Herrmann v. McMenomy & Severson

• Decision Date: 25 August 1998
• Docket Number: No. C2-98-388,C2-98-388
• Citation: 583 N.W.2d 283
• Court: Minnesota Court of Appeals
• Parties: Al HERRMANN, et al., Appellants, v. McMENOMY & SEVERSON, et al., Respondents, Bolin, Rucinski & Company, Ltd., et al., Defendants.

Page 283

583 N.W.2d 283

Al HERRMANN, et al., Appellants, v. McMENOMY & SEVERSON, et al., Respondents Bolin, Rucinski & Company, Ltd., et al., Defendants.

No. C2-98-388.

Court of Appeals of Minnesota.

Aug. 25, 1998.

Review Granted Oct. 20, 1998.

Syllabus by the Court

As a general rule, in a legal malpractice action based on the attorney's exposure of the client to a risk of pecuniary loss, the statute of limitations does not begin to run until the risk manifests in some form reasonably certain to cause the client to expend time and money or the client otherwise suffers pecuniary loss.

Gary Stoneking, Stoneking Law Office, Minneapolis, for appellants.

Richard J. Thomas, Bryon G. Ascheman, Burke & Thomas, Saint Paul, for respondents.

Considered and decided by WILLIS, P.J., HUSPENI and SCHULTZ, JJ. ^*

OPINION

WILLIS, Judge.

Appellants Al Herrmann and Al Herrmann Construction, Inc., challenge the district court's conclusion that their legal malpractice action is time-barred. We reverse and remand.

FACTS

For purposes of summary judgment, the parties stipulated to the relevant facts. In 1986, respondents are attorneys who assisted appellant Al Herrmann, the sole owner and employee of appellant Al Herrmann Construction, Inc. (AHC), in establishing a trust and pension plan, of which Herrmann was sole trustee and eventual beneficiary. The trust became a partner in a partnership named Bridlewilde that was created to develop and sell real estate. Between 1987 and 1993, AHC transferred property to Bridlewilde to be held pending sale; Bridlewilde then re-sold the property to AHC for sale to the ultimate purchaser. Such transactions between related parties are prohibited under federal tax law and require payment of a special excise tax, which AHC did not pay.

In 1989, respondents terminated their attorney-client relationship with Herrmann and his related entities. In 1993, appellants terminated their relationship with their accounting firm, the other defendants in this case. Appellants' new accountants informed them that the transactions between AHC and Bridlewilde were prohibited and could subject AHC to tax liability. In May 1993, AHC paid its new accountants to terminate the trust.

In May 1996, the IRS audited AHC and discovered the prohibited transactions. The IRS issued a draft assessment in the amount of $1.4 million against AHC, but the final amount of liability has not been determined.

On November 7, 1996, Herrmann and AHC commenced an action against their former attorneys and accountants, alleging legal and accounting malpractice in failing to warn of the illegality of the transactions. Respondents moved for summary judgment on the ground that the statute of limitations had expired. The district court granted the motion, concluding that the limitation period had begun to run on the date of the first prohibited transaction in 1987. The court ordered immediate entry of judgment for respondents, from which Herrmann and AHC appeal. Because we conclude that the statute of limitations began to run in 1993, we reverse and remand.

ISSUE

Did the district court err in concluding that appellants' action was time-barred?

ANALYSIS

This court reviews de novo a grant of summary judgment to determine whether there is a disputed issue of material fact and whether the district court correctly applied the law. Zip Sort, Inc. v. Commissioner of Revenue, 567 N.W.2d 34, 37 (Minn.1997). Where the facts are not in dispute, the question of when a statute of limitations begins to run is one of law, which this court also reviews de novo. Weeks v. American Family Mut. Ins. Co., 580 N.W.2d 24, 26 (Minn.1998).

Legal malpractice actions are governed by the six-year statute of limitations provided in Minn.Stat. § 541.05, subd. 1(5) (1996). See Sabes & Richman v. Muenzer, 431 N.W.2d 916, 918 (Minn.App.1988) (applying Minn.Stat. § 541.05, subd. 1(5) (1986)), review denied (Minn. Jan. 25, 1989). In Minnesota, a statutory limitation period begins to run when "the cause of action accrues." Minn.Stat. § 541.01 (1996). A cause of action accrues when all of its elements exist to the extent that the claim could withstand a motion to dismiss. Bonhiver v. Graff, 311 Minn. 111, 117, 248 N.W.2d 291, 296 (1976). A legal malpractice claim generally accrues when damage occurs as a result of the attorney's negligence. Sabes & Richman, 431 N.W.2d at 918. The supreme court has specifically rejected the contention that a limitation period in a tort action runs from the date when damage is or reasonably should have been discovered:

Courts have no power to extend or modify statutory limitation periods. Chapter 541 itself sets forth specific conduct or circumstances which will toll the running of the limitation periods. The legislature has not seen fit to provide a statutory tolling period to protect plaintiffs from their own ignorance although we held many years ago that such ignorance does not toll statutes of limitations.

Johnson v. Winthrop Labs. Div. of Sterling Drug, Inc., 291 Minn. 145, 151, 190 N.W.2d 77, 81 (1971) (citations omitted). Thus,

[t]he general rule is that ignorance of a cause of action which does not involve continuing negligence or trespass or fraud does not prevent the running of the statute of limitations.

Toombs v. Daniels, 361 N.W.2d 801, 809 (Minn.1985).

I. Minnesota Legal Malpractice Precedent

The supreme court has not addressed the issue of when damage occurs for purposes of a legal malpractice claim, but this court has done so in three cases. ¹ First, where the plaintiffs alleged that their attorney was negligent in negotiating the settlement of a real estate claim that eliminated an interest escalator clause from their contract for deed, this court concluded that the cause of action accrued when the contract for deed was executed. Grimm v. O'Connor, 392 N.W.2d 40, 42, 43 (Minn.App.1986). This court rejected the plaintiffs' contention that their claim did not accrue until they refinanced the property at a higher interest rate nine years after the contract was executed; the court reasoned that a contract for deed "has an ascertainable market value" that was affected immediately upon its execution by the absence of the interest escalator clause. Id. at 43.

Next, in a case factually analogous to this, the plaintiffs alleged that their attorneys negligently failed to warn them that the real estate rental arrangement they had entered into would disqualify them from the favorable estate tax status they had claimed. May v. First Nat'l Bank of Grand Forks, 427 N.W.2d 285, 288-89 (Minn.App.1988), review denied (Minn. Oct. 26, 1988). The IRS filed a lien against the property in 1980 but did not assess a deficiency until 1986. This court reasoned that the 1980 lien constituted damage because it was a cloud on the property's title that required the expenditure of time and money either to pay the amount of the lien or to prove the lien was improper; it also agreed with the district court's conclusion that actual damage had to have occurred sometime between the date the first rental payment was accepted in 1979 and the termination of the attorney-client relationship in 1981. ² Id. at 289. The court did not specify whether the claim had accrued in 1979, 1980, or 1981, presumably because all possible dates of accrual were more than six years before the action was commenced.

Finally, in Sabes & Richman, the plaintiffs sued their attorneys for failing to register a copyright on an advertising brochure, which resulted in another company distributing a similar brochure. 431 N.W.2d at 917-18. This court concluded that the damage occurred and the cause of action accrued when the second company's brochure was distributed and not when the plaintiffs received notice of the certainty of the damage by losing their federal copyright infringement action. Id. at 918.

Respondents argue, and the district court agreed, that appellants' claim for legal malpractice could have withstood a motion to dismiss at the time of the first prohibited transaction in 1987. Respondents contend AHC at that time suffered a diminution in its market value similar to that of the contract for deed in Grimm. But by that rationale, the claim in Sabes & Richman should have accrued when the plaintiffs distributed a brochure without proper copyright protection; the market value of an uncopyrighted brochure design is less than that of a copyrighted design.

On the facts of Sabes & Richman, there were three distinct points at which the court could have held the claim to have accrued: (1) when the plaintiffs were exposed to a risk of loss of money and intellectual property rights through the distribution of an inadequately protected brochure, (2) when that risk manifested itself in the form of another company's distribution of similar brochures, or (3) when it became evident through the plaintiffs' loss of their copyright infringement suit that their injury would not be compensated for by a damage award and that the injury had been caused by their attorney's negligence. This court chose the second alternative. But this appears inconsistent with Grimm, in which this court held the claim to have accrued when the clients were placed at a risk of pecuniary loss by their execution of a contract for deed without interest escalator protection, even though that risk would not have manifested absent an interest rate increase or sale of the contract.

If Grimm controls this case and a claim for legal malpractice accrues when an attorney's conduct places the client at the risk of pecuniary loss, even though that risk will not manifest absent an intervening factor, then respondents are correct that appellants' claim accrued on the date of the first prohibited transaction in 1987 because appellants at that point were exposed to a risk of tax penalties in the event of an audit. But if Sabes & Richman controls and damage is established only when the risk to which the attorneys'...