Opinion ID: 1426902
Heading Depth: 1
Heading Rank: 6

Heading: Reconciling Budd, Section 340.6, and Subsequent Case Law

Text: Jordache argues that several appellate decisions addressing section 340.6 support its view, while Brobeck's position is contrary to other decisions, including Adams, supra, 11 Cal.4th 583, 46 Cal.Rptr.2d 594, 904 P.2d 1205, International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606, 38 Cal.Rptr.2d 150, 888 P.2d 1279 ( Feddersen), and ITT Small Business Finance Corp. v. Niles (1994) 9 Cal.4th 245, 36 Cal.Rptr.2d 552, 885 P.2d 965(ITT). Jordache relies on Sirott v. Latts (1992) 6 Cal.App.4th 923, 8 Cal.Rptr.2d 206. There, the defendant attorneys allegedly advised a retiring doctor that he need not pay the required $50,000 premium for his medical malpractice insurer's tail coverage after his retirement. ( Id. at p. 926, 8 Cal.Rptr.2d 206.) The attorneys told the doctor the premium was unconstitutional and an unenforceable form of age discrimination. ( Ibid ) The doctor was sued later for medical malpractice. He had to use his own funds to retain defense counsel and to settle the suit in January 1990. ( Id. at p. 927, 8 Cal.Rptr.2d 206.) Meanwhile, the defendant attorneys unsuccessfully attempted to have the doctor's tail coverage reinstated and to have the required premium ruled an unconstitutional form of age discrimination. In August 1987, an arbitration award rejected the doctor's arguments and found the insurer had no duty to defend or indemnify him. A January 1988 judgment confirmed the arbitration award. The doctor sued the attorneys in January 1990, a few weeks after he paid the medical malpractice settlement. ( Id. at pp. 926-927, 8 Cal.Rptr.2d 206.) The Court of Appeal, following Budd, supra, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433, said the doctor sustained actual injury when he incurred attorney fees to defend the medical malpractice suit. ( Sirott v. Latts, supra, 6 Cal.App.4th at pp. 928-929, 8 Cal. Rptr.2d 206.) The doctor argued the attorney fees were not actual injury because they were less than the premium he would have paid if he had disregarded the negligent advice. The court rejected this novel and unsupported argument that actual injury can be negated by some form of offset ( Id. at p. 929, 8 Cal.Rptr.2d 206.) Sirott went on to comment that the doctor sustained another form of actual injury more than one year before he sued the attorneys. The court said that when the judgment confirmed the arbitration award, the doctor suffered damage at that point as well because he lost the right to malpractice insurance coveragethe subject of the allegedly negligent advice. ( Sirott v. Latts, supra, 6 Cal. App.4th at p. 929, 8 Cal.Rptr.2d 206.) However, contrary to Jordache's suggestion, Sirott does not support a general rule that judicial determinations are necessary precursors to actual injury. First, the court properly found under Budd that the doctor sustained actual injury for purposes of section 340.6 when he incurred costs to defend the medical malpractice action because he had no malpractice insurance. ( Sirott v. Latts, supra, 6 Cal.App.4th at pp. 928-929, 8 Cal.Rptr.2d 206; see Adams, supra, 11 Cal.4th at pp. 591, fn. 5, 46 Cal.Rptr.2d 594, 904 P.2d 1205 and accompanying text (lead opn. of Arabian, J.); id, at p. 597, 46 Cal. Rptr.2d 594, 904 P.2d 1205 (cone. opn. of Kennard, J.); cf. Walker v. Pacific Indemnity Co. (1960) 183 Cal.App.2d 513, 516, 6 Cal.Rptr. 924 [no injury when inadequate insurance coverage nevertheless provided defense of third party's claim].) Second, the attorneys' negligent insurance advice essentially was their prediction of how the insurer's right to the tail coverage premium, and the doctor's right to coverage without paying the premium, would be resolved if adjudicated. Thus, we view this aspect of the Sirott decision as an instance where the propriety of the attorney's advice or actions depended on the outcome of a claim by or against a client. (See Baltins v. James, supra, 36 Cal.App.4th at p. 1208,42 Cal.Rptr.2d 896.) In these circumstances, the claim may have to be resolved in order for the client to know that the attorney erred. The pertinent inquiry there may not be when the plaintiff sustained actual injury, but when the plaintiff discovered, or reasonably should have discovered, the facts constituting a wrongful act or omission. (§ 340.6, subd. (a).) In any event, the circumstances of Sirott do not support Jordache's claims of delayed actual injury. Jordache does not allege that Brobeck negligently predicted a future adjudication's result or otherwise advised Jordache incorrectly. Rather, Jordache alleges only omissionsa failure to investigate insurance issues or render any appropriate advice. Also, Jordache acknowledged it discovered Brobeck's alleged errors before it sued its insurers. Like the doctor in Sirott, Jordache incurred attorney fees because its attorneys' alleged errors caused it to forgo a primary benefit of a liability insurance policy. Sirott therefore does not support Jordache's assertion that its actual injury occurred only when it settled the coverage litigation. Jordache also refers to Foxborough v. Van Atta, supra, 26 Cal.App.4th 217, 31 Cal. Rptr.2d 525. The defendant attorney there allegedly failed to secure certain automatic development rights without time constraints in preparing an exchange agreement for property the plaintiff owned. ( Id. at p. 222, 31 Cal.Rptr.2d 525.) Instead, the development rights expired after three years, as a state regulation required. ( Id. at p. 223, 31 Cal.Rptr.2d 525.) The plaintiff then had to resort to a more onerous, expensive, and unpredictable course to pursue its development plans. The plaintiff also sued the other party to the exchange agreement, seeking damages for an alleged failure to notify the plaintiff the rights would expire. ( Ibid. ) The Court of Appeal held the plaintiff sustained actual injury when the development rights expired; the statute was not tolled until the plaintiff lost its suit against the other party. ( Id. at pp. 226-227,31 Cal.Rptr.2d 525.) Jordache finds it significant that Foxborough did not hold the plaintiff sustained actual injury when the exchange agreement became effective without unlimited automatic development rights. Jordache suggests Foxborough therefore supports the proposition that an immediate diminution of a right, such as the unlimited development right, is not actual injury. However, as Foxborough noted, the plaintiff could have exercised the development rights at any time during the initial three-year period. Thus, during that time, the attorney's alleged negligence created only the potential for harm. ( Foxborough v. Van Atta, supra, 26 Cal.App.4th at p. 227, 31 Cal.Rptr.2d 525.) The loss of the plaintiffs automatic development rights, and hence the actual injury, occurred when the three-year period expired. ( Ibid. ) Jordache also relies on Battins v. James, supra, 36 Cal.App.4th 1193, 42 Cal.Rptr.2d 896. The plaintiffs in that case, husband and wife, alleged the attorney negligently advised them about transferring and managing real property while the husband appealed an order setting aside his community property settlement agreement with his former wife. According to the complaint, the attorney told plaintiffs that, during the appeal, the husband could treat the property as if the order did not exist. The husband transferred a ranch to his new wife, although it was a community asset of his former marriage. He also spent more than $500,000 on properties he received under the former settlement agreement. He alleged he made the expenditures because the attorney told him he would receive either title to the properties or reimbursement. After the order was affirmed on appeal, the trial court entered a judgment finding the husband breached his fiduciary duties regarding the community property and denying most of the reimbursement credits he sought. ( Id. at pp. 1197-1199, 42 Cal.Rptr.2d 896.) In the legal malpractice action, the Court of Appeal concluded, Under the [plaintiffs'] allegations, any error in [the attorney's] advice was not determinable, and had no effect, until following his advice resulted in the adverse judgment in the dissolution action. [Citations.] ( Id. at p. 1208,42 Cal.Rptr.2d 896.) Jordache contends that, as in Baltins v. James, Brobeck's alleged negligence exposed Jordache only to a threat of injury that depended on the insurers' successfully raising the late notice defense. However, the alleged negligence in Baltins v. James was that the attorney predicted incorrectly how a court would resolve an issue in the future. Thus, the propriety of the legal advice, and hence the existence and effect of error, depended on the future resolution of the issue adversely to the client. ( Baltins v. James, supra, 36 Cal.App.4th at pp. 1196, 1208, 42 Cal.Rptr.2d 896; cf. Sirott v. Latts, supra, 6 Cal.App.4th at pp. 929-930, 8 Cal.Rptr.2d 206.) [9] By contrast, Brobeck's alleged professional negligence did not require an adjudication to indicate its existence. Jordache's claims against Brobeck do not require another proceeding to determine the propriety of affirmative advice or actions. Nor was this an instance where the alleged negligence would have no effect at all until a subsequent adjudication. Brobeck's neglect required Jordache to pay defense costs in the Marciano action for years and to lose investment opportunities for those funds. The alleged omissions also gave the insurers an objectively viable defense, which National Union raised immediately when it answered Jordache's complaint in the insurance coverage action. The circumstances Jordache alleges are not comparable to those of Baltins v. James, supra, 36 Cal.App.4th 1193, 42 Cal. Rptr.2d 896. Like the plaintiff in Sirott v. Latts, supra, 6 Cal.App.4th 923, 8 Cal. Rptr.2d 206, and unlike the plaintiffs in Baltins v. James, Jordache expended attorney fees as a direct result of its attorneys' alleged negligence well before the resolution of any collateral judicial action. Turning to the more recent decisions of this court, Jordache contends that interpreting actual injury to mean only the damage necessary to assert a cause of action would be contrary to ITT, supra, 9 cal.4th 245, 36 Cal.Rptr.2d 552, 885 P.2d 965, Feddersen, supra, 9 cal.4th 606, 38 Cal.Rptr.2d 150, 888 P.2d 1279, and Adams, supra, 11 cal.4th 583, 46 Cal.Rptr.2d 594, 904 P.2d 1205. As we have emphasized, Adams reaffirmed that Budd articulated the correct standard for determining actual injury under section 340.6. ( Adams, supra, 11 cal.4th at pp. 588-589, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (lead opn. of Arabian, J.); id. at p. 594, 46 Cal. Rptr.2d 594, 904 P.2d 1205 (cone. opn. of Kennard, J.).) Thus, Adams is entirely consistent with the rule that, under the Legislature's codification of Budd, actual injury occurs when the plaintiff sustains any loss or injury legally cognizable as damages in a legal malpractice action based on the acts or omissions that the plaintiff alleged. (See Adams, supra, 11 cal.4th at pp. 588-589, 46 Cal.Rptr.2d 594, 904 P.2d 1205; Budd, supra, 6 Cal.3d at pp. 200-202, 98 Cal.Rptr. 849, 491 P.2d 433.) We consider, then, whether the opinion in ITT is compatible with this rule. In ITT, the defendant attorney prepared a promissory note and loan documents to give the plaintiff lender various security interests. ( ITT, supra, 9 cal.4th at p. 248, 36 Cal. Rptr.2d 552, 885 P.2d 965.) A few years later, the borrower filed for bankruptcy and instituted an adversary proceeding that challenged the adequacy of the documents to protect the security interests. ( Ibid. ) The lender retained counsel to defend the documents' sufficiency in the adversary proceeding. The lender notified the attorney that it expected to be indemnified for losses attributable to negligence in preparing the loan papers; it also suggested that the attorney should notify his malpractice insurer. ( Id. at pp. 248-249, 36 Cal.Rptr.2d 552, 885 P.2d 965.) About two years later, the lender settled with the debtor and received less than the full value of its security. Two months after the settlement, the lender sued the attorney for negligence in preparing the loan documents. ( Id. at p. 249, 36 Cal.Rptr.2d 552, 885 P.2d 965.) The attorney argued that, in transactional malpractice actions, once the former client incurs attorney fees defending the attorney's work, it has discovered the fact of damage that triggers the running of the limitations period.... ( ITT, supra, 9 cal.4th at p. 251, 36 Cal.Rptr.2d 552, 885 P.2d 965, original italics.) Of course, discovery of damage is not a necessary component of actual injury under section 340.6, subdivision (a)(1). ( Foxborough v. Van Atta, supra, 26 Cal.App.4th at p. 227, 31 Cal.Rptr.2d 525.) In ITT, the lender alleged that it incurred attorney fees in an effort to protect its security interests and to mitigate its damages. ( ITT, supra, 9 Cal.4th at pp. 252, 257, 36 Cal.Rptr.2d 552, 885 P.2d 965.) Nevertheless, the court did not acknowledge that these attorney fees, incurred to defend negligently prepared documents and reduce the alleged error's effects, constituted actual injury. ( Id. at p. 253, 36 Cal.Rptr.2d 552, 885 P.2d 965.) Instead, the court declared a broad, categorical rule: [I]n transactional legal malpractice cases, when the adequacy of the documentation is the subject of dispute, an action for attorney malpractice accrues on entry of adverse judgment, settlement, or dismissal of the underlying action. It is at this point that the former client has discovered the fact of damage and suffered `actual injury' due to the malpractice under section 340.6. ( ITT, supra, 9 Cal.4th at p. 258, 36 Cal.Rptr.2d 552, 885 P.2d 965, original italics.) In ITT and again in Adams, this court described ITT as presenting a narrow holding restricted to the circumstances of that case. ( ITT, supra, 9 Cal.4th at p. 258, 36 Cal.Rptr.2d 552, 885 P.2d 965; Adams, supra, 11 Cal.4th at p. 588, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (lead opn. of Arabian, J.).) We are now convinced, however, that the rules ITT advanced cannot be reconciled with the particularized factual inquiry required to determine actual injury under section 340.6 in accord with Budd, Adams, and our decision in this case. The Legislature, by codifying the rule established in Budd, supra, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433, did not toll the limitations period to await preordained configurations of injury. The facts of each case must be examined in light of the specific attorney errors the plaintiff in each case alleges. Consequently, the rule that applies when a plaintiff sustains actual injury from malpractice in transactional matters cannot differ from the rule that applies when claims involve other areas of legal advice and services. The resolution of litigation related to alleged malpractice may or may not mark the point at which a plaintiff first sustains actual injury under section 340.6. The statutory scheme cannot accommodate a peremptory rule that declares otherwise. Accordingly, because ITT employed criteria for determining actual injury under section 340.6 that conflict with the principles reaffirmed in this opinion, we overrule it. Jordache misconceives Feddersen by attempting to apply that case to an analysis of section 340.6. As Adams noted, Feddersen presented specialized circumstances and did not articulate a rule of broad or general applicability. ( Adams, supra, 11 Cal.4th at p. 588, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (lead opn. of Arabian, J.); id at pp. 595-596, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (cone. opn. of Kennard, J.).) In Feddersen, the court considered when an accountant's allegedly negligent tax return preparation caused harm that commenced the two-year limitations period provided in section 339, subdivision 1. ( Feddersen, supra, 9 Cal.4th at p. 608, 38 Cal.Rptr.2d 150,888 P.2d 1279.) A key distinction between Feddersen and Jordache's case is the particular limitations statute involved. Feddersen dealt with section 339, subdivision l, and its two-year limitations period for suits upon a contract, obligation or liability not founded upon an instrument of writing.... (§ 339, subd. 1; Feddersen, supra, 9 Cal.4th at pp. 621-622, 38 Cal.Rptr.2d 150, 888 P.2d 1279.) The standards for beginning that limitations period result from judicial decisions rather than legislative enactment. (See Feddersen, supra, 9 Cal.4th at p. 614, 38 Cal.Rptr.2d 150, 888 P.2d 1279; Neel, supra, 6 Cal.3d 176, 98 Cal.Rptr. 837, 491 P.2d 421; Budd, supra, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433.) In section 340.6, the Legislature established a detailed, explicit, and exclusive scheme for commencing and tolling the legal malpractice limitations periods. The Legislature did not establish a comparable scheme for section 339. Therefore, Feddersen does not, and was not intended to, provide rules for legal malpractice actionsthe only subject we address here. [10]