# FILED
October 5, 1998 Cecil W. Crowson Appellate Cou rt Clerk IN THE SUPREME COUR T OF TENNESSEE AT NASHVILLE
) FOR PUBLICA

TION JOHN KOHL & COMPANY P.C., ) Filed: October 5, 1998 JOHN B. KOHL, III AND HELEN H. ) KOHL, INDIVIDUALLY, and JOHN B. ) Davidson Circuit KOHL, III, TRUSTEE, as Trustee of ) the John Kohl & Company, P.C. ) Hon. Thomas W . Brothers, Judge Profit Sharing Plan, ) ) Trial Court No. 90C-1962 Plaintiffs-Appellants, ) ) Supreme Court No. 01S01- v. ) 9711-CV-00255 ) DEARBORN & EWING, ) a Tennessee General Partnership, ) and DAN E. HUFFSTUTTER, ) ) Defendants-Appellees, )

For Plaintiffs-Appellants : For Defendants-Appellees: Steven C. Douse John Branham King & Ballow Kathryn Barnett Nashville, Tennessee Branham & Day, P.C. Nashville, Tennessee



## O P I N I O N

JUDGMENT OF COURT OF APPEALS DROWOTA, J. AFFIRMED.
In this legal malpractic e action, the plaintiffs, John Ko hl & Co mpany P.C., John B. Kohl, III and Helen H. Kohl, Individually, and J ohn B. Kohl, III, Trustee,1 The plaintiffs were awarded $33,091. 05 for the l egal malpracti ce of the defendant s. However, t he trial court found t he plaint iffs’ c laim s relati ng to the t ransfer of f unds into a pr ofit sharing plan an d the contribut ions of i ndividual retir ement account funds to the plan were bar red by the statute of limit

ations.

2 Tenn. Code Ann. § 28-3-104( a) provide s in perti nent part: “The foll owing a ctions sha ll b e commenced within one (1) year afte r the cause of act ion accrued:

. . . (2) Acti ons and suits aga inst at torneys . . . for malpractice, whether the actions are groun ded or based in contract or tort. . . .” -2- as Trustee of the John Kohl & Company, P.C. Profit Sharing Plan, (col lectivel y referred to as the “plaintiffs”), appeal from the Court of Appeals’ decisio n affirm ing the trial court’s finding

that the statute of limitations ba rred the plaintiffs’ recovery for negligentlyprovided legal a dvice pertaining to certain business matters. 1 The plainti ffs have also appealed from the denial of legal fees associated wi th prosecuting t his action against the defendant, Dearborn and Ewing, and one of its associates, Dan Huffstutter. The issues before us are: (1) wheth er certain of the plainti ffs’ claims
are barred by the one-year statute of limitations applic able to legal malpractice actions, see Tenn. Code Ann. § 28-3-104, 2 and (2) wh ether th e plaintiffs are entitled to recover legal fees as sociated with prosecuti ng this ac tio n. For the reasons explained hereafter, the decis ion of the Court of Appeals is affirmed.

BACKGROUND

Plainti ffs John and Helen Koh l hav e been in the land survey ing business since 1963. In 1983, they decided to incorporate their busines s and sought legal advice from th e defendant law firm of Dearborn and Ew ing. The defendant, Dan Huffstutter, an associate in the law firm, assisted the Koh ls in incorporating their business. He also advised the m from 198 3 to 1988 on issues related t o tax, business, and personal finance.

In 1984, Huffstutter advised the Kohls to adopt a

profit sharing plan for the benefit of themselves and their employees, which they did. Huffstutter aided in the development of the plan and administe red it until 1988. He als o advised the-3-

Kohls in 1986 on how to finance the purch ase o f a building to accommodate their expanding business. Pursuant to Huffstutter ’s advice, the Kohls obtained a loanfrom
a bank, a portion of which was gua ranteed by the Small Busines s Administration. The proceeds of th e loan were used to buy and renovate t he needed bu ilding. Huffstutter

further advised the Kohls that theirprofit sharing plan shoul d acquire the portion of the loan guaranteed by the government. He explained that in ord er to do this, the Kohls needed to transfer funds from their indi vidual retirement accounts into the pl an. Huffstutter informed the Kohls th at such a rollover would not be taxable

. Finally, Huffstutter advised each of the Kohl s to make a $2,000 contribution to the plan in 1986 instead of placing the moneyinto their own retirement accounts, which they did.

In September 1988, the Kohls receiv ed a letter from the IRS informing them of the f ollowing:

In our rev iew of your tax re turn for 1986, it appears that th e income, deduction s and credits you repor ted do not agree with the amounts reported to us on information returns filed by the pay ers. Please explain in a si gned statement where the amounts are re ported on your

tax re turn. I f the inc

ome was

not repo rted or

if t h e deductions or credits were overstated, please exp lain why. Attach any supporting material y

ou may want us to conside r. . . .

* * * An examiner will review you r return and records or other substantiation and explanation. If we propose any change s to your ta x, we will explain th em. If you agree to the proposed changes, we will ask you to sign an agreement form. If we do not hear from you within 3 0 days from the date of this letter, we will prepare the adjustment based on the information we have av ailable.
On October 19, 1988, th e Kohls’ accountant, Davi d Hinton, wrote a response letter on behalf of t he Kohls to the IRS whic h provided the explanati ons-4-

sought. A few days later on October 24, 1988, Robert Kol arich, another of the Kohls’ lawyers, wrote Dearborn & Ewing a letter which sta ted the follo wing:

In our last discuss ion o f John Kohl’s account with your firm, it was agreed that you would handle the application for

an extension of

his tax return, after which the file would be removed.Mr. Kohl intends to hire a new firm to handle his tax work, ho wever, I understand that a new question has arisen with regard to his pension and profit sharingplans. Evidently, Mr. Hu ffstutter had advised that the funds he ld in an IRA accountcould be transferred to the pension and profit sharing account and the IRS is review

ing the transaction. Please adv ise as to when this issue may be resolved so that the files may be trans ferred.

On May 1, 1990, the plaintif fs file d a legal malpractice claim against Dearborn & Ewing and Huffstutter

. The complaint alleged that the defendants committed malpractice in neglig ently drafting and adminis ter ing the profit sharing plan, advising the plainti ffs that the plan should acq uire the portion of the loan guaranteed by

the government, advis ing the plaintiffs that they should transfer funds from their own retirement accounts into the plan and that such rollov ers would not be taxed, and in advising the plaintiffs to make con tributions to the plan inst ead of to theirown retirement accounts.The plaintiffs sought to recover damages incurred as
a result of this advice, as wel l as for legal fees already paid to the defendants, the legal fees spent on correcting the defendants’ errors, and the legal fees associated with prosecuting the malpractice action agains t the defendants.

The defendants did not contest liability. Rather, they co ntende d that the statute of limitations had ru n on certa in of the plaintiffs’ claims, and tha t the plaintiffs were not entitled to legal fees incurred in prosecuting the present ac tion.

After a four-day

bench trial, the trial court found the defendan ts liable forfailing todraft and administer the profit sha ring plan correctly, and for erroneously-5-

advising that the plan should purchase th e go vernment guaranteed portio n of the loan obtained to buy the building housing the p lainti ff s’ business. The trial court awarded damages in the amount of $33,091.0 5, whic h in cluded legal fees for correcting the defendants’ errors. The court further found that the claims relating to the improper rollover an d contribution of individua l retirement a cco unt funds to the plan were barred by the one-year statute of limit a tions. The trial court noted that in the letter of October 24, 1988, M r. Kol arich and M r. Kohl had n oticed and became aware of the problem “a nd it was so s evere in his mind and Kohl’ s mind that they
were going to change law firms and have someone else do their tax w

ork.” Finally, the court determined that attorney ’s fees paid to the defen dants fo r work that had be en negligently performed were not recoverabl e, and neither were the leg al fee s associated with prosec uting the malpractice acti on.

The Court of Appeals affirmed the trial court, except for that portion of the judgment

denying the plaintiffs a recovery for attorney’s fees paid for legal work neg ligen tlyperformed by the defendants. Accordingly, the Court of App eals remanded the case to thetrial court to determine the amount of initial fees payable to the plaintiffs as damages.

Thereafter, we grant ed revie w to determine (1) w hether the lower courts erred in holding that the plaintiffs’ claims ar ising from the rollover and contr ibution of funds to the profit sharing plan were barred by the one-year statute of limitations, and (2) whether the plainti

ffs are entitled to recover attorney’ s fees incurred in pursuing the instant action. We find that the lower court s correctl y resolved t hese two questions.

ANAL YSIS-6- I.
The statute of limitations for legal malpractice i s one year from the time the cause of action accrues. Tenn. Code Ann. § 28-3-104(a)(2). When the cause of action accrues is determined by apply ing the discovery

rule. Under

this rule, a cause of action accrues when the plaintiff knows or in the ex ercise of reasonable care and d iligence should know that an injur y has been sustained as a r esult of wrongful or tortious conduct by the defendant. Shadrick v. Coker, 963 S.W.2d 726, 733 (Tenn. 1998); Stanbury v. Bacardi , 953 S.W.2d 671, 677 (Tenn. 1997).
In legal malpractice cases, the discovery rule is composed of two distinct element s: (1) the plaintif f must su ffer le gally cogniza ble dama ge - an actu al injury -
as a result of the defendant’s wrong ful or negligent conduct, and (2) the plaintiff must have known or

in the exer cise of re asonabl e diligenc e should have known that this injury was caused by the defendant’s wrongful or negli gent conduct. Carve ll v

. Bottoms , 900 S.W.2d 23, 28-30 (Tenn. 1995). An actual injury occurs when there is the loss of a legal right , remedy or interest, or t he imposition of a liability

. See LaMure v. Peters , 924 P.2d 1379, 1382 (N.M. App. 1996). An actual injury may also take the form of the plaintiff being fo rced to take some actio n or otherwise suffer “some actual inconvenience,” such as incurring an expens e, as a result of the defendant’s negligent o r wrongful ac t. See State v. McClellan , 85 S.W. 267, 270 (Tenn. 1905)( " [ A negligent act] may n ot inflict any immediate wrong on an individual, but

. . . his right to a remedy . . . will [not] commence until he has su ffered som e actual inconvenience. . . . [I] t may be stated as an invar iable rule that when the injury, however slight , is complete at the time of the act,the statutory period then commences, but, when the act is not l egally injurious until cer tai n consequences occur, the time commencesto run from the consequential damage. . . .” ). However, the injury element is not met if it is contingent upon a third party’s acti ons or amounts-7-

to a mere posssibility. See Caledonia Leasing v. Ar mstrong, Allen , 865 S.W.2d 10, 17 (Tenn. App. 1992).

The knowledge component of the discovery rul e may be established by evidence of actual or constructiv e knowledge of the injury

. Carvell , 900 S.W.2d at 29. Accordingly, the statute of limitations begins to run w hen the p laintiff has actual knowledge of t he injury as where, for example, the defendant admits to having committed mal practice o r the plaintiff is informed by an other attorney of the malpractice. Under the theory of constr uctive knowledge, however, the statute may begin to run at an earlier date - w henever the plaintiff becomes aware or reasonably should have become aware of facts sufficient to put a reasona ble person on notice that an injury has

been sustained as a result of the defendant’s negligent or wrongful conduct. Id . We have stressed, however, that there is no requirement that the plainti ff actually know the s pecific type of legal cl aim he or she has, or that the injury constituted a breach of the appropriate leg al standard. Shadrick , 963 S.W.2d at 733. Rather, “t he plaint iff is de emed to h ave discovered the right of action if he is aware of facts sufficient to put a reasonable per son on notice that

he has suffered an injury
as a re sult of wrongful conduct.” Carvell , 900 S.W .2d at 29 (quotin g Roe v. Jefferson , 875 S.W.2d 653, 657 (Tenn. 1994)). “It is knowledge of facts sufficient to put a plaintiff on notice that an injur y has been sustained which is crucial.” Stanbury , 953 S.W.2d at 678. A plaintiff may not, of cou rse, de lay filing suit unti l all the injuriouseffects or consequences of the al leged wrong are actually known to the plainti ff. Shadrick , 963 S.W.2d at 733; Wyatt v. A-Best Company , 910 S.W.2d 851, 855 (Tenn. 1995). Allowing suit to be filed once all the injurious effects and consequencesare known would defeat the rationale for the existence of statutes of limitations, which is to avoid the uncertainties and burdens inherent in pursuing

and defending stale claims. Wyatt , 910 S.W.2d at 855.-8- Applying these principles to the r ecord be for e us, we are persuaded that the lower courts c orr ectly found that the one-year statute of limitations had expired on those claims related to th e rollover and contri but ion o f individual retirement

accountfunds to the plaintiffs’ profit sharing plan. The plaintiffs suffered
an actual injury for purpos es of the discovery ru le when t hey began to incur expenses, or atleast ha d to take some action, as a result of the defen dants’ negligent advice. This would have been on October 19, 1988, when their account ant had to respond to the IRS’s req uest for information after it noted a conflict between the amount reported by the plaintiffs on their tax returns and the amounts reported bypayers. The plaintiffs’ argument to the contrary notwiths

tanding, the fact that the IRS had not taken any formal action against the Kohls as of that date, such as filing suit against them or issuing a deficiency notice, is largely irrel evant because, as
n oted above, it was unnecessary for the plaintiffs to have suffered all the injurio u s effects or consequences of the defendants’ neg ligence in or der for the statute to begin running. Shadrick , 963 S.W.2d at 733; Wyatt , 910 S.W.2d at 855; Sec. Bank & Trust Co. v. Fabricating Inc. , 673 S.W.2d 860, 864-65 (Tenn. 1983).

Regarding the discovery rul e’s knowledge req uirement, we c onclude that attorney Kolarich’s letter of October 24, 1988 to Dearborn & Ewing demonstrates that the plaintiffs knew or shoul d have known there w as a potential problem with the rollover and contribution of retirement funds into their pr ofi t sharing plan, and that Huffstutter

had advised the

plainti ffs on these matters. Again, it was unnecessary for the plaintiffs to have been a ware that there had been a br each of the appropriate legal standard in order to be deemed to have discovered their right of action, bu t needed only to be aware of facts sufficient to put them on n otice that an injury had been sustained as a result of Huffstutter ’s advice. Shadrick , 96 3 S.W .2d at 734; Carvell , 900 S.W.2d at 29. Kolarich’s letter establishes that the plaintiffs had notice of a problem with the roll over and contribution of re tirement funds into their profit-9-

sharing plan, especially si nce the letter was sent o n the heels of th e lette r to the Kohls by the IRS.

In sum, we conclude

that the statute of li mitations as to any clai ms resulting from the rollover and contribution of retirement funds to the plaintiff s’ profit sharing plan began to run on October 24,1988. The lower courts c orrectl y determined that the one-year statute of l imitationsfound in Tenn. Code Ann. § 28-3- 104(a) barred this as pect of th e plaintiffs’ su it becau se the pl aintiffs did not file their complaintuntil May 1, 1990. We do not mean to suggest by our h oldi ng that the
mer e routine questioning by the IRS of a tax return is always sufficient by its elf t o trigger the running of the statute of limitations as a matter of law for a potential legal malpractice action. We r ecognize that inquiries by governmental agencies into business transactions are routinel y conducted. While the inquiry by the IRS in this
case was sufficient to satisfy the injury prong of the disc overyrule because the plaintiffs had to take some action due t o the defendants’ negligence at that point , it
was not until attorney Kolari ch’s letter of October 24, 1988 to Dearborn & E wing that the knowledge prong of the rule was satisfied, thereby triggering the r

unning of the statute.

II.

Turning to the issue of legal fees, w e note that there are t hree
c ategoriesof attorney’s fees that may constitute damages resulting fro m lega l malpractice: (1) “initial fees” a pl aintiff pays or agrees to pa y an atto rney f or legal services that were negligently performed, (2) “cor rective fees” incurr

ed by the plainti

ff for wor k performed to correct the probl em caused by the neglig ent lawyer, and (3 ) “litigation fees,” which are legal fees paid by the plaintiff to prosecute the m alpractice action against the offending lawy er. The trial court in th is case correctly held that-10-

corrective fees were recoverable, and this ruling was not appealed. The trial court’s ruling that initial fees were n ot recoverable was appealed, and the Court of Appeals properlyreversed. Both lower courts agreed that the plainti ffs could not recover their legal fees in prosecu ting t he insta nt malpractice action. Rel ying upon Foster v. Duggin , 695 S.W.2d 526 (Ten n. 1985), the plaintiffs c ontend that this was error. They claim that attorney’ s fees should be assessed as part of their damages.

In Foster , the plaintiffs ret ained th e defendant as their attorney on a contingency fee basis to represent them in a personal injury acti on. The a t torney failed to timely file the complaint, and the plaintiffs lost their claim. In the subsequent malpractice action against the attorney, the attorney sought to reduc e the amount of the judgm ent against him by the amount of the fee he would ha ve earned had he successfully prosecuted the original case. Thus, the issue before us in Foster was “whether the d efenda nt, an attorney liable for mal practice, is entitled to have the judgmentagainst him reduced by the amount of the legal fee he contracted toreceive forlitigation he negligentlyconducted.” Foster , 695 S.W.2d at 526. We held that the attorney should be denied any credit for the contingency fee he would have receiv

ed had he obtained a judgment for his cl ients. Id

. at 527. Thus, the plaintiffs in Foster recovered initi al fees in their malpractic e suit. We made it clear that we we re not awarding the plaintiffs their attorney ’s fees incurred in pursui ng thei r m alpractice claim. Id

. at 527. Accordingly , the plaintiffs’ reliance upon Foster for the notion that they are entitled to their litigation fees is mispl aced.

Foster aside, the plaintiffs argue that they should be entitl ed to legal fees associated with prosec uting the present action i n order to make them whole. Theymaintain that

because such fees are the direct consequence of themalpractice, the fees should be awarded to them as part of their damages.-11- Although it i s true that there is some author ity for the proposition that a negligent attorney is responsib le for the reasonable lega l expense s incurred by a former client in prosecutin g a legal malpractice acti on, see Bailey v. Pocaro & Pocaro , 701 A.2d 916, 919 (N.J. App. 1997), most ju risdictions that have considered the issue have ad hered to the well-establ ished American rule, w hich provides that attorney’s fees may not be awa rded to the prevailing party absent statutory authorization or an agreement between the parties so providing. See , e.g. , Olson v. Fraase , 421 N.W.2d 820, 828-29 (N.D. 1988); Began v. Dixon , 547 A.2d 620, 624-25 (Del. Super. Ct. 1988); Whitney v. Buttrick , 376 N.W.2d 274, 281 (Minn. App. 1985); Stinson v. Feminist Women’s Health Center , 416 So.2d 1183, 1185 (Fla. App. 1982); Sorenson v. Fio Rito , 413 N.E.2 d 47, 51-5 3 (Ill. App . 1980). Tenness ee courts have long adhered to the American rule, conclu ding that an award of attorn ey’s fees as part of the prevailing part y’s damages is contr

ary topublic policy. See , e.g. , Pullman Standard v. Abex Corp. , 693 S.W.2d 336, 338 (Te nn. 1985); Gray v. Boyle Inv. Co. , 803 S.W.2d 678, 684 (Tenn. App. 1990); John J. Heirigs Constr. Co. v. Exide , 709 S.W.2d 604, 609 (Tenn. App. 1986); Pinney v. Tarpley , 686 S.W.2d 574, 581 (Tenn. App. 1984); Goings v. Aetna Casualty & Sur. Co. , 491 S.W.2d 847, 848 (Tenn. App. 197 2); Raski nd v. Raskind , 325 S.W.2d 617, 625 (Tenn. App. 1959). We are not persuad ed that legal malpractice claims should be made an exception to the rule. Without an agreement between the parties or a controlling statute, attorney’s fees in legal malpractice suits, as in other litigati on, may not beawarded. Accordingl y, the lower courts properly declin ed to award the plaintiffs their legal fees incurred as a result of prosecuting this action.

CONCLUSION

The decision of the Court of Appeals i s affirmed and th e ca use remanded to the trial court for any f urther pr oceedin gs which may b e necessa ry.-12-

Cost of this appeal are taxed to the plaintiffs-app ellants.

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_ Frank F. Drowota, II I Justice Concur: Anderson, C.J., Birch, Holder, and Barker, J.J.