Beal Bank, Ssb v. Arter & Hadden, Llp

• Decision Date: 27 September 2007
• Docket Number: No. S141131.,S141131.
• Court: California Supreme Court
• Parties: BEAL BANK, SSB, Plaintiff and Appellant, v. ARTER & HADDEN, LLP, et al., Defendants and Respondents.

66 Cal.Rptr.3d 52

42 Cal.4th 503

167 P.3d 666

BEAL BANK, SSB, Plaintiff and Appellant, v. ARTER & HADDEN, LLP, et al., Defendants and Respondents.

No. S141131.

Supreme Court of California.

September 27, 2007.

Leland, Parachini, Steinberg, Matzger & Melnick, Harvey L. Gould, San Francisco; Carroll, Burdick & McDonough, Vicki L. Freimann, Richard Fannan, Los Angeles, and David M. Rice, San Francisco, for Plaintiff and Appellant.

Horvitz & Levy, David M. Axelrad, Frederic D. Cohen, Encino; Moscarino & Connolly, John M. Moscarino and Paula C. Greenspan, Los Angeles, for Defendants and Respondents.

Jones Day, Elwood Lui, Eugenia Castruccio Salamon, Los Angeles; Snell & Wilmer and Richard A. Derevan, Costa Mesa, for Los Angeles County Bar Association and Orange County Bar Association as Amici Curiae on behalf of Defendants and Respondents.

Heller Ehrman and Adam M. Cole, San Francisco, for Bingham McCutchen, Cooley Godward Kronish, Farella Braun & Martel, Howard Rice Nemerovski Canady Falk & Rabkin, Morrison & Foerster, Orrick Herrington & Sutcliffe, Pillsbury Winthrop Shaw Pittman and Thelen Reid & Priest as Amici Curiae on behalf of Defendants and Respondents.

Robie & Matthai, Edith R. Matthai, Kyle Kveton and Steven S. Fleischman, Los Angeles, for Association of Southern California Defense Counsel as Amicus Curiae on behalf of Defendants and Respondents.

WERDEGAR, J.

Under California law, the statute of limitations for attorney malpractice claims arising from a given matter is tolled for the duration of the attorney's representation of the client in that matter. (Code Civ. Proc, § 340.6, subd. (a)(2).) When an attorney leaves a firm and takes a client with him, does the tolling in ongoing matters continue for claims against the former firm and partners? We conclude it does not and reverse the judgment of the Court of Appeal.

FACTUAL AND PROCEDURAL BACKGROUND¹

In 1996, plaintiff Beal Bank, SSB, (Beal Bank) acquired certain loans from another bank, which had been placed into conservatorship by the Federal Deposit Insurance Corporation (FDIC). The loan documents contained default interest clauses that provided that in the event of default, the entire balance of principal and interest would become due and thereafter bear interest at an increased rate over and above the contract rate. The debtors missed payments on some; of the loans. By the time Beal Bank acquired the loans, the debtors had negotiated with the FDIC discounted payoffs of the remaining loans, but had failed to make those payments as well. Beal Bank sent the debtors notices of acceleration and default and recorded notices of default.

In March 1997, Beal Bank retained respondent Arter & Hadden, LLP, to handle its collection efforts. Respondent Eric Dean, a partner, was the attorney primarily responsible for the representation. Counsel for the debtors advised Arter & Hadden, LLP, through correspondence and other means, that Beal Bank had no legal or factual basis for attempting to collect the default interest.

In June 1997, the debtors transferred the collateral for the outstanding loans to an entity they controlled. On the following day, that entity filed for bankruptcy protection. Steven Gubner, an associate at Arter & Hadden, LLP, then began representing Beal Bank in the bankruptcy court. On Beal Elank's behalf, Arter & Hadden, LLP, filed a motion for summary judgment in the bankruptcy court, arguing that Beal Bank was entitled to recover the default interest. The bankruptcy court ruled against Beal Bank and entered its final order on May 28, 1998. Beal Bank appealed the matter to the district court.

On December 31, 1998, Gubner left the employ of Arter & Hadden, LLP, and formed Gubner & Associates, which later became Ezra, Brutzkus & Gubner. In turn, Gubner's new firms took over representation of Beal Bank. In April 1999, the district court affirmed the bankruptcy court's ruling, and Beal Bank, represented by Ezra, Brutzkus & Gubner, appealed to the Ninth Circuit Court of Appeals. On September 25, 2001, the Ninth Circuit issued its opinion, affirming the rulings of the lower courts. (In re Crystal Properties, Ltd., L.P. (9th Cir.2001) 268 F.3d 743.)

On September 24, 2002, Beal Bank filed a legal malpractice action against the attorneys who had represented it in the unsuccessful litigation: Gubner; Gubner & Associates; Ezra, Brutzkus & Gubner; Arter & Hadden, LLP; and Dean. Two days later, Gubner filed a notice of withdrawal as counsel for Beal Bank in the bankruptcy court. All parties thereafter entered a tolling agreement covering the period September 24, 2002, to December 31, 2003, and Beal Bank dismissed the action.

On December 30, 2003, Beal Bank filed this action against the same defendants. It alleged defendants had failed to conduct any legal research, advise Beal Bank that its position was unlikely to prevail, or inform it of the risks involved in continuing to maintain its position. As a result, Beal Bank incurred unnecessary legal fees, was deprived of an opportunity to settle with the debtors on favorable terms, and was forced to defend a breach of contract action brought by the debtors.

Arter & Hadden, LLP, and Dean demurred, arguing that Beal Bank suffered an actual injury on May 28, 1998, the date the bankruptcy court entered an adverse ruling against it, which commenced the running of the one-year statute of limitations under Code of Civil Procedure section 340.6 on Beal Bank's malpractice claim. Relying on Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509, 80 Cal.Rptr.2d 94 (Crouse), which held that continuing representation by a firm's ex-attorney does not toll the statute of limitations against the firm, they argued that the statute of limitations was tolled as to them only until December 31, 1998, when Gubner left Arter & Hadden, LLP, taking Beal Bank with him as a client, and Arter & Hadden, LLP, ceased representing Beal Bank. Accordingly, the one-year limitations period expired on December 31, 1999.

In opposition, relying on Beane v. Paulsen (1993) 21 Cal.App.4th 89, 26 Cal. Rptr.2d 486 (Beane), which held that continuing representation by a firm's ex-attorney does toll the statute of limitations against the firm and its partners, Beal Bank argued that the statute of limitations was tolled during the time Gubner continued to represent Beal Bank and, by virtue of the parties' 2002 tolling agreement, its malpractice action was timely filed.

The trial court acknowledged the conflict of authority between Crouse, supra, 67 Cal.App.4th 1509, 80 Cal.Rptr.2d 94, and Beane, supra, 21 Cal.App.4th 89, 26 Cal.Rptr.2d 486. It found Crouse more persuasive, concluded the claims were time-barred, sustained the demurrers without leave to amend, and entered judgments of dismissal as to Dean and Arter & Hadden, LLP.²

On appeal, the Court of Appeal agreed with the reasoning of Beane, supra, 21 Cal.App.4th 89, 26 Cal.Rptr.2d 486, disagreed with the reasoning of Crouse, supra, 67 Cal.App.4th 1509, 80 Cal.Rptr.2d 94, and reversed. It held equitable considerations and potential disruption of the ongoing relationship between the departed attorney and client by an indemnity suit justified tolling the statute of limitations against the former firm.

We granted review to resolve this split of authority.

DISCUSSION

As in all cases of statutory interpretation, we begin with the language of the governing statute. (Eisner v. Uveges (2004) 34 Cal.4th 915, 927, 22 Cal.Rptr.3d 530, 102 P.3d 915.) Our role in interpreting it is "to divine and give effect to the Legislature's intent." (Brodie v. Workers' Comp. Appeals Bd. (2007) 40 Cal.4th 1313, 1324, 57 Cal.Rptr.3d 644, 156 P.3d 1100.) If the statute's text evinces an unmistakable plain meaning, we need go no further. (Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 750, 758, 47 Cal.Rptr.3d 216, 139 P.3d 1169.) If it is ambiguous, we may consider a variety of extrinsic sources in order to identify the interpretation that best effectuates the legislative intent. (Ibid.)

Code of Civil Procedure section 340.6, subdivision (a)³ provides in part: "An action against an attorney for a wrongful act or omission ... arising in the performance of professional services shall be commenced within one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first. In no event shall the time for commencement of legal action exceed four years except [where specified circumstances give rise to tolling]." Thus, the limitations period is one year from actual or imputed discovery, or four years (whichever is sooner), unless tolling applies.

The parties agree this action is timely if and only if Gubner's continued representation of Beal Bank after he left Arter & Hadden tolled the claims against Arter & Hadden under section 340.6, subdivision (a)(2), which tolls claims so long as "[t]he attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred." Significantly, while section 340.6, subdivision (a) defines the limitations period for "[a]n action against an attorney," the tolling provision in subdivision (a)(2) extends the limitations period only during ongoing representation by "[t]he attorney." Under ordinary rules of grammar, "[t]he attorney" in subdivision (a)(2) refers back to the "attorney" who is the target of the action in subdivision (a). (Cf. People v. Briceno (2004) 34 Cal.4th 451, 461, 20 Cal.Rptr.3d 418, 99 P.3d 1007 [word used in a statute presumed to have the same meaning throughout].) Thus, under the most natural reading of the statute, an action against an individual attorney is tolled so long as that attorney continues representation; conversely, an attorney's continued representation tolls an action only against that...