Moonie v. Lynch

• Decision Date: 27 November 1967
• Citation: 256 Cal.App.2d 361,64 Cal.Rptr. 55
• Court: California Court of Appeals Court of Appeals
• Parties: David L. MOONIE, Plaintiff, Cross-Defendant and Respondent, v. Frank W. LYNCH, Defendant, Cross-Complainant and Appellant. Civ. 23787.

Page 55

64 Cal.Rptr. 55

256 Cal.App.2d 361

David L. MOONIE, Plaintiff, Cross-Defendant and Respondent, v. Frank W. LYNCH, Defendant, Cross-Complainant and Appellant.

Civ. 23787.

Court of Appeal, First District, Division 3, California.

Nov. 27, 1967.

Lewis & Whiting, Palo Alto, for plaintiff, cross-defendant and respondent.

Fitzsimmons & Petris, Oakland, for defendant, cross-complaint and appellant

BRAY, Associate Justice. ^*

Defendant appeals from judgment dismissing a cross-complaint for alleged malpractice of an accountant, after demurrer sustained without leave to amend on ground that the alleged cause of action is barred by the statute of limitations.

QUESTION PRESENTED

Does the statute of limitations in an action for alleged malpractice by an accountant start to run from the alleged negligent act, from discovery of the negligence, or from the date when defendant was notified of the income tax penalty assessment?

May 15, 1963, plaintiff David L. Moonie, a certified public accountant, filed an action in the municipal court against defendant Frank W. Lynch, for services rendered and accounts stated. The services were alleged to have been rendered between January 1, 1959 and January 1, 1961. On November 5, 1963 defendant filed a cross-complaint alleging that plaintiff negligently prepared defendant's 1956 federal income tax return which resulted in defendant being damaged in the sum of $19,336.25 due to an income tax penalty assessment. Plaintiff demurred to the cross-complaint and by stipulation the demurrer was sustained with leave to amend. Thereafter, defendant filed an amended answer, cross-complaint and counterclaim. ¹ These alleged plaintiff's employment on or about January 1, 1956, to prepare and file for defendant a federal income tax return for the year 1956, plaintiff's negligence in the preparation of the tax return prepared and filed by plaintiff; that in April 1962 defendant was notified by federal tax officials that there was a deficiency in defendant's taxes for 1956 and that defendant was assessed finally and paid the government a penalty of $19,336.25 for such deficiency. Plaintiff demurred to the answer, cross-complaint and counterclaim generally and that the alleged causes of action were barred by the provisions of section 339, subdivision 1 of the Code of Civil Procedure. The court sustained the demurrer without leave to amend and dismissed the action as to the alleged malpractice. ² Thereafter, judgment in favor of plaintiff in the sum of $1,300 was stipulated, defendant waiving his right to appeal therefrom, but reserving his right to appeal from the judgment of dismissal of his cross-complaint.

The Statute of Limitations

The parties agree that the two-year statutory period of section 339, subdivision 1 of the Code of Civil Procedure controls in this case, the issue being when does it start to run? Plaintiff contends that it starts when the alleged negligent act occurs. Defendant contends that the starting date is from either the date of discovery of the act or from the date when injury occurs as a result of the act--here, when defendant was required to pay the tax penalty. Assuming that the starting date is either of the two suggested by defendant, his pleadings are defective in that nowhere is it alleged when defendant discovered the alleged negligent preparation of the return, whether defendant paid the penalty, and if so, when it was paid. However, if necessary, the pleadings possibly could be amended to supply these facts.

The date when the statute of limitations starts to run in an action for malpractice or negligence by an accountant has never been determined in California. The parties argue by analogy--defendant to the rules in physicians' and insurance agents' malpractice cases, and plaintiff to the rule in attorney malpractice cases. The statute in physician malpractice cases does not begin to run until discovery of the injury. Huysman v. Kirsch (1936) 6 Cal.2d 302, 57 P.2d 908. In attorneys' malpractice cases the statute commences to run when the negligent act occurs. (Griffith v. Zavlaris (1963) 215 Cal.App.2d 826, 30 Cal.Rptr. 517.) In insurance agent malpractice the statute does not start to run until a judgment against the intended insured which the neglected insurance was intended to cover has been obtained. (Walker v. Pacific Indemnity Co. (1960) 183 Cal.App.2d 513, 6 Cal.Rptr. 924.)

In Walker, where the insurance broker negligently secured automobile liability insurance in an amount less than that ordered by the car owner, and, as a result, the owner was not sufficiently insured against a judgment obtained against him because of the negligent operation of his truck, the opinion discusses the starting date for the statute of limitations in certain situations: '(A)n action for malicious levy of execution accrues when the levy is made, rather than when judgment enjoining the execution is entered. (Wood v. Currey, 57 Cal. 208); an action upon negligent report of title accrues when the report is made, rather than when the title is quieted in the true owner (Lattin v. Gillette, 95 Cal. 317, 30 P. 545, (29 Am.St.Rep. 115)); an action against a sheriff for negligent publication of notice of sale under execution accrues when the sheriff's certificate of sale is issued, and not when the purchaser's quiet title action resulted in a decree that he had no title (Medley v. Hill, 104 Cal.App. 309, 285 P. 891) * * * and an action against an attorney for negligent representation of his client accrues when the negligence occurs (DeGarmo v. Luther T. Mayo, Inc., 4 Cal.App.2d 604, 41 P.2d 366).' (At pp. 517--518, 6 Cal.Rptr. at p. 926.) The court then said: 'In each, a clear and definite loss accrued at the time the cause of action was held to have accrued. In those in which legal proceedings followed the breach of duty but preceded the action for such breach, the intervening proceedings served to make clear the measure of the loss, but a loss sufficiently substantial to support an action accrued when the duty was breached.' (At p. 518, 6 Cal.Rptr. at pp. 926--927.)

In our case, until defendant learned that a penalty was to be assessed against him by the government, defendant had no way of knowing that his tax return had been improperly prepared, and, just as in Walker the car owner did not have a cause of action against the insurance broker until he was injured by having a judgment rendered against him, defendant did not have a cause of action against plaintiff until the government assessed, or to plaintiff's knowledge was about to assess, a penalty. Defendant at all times was liable for the deficiency but the deficiency in itself did not cause injury for which he could recover against plaintiff. It was the assessment of the penalty due to plaintiff's alleged negligence which gave defendant a cause of action against plaintiff.

The case that comes nearest to the situation in the case at bench is L. B. Laboratories, Inc., v. Mitchell (1952) 39 Cal.2d 56, 244 P.2d 385. There the plaintiff and the defendant accountant entered into a written contract by the terms of which the accountant was to prepare and file the plaintiff's income tax returns. The plaintiff alleged in his complaint against the defendant that ...