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September 27, 2007

Beal Bank, SSB v. Arter & Hadden, LLP, (2007) 42 Cal.4th 503

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The Supreme Court holds that the continuous representation tolling provision of C.C.P.  § 340.6 does not apply to the former law firm of a departed attorney who continues to represent the client through final resolution of the underlying case. 

Beal Bank retained Arter & Hadden, LLP, to handle some collection matters.  An associate, Steven Gubner, represented Beal Bank in the bankruptcy court, and a summary judgment ruling against Beal Bank was on appeal when he left the firm.  Gubner and his new firm took over the representation through the final appeal.  More than one year after Arter & Hadden was discharged, but within a year the final appeal was resolved against Beal Bank, it filed an action against, among others, Arter & Hadden and the individual partner in charge of the matter.

Arter & Hadden and the partner demurred on the basis of the one year statute of limitations, C.C.P.  § 340.6, relying on precedent that held continuing representation by a former firm attorney does not toll the statute of limitations against the firm or any attorney no longer representing the client.  Beal Bank relied on precedent holding the opposite.  The trial court noted the conflict of authority but found in favor of Arter & Hadden.

The Supreme Court considered the continuous representation tolling language of § 340.6(a).  The most natural reading of the statute would lead to the conclusion that the tolling provision only applies to the individual attorney continuing the representation.  Although § 340.6 has also been applied to actions against law firms, the Supreme Court had never considered the tolling provision in a case against both a law firm and an attorney no longer affiliated with the firm.  The Court concluded that the text of the statute supports the conclusion that an action against a law firm is tolled so long as that firm continues representation, but representation by one attorney or firm does not toll claims that may exist against a different, unaffiliated former attorney or firm.

Attorney malpractice actions were once governed by a strict two-year limitations period running from the time of the negligent act.  The Supreme Court subsequently ruled that a malpractice action accrues only when the client discovers or should discover the facts essential to the malpractice claim, including actual and appreciable harm.  Section 340.6 was then passed to ameliorate the effect of the delayed discovery ruling.  During its passage the tolling provisions were added, including the continuous representation provision which codified the rule as it had then developed in other states.  One state, New York, extended the continuous representation tolling only to the attorney or firm involved in the continuous representation.  The Court would not conclude the Legislature intended a broader application when it codified the continuous representation rule.

The interpretation naturally suggested by the text dovetails with the Legislature’s ostensible purpose, a balancing of the interests of clients, who should be allowed the benefit of a delayed discovery rule, and attorneys, who need a definite outside limitations period to obtain malpractice coverage.  The codified delayed discovery rule protects clients; the firm four-year outside limit on liability protects attorneys.

Although the statute’s four tolling provisions diminish the certainty about the scope of potential liability, countervailing policies justified extension of the liability period.  The continuous representation exception avoids disruption of an attorney-client relationship by a lawsuit while the attorney attempts to correct or minimize an apparent error and prevents an attorney from defeating a malpractice cause by representing the client until the statutory period has expired.

These purposes are minimally implicated where an attorney leaves a firm and takes a client.  The firm cannot attempt to allow the statute of limitations to expire and the firm lose the ability to mitigate any damage to the client.  A contrary reading would undermine the Legislature’s overall purposes in adopting section 340.6 by reviving indeterminate liability for firms every time an attorney leaves and takes a client.

The Court rejected the argument that the indirect disruption of the ongoing relationship between the client and the attorney continuing the representation was a paramount policy concern that justified extending continuous representation tolling to former law firms.  Disruption could be reduced through voluntary tolling agreements and the inherent authority of the trial court to stay malpractice suits pending resolution of underlying litigation.

The risk that the attorney continuing to represent the client might lull unwary clients and prevent them from suing assumes that attorneys will not meet their fiduciary obligation to disclose material facts to their clients, including acts of malpractice.  There is nothing to suggest that the continuing attorney would breach that obligation, because it would not reduce the attorney’s liability since their ongoing representation will continue to toll the limitations period on claims against them.

Comment: As the Court noted, the decrease in risk for former firms increases the risk to the attorney who leaves the firm and continues the representation.  An attorney who leaves a firm and continues the representation could be left assuming the entire liability for a negligent act committed at a former firm absent careful planning that includes the use of tolling agreements and stays.


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