Posted on

Tolling of the 1-Year Statute of Limitations for Legal Malpractice Ends When Client Reasonably Should Have No Expectation That Attorney Will Provide Further Legal Services

Flake v. Neumiller & Beardslee, 1/31/17 CA3

This case concerns allegations of legal malpractice.  With certain tolling exceptions, legal malpractice cases must be filed within one year of when the client discovered or should have discovered the wrongful conduct. Code of Civ. Proc 340.6.  Flake sued his attorney, Neumiller, more than one year after the attorney had filed a motion to withdraw as counsel, but less than one year after the court granted that motion.  Section 340.6 also provides that the statute of limitations is tolled while the attorney continues to represented the client.  While a motion to withdraw is pending, Attorneys must continue representing their clients to avoid prejudice.  Nonetheless, Neumiller filed a motion for summary judgment because a substitution of attorney form had been circulated and executed by all concerned; the new attorney had simply failed to file it with the trial court.  Moreover, the new attorney was already actively engaged in representing Flake in the matter, including handling the three then-pending post-trial motions.  The court granted attorney’s summary judgment.  Held: Affirmed.

The end of an attorney-client relationship is not always signaled by a bright line, and “the failure to formally withdraw as attorney of record, standing alone, will not toll the statute of limitations under the rubric of continued representation.”  Based on the undisputed facts, the court accepted Neumiller’s theory on appeal, namely that no reasonable client could objectively believe Neumiller was still providing legal services after receiving the motion to withdraw alleging that the case had been handed off to successor counsel.

Posted on

Lender’s Seven-Year-Old Equitable Subrogation Claim Not Barred By Three Year Statute of Limitations

Bank of New York Mellon v. Citibank, 2/16/17, 2DCA/4

In 2006, borrower’s property was subject to a first trust deed, as well as a $500k second trust deed securing a line of credit with Citibank. Sneaky borrower refinanced the Citibank second for a higher amount ($600k), and almost simultaneously obtained a new line of credit for $1 million from Bank of New York’s predecessor (for ease, BNY).  BNY’s loan was supposed to be in second position, and neither borrowers nor Citibank informed BNY of the new Citibank loan, despite opportunities to do so.  It happened so quickly that BNY’s title search failed to pick up Citibank’s new trust deed.  After BNY’s loan was made, a comedy of errors ensued; ultimately BNY paid down Citibank’s new second and everything seemed right as rain.  That is, until Sneaky Borrower became Bad Borrower: It didn’t cancel the Citibank second and in 2007, it drew down $600,000 from the Citibank line of credit.  In 2011, Borrowers defaulted and Citibank commenced foreclosure proceedings; BNY sued in 2013, alleging equitable subrogation, statutory violations and various torts.  The trial granted Citibank’s demurrer without leave to amend based on Code Civ. Proc 338 three year statute of limitations.  Held: Reversed

The facts of this case are somewhat involved. The key takeaway for those who litigate equitable subrogation issues: The statute of limitations for a declaratory relief and equitable subrogation claims are the same as the legal or equitable claim on which they are based.  CCP 338(a) is a three year statute and applies to liabilities created by statute.  On the other hand, Civil Code 882.020 has a 10- or 60-year statute of limitations for enforcing a power of sale in a deed of trust.  To the extent that BNY claimed that Citibank violated a statute that required Citibank to reconvey the second trust deed once BNY paid it off, it would face a three year statute of limitations; to the extent that BNY asserted that it was equitably subrogated to Citibank’s position and its rights under the Citibank trust deed, BNY would be subject to the 10-/60 year statute. 

BNY apparently pled these theories in the alternative (it’s totally okay to plead in the alternative), and argued one or other theory with more or less force at the trial and the appellate levels. Citibank argued that BNY had waived key arguments by not making them. Nonetheless, the appellate court said that Citibank’s demurrer failed as a matter of law — BNY’s complaint had in fact alleged that BNY was equitably subrogated to Citibank’s trust deed. Thus, the demurrer should have been overruled.

A few other notes of interest:

The payoff of Citibank’s deed of trust securing a line of credit was insufficient to terminate the lien because the second expressly secured future advances.  In order to terminate the Citibank second, the borrowers would have had to sign a termination letter, which they did not do.  

The doctrine of equitable subrogation implies a right to recover from the principal debtor when the subrogee pays the debtor’s obligation to a creditor in order to protect the subrogee’s own interest.  That doctrine most often applies in insurance cases, but it applies in this context too.

Posted on

Plaintiff in Business Dispute Can’t Wait 6 Years to Sue for Issues Disclosed in Partnership Documents, But Wastes DCA’s Time with Weak Appeal Anyway

Stella v. Asset Management Consultants, 2/7/17, 2DCA/7

This appeal was dead on arrival.  Plaintiff invested in multiple limited partnerships with people he had done business with for about twenty years. He received and read the private placement memos.  Things didn’t go to his liking and six years later he sued everyone involved.  He claimed that the real estate commissions weren’t paid by the seller, as is customary; instead the price was negotiated and the commission was added to the price of the properties being acquired — just as the partnership documents said would happen!  The referee granted defendants’ demurrer based on the statute of limitations.  Held: Affirmed.

The partnership agreements contained a judicial reference provision per Code of Civ. Proc. 638, which required the trial judge to refer the matter to a referee to decide all issues of fact and law.  

Plaintiff argued against the statute of limitations defense based on a claim of “delayed discovery.”  The delayed discovery rule says that statute begins to run when the plaintiff suspects or should suspect that someone has done something wrong to him/her.  In other words, suspicion is enough to trigger the statute, even if the plaintiff doesn’t have the specific facts, which is what discovery is for.  

But the private placement memos contained this language:

“Market Value of Property. The purchase price of the Property has been negotiated to include a commission to be paid to Manager of the General Partner of the General Partner’s Manager by the Seller (see ‘General Partner’s Compensation and Fees’) in addition to other brokerage commissions owed by the Seller. Accordingly, the Seller would have sold the Property for a lower Purchase Price if it were not obligated to pay such commission.”

The limited partnership agreements had similar language. 

In granting the demurrer, the referee explained, “It is difficult to discern how Plaintiff could have been more clearly advised of the impact the Seller’s payment of the Commissions would have on the purchase price of the properties than by the statement in the [private placement memorandum] that, ‘Accordingly, the Seller would have sold the Property for a lower Purchase Price if it were not obligated to pay such commission.’” The referee found that disclosure language was clear and unambiguous and triggered the running of the limitations periods as of the date Stella purchased the limited partnership units—more than four years before he filed his original complaint.

Once again, the fact that parties can appeal doesn’t mean they should. RIP.