Jordache Enterprises, Inc. v. Brobeck, Phleger & Harrison

• Decision Date: 30 July 1998
• Docket Number: No. S056954,S056954
• Citation: 958 P.2d 1062,18 Cal.4th 739,76 Cal.Rptr.2d 749
• Court: California Supreme Court
• Parties: , 958 P.2d 1062, 98 Cal. Daily Op. Serv. 5893, 98 Daily Journal D.A.R. 8219 JORDACHE ENTERPRISES, INC., et al., Plaintiffs and Appellants, v. BROBECK, PHLEGER & HARRISON et al., Defendants and Respondents

Page 749

76 Cal.Rptr.2d 749

18 Cal.4th 739, 958 P.2d 1062, 98 Cal. Daily Op. Serv. 5893,

98 Daily Journal D.A.R. 8219

JORDACHE ENTERPRISES, INC., et al., Plaintiffs and Appellants, v. BROBECK, PHLEGER & HARRISON et al., Defendants and Respondents.

No. S056954.

Supreme Court of California

July 30, 1998.

Rehearing Denied Sept. 30, 1998. ^*

Conkle & Olesten, William C. Conkle, John A. Conkle and Eric S. Engel, Santa Monica, for Plaintiffs and Appellants.

Tyler T. Ochoa, Costa Mesa, Alan M. Klein, Los Angeles, Sainick & Cote, Newport Beach, Lance R. Cote, Larkin, Hoffman, Daly & Lindgren, Bloomington, MN, Ronn B. Krepps, C. Brent Robbins, Bloomington, MN, Brown, Todd & Heyburn, Arthur S. Beeman, Louisville, KY, Fletcher & Adair and John R. Fletcher, Santa Monica, as Amici Curiae on behalf of Plaintiffs and Appellants.

Keker & Van Nest, John W. Keker, Jeffrey R. Chanin, Stuart L. Gasner, Steven A. Hirsch, San Francisco, Hedges & Caldwell

and Christopher G. Caldwell, Los Angeles, for Defendants and Respondents.

Richard I. Miller, Wilke, Fleury, Hoffelt, Gould & Birney, Thomas G. Redmon, Sacramento, Matthew W. Powell, Matthew J. Smith, San Diego, Willkie, Farr & Gallagher, Richard L. Klein, Jeffrey B. Finnell, New York City, Morrison & Foerster, Raoul D. Kennedy, Kathleen M. Wardlaw and Frederick S. Chung, San Francisco, as Amici Curiae on behalf of Defendants and Respondents.

CHIN, Justice.

In this case, we again address the meaning of "actual injury" under the legal malpractice statute of limitations, Code of Civil Procedure section 340.6. ¹ That statute commences the limitations period with the attorney's wrongful act or omission, or with the plaintiff's actual or constructive discovery of the attorney's error. However, several specified circumstances toll the prescriptive period, including that "The plaintiff has not sustained actual injury...." (§ 340.6, subd. (a)(1).)

This court most recently considered the actual injury provision in Adams v. Paul (1995) 11 Cal.4th 583, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (Adams ). Adams reconfirmed the following: (1) determining actual injury is predominantly a factual inquiry; (2) actual injury may occur without any prior adjudication, judgment, or settlement; (3) nominal damages, speculative harm, and the mere threat of future harm are not actual injury; and (4) the relevant consideration is the fact of damage, not the amount. (Id. at pp. 585-586, 589, 591-592, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (lead opn. of Arabian, J.); id. at pp. 595-596, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (conc. opn. of Kennard, J.).) These propositions follow from Budd v. Nixen (1971) 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433 (Budd ), which the Legislature intended to codify in section 340.6. (Laird v. Blacker (1992) 2 Cal.4th 606, 611, 7 Cal.Rptr.2d 550, 828 P.2d 691 (Laird ).)

Ordinarily, the client already has suffered damage when it discovers the attorney's error. (Budd, supra, 6 Cal.3d at p. 201, 98 Cal.Rptr. 849, 491 P.2d 433.) In this case, the client alleged its attorneys failed to advise it about, or to assert a timely claim to, liability insurance benefits covering a third party's suit against the client. The client acknowledged it discovered its attorneys' alleged malpractice more than one year before it commenced this action. However, the client also contends it did not sustain actual injury until it later settled its action against its insurer for less than the full benefits it claimed.

We conclude that actual injury occurred before the client's settlement with the insurer. In reaching this conclusion, we reaffirm the basic principles established in Budd and reiterated in Adams. Actual injury occurs when the client suffers any loss or injury legally cognizable as damages in a legal malpractice action based on the asserted errors or omissions. (See Adams, supra, 11 Cal.4th at pp. 588-589, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (lead opn. of Arabian, J.); Budd, supra, 6 Cal.3d at pp. 200-202, 98 Cal.Rptr. 849, 491 P.2d 433.) Under the Legislature's codification of Budd, section 340.6, subdivision (a)(1), will not toll the limitations period once the client can plead damages that could establish a cause of action for legal malpractice.

Here, the attorneys' alleged neglect allowed the insurers to raise an objectively viable defense to coverage under the policies. The insurers' assertion of this defense necessarily increased the client's costs to litigate its coverage claims and reduced those claims' settlement value. (Cf. Laird, supra, 2 Cal.4th at p. 615, 7 Cal.Rptr.2d 550, 828 P.2d 691.) Moreover, because of the attorneys' alleged neglect, the client provided its own defense in the third party action for several years. Consequently, the client not only lost a primary benefit of liability insurance (see Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296, 24 Cal.Rptr.2d 467, 861 P.2d 1153), it also lost profitable alternative uses for the substantial sums it paid in defense costs. These detrimental effects of the attorneys' alleged neglect were not contingent on the outcome of the coverage action. Further, that action could not establish either a breach of a duty to provide timely insurance advice or a causal relationship between the alleged neglect and the claimed damages. Instead, the coverage action settlement simply reflected the client's preexisting predicament--the attorneys' alleged omissions had diminished the client's right to its liability insurance benefits.

The loss or diminution of a right or remedy constitutes injury or damage. (Adams, supra, 11 Cal.4th at p. 590, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (lead opn. of Arabian, J.).) Neither uncertainty of amount nor difficulty of proof renders that injury speculative or inchoate. (Ibid.) The coverage action settlement was not the first realization of injury from the alleged malpractice; the settlement simply resolved one alternative means to mitigate that injury. (See Foxborough v. Van Atta (1994) 26 Cal.App.4th 217, 226, 31 Cal.Rptr.2d 525.) Accordingly, the undisputed facts established that the client sustained actual injury more than one year before it commenced this suit.

FACTUAL AND PROCEDURAL BACKGROUND

Jordache Enterprises, Inc., And Avi, Joe, And Ralph Nakash (The Nakashes), Retained The Law Firm Of Brobeck, Phleger & Harrison (Brobeck) In 1984 To Defend Them In Georges Marciano Et Al. V. Joe Nakash Et Al. (The Marciano Action), A Lawsuit Filed In Los Angeles Superior Court. ² The Marciano action involved several claims, including that Jordache was marketing "knockoffs" of Guess?, Inc., apparel. Two weeks after that action was filed in November 1984, Jordache contacted its insurance broker, Advocate Brokerage Corp. (Advocate Brokerage), and requested advice on insurance coverage for the action. Advocate Brokerage informed Jordache its insurance provided no coverage for that lawsuit. Neither Jordache nor Advocate Brokerage gave Jordache's insurers notice of the Marciano action.

Jordache did not request from Brobeck, and Brobeck did not offer, any advice concerning insurance coverage for the Marciano action. Brobeck did not ask about Jordache's insurance or otherwise investigate whether any potential for coverage might trigger an insurer's duty to defend the Marciano action.

In April 1987, Jones, Day, Reavis & Pogue replaced Brobeck as Jordache's counsel of record in the Marciano action. Its new counsel advised Jordache there was potential insurance coverage for that action. In August 1987, Jordache instructed its counsel to demand that its insurers defend the Marciano action and two related cases then pending in Delaware and Hong Kong. Counsel sent copies of the fifth amended complaint in the Marciano action and the Delaware and Hong Kong complaints to Advocate Brokerage and asked it to submit the claims to Jordache's insurers.

In December 1987, Jordache retained the law firm of Conkle & Olesten and gave it "exclusive authority" to make and prosecute claims concerning the Marciano action against Jordache's liability insurers. By December 1987, Jordache had discovered Brobeck's alleged negligence in not notifying or advising Jordache to notify its insurers of the Marciano action.

At the outset, Jordache and its new counsel discussed the predicament in which Jordache found itself because of Brobeck's omissions. A "big issue" in these early discussions was the probability that the insurers would raise a late notice defense to Jordache's coverage claim. For instance, one of Jordache's liability insurance policies required Jordache to notify the insurer "whenever [Jordache] has information from which [it] may reasonably conclude that an Occurrence covered ... involved injuries or damages which, in the event that [Jordache] should be held liable is likely to involve [the] policy...."

More than three years after the Marciano action began, Conkle & Olesten formally tendered defense of the action directly to Jordache's liability insurance carriers. Soon after, in February 1988, Jordache sued its insurers, alleging they failed to provide a defense and wrongfully refused to acknowledge coverage. Jordache sought reimbursement for $30 million it had allegedly paid for attorney fees and costs in the Marciano action. Jordache also asserted the Nakashes and their companies lost millions of dollars in profits because the funds spent on legal fees would otherwise have been used for profitable investments.

One of the insurers Jordache sued was National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union). Its answer to the complaint and its November 1988 interrogatory answers denied any liability, alleging that Jordache's untimely notice of the Marciano action had caused it substantial prejudice.

In May 1990, the Marciano action settled. Jordache and National Union then filed cross-motions for summary adjudication of issues in their insurance coverage litigation. The trial court...