The Second District concludes misappropriation claims against attorneys filed 15 years after an aggregate settlement were untimely.
In Prakashpalan v. Engstrom, Lipscomb & Lack (2014) 23 Cal App 4th 1105 the Second District held an attorney’s responsibility to account for settlement proceeds was governed by the fiduciary provisions of the Probate Code. The statute of limitations for a clients’ fraud-based claims arising out of an attorney’s failure to properly distribute aggregate settlement proceeds was governed by Probate Code § 16040, and was tolled for over 15 years because the client had never received an accounting. In Britton, the same Division of the Second District concluded similar claims were untimely because the clients were on inquiry notice.
Plaintiffs sued three law firms that represented them in litigation against State Farm arising from the 1994 Northridge Earthquake. They alleged the firms failed to obtain Plaintiffs’ consent to an aggregate settlement, misappropriated funds, and failed to account for settlement funds.
Plaintiffs contended they did not discover their attorneys’ wrongdoing until over a decade later, when the Prakashpalans contacted them. At that time, Plaintiffs performed calculations they claimed showed unaccounted settlement funds. Within one year, Plaintiffs demanded an accounting, received no response, and sued.
In upholding the trial court’s dismissal on demurrer, the Britton court distinguished Prakashpalan. Prakashpalan alleged he first suspected fraud after random contact with a sampling of State Farm litigation plaintiffs and a mathematical analysis of the settlement.
By contrast, the Britton Plaintiffs admitted in their complaint the trial court appointed retired judges as special masters to recommend allocations of an aggregate settlement, and to hear appeals from recommended allocations. The Britton Plaintiffs did not challenge their allocations when they settled their claims over 15 years prior to filing suit. Plaintiffs knew they were not receiving an accounting, that all of their past and future claims were waived, and that they were not provided access to the complete settlement agreement or full description of the allocations. This indicated the Plaintiffs were on inquiry notice of their claims during the underlying settlement.
The three year fraud statute of limitations ran when all avenues of recourse – the special master proceedings, its internal appeal process, and a challenge to the allocation – expired. At the time of settlement Plaintiffs were on notice to investigate, and, through the special master, had the means to investigate, the settlement and the allocation of settlement funds.
Plaintiffs’ claims under Business & Professions Code § 6091, which requires an attorney upon request to furnish a complete statement of the trust account funds received and disbursed, were also untimely. It is unclear in the context of an aggregate settlement who is entitled to a § 6091 accounting. Moreover, Plaintiffs admitted they signed an agreement knowing they would not receive aggregate settlement accounting information.
A concurrence concluded Plaintiffs’ claims were governed by Code of Civil Procedure § 340.6, which had long passed. Further, Plaintiffs failed to adequately alleged facts which would constitute fraud or willful concealment, which are excepted from § 340.6.
Comment: By re-emphasizing the impact of inquiry notice, Britton reins in the reach of Prakashpalan and its prospect of client challenges to aggregate settlements many years after the fact.