Opinion ID: 2779227
Heading Depth: 1
Heading Rank: 4

Heading: analysis

Text: A. Claims Against Meloy. We first turn to the question of whether the district court correctly ruled the claims of Vossoughi and C, N, & A, Inc. against Meloy are time-barred. To resolve this issue, we must determine when the injuries claimed by Vossoughi and C, N, & A, Inc. gave rise to a cause of action. If the cause of action accrued more than five years before the plaintiffs filed their amended petition against Meloy on June 26, 2012, we must then evaluate whether the discovery rule extended the limitations period. 1. Actual injury. Legal malpractice claims sound in negligence. Claims based on negligence do not accrue, and the statute of limitations does not begin to run, until the injured plaintiff “has actual or imputed knowledge of all the elements of the action.” Franzen, 377 N.W.2d at 662; accord Buechel v. Five Star Quality Care, Inc., 745 N.W.2d 732, 736 (Iowa 2008); Stanley L. & Carolyn M. Watkins Trust v. Lacosta, 92 P.3d 620, 628 (Mont. 2004) (“[T]he statute of limitations in a legal malpractice action does not begin to run until . . . all elements of the legal malpractice claim, including damages, have occurred.”). To establish a prima facie claim of legal malpractice, the plaintiff must produce 10 evidence showing the attorney’s breach of duty caused “actual injury, loss, or damage.” Ruden v. Jenk, 543 N.W.2d 605, 610 (Iowa 1996). Until the attorney’s act or omission that breached the applicable duty “produces injury to claimant’s interest by way of loss or damage, no cause of action accrues.” Wolfswinkel v. Gesink, 180 N.W.2d 452, 456 (Iowa 1970). The injury must be concrete; “an essential element to a legal malpractice cause of action is proof of actual loss rather than a breach of a professional duty causing . . . speculative harm, or the threat of future harm.” 7A C.J.S. Attorney & Client § 303, at 337 (2004). No matter what the plaintiffs knew or when they knew it, the statute of limitations could not have begun to run any earlier than the date an actual injury occurred. The district court relied on Neylan in concluding the date of the plaintiffs’ injuries was either March 29, 2007 (the date the deed was executed), or April 9, 2007 (the date the deed was recorded), and in concluding this action against Meloy was time-barred. The plaintiffs in Neylan brought a legal malpractice action alleging their attorneys had “negligently failed to present adequate evidence to support [the plaintiffs’] claim of damages” at trial. Neylan, 400 N.W.2d at 542. In the malpractice action, the plaintiffs sued their attorneys for the damages they believed should have been recoverable. Id. The defendants asserted the district court’s decision entered against their former clients prior to appeal “should mark the time when a legal malpractice cause of action accrue[d], because the claimant [was] then formally advised of an adverse ruling and resulting damage.” Id. However, we adopted a different view and held the legal malpractice claim accrued when this court affirmed the trial court’s decision on appeal. Id. At that moment, when all avenues to recovery were exhausted and the underlying claims were 11 extinguished, the injury caused by the alleged breach of duty became actual rather than potential. See id. Our decision in Neylan was undergirded by the principle that each client “has a ‘right to rely upon the superior skill and knowledge of his attorney’ ” until that reliance results in actual injury. Id. (quoting Millwright v. Romer, 322 N.W.2d 30, 34 (Iowa 1982)). We also reasoned a litigant who believes she may have been injured through her attorney’s negligence should not be forced to choose between (a) sabotaging her relationship with her attorney during ongoing representation by filing a legal malpractice claim, and (b) waiving her opportunity to bring the claim before the statute of limitations extinguishes it. Id.; accord Dudden v. Goodman, 543 N.W.2d 624, 629 (Iowa Ct. App. 1995) (“[I]t would be palpably unjust and quite unreasonable to require a client of a lawyer to obtain a second opinion on every professional decision the lawyer makes.”); see also Amfac Distrib. Corp. v. Miller, 673 P.2d 795, 799 (Ariz. Ct. App.) (“Under our rule, a client will not have to challenge and question every decision made by his attorney or routinely double check his attorney’s conduct . . . . Thus, the client will have peace of mind to allow the legal process to work fully and finally in hopes that his position will ultimately be vindicated and will not be forced to disrupt his relationship with his lawyer to preserve what he thinks may be a valid malpractice claim.”), approved as supplemented, 673 P.2d 792 (Ariz. 1983) (en banc). We conclude Neylan does not justify summary judgment in Meloy’s favor under the circumstances presented here. The core teaching of Neylan is that speculative injury does not give rise to a legal malpractice claim. See Neylan, 400 N.W.2d at 542. An injury arising from legal malpractice is actionable when it is actual but not when it is merely 12 potential. See, e.g., Huber v. Watson, 568 N.W.2d 787, 790 (Iowa 1997) (requiring as an element of legal malpractice that “the [client] sustained actual injury, loss, or damage” (emphasis added)); Ruden, 543 N.W.2d at 610 (same); Vande Kop v. McGill, 528 N.W.2d 609, 611 (Iowa 1995) (same); Schmitz v. Crotty, 528 N.W.2d 112, 115 (Iowa 1995) (same); Dessel v. Dessel, 431 N.W.2d 359, 361 (Iowa 1988) (same); Burke v. Roberson, 417 N.W.2d 209, 211 (Iowa 1987) (same). To be sure, Neylan did not establish that a legal malpractice claim accrues when a client has not yet suffered actual injury. See Neylan, 400 N.W.2d at 542. Many other jurisdictions follow this rule. See, e.g., Greater Area Inc. v. Bookman, 657 P.2d 828, 829 n.3 (Alaska 1982) (“[I]f the client discovers his attorney’s negligence before he suffers consequential damages, the statute of limitations will not begin to run until the client suffers actual damages.”); Amfac Distrib. Corp., 673 P.2d at 798–99 (adhering to “the time-honored principles of law which require that the plaintiff be damaged or injured in some way as a predicate to bringing an action for negligence”); Jordache Enters., Inc. v. Brobeck, Phleger & Harrison, 958 P.2d 1062, 1070 (Cal. 1998) (“The mere breach of a professional duty, causing only . . . speculative harm, or the threat of future harm—not yet realized—does not suffice to create a cause of action for negligence.”); Romano v. Morrisroe, 759 N.E.2d 611, 614 (Ill. App. Ct. 2001) (“No cause of action accrues without actual damages, and damages are only speculative if their existence itself is uncertain.”); Pancake House, Inc. v. Redmond, 716 P.2d 575, 579 (Kan. 1986) (recognizing one theory of accrual is that “the client does not accrue a cause of action for malpractice until he suffers appreciable harm or actual damage as a consequence of his lawyer’s conduct”); Mass. Elec. Co. v. Fletcher, Tilton & Whipple, P.C., 475 N.E.2d 390, 391 (Mass. 1985) 13 (“[T]he electric companies knew immediately of the alleged negligence of the defendant attorneys, but it was not then clear that the alleged negligence had caused or would cause the companies any appreciable harm.”); Watkins Trust, 92 P.3d at 630 (“[T]he mere threat of future harm does not constitute actual damages.”); Semenza v. Nev. Med. Liab. Ins. Co., 765 P.2d 184, 186 (Nev. 1988) (“[W]here damage has not been sustained or where it is too early to know whether damage has been sustained, a legal malpractice action is premature . . . . [I]t follows that a legal malpractice action does not accrue until the plaintiff’s damages are certain and not contingent.”); Grunwald v. Bronkesh, 621 A.2d 459, 464– 65 (N.J. 1993) (“[T]he statute of limitations begins to run only when the client suffers actual damage . . . . Actual damages are those that are real and substantial as opposed to speculative.”); Jaramillo v. Hood, 601 P.2d 66, 67 (N.M. 1979) (“[T]he cause of action accrues when actual loss or damage results . . . .”); Kituskie v. Corbman, 714 A.2d 1027, 1030 (Pa. 1998) (“An essential element to [legal malpractice] is proof of actual loss rather than a breach of a professional duty causing only . . . speculative harm or the threat of future harm.”); Ameraccount Club, Inc. v. Hill, 617 S.W.2d 876, 878 (Tenn. 1981) (“The Court of Appeals erred in holding that the plaintiff's cause of action accrued and the statute of limitations began to run when the plaintiff became aware of the negligence of the defendant attorneys; still more was required, viz., damage or injury to the plaintiff resulting from that negligence.”); Hennekens v. Hoerl, 465 N.W.2d 812, 816 (Wis. 1991) (“A tort claim is not ‘capable of present enforcement’ until the plaintiff has suffered actual damage. . . . Actual damage is not the mere possibility of future harm.”). We also find support for the principle that a legal malpractice claim does not arise until actual injury results in the Restatement (Third) of the 14 Law Governing Lawyers, which focuses on pragmatic policy concerns like those we found persuasive in Neylan: [T]he statute of limitations does not start to run until the lawyer’s alleged malpractice has inflicted significant injury. For example, if a lawyer negligently drafts a contract so as to render it arguably unenforceable, the statute of limitations does not start to run until the other contracting party declines to perform or the client suffers comparable injury. Until then, it is unclear whether the lawyer’s malpractice will cause harm. Moreover, to require the client to file suit before then might injure both client and lawyer by attracting the attention of the other contracting party to the problem. Restatement (Third) of the Law Governing Lawyers § 54 cmt. g, at 406 (2000). The statute of limitations cannot require legal malpractice claims to be brought while “the record is uncertain and speculative whether a party has sustained damages.” Crookham v. Riley, 584 N.W.2d 258, 266 (Iowa 1998). Put another way, the statute of limitations cannot sensibly be applied in a way that forces parties to file suit before an actual injury has been sustained on penalty of losing the opportunity to file a claim at all. See Cannon v. Sears, Roebuck & Co., 374 N.E.2d 582, 584 (Mass. 1978). Accordingly, we reaffirm the statute of limitations does not begin to run on a legal malpractice claim until the cause of action accrues. The cause of action accrues when the client sustains an actual, nonspeculative injury and has actual or imputed knowledge 4 of the other elements of the claim. Franzen, 377 N.W.2d at 662 (“[T]he statute of limitations does not begin to run until the injured person has actual or 4Knowledge could be imputed through the doctrine of inquiry notice. We have said “[t]he [limitations] period begins at the time the [plaintiff] is on inquiry notice.” Franzen, 377 N.W.2d at 662. “A party is placed on inquiry notice when a person gains sufficient knowledge of facts that would put that person on notice of the existence of a problem or potential problem.” Buechel, 745 N.W.2d at 736. 15 imputed knowledge of all the elements of the action.” (Emphasis added.)); see Watkins Trust, 92 P.3d at 628. 2. Whether insecurity constitutes an actual injury. The question remains, however, whether the plaintiffs’ insecurity arising from the absence of a mortgage lien against the real estate and a perfected security interest in the personal property constituted an actual injury. We hold insecurity alone does not constitute an actual injury. Until Mark and PPM stopped making payments in February 2008, it was entirely possible the plaintiffs would have continued collecting contract payments without disruption. Accordingly, it was entirely possible the decision to structure the transaction without the protection of a mortgage on the real estate or a perfected security interest in the personal property would cause the sellers no actual injury. See 16 Gregory C. Sisk & Mark S. Cady, Iowa Practice Series: Lawyer and Judicial Ethics § 13:2(b)(2), at 1088 (2014) (“[U]ntil the final bell is rung and the match is truly over, the possibility persists that an unsatisfactory outcome could be avoided . . . because an opponent fails to take advantage of the error.”); see also David B. Lilly Co. v. Fisher, 18 F.3d 1112, 1117–18 (3d Cir. 1994) (determining when an attorney negligently structured a business acquisition transaction by failing to preserve Lilly’s “small business eligibility,” a legal malpractice claim did not accrue until several years later when a competitor challenged Lilly’s small business status); Fritz v. Ehrmann, 39 Cal. Rptr. 3d 670, 676 (Ct. App. 2006) (finding a promissory note with negligently drafted prepayment and interest provisions created only speculative injury because the promisors “might never have had the funds or the inclination to prepay principal, and they might have paid . . . without regard to any ambiguity” in the document). In other words, until the 16 payments stopped, the plaintiffs suffered only the prospect of future harm. See Rayne State Bank & Trust Co. v. Nat’l Union Fire Ins. Co., 483 So. 2d 987, 995 (La. 1986) (“Damage was not sustained by the bank by virtue of the mere existence of defects in the mortgages. At this point, the possibility of damage to the bank was merely speculative, uncertain and contingent on the possibility of an attack on the validity of the mortgages by a third party, or on the possibility that the debtors would declare bankruptcy. In the event that neither of these contingencies occurred, and the debtors continued payment of their indebtedness, no harm at all would have resulted to the bank.”); see also Dearborn Animal Clinic, P.A. v. Wilson, 806 P.2d 997, 1003 (Kan. 1991) (“[T]he alleged negligent act of Wilson occurred at the time he prepared the . . . agreement, and arguably the plaintiffs suffered injury at that time when they did not get the agreement that Dearborn hired Wilson to prepare. However, no actionable injury had occurred because [a third party] might have elected to exercise his option in which case the plaintiffs would have suffered no injury even though Wilson was negligent in preparing the agreement.” (Emphasis added.)); cf. Callahan v. Gibson, Dunn & Crutcher LLP, 125 Cal. Rptr. 3d 120, 133–34 (Ct. App. 2011) (finding no actual injury arose from an executed partnership agreement until its negligently drafted succession provisions became operative). An Idaho case provides an apt illustration. In Parsons Packing, Inc. v. Masingill, 95 P.3d 631, 632–33 (Idaho 2004), the plaintiff alleged its attorney had negligently failed to draft an effective security agreement and failed to file a financing statement to secure its interest in debtor Pro-Ag’s industrial onion bins. The Idaho Supreme Court determined the abstract and theoretical injury Parsons suffered from being placed in a weaker position by the attorney’s failure to secure its interest in the 17 collateral was not the injury that truly gave rise to the legal malpractice claim, and thus was not the injury that controlled the applicable statute of limitations. See id. at 634. Rather, the requisite injury—which, under Idaho law, is “some damage”—only occurred when Pro-Ag defaulted and recovery became impossible: Parsons entered into the Agreement as part of a normal lease and sale transaction and had Pro–Ag not defaulted, each party would have received the intended benefit of the bargain. The onion bins were exchanged for a promise on the part of Pro–Ag to make the agreed payments, which they did until 1998. Although it is true that steps could have been taken to secure Parsons’ interest in the bins in the event of Pro–Ag’s insolvency, bankruptcy was not contemplated and would have been mere speculation in 1992 when the Agreement was executed. Although they were subjected to a greater risk, the Parsons were not damaged by the lack of security in the bins until Pro–Ag’s bankruptcy. . . . For application of the statute of limitation some damage did not occur in 1992. Some damage occurred the date of default, April 14, 1998. Id. A Kentucky Supreme Court decision provides another relevant illustration of the importance of actual injury in our analysis: In April and again in October of 1990, appellee Wheatley conducted a title examination relating to certain real property upon which appellant proposed to make a first mortgage loan to its customers, the Pearmans. His opinion failed to disclose a recorded mortgage. Within a few months after the loan was made, the Pearmans defaulted and appellant commenced preparations to bring an action to enforce its mortgage lien. The prior mortgage lien was then discovered and appellant realized that its loan might be in jeopardy. .... In the present case, the time allowed [for the filing of the legal malpractice action] began to run as of the date of the foreclosure sale. Prior to that date, Appellants had only a fear that they would suffer a loss on the property. Their fear was not realized as damages until the sale of the property in June of 1992. At that time, what was merely 18 probable became fact, and thus commenced the running of the statute. Meade Cnty. Bank v. Wheatley, 910 S.W.2d 233, 234–35 (Ky. 1995). Here, even after the deed from Vossoughi to PPM was recorded, the plaintiffs’ injuries were merely speculative because Mark and PPM continued to make payments, and may have continued to do so until their obligations under the Noncompetition Agreement and Asset and Business Name Purchase Agreement were satisfied. The plaintiffs’ injuries became actual and nonspeculative no earlier than February 2008, when Mark and PPM stopped making payments. 5 “At that time, what was merely probable became fact . . . .” Id.; see also Pioneer Nat’l Title Ins. Co. v. Sabo, 432 F. Supp. 76, 76–77, 79, 81–82 (D. Del. 1977) (finding an insurance company whose hired attorney negligently drafted a title insurance policy to expand the insurance company’s liability suffered injury not when the policy was initially issued, but later, when the overinclusive coverage was actually implicated); Jeansonne v. Att’y’s Liab. Assurance Soc’y, 891 So. 2d 721, 728 (La. Ct. App. 2004) (“Mr. Jeansonne did not sustain damages by the mere existence of the alleged defects in the Promissory Note and Stock Purchase Agreement . . . . The possibility of damage to Mr. Jeansonne was merely speculative, uncertain and contingent on the clause Mr. Jeansonne believed was incorporated into the promissory note and stock purchase agreement. In 5Moreover, because Vossoughi could potentially have recovered the balance of the payment obligations on the remaining two agreements through his action against Mark and PPM for breach of contract, the actual injury might not have arisen until Mark and PPM filed for bankruptcy on May 15, 2008. But further analysis on this temporal question is unnecessary; whether the actual injury occurred in February 2008 when the payments stopped, in May 2008 when Mark and PPM filed for bankruptcy, or even at some later time—perhaps when the bankruptcy court discharged Vossoughi’s contract claims—the amended petition against Meloy on June 26, 2012 was indisputably timely. 19 the event that this contingency did not occur, no harm at all would have resulted . . . .”). 6 3. The discovery rule. The discovery rule can extend the applicable deadline for filing legal malpractice actions. It is “an ameliorative device favoring the right to bring suit” in situations where laypeople rely on professionals and later discover misplaced reliance caused injury. Poole v. Lowe, 615 A.2d 589, 592 (D.C. 1992)). “The rule is based on the theory that a statute of limitations should not bar the remedy of a person who has been excusably unaware of the existence of the cause of action.” Franzen, 377 N.W.2d at 662. 6We acknowledge a few courts have decided insecurity alone constitutes an actual injury for claim accrual purposes. See Ladner v. Inge, 603 So. 2d 1012, 1015 (Ala. 1992) (concluding the plaintiff suffered an actual injury “when she accepted . . . unsecured promissory notes” in exchange for real estate); Vision Mortg. Corp. v. Patricia