John Kohl & Co. P.C. v. Dearborn & Ewing

• Decision Date: 05 October 1998
• Citation: 977 S.W.2d 528
• Parties: JOHN KOHL & COMPANY P.C., John B. Kohl, Iii and Helen H. Kohl, Individually, and John B. Kohl, III, Trustee, as Trustee of the John Kohl & Company, P.C., Profit Sharing Plan, Plaintiffs-Appellants, v. DEARBORN & EWING, a Tennessee General Partnership, and Dan E. Huffstutter, Defendants-Appellees,
• Court: Tennessee Supreme Court

Page 528

977 S.W.2d 528

JOHN KOHL & COMPANY P.C., John B. Kohl, Iii and Helen H.

Kohl, Individually, and John B. Kohl, III,

Trustee, as Trustee of the John Kohl &

Company, P.C., Profit Sharing

Plan, Plaintiffs-Appellants, v. DEARBORN & EWING, a Tennessee General Partnership, and Dan

E. Huffstutter, Defendants-Appellees,

Supreme Court of Tennessee,

at Nashville.

Oct. 5, 1998.

Steven C. Douse, King & Ballow, Nashville, for Plaintiffs-Appellants.

John Branham, Kathryn Barnett, Branham & Day, P.C., Nashville, for Defendants-Appellees.

OPINION

DROWOTA, Justice.

In this legal malpractice action, the plaintiffs, John Kohl & Company P.C., John B. Kohl, III and Helen H. Kohl, Individually, and John B. Kohl, III, Trustee, as Trustee of the John Kohl & Company, P.C. Profit Sharing Plan, (collectively referred to as the "plaintiffs"), appeal from the Court of Appeals' decision affirming the trial court's finding that the statute of limitations barred the plaintiffs' recovery for negligently provided legal advice pertaining to certain business matters. ¹ The plaintiffs have also appealed from the denial of legal fees associated with prosecuting this action against the defendant, Dearborn and Ewing, and one of its associates, Dan Huffstutter. The issues before us are: (1) whether certain of the plaintiffs' claims are barred by the one-year statute of limitations applicable to legal malpractice actions, see TENN.CODE ANN. § 28-3-104, AND (2)² whether the plaintiffs are entitled to recover legal fees associated with prosecuting this action. For the reasons explained hereafter, the decision of the Court of Appeals is affirmed.

BACKGROUND

Plaintiffs John and Helen Kohl have been in the land surveying business since 1963. In 1983, they decided to incorporate their business and sought legal advice from the defendant law firm of Dearborn and Ewing. The defendant, Dan Huffstutter, an associate in the law firm, assisted the Kohls in incorporating their business. He also advised them from 1983 to 1988 on issues related to tax, business, and personal finance.

In 1984, Huffstutter advised the Kohls to adopt a profit sharing plan for the benefit of themselves and their employees, which they did. Huffstutter aided in the development of the plan and administered it until 1988. He also advised the Kohls in 1986 on how to finance the purchase of a building to accommodate their expanding business. Pursuant to Huffstutter's advice, the Kohls obtained a loan from a bank, a portion of which was guaranteed by the Small Business Administration. The proceeds of the loan were used to buy and renovate the needed building. Huffstutter further advised the Kohls that their profit sharing plan should acquire the portion of the loan guaranteed by the government. He explained that in order to do this, the Kohls needed to transfer funds from their individual retirement accounts into the plan. Huffstutter informed the Kohls that such a rollover would not be taxable. Finally, Huffstutter advised each of the Kohls to make a $2,000 contribution to the plan in 1986 instead of placing the money into their own retirement accounts, which they did.

In September 1988, the Kohls received a letter from the IRS informing them of the following:

In our review of your tax return for 1986, it appears that the income, deductions and credits you reported do not agree with the amounts reported to us on information returns filed by the payers.

Please explain in a signed statement where the amounts are reported on your tax return. If the income was not reported or if the deductions or credits were overstated, please explain why. Attach any supporting material you may want us to consider....

* * *

An examiner will review your return and records or other substantiation and explanation. If we propose any changes to your tax, we will explain them. If you agree to the proposed changes, we will ask you to sign an agreement form. If we do not hear from you within 30 days from the date of this letter, we will prepare the adjustment based on the information we have available.

On October 19, 1988, the Kohls' accountant, David Hinton, wrote a response letter on behalf of the Kohls to the IRS which provided the explanations sought. A few days later on October 24, 1988, Robert Kolarich, another of the Kohls' lawyers, wrote Dearborn & Ewing a letter which stated the following:

In our last discussion of John Kohl's account with your firm, it was agreed that you would handle the application for an extension of his tax return, after which the file would be removed. Mr. Kohl intends to hire a new firm to handle his tax work, however, I understand that a new question has arisen with regard to his pension and profit sharing plans. Evidently, Mr. Huffstutter had advised that the funds held in an IRA account could be transferred to the pension and profit sharing account and the IRS is reviewing the transaction. Please advise as to when this issue may be resolved so that the files may be transferred.

On May 1, 1990, the plaintiffs filed a legal malpractice claim against Dearborn & Ewing and Huffstutter. The complaint alleged that the defendants committed malpractice in negligently drafting and administering the profit sharing plan, advising the plaintiffs that the plan should acquire the portion of the loan guaranteed by the government, advising the plaintiffs that they should transfer funds from their own retirement accounts into the plan and that such rollovers would not be taxed, and in advising the plaintiffs to make contributions to the plan instead of to their own retirement accounts. The plaintiffs sought to recover damages incurred as a result of this advice, as well as for legal fees already paid to the defendants, the legal fees spent on correcting the defendants' errors, and the legal fees associated with prosecuting the malpractice action against the defendants.

The defendants did not contest liability. Rather, they contended that the statute of limitations had run on certain of the plaintiffs' claims, and that the plaintiffs were not entitled to legal fees incurred in prosecuting the present action.

After a four-day bench trial, the trial court found the defendants liable for failing to draft and administer the profit sharing plan correctly, and for erroneously advising that the plan should purchase the government guaranteed portion of the loan obtained to buy the building housing the plaintiffs' business. The trial court awarded damages in the amount of $33,091.05, which included legal fees for correcting the defendants' errors. The court further found that the claims relating to the improper rollover and contribution of individual retirement account funds to the plan were barred by the one-year statute of limitations. The trial court noted that in the letter of October 24, 1988, Mr. Kolarich and Mr. Kohl had noticed and became aware of the problem "and it was so severe in his mind and Kohl's mind that they were going to change law firms and have someone else do their tax work." Finally, the court determined that attorney's fees paid to the defendants for work that had been negligently performed were not recoverable, and neither were the legal fees associated with prosecuting the malpractice action.

The Court of Appeals affirmed the trial court, except for that portion of the judgment denying the plaintiffs a recovery for attorney's fees paid for legal work negligently performed by the defendants. Accordingly, the Court of Appeals remanded the case to the trial court to determine the amount of initial fees payable to the plaintiffs as damages.

Thereafter, we granted review to determine (1) whether the lower courts erred in holding that the plaintiffs' claims arising from the rollover and contribution of funds to the profit sharing plan were barred by the one-year statute of limitations, and (2) whether the plaintiffs are entitled to recover attorney's fees incurred in pursuing the instant action. We find that the lower courts correctly resolved these two questions.

ANALYSIS

I.

The statute of limitations for legal malpractice is one year from the time the cause of action accrues. Tenn.Code Ann. § 28-3-104(a)(2). When the cause of action accrues is determined by applying the discovery rule. Under this rule, a cause of action accrues when the plaintiff knows or in the exercise of reasonable care and diligence should know that an injury has been sustained as a result of wrongful or tortious conduct by the defendant. Shadrick v. Coker, 963 S.W.2d 726, 733 (Tenn.1998); Stanbury v. Bacardi, 953 S.W.2d 671, 677 (Tenn.1997).

In legal malpractice cases, the discovery rule is composed of two distinct elements: (1) the plaintiff must suffer legally cognizable damage--an actual injury--as a result of the defendant's wrongful or negligent conduct, and (2) the plaintiff must have known or in the exercise of reasonable diligence should have known that this injury was caused by the defendant's wrongful or negligent conduct. Carvell v. Bottoms, 900 S.W.2d 23, 28-30 (Tenn.1995). An actual injury occurs when there is the loss of a legal right, remedy or interest, or the imposition of a liability. See LaMure v. Peters, 122 N.M. 367, 924 P.2d 1379, 1382 (1996). An actual injury may also take the form of the plaintiff being forced to take some action or otherwise suffer "some actual inconvenience," such as incurring an expense, as a result of the defendant's negligent or wrongful act. See State v. McClellan, 113 Tenn. 616, 85 S.W. 267, 270 (1905) ("[A negligent act] may not inflict any immediate wrong on an individual, but ... his right to a remedy ... will [not] commence until he has suffered some actual inconvenience.... [I]t may be stated as an invariable rule that when the injury, however slight, is complete at the time of the act, the statutory period then commences, but, when the act is not legally injurious until certain consequences occur, the time commences to run from the...