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May 25, 2012

Shifren v. Spiro 2012 WL 1877407

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The Second District holds that prior to a family law court’s decision about the effect of a trust on property interests there was no actual injury and the statute of limitations was tolled.

Kenneth and Barbara Shifren established a trust and executed an agreement transmuting all property received during their marriage to community property, including gifts and inheritances.  Subsequently, the Shifrens retained Randy Spiro to amend the trust to preserve a contemplated gift of real property to Kenneth from his mother as Kenneth’s separate property.  When the Shifrens divorced, Barbara successfully asserted that the gift was community property because the amended trust did not invalidate the prior transmutation agreement.

Kenneth filed suit against Spiro within a year of the family law court’s decision.  Spiro successfully argued on summary judgment that the action was time barred.  He asserted that the statute began to run either when the trust was amended almost eight years prior to the suit, when the gift was made seven years prior to the suit, or when fees were incurred to contest Barbara’s position in the dissolution action three years prior to the suit.

The Court of Appeal identified the issue as whether the statute was tolled under the “actual injury” tolling provision in the legal malpractice statute of limitations, California Code of Civil Procedure § 340.6(a)(1).  In a footnote, the court rejected the date the trust was amended and the date the property was transferred as dates of “actual injury.” The court reasoned that at the time of those events the poorly drafted amendment created only a potential for future harm.
The California Supreme Court has explicitly rejected a bright line “actual injury” rule.

Actual injury occurs when the client suffers legally recoverable damages.  This does not always require an adjudication or settlement in an underlying case; the determination requires an analysis of the claimed error and its consequences.  Once the client incurs compensable damages, uncertainty as to the ultimate amount does not toll the limitations period.

Thus, a settlement in an insurance coverage action premised on a failure to tender a claim did not toll the statute in a case against the insured client’s counsel.  At the point of settlement the client had already incurred losses by defending an underlying lawsuit, by diverting investment funds, and by defending a coverage action.  The settlement merely addressed the client’s pre-existing
predicament caused by the attorney’s failure to secure the client’s liability insurance benefits.

However, in some cases an underlying action must be resolved before the client can know that the attorney erred.  Prior to the family law court’s determination, Kenneth had no reason to believe that the trust amendment was inadequate to protect his separate property.  The court’s determination did not merely confirm Kenneth’s actual injury or exacerbate his pre-existing
predicament; the drafting error had no consequence until the adjudication in the marital dissolution action.

Attorneys’ fees incurred in the marital dissolution action did not constitute actual injury.  During the dissolution Kenneth and Barbara disputed the terms of the amended trust.  Kenneth could have prevailed, and Spiro would have been vindicated.

The Court reasoned that the legal malpractice statute of limitations does not require a client to litigate two lawsuits simultaneously, one asserting that the attorney made no error, and the other asserting that the attorney erred.  Otherwise both parties in a dispute over a mutual attorney’s written work would be required to file premature legal malpractice actions prior to the outcome of the litigated dispute.

Furthermore, there is no reported case that awards litigation fees as legal malpractice damages where parties to an agreement dispute its validity, and the outcome determines attorney error.  Recoverable attorneys’ fees in reported legal malpractice cases include defense costs incurred when an attorney fails to tender to an insurance carrier; fees paid to defend a collateral action or to mitigate damages; and fees to defend an action seeking to escape the consequences of an attorney’s negligence.

Comment: This case will likely lead to disputes about tolling under the “actual injury” provision.  Clients will likely argue that an underlying matter establishes attorney error; attorneys will maintain that such litigation merely addresses a preexisting problem.  The court’s summary conclusion that the date the trust was amended constituted only the potential for future harm precluded analysis of whether the overall four-year time limitation should apply to bar the claim.

 

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