Court Opinion

ID: 9629798
Source: CourtListenerOpinion
Date Created: 2023-08-22 09:49:39.151344+00
Date Added: 2024-06-11T18:07:24.262214
License: Public Domain

MOSK, J.
I concur in the result, holding that the claim of accountant malpractice was timely.
I concur in the reasoning only under compulsion of Laird v. Blacker (1992) 2 Cal.4th 606 [7 Cal.Rptr.2d 550, 828 P.2d 691], on which the majority rely in concluding that the statute of limitations began running on the date of the deficiency assessment against plaintiff.
I continue, however, to prefer the views expressed in my dissent in Laird v. Blacker, supra, 2 Cal.4th at pages 621-628. As explained therein, to force malpractice plaintiffs to file their actions before they know the outcome of the case on which their claim is based does not promote judicial economy. The status of the malpractice claim is uncertain until administrative and *623judicial procedures for review are exhausted. Obviously, if the client should ultimately prevail in the underlying suit, the malpractice claim may well become moot for lack of damages.
Thus I believe that “actual injury” under Code of Civil Procedure section 339, subdivision 1, should not be deemed to occur until the taxpayer has exhausted administrative and judicial remedies and has suffered irremediable damage. As the majority observe, the date of the deficiency assessment against this plaintiff was not the point of “irremediability” because it is not equivalent to a final judgment; the taxpayer has 90 days from receipt of the notice of deficiency to file a petition for redetermination of the deficiency and may seek further administrative and judicial review. In the present case, plaintiff did not seek review. Accordingly, I would hold that the statute of limitations began running only when the deficiency became final.
KENNARD, J., Concurring and Dissenting.
How long after discovering a costly mistake in a federal income tax return may the taxpayer wait to bring a malpractice action against the accountant who prepared the return? For actions asserting malpractice by professionals other than attorneys or health care providers, Code of Civil Procedure section 339, subdivision 1, provides a two-year limitations period. In Budd v. Nixen (1971) 6 Cal.3d 195, 201 [98 Cal.Rptr. 849, 491 P.2d 433] (hereafter Budd), this court decided that the two-year limitations period for professional malpractice actions begins to run upon discovery of the malpractice and the occurrence of “[a]ny appreciable and actual harm.”
The majority holds that an accountant’s negligence in the preparation of a federal income tax return causes “appreciable and actual harm” only when the Internal Revenue Service (IRS) assesses a tax deficiency.
The majority is wrong. Under Budd, supra, 6 Cal.3d 195, the term “appreciable and actual harm” includes any nontrivial monetary loss or expense proximately caused by a professional’s negligence. This is consistent with the Legislature’s determination in Civil Code section 3333 that the measure of damages in negligence cases is “the amount which will compensate for all the detriment proximately caused” by the negligence. As applied to the situation in which an accountant’s negligent preparation of a tax return results in an IRS audit, Budd and Civil Code section 3333 both compel the conclusion that any nontrivial costs that the client-taxpayer incurs to respond to the audit, including accounting and legal fees, constitute appreciable and actual harm attributable to the accountant’s malpractice. In dismissing such costs as irrelevant or insignificant, the majority errs.
*624Nevertheless, I agree with the majority that the action under review here is not barred by the statute of limitations. In professional malpractice actions, the limitations period does not begin to run while the professional continues to represent the client in the matter at issue, even after the client has both discovered the negligence and suffered appreciable and actual harm. Because the record here shows that the defendant accountants represented the plaintiff clients in the IRS audit of the plaintiffs’ tax returns, and that this representation continued until less than two years before plaintiffs filed suit, the action is timely.
I
In 1974, Feddersen and Company (Feddersen), an accounting firm, assisted plaintiff International Engine Parts, Inc. in setting up plaintiff I.E.P.O., Inc. (IEPO) as a “domestic international stock corporation” (DISC) to qualify for certain tax benefits. Feddersen prepared plaintiffs’ 1983 and 1984 tax returns, in which plaintiffs claimed the DISC tax benefits. In 1984, the IRS began an audit of plaintiffs’ returns, looking specifically at the DISC status of IEPO. Plaintiffs retained Feddersen to represent them during the audit.
In 1986, the IRS informed plaintiffs that it would disqualify IEPO as a DISC because the tax returns did not include the proper documentation of “producer loans” and inter-company pricing agreements. When plaintiffs raised the matter with Feddersen, Feddersen admitted that its accountants had “just forgot it or missed it.” Feddersen advised plaintiffs that the resulting tax liability could be in the range of $300,000. Plaintiffs also consulted their attorneys on the matter, thereby incurring legal fees.
In June 1987, the IRS sent Feddersen its audit report stating that it would disqualify IEPO as a DISC and impose a tax deficiency, interest, and penalties for the tax years 1983 and 1984. Feddersen forwarded the report to plaintiffs. Plaintiffs requested and obtained extensions of time to finalize the audit because plaintiffs anticipated a refund from the audit of a separate but related entity and hoped to use the refund to partly offset the deficiency. On May 16, 1988, the audit was finalized, and the deficiency was formally assessed, when plaintiffs and the IRS signed the appropriate forms.
On May 15, 1990, plaintiffs filed this malpractice action against Feddersen. The trial court granted summary judgment for Feddersen on the basis that the action was barred by the two-year statute of limitations in Code of Civil Procedure section 339, subdivision 1. Plaintiffs appealed and the Court of Appeal affirmed. That court rejected plaintiffs’ contention that there was *625no actual damage until plaintiffs signed the documents finalizing the audit and accepting the deficiency assessment. The court reasoned that actual damage had occurred when Feddersen failed to document the producer loans and inter-company pricing agreements (documents that must be generated at the time the transactions occur) or, at the latest, when plaintiffs paid Feddersen to represent them in the audit and paid fees to their attorneys to advise them on the audit problem.
This court granted plaintiffs’ petition for review.
II
If the lost DISC tax benefits and the interest and penalties imposed by the IRS for underpayment of taxes were the only damages that Feddersen’s negligence caused plaintiffs to suffer, I would agree with the majority that plaintiffs incurred appreciable and actual harm only when the IRS assessed the deficiency. For the reasons stated by the majority, assessment of tax deficiency is an appropriate point in time to mark the occurrence of those injuries for statute of limitations purposes. But the majority is wrong when it dismisses as unimportant or irrelevant the many other species of damage that may result from an accountant’s negligence in the preparation of a business’s income tax return and that often precede the deficiency assessment.
The majority here makes essentially the same mistake as in ITT Small Business Finance Corp. v. Niles (1994) 9 Cal.4th 245 [36 Cal.Rptr.2d 552, 885 P.2d 965] (hereafter ITT). In that case, the corporate plaintiff had alleged that its attorney’s negligence in preparing loan documents had required it to engage in litigation with third parties. A majority of this court held that the limitations period began to run only when the third party litigation terminated adverse to the plaintiff corporation by settlement. As I explained in my dissent, this holding cannot be reconciled with Budd, supra, 6 Cal.3d 195, or with the plain meaning of the statute (Code Civ. Proc., § 340.6) that codified the holding of Budd for legal malpractice actions. (ITT, supra, 9 Cal.4th 245, 258-262 (dis. opn. of Kennard, J.).)
Attempting to rationalize its holding in ITT, supra, 9 Cal.4th 245, the majority now states that in attorney malpractice cases, “the question whether the attorney has actually committed malpractice has not been resolved” until the third party litigation terminates in a manner adverse to the client by judgment, settlement, or dismissal. (Maj. opn., ante, at p. 619.) The majority further declares that “the question whether the plaintiff [client] suffered actual injury as a result of the attorney’s [malpractice] is contingent on the outcome of the [third party] proceeding.” (Ibid.) This explanation is problematic for several reasons.
*626First, if the majority means that the third party proceeding will “resolve" the issues of malpractice and actual injury by operation of collateral estoppel, the majority is wrong. The doctrine of collateral estoppel, under which a determination of issues in one action precludes relitigation of the same issues in later actions, cannot be invoked against one who was not a party (or in privity with a party) to the earlier proceeding. (Western Steamship Lines, Inc. v. San Pedro Peninsula Hospital (1994) 8 Cal.4th 100, 118 [32 Cal.Rptr.2d 263, 876 P.2d 1062] [stating that “a judgment cannot bind one who was not a party thereto”]; see 7 Witkin, Cal. Procedure (3d ed. 1985) Judgment, § 298, p. 737.) Thus, litigation between a client and a third party cannot “resolve” the issue of malpractice by an attorney or accountant (or the issue of actual injury) by operation of the doctrine of collateral estoppel unless the client’s attorney or accountant was a party to the earlier action, a situation that seldom occurs and did not occur in ITT, supra, 9 Cal.4th 245.
Second, it is unlikely that the issue of malpractice—that is, whether the attorney or accountant exercised the skill, knowledge, and care ordinarily possessed and exercised by members of these professions (Flowers v. Torrance Memorial Hospital Medical Center (1994) 8 Cal.4th 992, 998 [35 Cal.Rptr.2d 685, 884 P.2d 142])—will actually be litigated or decided in a third party suit. Collateral estoppel applies only if the issue decided in the earlier action was “identical” to the issue presented in the later action. (Bernhard v. Bank of America (1942) 19 Cal.2d 807, 813 [122 P.2d 892]; Bear Creek Planning Com. v. Title Ins. & Trust Co. (1985) 164 Cal.App.3d 1227, 1242 [211 Cal.Rptr. 172].)
Third, a judgment in a third party action may not “resolve” issues even as between the client and the third party because the judgment may be reversed on appeal.
Finally, and perhaps most importantly, the malpractice of an attorney or accountant may severely damage the client even when the third party litigation terminates in the client’s favor. As I have stated, “it defies common sense to hold, as the majority does, that a client has not sustained ‘actual injury’ even though the client has paid thousands, perhaps hundreds of thousands, of dollars [in litigation costs] because the attorney’s malpractice has compelled the client to prosecute or defend third party litigation.” (ITT, supra, 9 Cal.4th 245, 259 (dis. opn. of Kennard, J.).)
For example, an accountant’s negligent preparation of a business’s tax returns may trigger a full-scale audit by the IRS. In the end, the IRS may assess no deficiency because the accountant made mistakes in the government’s favor that offset mistakes in the client’s favor. Does this mean the *627client has suffered no injury? Not at all. In responding to the audit, the client may have incurred massive expenses, including legal fees, accountant fees, and the time expended by the client’s own employees. In addition, the audit may disclose the permanent loss of tax benefits that should have been but, because of the accountant’s negligence, were not claimed in the client’s return. Thus, I cannot agree that the issue of actual harm is “contingent on the outcome of the audit.” (Maj. opn., ante, at p. 619.)
The error in the majority’s analysis is further illustrated by examination of the case law allowing recovery of attorney fees incurred in third party litigation caused by the “tort of another.” This court has stated the rule in these terms: “A person who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover compensation for the reasonably necessary loss of time, attorney’s fees, and other expenditures thereby suffered or incurred. [Citations.]” (Prentice v. North Amer. Title Guar. Corp. (1963) 59 Cal.2d 618, 620 [30 Cal.Rptr. 821, 381 P.2d 645]; see also, Rest.2d Torts, § 914, subd. (2).) The “tort of another” rule does not require that the claimant be unsuccessful in the third party litigation. On the contrary, courts applying the rule have upheld damage awards for attorney fees incurred in third party litigation that terminated in favor of the party claiming those fees. (E.g., Saunders v. Cariss (1990) 224 Cal.App.3d 905, 909-910 [274 Cal.Rptr. 186]; Slaughter v. Legal Process & Courier Service (1984) 162 Cal.App.3d 1236, 1251-1252 [209 Cal.Rptr. 189]; Brousseau v. Jarrett (1977) 73 Cal.App.3d 864, 871 [141 Cal.Rptr. 200]; Nilson-Newey & Co. v. Ballou (6th Cir. 1988) 839 F.2d 1171, 1177 ; see also Moe v. Transamerica Title Ins. Co. (1971) 21 Cal.App.3d 289, 303 [98 Cal.Rptr. 547] [stating that plaintiff’s lack of success in the third party action was “of no legal importance”].)
Here, a trier of fact might find, were the matter fully litigated, that Feddersen’s negligence in the preparation of plaintiffs’ tax returns triggered the IRS audit or at least made that audit longer or more costly than it otherwise would have been. Even if plaintiffs had somehow prevailed in the audit, and the IRS had assessed no deficiency, the audit-related costs, to the extent they are directly attributable to the malpractice, should be recoverable under the “tort of another” rule.
For all these reasons, I would hold that plaintiffs suffered appreciable and actual harm for purposes of the statute of limitations when they incurred any nontrivial audit-related costs as a result of Feddersen’s negligence in preparing plaintiffs’ tax returns. To the extent the majority holds otherwise, I respectfully disagree.
*628III
Nevertheless, the majority reaches the correct result in this case when it holds that plaintiffs’ action against Feddersen is not barred by the statute of limitations. The result is correct because of the “continuous representation” or “continuing relationship” rule, under which the statute of limitations on a cause of action for professional malpractice does not begin to run while the professional continues to render services to the injured client in relation to the matter at issue.
As I shall explain, California courts developed the “continuous representation” rule in medical malpractice actions as a corollary to the “discovery” rule, which precludes the running of a statute of limitations while the plaintiff is justifiably ignorant of the injury and its negligent cause. The “continuous representation” rule has been applied in actions alleging negligence by accountants and attorneys, and the Legislature has expressly approved and adopted it in Code of Civil Procedure section 340.6, subdivision (a)(2), which governs actions for legal malpractice. In its statutory form, the rule has assumed significance independent of its origins as an aspect of the “discovery” rule, so that the statute of limitations for attorney malpractice will not run during the period of continuing professional representation even when the client is fully aware of both the attorney’s negligence and the resulting harm. Consistent with the policy underlying the rule as the Legislature has embraced it, I would hold that in a negligence action against an accountant, the statute of limitations does not begin to run while the accountant continues to represent the client in relation to the matter at issue.
A. Medical Malpractice Cases
In California, both the “discovery” rule and the “continuous representation” rule may be traced to this court’s landmark decision in Huysman v. Kirsch (1936) 6 Cal.2d 302 [57 P.2d 908]. There, a patient sued a surgeon for damages resulting from the surgeon’s negligence in leaving a rubber drainage tube in the patient’s body. The surgeon left the tube in the patient’s body dining an operation performed on January 3,1931, and did not remove it until September 26, 1932. {Id. at p. 305.) The patient filed suit against the surgeon on January 7, 1933. The trial court dismissed the action, ruling that the one-year limitations period for personal injury actions began to run on the date of the plaintiff’s injury, that the plaintiff had been injured on the date of the first operation (Jan. 3, 1931), and consequently that the action was barred by the statute of limitations. (Ibid.)
*629Noting that in the workers’ compensation arena courts had adopted the principle that “the statute of limitations should not run against an injured employee’s right to compensation during the time said person was in ignorance of the cause of his disability and could not with reasonable care and diligence ascertain such cause,” this court concluded that the same principle should govern actions for medical malpractice. (Huysman v. Kirsch, supra, 6 Cal.2d 302, 312.) Accordingly, this court reversed the trial court’s judgment.
The rationale of the “continuous representation” rule appears in a part of the Huysman opinion quoting these words from an earlier Ohio decision: “ ‘Indeed, it would be inconsistent to say, that the plaintiff might sue for her injuries while the surgeon was still in charge of the case and advising and assuring her that proper patience would witness a complete recovery. It would be trifling with the law and the courts to exact compliance with such a rule, in order to have a standing in court for the vindication of her rights. It would impose upon her an improper burden to hold, that in order to prevent the statute from running against her right of action, she must sue while she was following the advice of the surgeon and upon which she all the time relied.’” (Huysman v. Kirsch, supra, 6 Cal.2d 302, 309, quoting Gillette v. Tucker (1902) 67 Ohio St. 106 [65 N.E. 865, 871].)
Later cases viewed the continuing doctor-patient relationship primarily as a justification for the patient’s failure to investigate facts that would otherwise have alerted the patient to the possibility of the doctor’s negligence. (See, e.g., Stafford v. Schultz (1954) 42 Cal.2d 767, 778 [270 P.2d 1] [stating that “the fiduciary relationship of physician and patient excused plaintiff from greater diligence in determining the cause of his injury’’]; Myers v. Stevenson (1954) 125 Cal.App.2d 399, 401-402[270 P.2d 885] [stating that the plaintiff is “not ordinarily put on notice of the negligent conduct of the physician upon whose skill, judgment and advice he continues to rely’’].) Although I have found no case directly so holding, some decisions contain dictum stating that the statute of limitations begins to run on a medical malpractice claim once the patient acquires actual knowledge of both the injury and its negligent cause even though the patient elects to continue treatment with the same doctor. (See Sanchez v. South Hoover Hospital (1976) 18 Cal.3d 93, 97 [132 Cal.Rptr. 657, 553 P.2d 1129]; Mock v. Santa Monica Hospital (1960) 187 Cal.App.2d 57, 64 [9 Cal.Rptr. 555].)
In 1970, the Legislature established a special limitations provision for medical malpractice—Code of Civil Procedure section 340.5. (Stats. 1970, ch. 360, § 1, p. 772.) Under this provision, the patient is generally required to commence the malpractice action within four years after the date of *630injury, or one year after the date of discovery, whichever occurs first. {Ibid.) Although the Legislature did not expressly codify the “continuous representation” rule, courts in medical malpractice actions still use the rule to determine the date of which the patient will be deemed to have discovered the injury. (See, e.g., Gray v. Reeves (1977) 76 Cal.App.3d 567, 577, fn. 3 [142 Cal.Rptr. 716].)
B. Legal Malpractice Cases
After developing the “discovery” and “continuous representation” rules for medical malpractice actions, courts eventually applied them also to actions alleging attorney malpractice. The leading case is Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176 [98 Cal.Rptr. 837, 491 P.2d 421] (hereafter Neel), in which this court established that in legal malpractice actions the statute of limitations does not begin to run until the client has discovered, or through the exercise of diligence should have discovered, both the attorney’s negligent act and the resulting damage. (Id. at p. 190.) In a footnote, we discussed the significance of a continuing attorney-client relationship in determining when the statute of limitations begins to run, concluding that if the client had not yet discovered the facts essential to the cause of action, termination of the attorney-client relationship would not commence the running of the limitations period. (Id. at p. 189, fn. 26.) We did not discuss the converse situation, in which discovery of the cause of action precedes termination of the attorney-client relationship.
As it had done for medical malpractice actions, the Legislature in 1977 enacted a special statute of limitations provision for attorney malpractice actions—Code of Civil Procedure section 340.6. (Stats. 1977, ch. 863, § 1, p. 2608.) Under this provision, the client is generally required to commence the legal malpractice action within one year after the plaintiff’s discovery of facts constituting the wrongful act, or within four years after the wrongful act, whichever occurs first. Unlike the provision for medical malpractice actions, however, Code of Civil Procedure section 340.6 expressly addresses the “continuing relationship” issue, providing that “the period [of limitation] shall be tolled during the time that ...[¶] (2) The attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred . . . .”
This court has explained that the Legislature’s purpose in adopting the “continuous representation” rule in attorney malpractice cases was “to ‘avoid the disruption of an attorney-client relationship by a lawsuit while enabling the attorney to correct or minimize an apparent error, and to *631prevent an attorney from defeating a malpractice cause of action by continuing to represent the client until the statutory period has expired.’ (Sen. Com. on Judiciary, 2d reading analysis of Assem. Bill No. 298 (1977-1978 Reg. Sess.) as amended May 17, 1977.)” (Laird v. Blacker (1992) 2 Cal.4th 606, 618 [7 Cal.Rptr.2d 550, 828 P.2d 691].)
The Courts of Appeal have stated that the “continuous representation” rule as embodied in Code of Civil Procedure section 340.6, subdivision (a)(2), is “substantially similar” to a rule fashioned by the state courts of New York. (Gurkewitz v. Haberman (1982) 137 Cal.App.3d 328, 333 [187 Cal.Rptr. 14]; accord, Hensley v. Caietti (1993) 13 Cal.App.4th 1165,1171 [16 Cal.Rptr.2d 837]; Shapero v. Fliegel (1987) 191 Cal.App.3d 842, 847-848 [236 Cal.Rptr. 696].) Under this view, the existence of the attorney-client relationship is more than just an excuse for the client’s failure to investigate evidence of legal practice. Tolling the limitations period while the attorney continues to represent the client serves also to afford the attorney an opportunity to rectify mistakes the attorney has made and to mitigate the client’s losses without jeopardizing the client’s right to recover damages from the attorney for any harm that is caused by the attorney’s malpractice and ultimately remains unremedied.
C. Accountant Malpractice Cases
The “discovery” rule of Huysman v. Kirsch, supra, 6 Cal.2d 302, was extended to accountants in Moonie v. Lynch (1967) 256 Cal.App.2d 361, 365-366 [64 Cal.Rptr. 55]. (See also, Electronic Equipment Express, Inc. v. Donald H. Seiler & Co. (1981) 122 Cal.App.3d 834, 848 [176 Cal.Rptr. 239].) The rule of “continuous representation” has likewise been applied to actions for accountant malpractice. (Electronic Equipment Express, Inc. v. Donald H. Seiler & Co., supra, 122 Cal.App.3d 834, 854-856.) The only question is whether the rule to be applied in such cases is the “continuous representation” rule as codified by the Legislature for legal malpractice cases or the somewhat more limited rule that the courts developed in medical malpractice cases.
I would apply the rule in the form that the Legislature has adopted. As this court stressed in Neel, supra, 6 Cal.3d 176, professional malpractice actions —whether involving doctors, lawyers, accountants, or stockbrokers—have much in common. All professionals are legally obligated to possess and employ the special knowledge and skills of their profession; a layperson who employs any professional is frequently not in a position to judge the quality of the professional’s work and thus may not immediately detect malpractice, *632not only because the layperson lacks the professional’s skill and knowledge, but also because the professional frequently works out of the client’s view; and, finally, all professionals are under a fiduciary duty to fully disclose to their clients facts materially affecting the clients’ interests. {Id. at pp. 187-189.) Because of these similarities among the professions, the rules governing the running of the statute of limitations for the various professions should be alike unless there is a particular justification for different treatment. (See id. at p. 189; see also Baright v. Willis (1984) 151 Cal.App.3d 303, 311-313 [198 Cal.Rptr. 510] [citing medical malpractice precedents to resolve a statute of limitations problem in a legal malpractice case].)
The statutory form of the “continuous representation” rule is appropriate for accountant malpractice cases. Accountants no less than attorneys should be afforded an opportunity to correct their mistakes and to mitigate the client’s damages without the client being compelled by the running of the statute of limitations to bring a malpractice action. Accountants no less than attorneys should be prevented from defeating a malpractice cause of action by continuing to represent the client until the statutory period has expired. Therefore, the articulation of the rule in the attorney malpractice statute should guide our construction of Code of Civil Procedure section 339, subdivision 1, as it applies to actions against an accountant for negligence in the preparation of an income tax return.1 In this case, I would hold that the limitations period did not begin to run while Feddersen continued to represent plaintiffs in the IRS audit of plaintiffs’ tax returns.
Conclusion
Attempting to articulate a “bright line” rule for the accrual of professional malpractice actions, the majority has instead fashioned a judicial straightjacket, into which it forces all manner of cases, no matter how poor the fit. The determination of the point of “appreciable and actual” harm is essentially a factual question, as this court acknowledged in Budd. The situations calling for application of the rule are simply too variable to allow the majority, by adoption of one or many “bright line” rules, to eliminate all triable issues of fact and thereby permit summary disposition by demurrer or summary judgment.
Nevertheless, the majority is correct that the plaintiffs’ action here was timely. Even though plaintiffs discovered the accountant’s negligence, and *633incurred appreciable and actual harm as a result of that negligence, the limitations period did not begin to run while the accountants continued to represent plaintiffs in the IRS audit of plaintiffs’ tax returns.
Respondent’s petition for a rehearing was denied April 13,1995. Kennard, J., was of the opinion that the petition should be granted.

 The New York courts have so concluded, extending the “continuous representation” rule developed in the context of doctor and attorney malpractice cases to malpractice cases against accountants. (Zwecker v. Kulberg (1994) 209 A.D.2d 514 [618 N.Y.S.2d 840, 841]; Wilkin v. Dana R. Pickup & Co. (1973) 74 Misc.2d 1025 [347 N.Y.S.2d 122, 124-125].)