Beal Bank, SSB v. Arter & Hadden, LLP, et al., 66 Cal.Rptr.3d 52, 167 P.3d 666 (2007)

Brief Summary
Under Code. Civ. Proc., § 340.6, subd. (a)(2) of California law, the statute of limitations for attorney malpractice in a matter is tolled for the duration of the attorney’s representation of the client in that matter. The court in this case held that when an attorney leaves a firm and takes a client with him or her, the tolling period does not continue for claims against the former firm and its partners.

Complete Summary
Beal Bank, SSB (“Beal Bank”) retained the law firm of Arter & Hadden, LLP in March 1997 to handle its collections for loans acquired from another bank. Eric Dean was the lead attorney for this client. A firm associate, Steven Gubner, began representing Beal Bank in bankruptcy court when the debtor entity filed for bankruptcy protection. When the bankruptcy court ruled against it on May 28, 1998, Beal Bank appealed to the district court.

In December 1998, Mr. Gubner left Arter & Hadden and joined the firm ultimately known as Ezra, Brutzkus & Gubner. The new firm took over the representation of Beal Bank. Despite subsequent appeals, the bankruptcy court’s ruling against Beal Bank was affirmed. Id. at 54. In September 2002, Beal Bank filed a malpractice action against Mr. Gubner and his firm, as well as Arter & Hadden and the former lead attorney, Mr. Dean. 

The parties initially entered a tolling agreement that expired on Dec. 31, 2003, and Beal Bank dismissed the lawsuit. The action was re-filed on Dec. 30, 2003, against the same defendants for failing to perform legal research and advise Beal Bank it was unlikely to prevail, which allegedly resulted in the loss of the bank’s ability to settle the dispute and avoid a breach of contract action by the debtors. Id. at 54. Arter & Hadden and Mr. Dean demurred on the basis that the one-year statute of limitations had run. Arter & Hadden argued that under Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509, 80 Cal. Rptr. 94, continuing representation by an ex-attorney at the firm did not toll the statute of limitations against the firm. Beal Bank took the opposite position that under Beane v. Paulsen (1993) 21 Cal.App.4th 89, 26 Cal.Rptr.2d 486, continuing representation by the firm’s ex-attorney did toll the statue of limitations. Id. at 55.

The trial court agreed that there was a conflict of case authority between Crouse and Bean. The trial court agreed with the reasoning of the Crouse decision and found the action against Arter & Hadden and Mr. Dean time barred. On appeal, however, the Court of Appeal sided with the rationale of the Beane decision, and believed equitable considerations and the “potential disruption of the ongoing relationship between the departed attorney and client by an indemnity suit justified tolling the statute of limitations against the former firm.”  Id. at 55. The Supreme Court granted review to resolve this split of authority.

The court reviewed the provisions of the Code of Civil Procedure section 340.6, subdivision (a), which provides “[A]n action against an attorney for wrongful act or omission…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, whichever occurs first. In no event shall the time for the commencement of legal action exceed four years except [where specified circumstances give rise to tolling]” Id. at 55. Although this section refers to “the attorney,” the Court of Appeal had broadened the interpretation to include law firms. The Supreme Court noted that the cases cited by the Court of Appeal, however, did not involve an action against a law firm and an attorney no longer affiliated with that firm. Id. at 56. The Supreme Court held that although an action against an attorney is tolled while that attorney continues representation, that representation does not toll claims against a different attorney or firm. Id. at 56.

The Supreme Court focused on the legislative history leading up to the enactment of section 340.6, which resulted from balancing the need for an equitable amount of time for the client to discover malpractice against the need for some time limit on the exposure to the attorney and for insurance companies to determine present exposures. The Supreme Court also noted that the legislature had relied heavily on articles by Ron Mallen (of Hinshaw & Culbertson LLP), which included a proposal for extending the statute of limitations tolling period for continuous representation. Id. at 57, citing Mallen, Panacea or Pandora’s Box? A Statute of Limitations for Lawyers (1977) 52 Cal. St. B.J. 22, 22; Mallen, An Examination of a Statute of Limitations for Lawyers (1978) 53 Cal. St. B.J. 166, 166. The Supreme Court discussed the legislative intent to balance the interests between clients and their need to obtain relief in cases of professional negligence and attorneys, and their need to obtain malpractice coverage.

Ultimately, the clients received a codification of the delayed discovery rule and the attorneys received the four-year limit on liability. Id. at 58. The continuous representation exception was adopted based on the need 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 prevent an attorney from defeating a malpractice cause of action by continuing to represent the client until the statutory period has expired.” Id. at 58, quoting Laird v. Blacker (1992) 2 Cal. 4th 606 at 618.

The Supreme Court also noted that when an attorney leaves a firm and takes the case along, there is no continuing risk that the firm would then attempt to “run out the clock” on the statute of limitations by reassurances to the former client who has gone with the ex-attorney. In addition, the firm would not have the ability to mitigate any damage to the client because there is no continued representation. Id. at 58.

In concluding that the Court of Appeals decision should be reversed, the Supreme Court asserted that while there was no “perfect solution” to the conflicting interests the legislature attempted to balance, the “interpretation we adopt is the one most faithful to section 340.6’s language and to the full range of interests the Legislature balanced in passing that statute.” To the extent the Beane case was inconsistent with this opinion, the court noted its “disapproval” of that holding. Id. at 61.

Significance of Case
The Supreme Court’s decision provides more certainty and protection for firms whose representation ends when individual lawyers depart with a case. As is often true for the client facing uncertainty in the face of a statute of limitations, the issue usually can be addressed by a tolling agreement, which is what the Supreme Court recommended.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.