Gust, Rosenfeld & Henderson v. Prudential Ins. Co. of America

• Citation: 898 P.2d 964,182 Ariz. 586
• Decision Date: 22 June 1995
• Docket Number: No. CV-94-0098-PR,CV-94-0098-PR
• Parties: GUST, ROSENFELD & HENDERSON, an Arizona partnership, Plaintiff/Appellee, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, Defendant/Appellant.
• Court: Supreme Court of Arizona

Page 964

898 P.2d 964

182 Ariz. 586

GUST, ROSENFELD & HENDERSON, an Arizona partnership, Plaintiff/Appellee, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, Defendant/Appellant.

No. CV-94-0098-PR.

Supreme Court of Arizona, In Banc.

June 22, 1995.

[182 Ariz. 587] Beus, Gilbert & Morrill by Martin A. Aronson and Anthony H. Misseldine, Phoenix, for plaintiff/appellee.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth and Beshears by Jeffrey B. Smith and Christopher Robbins, Phoenix, for defendant/appellant.

OPINION

MOELLER, Vice Chief Justice.

STATEMENT OF THE CASE

This is a breach of contract action arising out of a written lease for space in the building formerly known as the Valley Bank Center in Phoenix. Plaintiff law firm Gust, Rosenfeld & Henderson ("Gust") entered into the lease with Valley Bank Building, Inc., a wholly owned subsidiary of Valley National Bank (VNB). Gust filed this action against VNB's successor, Prudential Insurance Company.

The primary issue on appeal is whether the statute of limitations bars Gust's claim. The trial court applied the "discovery rule" and concluded that whether the claim was barred was a disputed issue of fact. The jury returned a verdict in favor of Gust. The trial court entered judgment accordingly, and the court of appeals affirmed in an unpublished, memorandum decision. Because Arizona law is unclear concerning the propriety of using the "discovery rule" in breach of contract cases, we granted Prudential's petition for review on that issue only. We have jurisdiction under Ariz. Const. art. 6, § 5(3) and Ariz.R.Civ.App.P. 23. For reasons stated below, we affirm.

FACTS AND PROCEDURAL HISTORY

Gust leased space in the Valley Bank Center in 1972. One provision of the lease, which was actually included in a letter that the leasing agent sent to Gust along with the lease itself, reads:

In addition, if the general rental rate structure for space equivalent to that which you are leasing shall fall below the rental provided for in the lease, your rental will be adjusted accordingly. This would also include monies available for above "building standard" construction. I will also advise you of any material changes in the standard lease form and other items which might effect [sic] your total expense in relation to other tenants who occupy equivalent space in the building, and pass any such benefits on to you up until the building is 85% occupied.

Given the resolution of disputed facts below on issues not now before this court, this "most favored nation" clause entitled Gust to receive as good a deal on rent and other allowances as any tenant who signed a lease at any time up until the building was eighty-five percent occupied.

Later in 1972, the landlord entered into a written lease with another law firm tenant, Snell & Wilmer ("Snell"), which contained terms more advantageous than those in Gust's lease with regard to remodeling allowance, carpet replacement provisions, and lease rental rates in years sixteen through twenty of the lease term. In 1974, VNB sold floors fourteen through thirty-four of the Valley Bank Center to defendant Prudential, which assumed VNB's obligations under the leases. Those floors include Gust's offices.

In August 1975, Mr. Devans Gust of the Gust law firm heard from a Snell lawyer that Snell had been asked to waive the most favored nations clause contained in Snell's lease. As a result of this conversation, Mr. Gust wrote to the building's leasing agent, Cushman & Wakefield, and asked if anything had occurred that would invoke Gust's most favored nation clause. The leasing agent replied that it had not violated Gust's most favored nation clause and that it never would.

Gust learned of Snell's more favorable lease in 1989 and filed this lawsuit shortly thereafter. Prudential moved for summary judgment alleging, among other things, that Gust's claim was barred by the six-year statute of limitations applicable to contract actions. See Ariz.Rev.Stat.Ann. (A.R.S.) § 12-548 (1992). In denying the motion, the trial court applied the rule that a cause of action does not accrue until a plaintiff discovers or should have discovered by reasonable diligence that he or she has been injured--the so-called "discovery rule." The trial court also held that it was a disputed issue of fact whether Gust knew or reasonably should have known of the breach more than six years before filing its claim.

At trial, Prudential again raised the statute of limitations in its motions for directed verdict, which the trial court denied. The trial court sent the case to the jury with instructions on the discovery rule, and the jury determined that the statute of limitations did not bar Gust's claim. It also found for Gust on the merits. In accordance with the jury's verdict, the trial court entered judgment for approximately $500,000 in damages and awarded approximately $70,000 in attorneys' fees. Prudential moved for judgment notwithstanding the verdict and for a new trial, challenging the trial court's rulings concerning the discovery rule. The trial court denied the motions.

Prudential appealed, and the court of appeals affirmed in a memorandum decision. Although Prudential's petition for review raised several issues, we granted review on only one issue.

ISSUE

The issue is whether the discovery rule can apply to breach of contract actions. We hold that it can.

DISCUSSION

The parties agree that the applicable statute of limitations is A.R.S. § 12-548, which allows a party to sue for breach of a written contract "within six years after the cause of action accrues." For purposes of resolving this issue, the parties agree that Valley National Bank breached the lease agreement in 1972 when it gave another tenant, Snell, a lease with terms better than Gust's. The parties dispute when Gust's claim "accrued" and, thus, when the statute of limitations began to run. Prudential argues that the discovery rule does not apply to this breach of contract action and that, as a matter of law, Gust's claim accrued when the breach occurred in 1972. Gust argues that the discovery rule applies and that the claim accrued when Gust knew or should have known by exercise of reasonable diligence that it had been injured. We hold that the trial court correctly applied the discovery rule. ¹

As a general matter, a cause of action accrues, and the statute of limitations commences, when one party is able to sue another. Sato v. Van Denburgh, 123 Ariz. 225, 227, 599 P.2d 181, 183 (1979); Norton v. Steinfeld, 36 Ariz. 536, 544, 288 P. 3, 5 (1930). The traditional construction of that rule has been that the period of limitations begins to run when the act upon which legal action is based took place, even though the plaintiff may be unaware of the facts underlying his or her claim. See Stockmen's State Bank v. Merchants' and Stockgrowers' Bank, 22 Ariz. 354, 363-64, 197 P. 888, 892 (1921). In an effort, however, to mitigate the harshness that the traditional rule was capable of inflicting on a plaintiff who did not know of the breach, courts have developed an exception. Under the "discovery rule," a plaintiff's cause of action does not accrue until the plaintiff knows or, in the exercise of reasonable diligence, should know the facts underlying the cause. 2 Calvin W. Corman, Limitations of Actions § 11.1.1 (1991).

In tort cases, Arizona courts were early in recognizing the equities behind the discovery rule. In 1932, this court held, in an action for trespass based on the unintentional, wrongful removal of underground ore, that the statute of limitations did not commence until the plaintiff knew or reasonably should have known of the removal of the ore. Tom Reed Gold Mines Co. v. United Eastern Mining Co., 39 Ariz. 533, 535, 8 P.2d 449, 450 (1932). The nature of the situation--the inherent opportunity to take the ore secretly--made it equitable to commence the limitations period upon discovery. Id. at 536-37, 8 P.2d at 450.

Similarly, this court held in 1948 that in a medical malpractice case where the injury was by nature difficult to detect, the statute of limitations did not begin to run until the plaintiff discovered the facts constituting his cause of action. Morrison v. Acton, 68 Ariz. 27, 36, 198 P.2d 590, 596 (1948). Our court of appeals expressly adopted the discovery rule in its current form in another medical malpractice case, Mayer v. Good Samaritan Hospital, 14 Ariz.App. 248, 252, 482 P.2d 497, 501 (1971) ("[A] cause of action in a malpractice case accrues when the plaintiff knew or by the exercise of reasonable diligence should have known of the defendant's conduct.").

Although the discovery rule found wide application first in tort cases, a significant number of courts in recent years have applied the discovery rule to contract cases as well, ² with at least three jurisdictions expressly extending the rule to all common law contract causes of action. Bauman v. Day, 892 P.2d 817, 828 (Alaska 1995) (applying discovery rule to breach of contract case involving a latent defect in real property; extending rule to common law contract causes of action); Poffenberger v. Risser, 290 Md. 631, 431 A.2d 677, 680 (1981) (applying rule to breach of contract case involving latent defect in construction; extending rule to all causes of action); Santee Portland Cement Co. v. Daniel Int'l Corp., 299 S.C. 269, 384 S.E.2d 693, 695 (1989) (extending discovery rule to contract claims).

The rationale behind the discovery rule is that it is unjust to deprive a plaintiff of a cause of action before the plaintiff has a reasonable basis for believing that a claim exists. 54 C.J.S. Limitations of Actions § 87(a) (1987). This reasoning is perfectly consistent with the kinds of cases to which this and other courts have applied the rule:

A common thread seems to run through all the types of actions where courts have applied the discovery rule. The injury or the act...