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February 2, 2014

Prakashpalan v. Engstrom, Lipscomb and Lack (2014) 223 Cal.App.4th 1105

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The Second District hold claims based on distribution of settlement proceeds 15 years prior were timely based on the Probate Code.  

Prakashpalan’shome was severely damaged by the 1994 Northridge earthquake. Engstrom represented Prakashpalan and other property owners in a bad faith and property damage claim against State Farm. State Farm paid over $100 million to settle 93 claims. Fifteen years later, Prakashpalan contacted 17 plaintiffs and determined, based on a mathematical analysis, that there was no accounting for over $22 million of settlement funds. Prakashpalan filed a complaint alleging legal malpractice and fraud; Engstrom demurred that the claims were time-barred, speculative, and could not be defended without invading the attorney-client privilege of other clients.

The Court of Appeal held the malpractice and breach of fiduciary duty claims were time-barred because the injury occurred more than 15 years earlier, when Engstrom allegedly withheld the settlement funds. However, the fraud-based claims arising out of Engstrom’s alleged failure to distribute the aggregate settlement proceeds were governed by Probate Code section 16460, applicable to a fiduciary’s duty to provide an accounting to a beneficiary. The statute allows three years from receipt of an accounting sufficient to put a beneficiary on notice of a claim, or three years from discovery of a claim, to file an action. Engstrom never provided an accounting sufficient to determine whether the settlement proceeds were fairly and accurately distributed. Thus, the limitations period on the fraud claims commenced upon Prakasplan’s discovery that $22 million was unaccounted for based on his survey of other plaintiffs.

The Court rejected Engstrom’s contention the fraud-based claims were speculative. The Professional Rules of Conduct required an accounting, and Prakashpalan alleged he did not receive sufficient information about the disposition of the aggregate settlement. The lack of specific allegations was due to Engstrom’s failure to adequately account.

Finally, an attorney’s duty of confidentiality did not preclude disclosure of information sufficient to permit the aggregate settlement plaintiffs to determine whether the settlement funds had been properly distributed.

Comment: The case is significant to all attorneys who hold funds for a client. The failure to properly account to a client could result in a timely lawsuit far in the future.

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