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October 10, 2011

Susan V.I. Callahan, as Trustee, etc., v. Gibson, Dunn & Crutcher LLP

 

Holding

The California Court of Appeal, Second District, held that based upon the exception found within CCP § 340.6(a)(1), the statute of limitations for a legal malpractice action is tolled until an actual injury is suffered.  The Court concluded that the determination of actual injury is a fact specific analysis.  The Court in this instance held that the actual injury sustained did not occur when a partnership agreement was negligently drafted, but rather when the effect of such negligence was realized in the dissolution of a client’s partnership due to a lawyer’s failure to include provisions dealing with succession in the event of incapacitation.    

Why This Case is Important

The statute of limitations for legal malpractice actions is located in CCP §340.6.  CCP 340.6(a) provides that a cause of action for legal malpractice must be filed “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, or four years from the date of the wrongful act or omission, whichever occurs first.”  In pertinent part, the statute provides that in no event shall the time for commencement of legal malpractice action exceed four years without an applicable exception.  This case analyzes one such exception provided in CCP § 340.6(a)(1), namely, that the statute of limitations will be tolled until an actual injury is suffered.   

Facts

In 1988, two brothers, Oliver and Robert, retained Gibson, Dunn & Crutcher LLP (“Gibson”) to advise them on the restructuring of their successful business, then operating as a real estate trust.  Gibson recommended the conversion to a limited partnership, and a partnership agreement was executed.  The brothers were named as general partners, and their personal trusts were named as limited partners.  Oliver died in 2003; shortly before his death, a bank had been substituted for Oliver as successor trustee in Oliver’s personal trust.  In 2004, the bank filed a probate action seeking dissolution of the partnership, alleging that the partnership dissolved under the agreement because the surviving brother, Robert, was disabled or incompetent.  The parties settled but, in 2007, Oliver and Robert’s family sued Gibson for legal malpractice, alleging that Gibson had failed to include a provision for the continuation of the partnership if the sole remaining partner became incompetent or disabled.  Gibson moved for summary judgment, stating that the statute of limitations had run by 1992, four years after the execution of the partnership agreement.  The trial court granted Gibson’s motion, holding that plaintiffs sustained actual injury in 1988 at the time of the execution of the agreement and the payment of legal fees.  The brothers’ family appealed.  

Discussion

CCP 340.6(a) provides that a cause of action for legal malpractice must be filed “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, or four years from the date of the wrongful act or omission, whichever occurs first.”  The statute continues by stating that “in no event shall the time for commencement of legal action exceed four years except that the period shall be tolled during the time that any of the following exist: (1) The plaintiff has not sustained actual injury….”  

Gibson argued that the actual injury sustained due to legal malpractice, if at all, occurred in 1988 with the drafting of the partnership agreement that omitted a provision to provide for the replacement of general partners in the event of disability or incapacitation.  Thus, Gibson argued that the legal malpractice statute of limitations had run by 1992.  

Conversely, the appellants argued that the statute of limitations did not commence when the partnership agreement was negligently drafted, but rather when the intent of the partners and their succession plans were obviated by the fact Robert became incompetent and due to Gibson’s negligence the partnership dissolved.  

In analyzing these arguments, the Court agreed with the appellants.  The Court focused on the meaning of the term “actual injury,” stating that if the allegedly negligent conduct does not cause damage, it generates no cause of action in tort, and “the mere breach of a professional duty, causing only nominal damages, speculative harm, or threat of future harm – not yet realized – does not suffice to create a cause of action for negligence.”  The Court opined that Gibson’s alleged negligence in drafting the succession and termination provisions of the agreement created only a potential for harm prior to Oliver’s death and Robert’s purported disability.  Once Robert became incapacitated, however, the agreement required partnership dissolution and did not allow others, such as a spouse, to succeed as a general partner, thus an actual injury was suffered.   

Therefore, in accordance with CCP 340.6(a)(1) the Court concluded that the statute of limitation for appellants’ legal malpractice action against Gibson was tolled until either Robert was determine to be incapacitated or when the bank filed for partnership dissolution based upon such incapacitation.  In either case, the Court held that it was at this point that the family suffered actual injury as a result of Gibson’s negligent preparation of the partnership agreement, and as such it was at this point that the statute of limitation for legal malpractice under CCP § 340.6 commenced.  

Based upon this analysis, the Court of Appeal reversed and remanded. 

 

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