Eckert v. Schaal

Decision Date15 May 1967
Citation251 Cal.App.2d 1,58 Cal.Rptr. 817
CourtCalifornia Court of Appeals Court of Appeals
PartiesRaymond J. ECKERT, William I. Winterburn and Frank E. Hawkins, Cross-Complainants and Appellants v. Thomas E. SCHAAL, Cross-Defendant and Respondent. Civ. 23080.

Janin, Morgan, Brenner & Freeman, Harry L. Freeman, San Francisco, for appellants.

Cushing, Cullinan, Hancock & Rothert, by Harlow P. Rothert, San Francisco, for respondent.

CHRISTIAN, Associate Justice.

In a derivative suit brought to recover secret profits gained by appellants at the expense of the corporation which they had promoted and formed, appellants cross-complained against their former attorney for negligently giving advice which led them into a position of liability to the corporation and to its shareholders. Cross-defendant attorney demurred on the ground that the cause of action against him was barred by the two-year statute of limitations. (Code Civ.Proc. § 339, subd. 1.) We hold that the trial court correctly sustained the demurrer.

Put into narrative form, the pertinent allegations of the amended cross-complaint follow. In March, 1962, appellants (the clients) became interested in trying to buy at a bargain price the Weber Ranch in Marin County. Respondent (the attorney) was engaged for the purpose of forming a joint venture among the clients, negotiating the purchase in behalf of the joint venture, and forming a corporation to issue shares to local residents and with the proceeds purchase the property from the joint venturing clients. The purchase of the property was arranged for $215,000, which the clients regarded as a bargain price. On March 28, 1962, the clients executed an agreement among themselves, drafted by the attorney, to sell the property to a corporation which the parties would form for that purchase, or complete the purchase themselves as equal owners.

The attorney advised his clients that they could lawfully realize a profit upon the resale of the property to a corporation promoted by them. Acting on instructions given in reliance on that advice, the attorney drafted a pre-incorporation subscription agreement which provided that the corporation would purchase the property for $319,800. The attorney advised his clients that they need not disclose to other subscribers the fact that they planned to make a profit of $104,800 in the transaction. In fact, the profit was disclosed to only one subscriber in response to his specific inquiry.

Articles of incorporation were filed with the Secretary of State on April 30, 1962. Title to the property was transferred to the corporation and on May 31, 1962, the clients received in exchange cash and corporate stock representing the agreed purchase price. Between June 7 and July 6, the corporation issued 218 shares of stock of which a major proportion were sold to persons other than the original promoters. On January 6, 1964, after various skirmishes not pertinent here, certain of the shareholders brought a derivative action to recover the clients' secret profits. On August 24, 1964, the clients cross-complained against their attorney alleging his malpractice in advising them that they had no duty to disclose promoters' profits and seeking indemnity in the amount of their liability as established in the main action.

An amendment to the cross-complaint added an allegation that at the time of a shareholders' meeting on December 17, 1962, the attorney was still acting for his clients in a professional capacity and negligently failed to advise them of their continuing duty to disclose secret profits.

The attorney demurred, asserting that more than two years had elapsed from the negligent rendering of advice, and from the time the cause of action arose, to the filing of the cross-complaint. The demurrer further asserted that the allegations added to the cross-complaint by amendment do not show that a new cause of action arose on December 17, because the advice given that day was not acted upon by the clients and did not cause detriment to them. After sustaining the demurrer, the court entered judgment dismissing the cross-complaint.

On appeal, the clients assert that (1) the statute of limitations runs from the time an attorney's negligent advice causes actionable damage rather than from the time such advice was given and (2) in any event the attorney was guilty of negligence within two years of the filing of the cross-complaint. In their opening brief, appellants urged us to hold that by analogy to the rule applicable to medical malpractice actions the period of limitation does not commence to run until the client discovers or should have discovered the negligence of the attorney. That point has now been abandoned, appellants conceding that we are bound by the recent contrary decision of the California Supreme Court in Alter v. Michael (1966) 64 Cal.2d 480, 483, 50 Cal.Rptr. 553, 413 P.2d 153.

COMMENCEMENT OF THE PERIOD OF LIMITATION

Promoters, directors, and officers of corporations have a fiduciary duty to deal in good faith with or on behalf of the corporation's shareholders and pre-incorporation subscribers. (Corp.Code, § 820; Tevis v. Beigel (1957) 156 Cal.App.2d 8, 319 P.2d 98.) Suit may be brought by or on behalf of the corporation to recover secret profits. (Corp.Code § 834; Burt v. Irvine Co. (1965) 237 Cal.App.2d 828, 851, 47 Cal.Rptr. 392.) If no stock certificates are outstanding, subscribers are 'shareholders' to whom the fiduciary duty is owed. (Corp.Code, § 103; Brown v. North Ventura Road Dev. Co. (1963) 216 Cal.App.2d 227, 233, 30 Cal.Rptr. 568.)

Appellants in effect concede that under these principles they are liable to the other shareholders and subscribers, and allege that they were led into this position by their attorney's erroneous advice, negligently given, that they need not disclose the secret profit. The elements of a cause of action for malpractice arising out of legal advice negligently given are: (1) the existence of the attorney-client relationship; (2) the negligent giving of advice in the course of that relationship; (3) change of position on the part of the client in reliance on that advice; (4) the suffering of loss and injury as a direct and proximate result of the client's change of position. (Modica v. Crist (1954) 129 Cal.App.2d 144, 146, 276 P.2d 614.)

It is generally held that the period of limitation applicable to any class of action commences when the cause of action is complete (Merchants Fire Assur. Corp. of New York v. Retail Credit Co., Inc. (1962) 206 Cal.App.2d 55, 58, 23 Cal.Rptr. 544.) It is clear that the attorney-client relationship arose, advice was negligently given, and the clients changed their position in reliance on that advice, all more than two years before the filing of the cross-complaint. The crucial question, therefore, is when loss and injury was suffered. Appellants contend that no damage was sustained until the shareholders' derivative suit was filed against them. Respondent maintains that damage occurred when the clients fell under the burden of liability to the corporation, and other persons interested in it, by selling land to the corporation without disclosing their secret profit. That liability attached not later than July 6, 1962, by which time other shareholders had subscribed for and received shares in the corporation. Respondent also points out that as soon as the tainted transaction was completed the clients were deprived of any expectation of selling the property to anyone else and thereby realizing a profit. This is because the corporation was entitled to keep the property and compel the promoters to disgorge their entire profit.

The general rule in the United States is that '* * * in the absence of fraudulent concealment, where an attorney at law is guilty of negligence or breach of duty in performing services for his client, the client's cause of action accrues and the statute begins to run at the time when the negligence or breach of duty occurs, not at the time when it is discovered or actual damage results or is fully ascertained; * * *.' (54 C.J.S. Limitations of Actions § 135, subd. c, p. 57.) The California decisions conform to that statement. In Lattin v. Gillette (1892) 95 Cal. 317, 319, 30 P. 545, 546, contentions closely resembling those advanced in the...

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    ...by two Court of Appeal decisions (Yandell v. Baker (1968) 258 Cal.App.2d 308, 314--315, 65 Cal.Rptr. 606; Eckert v. Schaal (1967) 251 Cal.App.2d 1, 5--6, 58 Cal.Rptr. 817), and noted in dictum in many cases in this court 14 and the Court of Appeal. 15 Characteristically, none of the cases a......
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