Opinion ID: 2614021
Heading Depth: 1
Heading Rank: 5

Heading: Actual Injury

Text: (2a) Niles contends that the better rule in transactional malpractice cases is stated in several Court of Appeal cases concluding that actual injury under section 340.6 (a)(1) occurs when the former client as plaintiff incurs attorney fees either in defending the adequacy of the documentation in the third party action or in defending its reliance on the allegedly negligent attorney in that action. Once attorney fees have been incurred, asserts Niles, the former client has discovered the fact of damage that triggers the running of the limitations period of section 340.6. Niles relies on several appellate cases to support his contention, including Sirott v. Latts (1992) 6 Cal. App.4th 923 [8 Cal. Rptr.2d 206] (hereafter Sirott ), Johnson v. Sionelli (1991) 231 Cal. App.3d 105 [282 Cal. Rptr.2d 205] (hereafter Johnson ), Kovacevich v. McKinney & Wainwright (1993) 16 Cal. App.4th 337 [19 Cal. Rptr.2d 692] (hereafter Kovacevich ), and Hensley v. Caietti (1993) 13 Cal. App.4th 1165 [16 Cal. Rptr.2d 837] (hereafter Hensley ). As the Court of Appeal below observed, however, these cases were either wrongly decided, can be distinguished from the present case or are consistent with it. In Sirott, supra, 6 Cal. App.4th 923, defendant attorneys negligently advised the plaintiff, a physician, that he did not have to purchase a specific type of specialized medical malpractice insurance. The plaintiff was later sued for medical negligence and, as of January 1988, had incurred legal fees in an amount less than the $50,000 premiums he would have paid had he purchased the specific malpractice insurance. The physician's attempt to reinstate his insurance was unsuccessful: an arbitrator held that the insurer was not obligated to defend or indemnify plaintiff in the medical malpractice action. A judgment confirming the arbitration award was entered in January 1988. Because he had no insurance coverage, the physician was forced to defend and settle the malpractice claim against him at his own expense. Over two years later, in January 1990, the physician sued the attorneys who advised him not to purchase the malpractice insurance. The Court of Appeal affirmed the trial court's judgment sustaining defendants' demurrer based on section 340.6, on the ground that plaintiff sustained actual damage as a result of the attorneys' malpractice on entry of the judgment confirming the arbitration award in January 1988. It was at this point, the court reasoned, that it was judicially determined that plaintiff was not entitled to [the specialized] malpractice insurance coverage, and he was compelled to pay the expenses of defending the medical malpractice action regardless of the outcome of that action. ( Sirott, supra, 6 Cal. App.4th at pp. 929-930, italics added.) Relying on Sirott, Niles asserts that ITT suffered actual injury when it was forced to incur legal fees in order to defend the negligently prepared documents in the adversary proceeding. As plaintiff observes, however, Niles ignores a key factor in that case. In Sirott, if the plaintiff had been successful at the arbitration regarding his insurance coverage, the advice rendered by the attorney would have been correct, and no actionable malpractice would have been committed. The resolution of the arbitration necessarily included a determination regarding the attorney's advice. Therefore, the Sirott court correctly concluded that the physician's cause of action for legal malpractice accrued on entry of the adverse judgment of arbitration. The Sirott court did not hold that the legal fees incurred in litigating the arbitration proceeding itself represented sufficient actual injury. The legal malpractice action was held to accrue once the arbitration judgment was entered. In the present case, the adversary proceeding is analogous to the arbitration in Sirott. Here, there was no indication the attorney's alleged negligent preparation of documents would cause ITT loss until it was forced to settle on adverse terms with its debtor. ITT incurred legal fees in defending its former attorney's actions in negligently drafting the loan documents, just as the doctor in Sirott incurred legal fees in defending his attorney's advice during the coverage dispute eventually resolved against him in the arbitration proceeding. As in Sirott, these initial legal fees incurred by ITT were not sufficient actual injury within the meaning of section 340.6(a)(1) because at the time the proceeding was filed and ITT hired counsel to defend the loan documentation, there was no actual harm attributable to malpractice. The statute of limitations remained tolled until ITT suffered an actual loss attributable to its attorney's alleged malpractice, that is, when it was forced to accept an unfavorable settlement of the adversary proceeding. Niles also relies on Johnson, supra, 231 Cal. App.3d 105, in which the court held the former client suffered actual injury under section 340.6 (a)(1) when buyers defaulted on a promissory note that was secured by inadequate and defective collateral. The promissory note had been prepared by the former attorney. The Johnson court reasoned that the inadequate security created a potential for injury that was realized once the buyers defaulted on the promissory note. The court stated: Hence, at the time of default on the note if the security was adequate, plaintiff had no cause of action; if the security was inadequate actual injury occurred and the statute of limitations commenced running. ( Johnson, supra, 231 Cal. App.3d at p. 110.) Because the buyers defaulted on the note in July 1983, more than one year prior to the filing of the malpractice action in December 1985, the Johnson court concluded the action was barred by section 340.6. ( Johnson, supra, 231 Cal. App.3d at p. 110.) In our view, the Johnson court erred in determining that actual injury occurred when the buyers defaulted on the promissory note in July 1983. In Johnson, the plaintiff was injured not by the promissory note itself; rather he was injured by the inadequacy of the collateral securing the note. Thus, the plaintiff suffered actual injury in Johnson at the time of the sale of the collateral for less than the balance due on the note in June 1984. ( Johnson, supra, 231 Cal. App.3d at p. 108.) Because the sale of collateral occurred more than one year prior to the filing of his complaint for legal malpractice in December 1985, the action was time barred by the limitations period of section 340.6. To the extent the Johnson court analysis is inconsistent with our analysis herein, it is disapproved. Niles's reliance on Kovacevich, supra, 16 Cal. App.4th 337, is also misplaced. There, Kovacevich was an investor in a joint venture and member of an organizing committee formed to establish a bank. On the advice of his counsel, Kovacevich signed a personal guaranty for notes securing the lines of credit to establish the new bank. After the new bank defaulted on the notes, the lending institution filed a complaint against the bank and its investors, seeking damages for breach of the line of credit notes and for breach of the continuing guaranties. In December 1984, when Kovacevich was served with the lending institution's action, he hired independent counsel, not to challenge the claim that he was personally liable on the notes, but to mitigate his losses by arranging matters so that he could sue some of his fellow investors and the original lawyers as well. This new counsel advised Kovacevich that his original attorneys had given him negligent advice pertaining to the legal import of a continuing personal guaranty and to the liability of the other organizers on the notes, and had failed to obtain contribution agreements from the organizers who were not liable under the notes. Cal-Farm Insurance Company insured Kovacevich under a general liability policy covering the investors. The insurer agreed to pay Kovacevich's new attorney. The lending institution selected Kovacevich as its target defendant, obtained a writ of attachment against his land holdings and later, in June 1985, obtained summary judgment against him in the sum of $927,000. Kovacevich paid the judgment and in March 1986, filed a legal malpractice action against his original counsel based on counsel's failure to give Kovacevich adequate legal advice and failure to obtain contribution agreements. The Kovacevich court affirmed summary judgment against Kovacevich on the ground that the statute of limitations for the legal malpractice action barred the suit. The court determined that Kovacevich suffered actual injury under section 340.6 (a)(1) when he incurred legal fees after hiring the second law firm to mitigate the harm caused by the original malpractice, because that was the point when Kovacevich accepted the adverse position in which his former counsel had placed him. We conclude the Kovacevich court erred and its holding should be disapproved. In our view, Kovacevich did not suffer actual injury within the meaning of section 340.6 until June 1985, when summary judgment was entered against him. As the Court of Appeal below observed, the Kovacevich analysis produces a result against public policy and ignores Laird's critical distinction between the fact and knowledge of damage, and the amount of damage. ( Laird, supra, 2 Cal.4th at p. 615, italics in original; see also Budd v. Nixen, supra, 6 Cal.3d 195 [cause of action for legal malpractice accrues when client discovers or should discover facts essential to malpractice action, and suffers appreciable and actual harm from malpractice].) Therefore, to the extent that Kovacevich can be interpreted to hold that the mere accrual of the obligation for attorney fees is sufficient to trigger the statute of limitations, it is disapproved. Niles also relies on Hensley, supra, 13 Cal. App.4th 1165. There, the plaintiff was represented in a marital dissolution by the defendant attorney. After a settlement conference on September 1989, the parties and their counsel asked the court to record a stipulated settlement agreement allocating property and debts, providing for equalization payments, waiving spousal support, and obligating each party to execute implementing documents. After examining the parties under oath, the court approved the stipulation, informed them that the settlement was effective immediately, and directed husband's attorney to prepare the judgment. The Hensley plaintiff later refused to agree to the proposed judgment and discharged defendant as her attorney. The plaintiff's new counsel moved unsuccessfully to set aside the stipulated settlement agreement. The judgment of dissolution incorporating the settlement agreement was entered in October 1990. The plaintiff filed her legal malpractice action in November 1990. The trial court granted summary judgment for the defendant on the ground that the one-year statute of limitations of section 340.6 had run because the plaintiff suffered actual injury at the time she stipulated to the settlement. The Court of Appeal affirmed, concluding that the statute of limitations was not tolled by defendant's continuing representation of the plaintiff. The court reasoned that such representation ceased when the plaintiff asked new counsel to represent her, not when the defendant signed the substitution of attorney. The court concluded that the statute was not tolled until the judgment of dissolution, and agreed with the trial court that the plaintiff suffered actual injury when she stipulated to the settlement agreement. Contrary to Niles's contention, Hensley is distinguishable on its facts. In Hensley, the stipulation to the marital settlement agreement acted immediately to deprive the plaintiff of certain property. Thus, once the stipulation was entered by the court, the plaintiff suffered actual injury under section 340.6 (a)(1). (See also Bennett v. McCall (1993) 19 Cal. App.4th 122, 127 [23 Cal. Rptr.2d 268] [plaintiff suffered actual harm when he entered into binding marital settlement agreement and hired new counsel in attempt to correct alleged inequities in agreement].) By contrast, as noted above, ITT did not suffer actual injury until it entered into the adverse settlement agreement with the debtor. In essence, the Hensley final settlement agreement, like the ITT settlement agreement with the debtor, acted as the benchmark from which the plaintiff could sue for legal malpractice, for that is the point the malpractice was both discovered and confirmed and the plaintiff was damaged. Such a holding is consistent with our observation in Laird that the focus of section 340.6 is on discovery of the malpractice and actual injury, not success on appeal or proof of the total amount of monetary damages suffered by the former client. ( Laird, supra, 2 Cal.4th at p. 614.) In a related context, Niles asserts that the pre- Laird case of Horne v. Peckham (1979) 97 Cal. App.3d 404 [158 Cal. Rptr. 714] supports his contention that the statute of limitations for legal malpractice should commence at the point the former client incurs attorney fees defending the documentation drafted by the former attorney. In Horne, an attorney was sued for malpractice after negligently drafting an irrevocable trust and a license agreement for Horne's three sons. The negligence cost the plaintiffs substantial additional taxes assessed by the Internal Revenue Service in August 1970, because the trust failed to transfer tax liability for the licensor's income to the trust beneficiaries. The plaintiffs hired independent counsel to contest the assessment, but after losing at the administrative level conceded the tax liability. In 1972, the plaintiffs brought a malpractice action against the lawyer who drafted the trust and license agreement. The defendant asserted the cause of action for malpractice was barred by the limitations period for malpractice actions, which at that time was two years, (former § 339, subd. (1)), and claimed the statute of limitations commenced when the plaintiffs paid the defendant's bill for the legal work in creating the trust in 1967. The Court of Appeal disagreed, concluding that the cause of action for malpractice accrued when the trust was challenged and plaintiffs were forced to pay legal fees to defend the negligently drafted trust documents. ( Horne v. Peckham, supra, 97 Cal. App.3d at p. 417.) This statement in Horne, asserts Niles, supports his contention that in transactional malpractice cases, the cause of action for legal malpractice should accrue once the former client incurs attorney fees to defend the negligently drafted documents. We do not read Horne v. Peckham, supra, 97 Cal. App.3d 404, to stand for such a broad rule. The Horne court recognized that the plaintiffs learned of the malpractice when they were advised by the new attorney that they would have to pay additional taxes as a result of the deficiencies in the documents drafted by the defendant. Under former section 339, subdivision (1), the plaintiffs then had two years to file the malpractice action. The Court of Appeal simply concluded that the date on which the plaintiffs should have discovered the malpractice was a factual issue for the jury, and that there was substantial evidence to support the jury's finding of timeliness. The Horne court was not faced with the question, nor did the court specifically determine, whether actual injury occurred when the client incurred attorney fees, or after the trust was challenged. That determination was not necessary to the court's judgment. Accordingly, Horne is not helpful to Niles in creating a bright line rule that establishes the incurring of attorney fees as the event triggering the malpractice action in transactional malpractice cases. Nonetheless, to the extent the case can be so interpreted, it is disapproved. (3) Niles next asserts ITT admitted in its pleadings that it suffered actual injury when it hired an attorney to defend the adequacy of the negligently prepared documentation in an effort to mitigate its damages. Niles claims ITT's defense of the loan documentation in the adversary proceeding amounted to a judicial admission that is conclusive evidence that ITT had discovered the malpractice and suffered actual injury at the time it defended the adversary proceeding. (See, e.g., Troche v. Daley (1990) 217 Cal. App.3d 403 [266 Cal. Rptr. 34] [judicial admission in pleading is conclusive concession of truth of matter and has effect of removing it from issues in litigation].) Niles's contention is without merit. Section 340.6 provides that knowledge or discovery of malpractice is different from actual injury and both knowledge and actual injury must be present before a cause of action for legal malpractice will accrue. (§ 340.6 (a)(1).) Accordingly, ITT's statement in its pleadings that it defended the documentation in the adversary proceeding in an attempt to mitigate its damages may indicate that ITT discovered the potential malpractice at the time the adversary proceeding was filed, but did not conclusively establish or admit that ITT was actually damaged by the malpractice.