LAW OFFICES
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
LIABILITY UPDATE
January 4, 2008
In Beal Bank, SSB v. Arter & Hadden, LLP 2007 Daily Journal D.A.R 15089, the California Supreme held that when an attorney leaves a firm and takes a client with him, the tolling in ongoing matters does not continue for claims against the former firm and partners.
In 1996, plaintiff Beal Bank, SSB, (Beal Bank) acquired certain loans from another bank, which had been placed into conservatorship by the Federal Deposit Insurance Corporation (FDIC). The loan documents contained default interest clauses that provided that in the event of default, the entire balance of principal and interest would become due and thereafter bear interest at an increased rate over and above the contract rate. The debtors missed payments on some of the loans. Beal Bank sent the debtors notices of acceleration and default and recorded notices of default.
Beal Bank retained defendant Arter & Hadden, LLP, to handle its collection efforts on these loans. Defendant Eric Dean, a partner, was the attorney primarily responsible for the representation. Counsel for the debtors advised Arter & Hadden, LLP, through correspondence and other means, that Beal Bank had no legal or factual basis for attempting to collect the default interest. In June 1997, the debtors transferred the collateral for the outstanding loans to an entity they controlled, which then filed for bankruptcy protection. Steven Gubner, an associate at Arter & Hadden, LLP, then began representing Beal Bank in the bankruptcy court. On Beal Bank’s behalf, Arter & Hadden, LLP, filed a motion for summary judgment in the bankruptcy court, arguing that Beal Bank was entitled to recover the default interest. The bankruptcy court ruled against Beal Bank and entered its final order on May 28, 1998. Beal Bank appealed the matter to the district court.
On December 31, 1998, Gubner left the employ of Arter & Hadden, LLP. Gubner’s new firm took over representation of Beal Bank. After the district court affirmed the bankruptcy court’s ruling, Beal Bank appealed to the Ninth Circuit Court of Appeals. On September 25, 2001, the Ninth Circuit issued its opinion, affirming the rulings of the lower courts.
Beal Bank filed a legal malpractice action against the attorneys who had represented it in the unsuccessful litigation: Gubner; Gubner & Associates; Ezra, Brutzkus & Gubner; Arter & Hadden, LLP; and Dean. It alleged defendants had failed to conduct any legal research, advise Beal Bank that its position was unlikely to prevail, or inform it of the risks involved in continuing to maintain its position and that as a result, Beal Bank incurred unnecessary legal fees, was deprived of an opportunity to settle with the debtors on favorable terms, and was forced to defend a breach of contract action brought by the debtors.
Arter & Hadden, LLP, and Dean demurred, arguing that Beal Bank suffered an actual injury on May 28, 1998, the date the bankruptcy court entered an adverse ruling against it, which commenced the running of the one-year statute of limitations under Code of Civil Procedure section 340.6 on Beal Bank’s malpractice claim. Relying on Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509 (Crouse), which held that continuing representation by a firm’s ex-attorney does not toll the statute of limitations against the firm, they argued that the statute of limitations was tolled as to them only until December 31, 1998, when Gubner left Arter & Hadden, LLP, taking Beal Bank with him as a client, and Arter & Hadden, LLP, ceased representing Beal Bank. In opposition, relying on Beane v. Paulsen (1993) 21 Cal.App.4th 89 (Beane), which held that continuing representation by a firm’s ex-attorney does toll the statute of limitations against the firm and its partners.
The trial court acknowledged the conflict of authority between Crouse and Beane. It found Crouse more persuasive, concluded the claims were time-barred, sustained the demurrers without leave to amend, and entered judgments of dismissal as to Dean and Arter & Hadden, LLP. On appeal, the Court of Appeal agreed with the reasoning of Beane, supra, 21 Cal.App.4th 89, disagreed with the reasoning of Crouse, supra, 67 Cal.App.4th 1509, and reversed. The Supreme Court granted review to resolve this split of authority.
Code of Civil Procedure section 340.6, subdivision (a) provides in part: “An action against an attorney for a wrongful act or omission . . . 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 [where specified circumstances give rise to tolling].” Thus, the limitations period is one year from actual or imputed discovery, or four years (whichever is sooner), unless tolling applies.
The Court found it significant that, “while section 340.6, subdivision (a) defines the limitations period for “[a]n action against an attorney,” the tolling provision in subdivision (a)(2) extends the limitations period only during ongoing representation by “[t]he attorney.” “Under ordinary rules of grammar, ‘[t]he attorney’ in subdivision (a)(2) refers back to the ‘attorney’ who is the target of the action in subdivision (a). . . . Thus, under the most natural reading of the statute, an action against an individual attorney is tolled so long as that attorney continues representation; conversely, an attorney’s continued representation tolls an action only against that attorney.”
The Court of Appeal had “dismissed the text of the statute” by noting that section 340.6 has also been applied to actions against law firms. The Supreme Court pointed out, however, “[t]hat either an attorney or a firm may be the subject of an action does not support a reading under which representation by one attorney or firm might toll the limitations period as to another no longer affiliated attorney or firm. Rather, the text implies an action against a law firm is tolled so long as that firm continues representation, just as an action against an attorney is tolled so long as that attorney continues representation, but representation by one attorney or firm does not toll claims that may exist against a different, unaffiliated attorney or firm.”
The Court found that the interpretation “most naturally suggested by the statute’s text” “dovetails with the Legislature’s ostensible purposes in adopting section 340.6. Assembly Bill No. 298 reflected a balancing of the interests of clients, who should not be prevented from obtaining relief when they could not have become aware of professional negligence, and attorneys, who in order to obtain malpractice coverage needed some definite outside limitations period.” “As the legislative history indicates, ‘[t]he purpose of the bill [was] to reduce the costs of legal malpractice insurance.’ ”
We do not presume that our interpretation offers a perfect solution or that stays and tolling agreements will eliminate entirely disruption of the client’s relationship with its chosen counsel. Given the conflicting interests at stake, there are no perfect solutions. The interpretation we adopt is the one most faithful to section 340.6’s language and to the full range of interests the Legislature balanced in passing that statute. The Court of Appeal, and Beane before it, erred in disregarding section 340.6’s language and in engaging in policy analysis unmoored from the statutory text. We disapprove Beane v. Paulsen, supra, 21 Cal.App.4th 89, to the extent it is inconsistent with this opinion.
----Andrea Lynn Rice
OF
ANDREA LYNN RICE
A Professional Corporation
12100 Wilshire Boulevard
Suite 780
Los Angeles, California 90025
Telephone (310) 207-3717
Facsimile (310) 207-6785
LIABILITY UPDATE
January 4, 2008
In Beal Bank, SSB v. Arter & Hadden, LLP 2007 Daily Journal D.A.R 15089, the California Supreme held that when an attorney leaves a firm and takes a client with him, the tolling in ongoing matters does not continue for claims against the former firm and partners.
In 1996, plaintiff Beal Bank, SSB, (Beal Bank) acquired certain loans from another bank, which had been placed into conservatorship by the Federal Deposit Insurance Corporation (FDIC). The loan documents contained default interest clauses that provided that in the event of default, the entire balance of principal and interest would become due and thereafter bear interest at an increased rate over and above the contract rate. The debtors missed payments on some of the loans. Beal Bank sent the debtors notices of acceleration and default and recorded notices of default.
Beal Bank retained defendant Arter & Hadden, LLP, to handle its collection efforts on these loans. Defendant Eric Dean, a partner, was the attorney primarily responsible for the representation. Counsel for the debtors advised Arter & Hadden, LLP, through correspondence and other means, that Beal Bank had no legal or factual basis for attempting to collect the default interest. In June 1997, the debtors transferred the collateral for the outstanding loans to an entity they controlled, which then filed for bankruptcy protection. Steven Gubner, an associate at Arter & Hadden, LLP, then began representing Beal Bank in the bankruptcy court. On Beal Bank’s behalf, Arter & Hadden, LLP, filed a motion for summary judgment in the bankruptcy court, arguing that Beal Bank was entitled to recover the default interest. The bankruptcy court ruled against Beal Bank and entered its final order on May 28, 1998. Beal Bank appealed the matter to the district court.
On December 31, 1998, Gubner left the employ of Arter & Hadden, LLP. Gubner’s new firm took over representation of Beal Bank. After the district court affirmed the bankruptcy court’s ruling, Beal Bank appealed to the Ninth Circuit Court of Appeals. On September 25, 2001, the Ninth Circuit issued its opinion, affirming the rulings of the lower courts.
Beal Bank filed a legal malpractice action against the attorneys who had represented it in the unsuccessful litigation: Gubner; Gubner & Associates; Ezra, Brutzkus & Gubner; Arter & Hadden, LLP; and Dean. It alleged defendants had failed to conduct any legal research, advise Beal Bank that its position was unlikely to prevail, or inform it of the risks involved in continuing to maintain its position and that as a result, Beal Bank incurred unnecessary legal fees, was deprived of an opportunity to settle with the debtors on favorable terms, and was forced to defend a breach of contract action brought by the debtors.
Arter & Hadden, LLP, and Dean demurred, arguing that Beal Bank suffered an actual injury on May 28, 1998, the date the bankruptcy court entered an adverse ruling against it, which commenced the running of the one-year statute of limitations under Code of Civil Procedure section 340.6 on Beal Bank’s malpractice claim. Relying on Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509 (Crouse), which held that continuing representation by a firm’s ex-attorney does not toll the statute of limitations against the firm, they argued that the statute of limitations was tolled as to them only until December 31, 1998, when Gubner left Arter & Hadden, LLP, taking Beal Bank with him as a client, and Arter & Hadden, LLP, ceased representing Beal Bank. In opposition, relying on Beane v. Paulsen (1993) 21 Cal.App.4th 89 (Beane), which held that continuing representation by a firm’s ex-attorney does toll the statute of limitations against the firm and its partners.
The trial court acknowledged the conflict of authority between Crouse and Beane. It found Crouse more persuasive, concluded the claims were time-barred, sustained the demurrers without leave to amend, and entered judgments of dismissal as to Dean and Arter & Hadden, LLP. On appeal, the Court of Appeal agreed with the reasoning of Beane, supra, 21 Cal.App.4th 89, disagreed with the reasoning of Crouse, supra, 67 Cal.App.4th 1509, and reversed. The Supreme Court granted review to resolve this split of authority.
Code of Civil Procedure section 340.6, subdivision (a) provides in part: “An action against an attorney for a wrongful act or omission . . . 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 [where specified circumstances give rise to tolling].” Thus, the limitations period is one year from actual or imputed discovery, or four years (whichever is sooner), unless tolling applies.
The Court found it significant that, “while section 340.6, subdivision (a) defines the limitations period for “[a]n action against an attorney,” the tolling provision in subdivision (a)(2) extends the limitations period only during ongoing representation by “[t]he attorney.” “Under ordinary rules of grammar, ‘[t]he attorney’ in subdivision (a)(2) refers back to the ‘attorney’ who is the target of the action in subdivision (a). . . . Thus, under the most natural reading of the statute, an action against an individual attorney is tolled so long as that attorney continues representation; conversely, an attorney’s continued representation tolls an action only against that attorney.”
The Court of Appeal had “dismissed the text of the statute” by noting that section 340.6 has also been applied to actions against law firms. The Supreme Court pointed out, however, “[t]hat either an attorney or a firm may be the subject of an action does not support a reading under which representation by one attorney or firm might toll the limitations period as to another no longer affiliated attorney or firm. Rather, the text implies an action against a law firm is tolled so long as that firm continues representation, just as an action against an attorney is tolled so long as that attorney continues representation, but representation by one attorney or firm does not toll claims that may exist against a different, unaffiliated attorney or firm.”
The Court found that the interpretation “most naturally suggested by the statute’s text” “dovetails with the Legislature’s ostensible purposes in adopting section 340.6. Assembly Bill No. 298 reflected a balancing of the interests of clients, who should not be prevented from obtaining relief when they could not have become aware of professional negligence, and attorneys, who in order to obtain malpractice coverage needed some definite outside limitations period.” “As the legislative history indicates, ‘[t]he purpose of the bill [was] to reduce the costs of legal malpractice insurance.’ ”
We do not presume that our interpretation offers a perfect solution or that stays and tolling agreements will eliminate entirely disruption of the client’s relationship with its chosen counsel. Given the conflicting interests at stake, there are no perfect solutions. The interpretation we adopt is the one most faithful to section 340.6’s language and to the full range of interests the Legislature balanced in passing that statute. The Court of Appeal, and Beane before it, erred in disregarding section 340.6’s language and in engaging in policy analysis unmoored from the statutory text. We disapprove Beane v. Paulsen, supra, 21 Cal.App.4th 89, to the extent it is inconsistent with this opinion.
----Andrea Lynn Rice
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