*District Judge of the District of Maryland, sitting by

designation. 

 

1The defendants-appellees in the within action are the law

firm of Chapman & Cutler, headquartered in Chicago, Illinois, and

fifty of its general partners (hereinafter referred to

collectively as "Chapman"). 

1

United States Court of Appeals,

Fifth Circuit.

No. 93-1202.

INDUSTRIAL INDEMNITY COMPANY, Plaintiff-Appellant,

v.

CHAPMAN AND CUTLER, et al., Defendants-Appellees.

June 16, 1994.

Appeal from the United States District Court for the Northern

District of Texas.

Before WISDOM and HIGGINBOTHAM, Circuit Judges, KAUFMAN*, District

Judge.

FRANK A. KAUFMAN, District Judge:

Plaintiff-Appellant Industrial Indemnity Company ("IIC")

appeals from the grant of summary judgment by the federal district

court below in favor of defendants-appellees.1 In that court,

appellant alleged instances of actionable negligence, amounting to

legal malpractice, on the part of appellees. Appellees

successfully sought the grant of summary judgment upon the ground

that appellant's claims were barred by the applicable statute of

limitations. For the reasons set forth infra, we affirm.

I.

The district court, in its Memorandum Order granting summary

judgment for appellees, set forth the following facts:
2

In September 1984, [IIC] issued a commitment to guarantee

a real estate transaction in Dallas, Texas. Under the

commitment, IIC undertook to insure payment of promissory

notes that several Texas limited partnerships, related to

Cloyce K. Box ("Box"), planned to issue to institutional

investors. The collateral for the transaction was 494 acres

of land in Frisco, Texas. Box intended to use the funds

obtained from this financing to invest in a cement plant.

IIC's guaranty provided that if the makers of the

promissory notes, which totaled $120 million, did not pay them

in full at their maturity date, October 15, 1988, IIC would

pay them. The IIC employees responsible for analyzing the

transaction and its attendant risk to IIC failed, however, to

perform their usual underwriting investigation before the

commitment was issued.

IIC claims in this suit that by December 1984, when the

policies were to be issued, it realized that the commitment

had been obtained by the fraud of its agent FGC Services,

Inc., and other participants in the transaction, primarily

with respect to the value of the collateral.1 Representatives

of IIC who travelled to Dallas, Texas[,] in December for the

scheduled closing of the transaction intended, so it is

alleged, to withdraw from the venture. Instead, they

attempted to renegotiate IIC's commitment. Several changes

were made, but when IIC pushed for additional concessions, Box

threatened a $150 million lawsuit if it failed to honor its

commitment.

1 IIC has not claimed that Chapman was guilty of any

misrepresentations or omissions.

At this point, IIC consulted a Chapman partner, Paul

Kosin ("Kosin"), who was in Dallas to assist with the

transaction. According to IIC, Kosin advised that Box

appeared to have a meritorious claim and would probably

prevail in a lawsuit. IIC maintains that the advice given by

Kosin was incorrect and given without proper analysis or

review. Further, IIC alleges that but for Kosin's advice, it

would not have issued the subject policies guaranteeing

payment of the notes.

IIC reviewed this transaction, as well as the others it

had made, throughout 1985 and 1986, thereby incurring costs

for attorneys' fees and other investigative expenses. In

1985, IIC terminated its financial guarantee business,

recognizing in consequence a loss of $160 million. Crum and

Forster ("C & F"), the parent company of IIC, set up a

discontinued operations reserve on its books to cover

potential future administrative costs and claims expenses

which might arise under the different guarantees IIC had
 

2§ 1404(a) states:

For the convenience of parties and witnesses, in

3

issued. This reserve included a contingency reserve of $55

million for the Frisco transaction which was recorded as a $55

million loss on the financial statements of IIC's parent

company, C & F, and its parent, Xerox Financial Services (a

subsidiary of Xerox Corporation).

Shortly after issuing the policies, in January 1985, IIC

received a premium of approximately $4.6 million from the limited

partnerships. The promissory notes issued by IIC were "zero coupon

notes" which required no interim installments of principal or

interest and no financial performance or payment by the makers of

the notes to the holders until October 1988. Upon the notes'

maturation, the makers completely defaulted, leaving IIC to perform

as required and to pay the holders the full $120 million. After so

doing, IIC foreclosed upon the inadequate real-estate collateral.

IIC, a California corporation, instituted suit in the Superior

Court for San Francisco County, California, on April 6, 1989,

alleging legal malpractice by appellees. Appellees promptly

removed the case to the federal district court for the Northern

District of California based upon the diversity of citizenship

among the parties. 28 U.S.C. § 1332. The headquarters office of

the law firm of Chapman & Cutler is located in Illinois, and none

of the partners of that firm who also is named as a defendant

resides in California. After the said removal, appellees

successfully sought transfer of the case from the Northern District

of California to the Northern District of Texas pursuant to 28

U.S.C. § 1404(a)2 and moved for summary judgment upon the ground
the interest of justice, a district court may transfer

any civil action to any other district or division

where it might have been brought. 

 

3See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487,

61 S.Ct. 1020, 85 L.Ed. 1477 (1941). 

 

4In support of its appeal to this Court in connection with

the limitations issue, IIC has referred in its briefs to several

factual and legal contentions which appellees assert, in a motion

to strike filed with this Court, were not presented in any court

below. Because we determine that the district court correctly

decided the question of limitations, whether or not any or all of

IIC's said contentions are sound, we treat appellees' motion to

strike as moot.

IIC also urges this Court to rule that the district

court mistakenly treated two of appellees' requests for

admission as admitted by IIC, despite IIC's claim that it

previously had denied the assertions which were the subjects

of those requests. However, IIC readily admits that, if

this Court affirms the grant of summary judgment in this

case, we need not decide that question. Accordingly,

because we do so affirm, we do not reach that issue. 

4

that IIC's action was barred by the applicable statute of

limitations.

The "transferee" federal district court in Texas, applying

California choice-of-law case law in the same manner as would the

"transferor" federal district court in California to which this

case earlier had been removed,3 determined that either the

California or Texas statute of limitations applied and that, under

either statute, the period for filing suit upon IIC's claim had

expired. IIC appeals that conclusion to this Court, asserting that

the district court erred in its invocation of the California and

Texas statutes, rather than the statute of limitations of Illinois,

and that, even under each or both of the California and Texas

statutes, the limitations period had not expired.4
 

5"The grant of a motion for summary judgment is reviewed de

novo." Securities & Exchange Comm'n v. Recile, 10 F.3d 1093,

1097 (5th Cir.1993). The appellate court applies "the same

standard as a district court would employ under Federal Rule of

Civil Procedure 56(c)." Abbeville Gen. Hosp. v. Ramsey, 3 F.3d

797, 801 (5th Cir.1993); Recile, 10 F.3d at 1097. 

5

For the reasons set forth infra, and on a de novo review

basis,5 we conclude that the district court below correctly

employed California choice-of-law principles in determining that

either the California or Texas statute of limitations applies in

this case and in granting summary judgment for appellees upon the

basis that, under either statute, the limitations period within

which appellant could file suit ended before appellant so filed.

II.

The parties agree that the district court correctly

determined that, in this case, California's choice-of-law rules

govern which statute of limitations should apply. See Cowan v.

Ford Motor Co., 713 F.2d 100, 104 n. 6 (5th Cir.1983) (stating that

when a case is "transferred to another federal district court ...

under § 1404(a), the transferee court must act as would the

transferor court"); see also KL Group v. Case, Kay & Lynch, 829

F.2d 909, 915 (9th Cir.1987). We also so agree.

The parties also agree that the district court appropriately

recited the test for selecting the applicable statute of

limitations under California law. California utilizes the "

"governmental interest' approach to questions of conflicts of

laws." In re Aircrash in Bali, 684 F.2d 1301, 1307 (9th Cir.1982)

(citation omitted); Offshore Rental Co. v. Continental Oil Co., 22
 

6There appears to be some dissonance between the affirmative

hue of the "greater interest" standard pronounced in In re

Aircrash and the negatively phrased "impairment" formulation in

Liew, but any such difference seems more theoretical and semantic

than real. In any event, in this case we reach the same result

regardless of the phraseology employed. 

6

Cal.3d 157, 148 Cal.Rptr. 867, 869, 583 P.2d 721, 723 (1978). That

approach requires the Court to engage in three discrete steps:

1. To examine the substantive law relating to [the topic

in question] in [the various jurisdictions at issue], to

determine if the laws in th[ose] jurisdictions differ as

applied to this ... transaction;

2. If they do differ, then to determine whether [those]

jurisdictions have an interest in having their laws applied.

If only one jurisdiction has such an interest, then we do not

have a "true conflict" and we apply the law of that

jurisdiction;

3. If there is a "true conflict" then we proceed, under

the "comparative impairment" approach, to determine which

jurisdiction's interest would be more impaired if its policy

were subordinated to the policy of the other. The conflict

should be resolved by applying the law of the jurisdiction

whose interest would be more impaired if its law were not

applied.

Liew v. Official Receiver and Liquidator, 685 F.2d 1192, 1196 (9th

Cir.1982) (footnotes omitted); see also Waggoner v. Snow, Becker,

Kroll, Klaris & Krauss, 991 F.2d 1501, 1506-07 (9th Cir.1993).

"California will decline to apply its own law to a case brought in

California only if it is shown that another state has a greater

interest in having its law applied."6 In re Aircrash, 684 F.2d at

1307; see also Nelson v. Tiffany Industries, Inc., 778 F.2d 533,

534 (9th Cir.1985).

 Employing that test, the parties—and we—agree that the laws

of California and Texas, on the one hand, and Illinois, on the

other hand, differ with regard to the effect of a limitations
 

7At the time when this action was filed, legal malpractice

suits in Illinois were governed by a statute covering actions

upon unwritten contracts which allowed five years after the cause

of action accrued. See Ill.Rev.Stat. ch. 110, para. 13-205

(1983); Dolce v. Gamberdino, 60 Ill.App.3d 124, 17 Ill.Dec. 274,

276, 376 N.E.2d 273, 275 (1978). Effective January 1, 1991,

Illinois adopted a statute specifically to deal with cases of

attorney malpractice. The new statute, which only applies

prospectively, see Gould v. Sachnoff & Weaver, Ltd., 240

Ill.App.3d 243, 180 Ill.Dec. 805, 807, 607 N.E.2d 1318, 1320

(1992), affords only two years within which aggrieved clients can

bring suit, although it may liberalize requirements for suit in

other ways. See Ill.Rev.Stat. ch. 110, par. 13-214.3 (1991).

California and Texas apparently allow one and two years

respectively for potential plaintiffs to bring suit based

upon attorney malfeasance. Both parties concede, and the

district court agreed, that, for purposes of the within

case, identical results stem from both the Texas and

California statutes. For that reason, the district court

declined, as does this Court, to choose which of those two

states' statutes governs in this case. See, e.g., Fed.

Depos. Ins. Corp. v. Cardinal Oil Well Servicing Co., Inc.,

837 F.2d 1369, 1370 n. 1 (5th Cir.1988); Miller v.

Transamerican Press, Inc., 621 F.2d 721, 724 (5th Cir.1980),

cert. denied, 450 U.S. 1041, 101 S.Ct. 1759, 68 L.Ed.2d 238

(1981). The sole question for decision centers on whether

Illinois's interest in applying its law outweighs the

interests of either and both of California and Texas. 

7

defense upon IIC's claim in this case.7

It also seems clear that the district court was correct in

concluding that each of the three states possesses some interest in

the application of its own statute of limitations in this case.

Among the fundamental purposes underlying a state's statute of

limitations is the protection of the resident defendants of that

state and of that state's courts from the burdens of dealing with

stale claims. See Ledesma v. Jack Stewart Produce, Inc., 816 F.2d

482, 485 (9th Cir.1987); Murray v. San Jacinto Agency, Inc., 800

S.W.2d 826, 828 (Tex.1990); Ashland Chem. Co. v. Provence, 129

Cal.App.3d 790, 181 Cal.Rptr. 340, 341 (1982); Dolce, 60
 

8"While the processing of the claim in this case would

affect a federal and not a California court, a federal court

sitting in diversity applies "governmental interest' analysis as

would a California court." Ledesma, 816 F.2d at 485 n. 4. 

 

9A state has an "interest in allowing its residents to

recover for injuries sustained in a state that would recognize

their claim as timely." See Ledesma, 816 F.2d at 485. But cf.

James v. Bell Helicopter Co., 715 F.2d 166, 172-73 n. 6 (5th

Cir.1983) (noting that "California courts have tended to apply

the law of the place of the injured's domicile" in order to aid

recovery for injuries, but adding that that approach tends to

apply only to "injured plaintiffs suing for personal injuries, as

opposed to a commercial" plaintiff). In any event, the interest

of a state in the application of its own particular statute of

limitations on behalf of a resident plaintiff is weaker than if

that interest stemmed from the involvement of a resident

defendant. See Ledesma, 816 F.2d at 485 (stating that the fact

that plaintiffs reside in California "weaken[s] the forum state's

interest in [applying] its own statute of limitations" in

comparison to an earlier decision which involved a California

8

Ill.App.3d 124, 17 Ill.Dec. at 277, 376 N.E.2d at 276; Davies v.

Krasna, 14 Cal.3d 502, 125 Cal.Rptr. 705, 712, 535 P.2d 1161, 1168

(1975). California possesses a plausible interest in the

litigation given the fact that the instant case arose in a court

located in California. As the subsequent removal of this action to

federal district court in California was predicated upon

diversity-of-citizenship jurisdiction, notwithstanding the fact

that it subsequently was transferred to a federal court in Texas,

California is regarded as the forum state.8 See, e.g., KL Group,

829 F.2d at 915; Cowan, 713 F.2d at 104 n. 6. IIC's incorporation

in California also may play a role in evaluating California's

degree of interest, although, as IIC would be harmed by the

application of its state's laws (see the discussion infra in Part

III of this Opinion), California's interests might be better served

by the application of Illinois's statute.9 Texas also has an
resident as defendant). 

 

10Appellant contends that several of the negligent acts

occurred in Illinois, based upon appellant's seemingly correct

factual assertions that telephone calls from appellees to IIC

were placed from Chapman & Cutler's home office in Chicago, and

that appellees' failure to advise IIC (ie. their omissions)

likewise to some extent can be grounded in Illinois. Appellees,

in their brief and in a motion to strike filed with this Court,

protest that those assertions represent new arguments not pressed

in any court prior to the within appeal and that the declarations

cited in support of those theories are not part of the summary

judgment record. Specifically, appellees argue that at no time

prior to this appeal did IIC raise the possibility that the

claimed negligent acts took place in Illinois and that at no time

before the present appeal did IIC allege negligent omissions on

the part of appellees. As mentioned in note 4 supra, this Court

herein affirms the grant of summary judgment even in the face of

appellant's additional contentions and therefore regards

appellees' motion to strike as moot. 

9

interest in this litigation in that the underlying transaction

giving rise to this action occurred within its borders and at least

some of the negligent acts or omissions alleged against appellees

transpired there as well. Finally, Illinois can demonstrate an

interest in applying its statute of limitations in the light of the

domiciles there of appellees and of the possibility that some of

the allegedly negligent acts and/or omissions took place, at least

in part, in that jurisdiction.10 Additionally, IIC asserts an

Illinois interest, which it contends is reflected in the statute of

limitations, in regulating its attorneys and preventing misconduct.

That assertion will be discussed infra in the context of weighing

the competing interests.

It seems apparent from the foregoing summary discussion that

this case involves a "true conflict," Liew, 685 F.2d at 1196, and

therefore requires an evaluation of which state's interest would be
 

11However, that interest seems to apply most strongly in

cases of individual plaintiffs who seek recompense for some

personal injury, rather than in situations involving a corporate

plaintiff, as is the situation herein. See note 9, supra. 

10

most impaired by the application of another state's statute.

III.

California seems to manifest countervailing considerations in

the within case which tug in both the directions of applying its

own statute of limitations and of utilizing that of Illinois. For

example, California's imputed desire to assist its resident

plaintiffs in achieving recompense for their injuries, by applying

whatever statute would allow such recovery, militates in favor of

the use of the Illinois statute.11 Nevertheless, one of the primary

goals of a state's statute of limitations, i.e. the diminution of

burdens upon that state's courts stemming from the prosecution of

old claims, see, e.g., Ledesma, 816 F.2d at 485, as well as

California's status as the forum state, cuts even more strongly in

favor of applying the California statute. See Rosenthal v. Fonda,

862 F.2d 1398, 1402 (9th Cir.1988); In re Yagman, 796 F.2d 1165,

1171 (9th Cir.1986), cert. denied, 484 U.S. 963, 108 S.Ct. 450, 98

L.Ed.2d 390 (1987); American Bank of Commerce v. Corondoni, 169

Cal.App.3d 368, 215 Cal.Rptr. 331, 333 (1985).

Texas, despite appellant's vigorous assertions to the

contrary, possesses a powerful interest in encouraging the use of

its statute in this case. The underlying acts from which the

claims of legal malpractice arose, namely the Frisco transactions

between IIC and Box, took place in Texas. The land used as
 

12Stavriotis v. Litwin, 710 F.Supp. 216 (N.D.Ill.1988),

aff'd, Carmel v. Clapp & Eisenberg, P.C., 960 F.2d 698 (7th

Cir.1992), is of little or no aid to appellant herein. In that

case, the court determined that the failure to act giving rise to

the suit by a former client against his attorneys should be

attributed to New Jersey, which was the location of defendants'

law offices. See id. at 219. Defendants in Stavriotis admitted

that they provided most services to plaintiff at their New Jersey

office and were licensed to practice only in New Jersey. The

court in that case stated that, under the "most significant

relationship" test which the court employed as its choice-of-law

analysis, the place with "the most significant relationship to

this action is the place where the conduct causing the injury

occurred." Id. Also in Stavriotis, the New Jersey legal

malpractice limitations period was six years, and the Illinois

period was five years, rendering the Illinois Borrowing Act,

which permitted the use of a foreign statute under certain

circumstances, inapplicable by its own terms because the

otherwise applicable foreign (New Jersey) statute was longer, not

shorter, than that of Illinois. Id. at 219-20. 

11

collateral was located there, extensive negotiations took place

there, and the closing documents were signed in Texas. More

importantly, many of the alleged acts which IIC claims constituted

malpractice by appellees took place in Texas. Although the

telephone calls rendering legal advice to appellant during its

negotiations with Box appear to have originated in Chicago, the

advice was received and discussed in Texas, and the injury

effectively seems to have been completed in Texas.12 Appellees, by

venturing into the legal market in Texas through their involvement

in Texas-based transactions, and by undertaking to represent a

California corporation as client, subject themselves to the laws of

those states. In this case, such redounds to their benefit.

The Ninth Circuit, in Yagman, 796 F.2d at 1170-71, utilized a

similar analysis in determining the locus of the action in that

case. In so doing, the Ninth Circuit, in construing California's
 

13Of course, appellants maintain that one of Illinois's

principal interests arises from its legitimate purpose of

regulating its own attorneys. That contention is discussed

infra. 

 

14Becker did not involve a statute of limitations question. 

12

choice-of-law approach in a defamation case which did not involve

a statute of limitations, stated that, even though the alleged

defamatory remarks were made by New York defendants in New York,

they were tied more closely to California, the home of the

plaintiffs, as "it is the state where the damage to plaintiffs'

reputations, if any, would have occurred.... New York has

"absolutely no interest in the reputation of a California citizen.'

" Yagman, 796 F.2d at 1171 (quoting transcript in that case).

Similarly here, the damage was incurred by a California plaintiff,

IIC, and stemmed from a Texas transaction; it bore little relation

to Illinois.13

"Texas also has an overriding interest in governing the

conduct of persons situated within its borders. Moreover, persons

within Texas, regardless of whether or not they are citizens, have

a right to rely on and to act in conformity with Texas' laws.

Hence, Texas has a real interest in seeing its laws applied."

Becker v. Computer Sciences Corp., 541 F.Supp. 694, 705

(S.D.Tex.1982).14 In the case at bar, the advice, or lack thereof,

provided by appellees centered around a transaction in Texas for a

client who, during the period in question, was visiting Texas in

order to consummate or to terminate the deal and therefore

implicates substantial interests of that state.
 

15In fact, appellees, in their brief filed with this Court

refer to certain portions of the legislative history of the newly

enacted statute as probative evidence that the change was

motivated by concerns over the perceived ill effects of excessive

malpractice liability and was intended to shelter attorneys from

stale claims and the public from increased attorney fees

associated with excessive malpractice premiums. See Illinois

13

Finally, Illinois does possess an interest of its own in the

instant proceedings, since Illinois, as do all states, has an

interest in regulating its attorneys. See, e.g., Waggoner, 991

F.2d at 1508; Santos v. Sacks, 697 F.Supp. 275, 284 (E.D.La.1988).

Nonetheless, the question remains as to whether Illinois sought to

accomplish that goal through its statute of limitations. The fact

that, until recently, Illinois did not possess a statute of

limitations specifically addressed to cases of legal malpractice is

not fatal to appellant's claim; Illinois courts apparently have

construed that state's general statute dealing with unwritten

contracts to apply to cases of legal malpractice since at least

1912, see Maloney v. Graham, 171 Ill.App. 409 (1912), and that

judicial construction, left undisturbed by the legislature, fairly

can be said to reflect legislative intent in that respect. See

Miller v. Lockett, 98 Ill.2d 478, 75 Ill.Dec. 224, 227, 457 N.E.2d

14, 17 (1983). In any event, appellant offers no evidence that a

motivation to regulate the Illinois bar underlay either the old or

the new Illinois statute; in fact, that new statute shortens the

amount of time during which an aggrieved client may bring suit

against an allegedly remiss attorney, indicating that the statute

perhaps was impelled by factors other than a desire to extend

greater protection to the public from errant lawyers.15
State Senate, 86th General Assembly, 106th Legislative Day, at

33-34 (June 21, 1990) (statements of Sens. Marovitz and

Barkhausen). The cited history also reveals that the new statute

was proposed by the Illinois State Bar Association. Id. While

that fact in itself is not controlling, appellant has not

proffered any legislative history surrounding the adoption of the

new statute which affirmatively supports its position that a

desire further to regulate the bar was a purpose of the law. 

14

Some of the acts by appellees of which appellant complains, as

well as appellees' purported failure to act, may, of course, be

attributable to the home office of appellees in Illinois. However,

as explained supra, the bulk of such attribution seems to lie more

appropriately with Texas or California. Accordingly, we look to

California or Texas, rather than to Illinois, law as the governing

law in this case.

IV.

Having decided that either the California or Texas limitations

statutes apply, we now must ascertain when appellant sustained

damages from appellees' asserted misconduct so as to trigger the

running of one or both of those statutes, in order to determine

whether the district court below correctly concluded that, under

either statute, appellant's claim is barred as untimely.

IIC insists that it suffered no damage until Box and the other

companies defaulted upon the notes, at which time ICC was forced to

pay the entire $120 million. Appellees offer several alternative

trigger dates, including the date upon which IIC entered into the

allegedly faulty agreement with Box and his affiliated companies,

either because of the mere act of signing that agreement or due to

the immediate financial harm incurred by IIC as a result of that
 

16That category of harm encompasses the insufficiency of the

collateral; the failure of appellees to ensure that Box was

required to use the funds generated from the transaction to

improve and/or to develop the Frisco collateral; the lack of

recourse to, or indemnity from, Box or any of his companies; the

generally riskier nature of IIC's guarantee as a result of the

above-listed deficiencies; and the consequent drop in value of

the guarantee on the reinsurance market. 

15

agreement16; the date IIC began accumulating legal and other fees

as a result of its investigations, which included an examination of

the Frisco transaction; the closing of IIC's financial guarantee

operations; and the establishment of a reserve by IIC's parent,

Crum & Forster, in part to protect against future liability in

connection with the Frisco deal.

Appellant brought suit in the within action on April 6, 1989.

Accordingly, if appellees correctly have identified any of the

above events as trigger dates for the limitations period, IIC's

claims would be barred under both the Texas and California

statutes, as all of the listed events transpired before April 1987.

Both California and Texas apply similar rules to determine

when a cause of action accrues for purposes of application of their

respective statutes of limitations. For ease of analysis, we take

up each in turn.

V.

California law provides in pertinent part:

(a) 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.... The period shall be tolled during the time that any
 

17As the district court noted in its Memorandum Order

granting summary judgment to appellees, "IIC does not dispute

that it had knowledge of the facts upon which its claim of

negligence is based in 1984, or at the latest in 1986, after IIC

had at least twelve attorneys investigate the transaction." 

Consequently, in order to escape proscription under the statute,

because IIC discovered the alleged negligence more than one year

before filing suit, IIC must demonstrate that no actual injury

occurred until a later date. 

16

of the following exists:

(1) The plaintiff has not sustained actual injury.

Cal.Civ.Proc.Code § 340.6(a) (West 1982).

In this case, appellant contends that no "actual injury"

arose until it was forced to pay in October 1988 (less than a year

before appellant instituted this case in April 1989) the $120

million it had guaranteed under the promissory notes.17

Ordinarily, the determination of the time when a

plaintiff suffered damages giving rise to a cause of action

for attorney malpractice is a question of fact, but where

there are no triable issues of fact as to when the plaintiff

suffered such damage then a court may determine this as a

matter of law.

Johnson v. Simonelli, 231 Cal.App.3d 105, 282 Cal.Rptr. 205, 208

(1991).

A determination of actual injury does not require that the

amount of said damages be ascertained, nor is it " "necessary that

all or even the greater part of the damages have to occur before

the cause of action arises.' " United States v. Gutterman, 701

F.2d 104, 106 (9th Cir.1983) (quoting Bell v. Hummel and Pappas,

136 Cal.App.3d 1009, 186 Cal.Rptr. 688, 694 (1982)); see also

Davies, 125 Cal.Rptr. at 713, 535 P.2d at 1169; Budd v. Nixen, 6

Cal.3d 195, 98 Cal.Rptr. 849, 852, 491 P.2d 433, 436 (1971). "[I]t
17

is the fact and knowledge of damage and not the amount thereof that

is required to prove actual injury." Bennett v. McCall, 19

Cal.App. 4th 122, 23 Cal.Rptr.2d 268, 271 (1993) (citing Laird v.

Blacker, 2 Cal.4th 606, 7 Cal.Rptr.2d 550, 553, 555, 828 P.2d 691,

694, 696 (1992), modified, 2 Cal. 4th 1253, cert. denied, --- U.S.

----, 113 S.Ct. 658, 121 L.Ed.2d 584 (1992)). The injury must be

"objectively existing and not feigned or merely speculative, real

and not imagined.... Asked differently, the question is whether we

can say that, as of the relevant date, a reasonable person would

have considered the injury to be real." Laird v. Blacker, 279

Cal.Rptr. 700, 710 (Cal.App.1991), aff'd, 2 Cal.4th 606, 7

Cal.Rptr.2d 550, 828 P.2d 691 (1992).

The payments by IIC of attorney fees and other costs in

connection with its investigation of the Frisco transaction and of

possible litigation in connection therewith seem the most

persuasive examples of the occurrence of actual harm that was

suggested by appellees. See Sirott v. Latts, 6 Cal.App.4th 923, 8

Cal.Rptr.2d 206, 209 (1992). Appellant raises two objections with

regard to considering those fees as harm sufficient to trigger the

limitations period. First, IIC claims that, because it received

approximately $4.5 million in premium payments prior to the

attorney-fee and investigative payments, it suffered no net loss in

connection with the notes until after the default and thus cannot

be considered to have incurred actual harm until that time. See,

e.g., Heckert v. MacDonald, 208 Cal.App.3d 832, 256 Cal.Rptr. 369,

372-73 (1989) (labeling that principle the " "special benefit'
 

18Appellant correctly notes that "[t]he decision of an

intermediate appellate state court guides, but is not necessarily

controlling upon, the federal court when determining what the

applicable state law is." Wood v. Armco, Inc., 814 F.2d 211, 213

n. 5 (5th Cir.1987). However, in this case, we see no reason to

depart from the reasoning of the intermediate court. See 32

Am.Jur.2d Fed.Pract. & Proced. § 296 (1982) (footnotes omitted):

In determining the law of a state, a federal court

looks to the decisions of the lower state courts as

well as to those of the state's highest court.... [A]

federal court is not free to reject the state rule

merely because it has not received the sanction of the

highest state court, even though the federal court

thinks that the rule is unsound in principle or not the

better rule. 

18

doctrine"). However, in Sirott, the Court of Appeal of California

expressly rejected that argument in connection with a limitation

issue in a case involving attorney fees incurred as a result of

alleged malpractice.18 See Sirott, 8 Cal.Rptr.2d at 209 (stating

that "[a] client suffers damage when he is compelled, as a result

of the attorney's error, to incur or pay attorney fees," even

though those fees "did not exceed the ... premium plaintiff would

have been required to pay had he not followed defendants' advice").

Second, IIC states that attorney fees are not recoverable

pursuant to California law in this case, thereby eliminating them

from consideration as actual harm. IIC contends that only fees

arising under what it terms the third-party tort exception, i.e.,

when "a defendant has wrongfully made it necessary for a plaintiff

to sue a third person," may be recovered under California law, not

fees incurred in the "ordinary two-party lawsuit." Prentice v. N.

American Title Guaranty Corp., 59 Cal.2d 618, 30 Cal.Rptr. at 823,

381 P.2d 645, 647 (1963). We agree that if IIC, in fact, were
 

19Appellant, in its brief filed with this Court, describes

those costs as follows:

In 1985 and 1986, employees of IIC and its parent

corporations, along with outside attorneys, examined

and investigated a number of the financial guarantees

issued by IIC, including the Frisco Policies.... Their

purpose was to learn more about the status and value of

IIC's collateral, to determine whether IIC's rights had

been abused in the Transaction and to assess the

likelihood of a future claim under the Policies. The

review also examined Chapman's role in the Frisco

Transaction and potential, related litigation. 

19

unable to recover those fees from appellees, those fees would not

seem to represent actual harm sufficient to confer upon IIC a cause

of action and thereby to commence the limitations period. However,

that objection fails for two reasons. The general proscription

against recovery of fees appears to apply only in the context of

fees spent in connection with actual litigation, or at least in

contemplation thereof. See, e.g., UMET Trust v. Santa Monica

Medical Investment Co., 140 Cal.App.3d 864, 189 Cal.Rptr. 922, 927

(1983); Prentice, 30 Cal.Rptr. at 823, 381 P.2d at 647. Some of

the expenditures by IIC involved the allocation of non-attorney

employees to investigative tasks, and those costs, as well as

others, do not seem to have been solely litigation-related in

nature.

19 Furthermore, if any of those fees were spent for the

purpose of evaluating possible litigation against Box and its

affiliates, or against IIC's agent, FGC Services, those fees indeed

may fall within the third-party tort exception, as the contemplated

litigation would have been necessary only as a result of appellees'

negligent conduct. cf. UMET Trust, 189 Cal.Rptr. at 927 (holding

that when a lawsuit by a claimant against a third party "was not
 

20Because we conclude that those fees and related expenses

suffice as actual harm suffered by IIC, we need not further

consider the validity of the other examples proffered by

appellees. 

 

21Texas law, like that of California, follows a "discovery

rule" for purposes of the statute of limitations. In re

Gleasman, 933 F.2d 1277, 1281 (5th Cir.1991). "[T]he limitations

period begins to run when the plaintiff discovers or, in the

exercise of reasonable diligence, should have discovered the

injury." Id. Thus, in order to contest preclusion under the

Texas statute, appellant must demonstrate that, despite

appellant's knowledge of the alleged malpractice not later than

1986, no legal injury occurred until the default of the notes

which did not occur until less than one year before appellant

instituted this action in the California state court. See note

17, supra. 

20

compelled or required ... to protect its own interests because of

the wrongdoing of" the attorney, the third-party tort exception

does not apply).

For the foregoing reasons, we locate the beginning of the

"actual harm," suffered by appellant under California law because

of appellees' allegedly deficient legal advice, with the time when

the investigative and legal fees and expenses were incurred by

appellant during 1985 and 1986.20

VI.

 In Texas, "[t]he prevailing view is that a cause of action

for legal malpractice is in the nature of a tort and is thus

governed by the two-year limitations statute." Black v. Wills, 758

S.W.2d 809, 814 (Tex.App. Dallas 1988); see also Willis v.

Maverick, 760 S.W.2d 642, 644 (Tex.1988). A plaintiff must suffer

a "legal injury" before a cause of action accrues.21 Zidell v.

Bird, 692 S.W.2d 550, 555 (Tex.App. Austin 1985). "The fact that

damage may continue to occur for an extended period ... does not
 

22Appellant's reliance upon the cases of Hughes v. Mahaney

and Higgins, 821 S.W.2d 154 (Tex.1991), Aduddell v. Parkhill, 821

S.W.2d 158 (Tex.1991), cert. denied, --- U.S. ----, 112 S.Ct.

2998, 120 L.Ed.2d 874 (1992), and Gulf Coast Investment Corp. v.

Brown, 821 S.W.2d 159 (Tex.1991), is misplaced. Those decisions

together set forth the proposition "that when an attorney commits

malpractice in the prosecution or defense of a claim that results

in litigation, the statute of limitations on the malpractice

claim against the attorney is tolled until all appeals on the

underlying claim are exhausted." Hughes, 821 S.W.2d at 157. 

Gulf Coast applied that stay in the limitations period to include

wrongful foreclosure actions brought against the client as a

result of the attorney's malpractice. See Gulf Coast, 821 S.W.2d

at 160. The Supreme Court of Texas, in Hughes, explained the

rule as stemming from the desire to allow the client to avoid

"adopting inherently inconsistent litigation postures in the

underlying case [against the third party] and in the malpractice

case." Hughes, 821 S.W.2d at 156. In this case, no litigation

between IIC and any of the other parties to the Frisco

transaction has transpired, so cases such as Hughes seem

inapplicable herein. See Hoover v. Gregory, 835 S.W.2d 668, 675

(Tex.App. Dallas 1992, writ denied) (commenting that "[w]e

interpret Hughes narrowly as controlling in legal malpractice

cases when a malpractice suit is brought against an attorney in

the course of litigating the complainant's underlying claim ")

(emphasis added). 

21

prevent limitations from starting to run. Limitations commences

when the wrongful act occurs resulting in some damage to the

plaintiff." Murray, 800 S.W.2d at 828 (emphasis added).22

In Atkins v. Crosland, 417 S.W.2d 150, 153 (Tex.1967), the

Supreme Court of Texas stated that "a cause of action sounding in

tort accrues ... notwithstanding the fact that the damages, or

their extent, are not ascertainable until a later date" and quoted

with approval from 54 C.J.S. Limitations of Actions § 168, pp. 122-

123, the maxim that "the cause of action accrues, and the statute

[of limitations] begins to run, when, and only when, the damages

are sustained." See also Cal. Fed. Mortgage Co. v. Street, 824

S.W.2d 622, 627 (Tex.App. Austin 1991, writ denied); Zidell, 692
 

23See note 19, supra. 

 

24We note that Texas law may treat the mere act of signing

the agreements in the Frisco transaction as injury sufficient to

begin the limitations period. See American Medical Electronics,

Inc. v. Korn, 819 S.W.2d 573, 578 (Tex.App. Dallas 1991, writ

denied) (asserting that "[t]he initial damage to [plaintiff],

although perhaps nominal, occurred when its right to receive

professional and complete advice from its attorneys was violated"

in connection with plaintiff's decision to sign an assignment

agreement, and stating that limitations began to run when

plaintiff discovered that the advice it had received was

erroneous); see also Zidell, 692 S.W.2d at 558 (asserting that

plaintiffs' cause of action against attorney accrued when

plaintiffs acted upon the negligent advice of counsel and signed

a contract which "irrevocably" prevented them, "if called upon to

do so," from performing an earlier contractual obligation); cf.

Hoover, 835 S.W.2d at 673 (construing Atkins and subsequent case

law to focus upon "creation and notice of a risk of harm, not a

finally established or inevitable harm"). 

22

S.W.2d at 558. Nor does Peterson v. Dean Witter Reynolds, Inc.,

805 S.W.2d 541, 549 (Tex.App. Dallas 1991), in which clients were

denied the right to recover attorney fees "expended in prior

litigation with third parties," appear to prevent the fees in this

case from constituting actionable injury. At least a portion of

the fees incurred by IIC appear to have been non-legal in nature,

and another segment of the costs do not seem to have been part of

any litigation or anticipated litigation.23 In that context, IIC's

payments of investigative fees and related costs in 1985 and 1986

provide a sufficient trigger for the Texas statute, as well as for

the California statute.24

VII.

IIC's investigative expenditures and related costs, incurred

during the period of 1985-1986, comprised "actual harm" and "legal

injury" sufficient to commence the running of each and both of
23

California's and Texas's limitations periods. Accordingly, because

appellant's cause of action was foreclosed by both states' statutes

of limitations, and because we deem said statutes, rather than that

of Illinois, to be applicable in this case, we hereby affirm the

grant of summary judgment by the district court below in favor of

appellees.

AFFIRMED.