injuries were speculative at the time of the preparation of the note. The Patels might never have had the funds or the inclination to prepay principal, and they might have paid the deferred interest in accord with the parties’ original understanding without regard to any ambiguity in the second note.

Our conclusion that injury was still speculative and contingent in 1995 is supported by the Supreme Court’s decision in Adams v. Paul in which it states that in some circumstances, “the actual loss of the underlying remedy may remain contingent, that is, the attorney’s negligence may have created only the potential for future harm.” (Adams v. Paul, supra, 11 Cal.4th at p. 590.) The court gave as an example an attorney’s negligent preparation of trust documents, where damage did not occur “ ‘until the trust was challenged

On appeal, the defendant argued that all of the plaintiffs’ damages flowed from the trial court’s 1984 order, which had been alleged as a basis for the plaintiffs’ malpractice in the original complaint but had been dropped in the amended complaint. Explaining why the amended complaint did not represent an attempt to avoid demurrer by omitting essential facts or pleading inconsistent facts, the court stated: “Here ... the [plaintiffs] have not omitted facts without explanation or pleaded inconsistent facts to avoid the statute of limitations. Instead, they have dropped their time-barred claims for negligence related to the 1984 orders setting aside the initial property division and increasing [the husband’s] support obligations, and to defense of the collateral lawsuit. They reasserted only the claims that [defendant] negligently advised them about the prior appeal’s effect, and that the negligent advice caused [the second wife’s] embroilment in the property division dispute and the finding that [the husband] violated fiduciary duties. The allegations in the amended complaint are consistent with those in the original complaint. Where the original complaint essentially alleged three instances of negligent conduct, and three types of resulting damage, the amended complaint alleges only the negligent advice and the damages related to that advice. Consequently, we do not concern ourselves with the superseded negligence claims.” (Baltins, supra, 36 Cal.App.4th at pp. 1205-1206.)

Here, as in Baltins, there were two separate and distinct acts of negligence with separate and distinct potential injuries and statutes of limitations. Injury from prepayment of principal could arise at any time during the note’s 20-year term; injury from the failure to address the deferred interest would not necessarily manifest itself until it became due at the note’s end. We perceive no reason why Fritz could not simply have omitted all discussion of the prepayment prohibition and gone forward with the complaint based on

In Lockley, supra, 91 Cal.App.4th 875 , the plaintiff was a police officer terminated from his employment in 1988. He filed a workers’ compensation claim and a claim alleging racial discrimination. The Cantrell firm represented him in connection with the workers’ compensation claim. The plaintiff entered into a settlement agreement with his former employer in which he agreed to relinquish all his claims in exchange for assistance in obtaining disability retirement. The employer subsequently breached the agreement, and the plaintiff revived his workers’ compensation claim. The workers’ compensation judge (WCJ) awarded him damages and reinstated him to his position as a police officer. His attorneys raised the settlement agreement before the WCJ, but the WCJ refused to approve it. Ultimately, the damages awarded by the WCJ were affirmed but the reinstatement was not, and the Court of Appeal questioned why no action had been pursued for breach of the settlement agreement. The plaintiff filed a malpractice action against the Cantrell firm for failure to enforce the settlement agreement and failure to advise him concerning his racial discrimination and wrongful termination claims. The trial court sustained a demurrer on statute of limitations grounds.

On appeal, the Cantrell firm argued that assuming it had represented the plaintiff in connection with the settlement agreement, any such representation would have been separate and distinct from the workers’ compensation claim, and the time to pursue a malpractice action related to the settlement agreement had passed. The Court of Appeal concluded that because the settlement agreement “clearly and adversely affected [the plaintiff’s] claim to all workers’ compensation benefits,” the firm’s “advice to [the plaintiff] in connection with the agreement and [the firm’s] representation with regard to [the plaintiff’s] workers’ compensation claim appear, at least at this stage of the litigation, to have comprised the same specific subject matter.” (Lockley, supra, 91 Cal.App.4th at p. 889.) Because litigation with regard to the workers’ compensation claim was continuous, the court had no need to address the issue of whether an interruption would have had an impact on the tolling provision in section 340.6, subdivision (a)(2), so its opinion is not dispositive here.

In Worthington, supra, 29 Cal.App.4th 1488 , the plaintiff’s mother left her a life estate in certain property. The defendant, an attorney she consulted in 1988, advised her to renounce the life estate. In 1991, when problems arose, she contacted the attorney and he offered further advice by letter dated April 5, 1991. On May 1, 1991, the plaintiff formally substituted a new attorney for the defendant. Eleven months later, she filed a malpractice action against her

The plaintiff in Crouse, supra, 67 Cal.App.4th 1509 , had hired the Brobeck firm to advise her in connection with the sale of a limited partnership interest in 1987. The attorney who assisted her was named Boatwright. The sale closed at the end of 1988. The plaintiff was supposed to receive a promissory note from the purchasers, but Boatwright failed to ensure that the note was delivered to her or held in a secure location. In 1989, Boatwright left the Brobeck firm and joined the Page firm. In 1990, the parties wished to enter into a new agreement involving a new note. The plaintiff retained Boatwright and the Page firm to represent her. Because Boatwright was unable to produce the original note, the deal fell through. Later, however, a new agreement was reached which did not require surrender of the note. From 1990 until July 1993, Boatwright continued to represent the plaintiff by collecting the proceeds from the restructured note and negotiating a discounted payoff of the note. The plaintiff obtained independent legal advice in October 1990, and filed her malpractice complaint which, due to a tolling agreement, was deemed to have an effective date of December 1993.

The court addressed the issue of whether a malpractice claim based on Boatwright’s alleged negligence in connection with the loss of the note in 1988 was time-barred. The trial court had apparently granted a partial summary judgment in his favor with respect to any 1988 negligence on statute of limitations grounds. But the summary judgment was based on the first and second notes being two different matters, not any hiatus in the representation. The Court of Appeal analyzed the issue, and concluded that Boatwright’s later representation of the plaintiff involved the same, specific subject matter. Therefore, the statute of limitations was tolled. (Crouse, supra, 67 Cal.App.4th at p. 1538.)

Notwithstanding the lack of relevant case authority, we believe Fritz’s position is the correct one. “In construing a statute, our principal task is to ascertain the intent of the Legislature.” (People v. Broussard (1993) 5 Cal.4th 1067 , 1071 [ 22 Cal.Rptr.2d 278 , 856 P.2d 1134 ].) “We do so by first turning to the words themselves, giving them their ordinary meaning.” (Ibid.) “When

The Legislature’s intent in adopting the continuing-representation tolling provision contained in section 340.6, subdivision (a)(2), is set forth in the legislative history. There were two purposes: (1) “to ‘avoid the disruption of an attorney-client relationship by a lawsuit while enabling the attorney to correct or minimize an apparent error,’ ” and (2) “ ‘to prevent an attorney from defeating a malpractice cause of action by continuing to represent the client until the statutory period has expired.’ ” (Laird v. Blacker (1992) 2 Cal.4th 606 , 618 [ 7 Cal.Rptr.2d 550 , 828 P.2d 691 ], quoting Sen. Com. on Judiciary, 2d reading analysis of Assem. Bill No. 298 (1977-1978 Reg. Sess.) as amended May 17, 1977; accord, Crouse, supra, 67 Cal.App.4th at p. 1535.)

The interpretation of section 340.6 put forth by Ehrmann would undermine the legislative intent behind the tolling provision for the majority of situations where an attorney commits malpractice during the preparation of transactional documents. In most instances, mistakes in transactional documents do not manifest themselves until after the project is completed. The first impulse of a client who learns about a problem in a transactional document prepared by his or her attorney is to return to that attorney for an explanation or a fix. An honest attorney will admit to mistakes made and work in good faith to correct or mitigate any damage, as Ehrmann did here. The client is unlikely to consult another source for legal advice while the first attorney is working to rectify the issue—a process that could take years. This means it would be up to die attorney who made the mistake to inform the client that time is ticking on a legal malpractice action. While we have no doubt that most attorneys would do just that, the interpretation urged by Ehrmann would afford unscmpulous lawyers an opportunity to simply let the statute mn. It would be incongruous to construe the legal malpractice scheme in a way that would compel only honest attorneys to face the consequences of their negligent actions.