Sharts v. Natelson

• Decision Date: 26 October 1994
• Docket Number: No. 21404,21404
• Citation: 118 N.M. 721,885 P.2d 642,1994 NMSC 114
• Parties: Wallace G. SHARTS and Stakeout Properties, Inc., Plaintiffs-Respondents, v. Stephen NATELSON and Natelson & Ross, Defendants-Petitioners.
• Court: New Mexico Supreme Court

Page 642

885 P.2d 642

118 N.M. 721

Wallace G. SHARTS and Stakeout Properties, Inc. Plaintiffs-Respondents, v. Stephen NATELSON and Natelson & Ross, Defendants-Petitioners.

No. 21404.

Supreme Court of New Mexico.

Oct. 26, 1994.

[118 N.M. 722] Rodey, Dickason, Sloan, Akin & Robb, P.A., Joseph J. Mullins and Charles K. Purcell, Albuquerque, for petitioners.

Bosson & Canepa, P.A., Richard C. Bosson, Santa Fe, for respondents.

OPINION

MONTGOMERY, Justice.

The issue in this case, as framed by our Court of Appeals in one of its opinions below, Sharts v. Natelson, 118 N.M. 330, 881 P.2d 690 (Ct.App.1993), is: "[W]hen may a trial court rule, as a matter of law, that harm or loss in fact exists sufficient for a cause of action in legal malpractice to accrue and begin the running of the four year limitation period provided by [NMSA 1978,] Sections 37-1-1 and -4 [ (Repl.Pamp.1990) ]"? Id. at 341, 881 P.2d at 700. The trial court answered this question by holding that, on the materials presented in connection with Defendants' motion for summary judgment, there was "a genuine issue of material fact regarding that point in time at which the damages ... first existed sufficient for the accrual of the instant cause of action for legal malpractice...." The court accordingly denied the motion for summary judgment; however, the court certified its ruling for interlocutory appeal. The Court of Appeals accepted the appeal and in three separate opinions--one by each of the three judges participating in the decision--affirmed, two-to-one, the trial court's order. See id. at 332, 881 P.2d at 698 (Alarid, J., ruling that costs and delays incurred as result of negligently drafted covenants were not sufficient to cause malpractice claim to accrue until claimant's rights were fixed by entry of adverse declaratory judgment); id. at 332-333, 881 P.2d at 698-99 (Apodaca, J., specially concurring in result on ground that harm to claimant was not discoverable as matter of law until new attorney entered appearance on claimant's behalf in declaratory judgment action, but disagreeing with Judge Alarid that harm or loss did not occur until trial court entered declaratory judgment); id. at 341-344, 881 P.2d at 700-704 (Hartz, J., dissenting on ground that essential facts of claimant's claim were discoverable well before four years prior to claimant's filing of malpractice action, though agreeing with Judge Apodaca that harm occurred when claimant's legal rights were fixed by sales of land through deeds containing restrictive covenants permitting purchasers to enforce covenants against claimant's land).

We granted certiorari to resolve the issues in this case and in the Court of Appeals' divergent opinions. We now reverse the Court of Appeals' decision and remand to the trial court with instructions to enter summary judgment in Defendants' favor.

I.

In 1975 Wallace G. Sharts purchased sixty acres of undeveloped land in Taos County, New Mexico. He subsequently conveyed the northerly parcel of thirty acres (Tract One) through separate sales to several individual purchasers. Most of the deeds in these sales specifically incorporated by reference a Declaration of Restrictive Covenants prepared by his attorney, Stephen Natelson, and filed in 1978. The covenants restricted development to single-family residences on lots no smaller than three acres.

In the early 1980's Sharts began developing the southerly thirty acres (Tract Two) as a residential subdivision on half-acre lots. Questions soon arose over whether the covenants applied to both Tract One and Tract Two, so as to restrict the lot size in Tract Two to a minimum of three acres. Between 1981 and 1983 Sharts received at least two letters from attorneys representing property owners in Tract One, threatening legal action to enforce the covenants as to Tract Two. In 1983, as Sharts was attempting to obtain financing to develop the first unit in Tract Two, he was informed by a title company that the covenants applied to all sixty acres of his property. The covenants, said the title company, constituted an impermissible cloud on the title to any lots developed smaller than three acres and that the title insurance company could not issue title insurance on those lots. The bank, of course, would not fund the purchasers' loans without title insurance.

Sharts and Natelson attempted unsuccessfully to negotiate with the property owners in Tract One to secure a waiver and modification of the covenants. On Natelson's suggestion, Sharts agreed to seek a declaratory judgment to establish that the covenants did not apply to Tract Two. On December 17, 1984, Natelson filed suit on Sharts' behalf for a declaratory judgment.

On April 3, 1985, while the declaratory judgment action was pending, Sharts wrote a letter to Natelson as follows:

This letter is to inform you that if you can get a DECLARATORY JUDEGEMENT [sic] in my favor, I'm only going to sue you for approximately $35,000 which represents the extent of the damages I've suffered so far, in the form of interest payments I've had to pay while waiting for you to correct the legal errors you should have corrected two years ago when you were made aware of them.

If you lose, the Declaratory Judgement to set the record straight, I intend to bring a MALPRACTICE SUIT against Natelson and Ross for a minimum of $800,000 to $2,000,000 which represents the direct and provable damages you have caused me by your carelessness.

I am bringing to New Mexico some very expensive and very professional "family" attornies [sic] who are very interested in the case. [Capitalization and emphasis in original.]

Natelson continued to represent Sharts in the declaratory judgment action and in other matters after receiving this letter. On June 20, 1985, the law firm of Natelson and Ross was disqualified from representing Sharts in the declaratory judgment action because Natelson was a potential witness in the case. The disqualification was effective upon issuance of the order, and Sharts was given fifteen days to retain new counsel. On July 10, 1985, attorney Daniel Marlowe entered his appearance in the declaratory judgment action on Sharts' behalf. Sharts testified at his deposition that he had engaged Marlowe to represent him several days before July 10.

The declaratory judgment action was decided against Sharts on September 22, 1986, and the covenants were held applicable to Tract Two. The Court of Appeals affirmed the declaratory judgment on June 14, 1988, in Sharts v. Walters, 107 N.M. 414, 759 P.2d 201 (Ct.App.1988).

On July 10, 1989, Sharts and Stakeout Properties, Inc. (Plaintiffs), filed a complaint against Natelson and his law firm, Natelson and Ross (Defendants), alleging legal malpractice in Natelson's preparation of the covenants. Defendants moved for summary judgment on the ground that the action was barred by the four-year statute of limitations in Section 37-1-4. The trial court denied the motion and the Court of Appeals affirmed. We granted Defendants' petition for a writ of certiorari to consider the question stated at the beginning of this opinion.

II.

Our first--and only--discussion of the statute of limitations for legal malpractice claims is in Jaramillo v. Hood, 93 N.M. 433, 601 P.2d 66 (1979). In that case we adopted a two-step approach for determining when a cause of action for legal malpractice accrues, following the California cases of Neel v. Magana, Olney, Levy, Cathcart & Gelfand, 6 Cal.3d 176, 98 Cal.Rptr. 837, 491 P.2d 421 (1971) (in bank), and Budd v. Nixen, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433 (1971) (in bank). In Neel, the California Supreme Court adopted the discovery rule, holding that "a cause of action for legal malpractice does not accrue until the client discovers, or should discover, the facts establishing the elements of his cause of action." 98 Cal.Rptr. at 849, 491 P.2d at 433. A cause of action for legal malpractice is established when the client can allege the following facts: "(1) the employment of the defendant attorney; (2) the defendant attorney's neglect of a reasonable duty; and (3) the negligence resulted in and was the proximate cause of loss to the [client]." Hyden v. Law Firm of McCormick, Forbes, Caraway & Tabor, 115 N.M. 159, 162-63, 848 P.2d 1086, 1089-90 (Ct.App.), cert. denied, 115 N.M. 60, 846 P.2d 1069 (1993). Thus, the statute of limitations does not begin to run until the client discovers, or should discover, that he or she has suffered a loss and that the loss may have been caused by the attorney's wrongful act or omission. See 2 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice Sec. 18.15, at 137 (3d ed. 1989 & Supp.1993) [hereinafter Legal Malpractice ].

The California Supreme Court also held, in the companion case Budd v. Nixen, that the cause of action does not accrue until the allegedly negligent conduct has caused "appreciable and actual harm." 98 Cal.Rptr. at 852, 491 P.2d at 436. In 1977 the California legislature replaced the "appreciable and actual harm" test in Budd with the requirement that the client must have suffered "actual injury." See Cal.Civ.Proc.Code Sec. 340.6 (West 1982). We believe that the "actual injury" standard more accurately describes the nature of the harm the client must suffer before the statute of limitations begins to run. See 2 Legal Malpractice, supra, Sec. 18.11, at 34 (discussing California approach to nature of damage necessary for accrual of cause of action). Thus, the limitations period for legal malpractice commences when (1) the client sustains actual injury¹ and (2) the client discovers, or through reasonable diligence should discover, the facts essential to the cause of action. See, e.g., Jaramillo, 93 N.M. at 434, 601 P.2d at 67; Laird v. Blacker, 2 Cal.4th 606, 7 Cal.Rptr.2d 550, 552, 828 P.2d 691, 693 (in bank), cert. denied, --- U.S. ----, 113 S.Ct. 658, 121 L.Ed.2d 584 (1992); Grunwald v. Bronkesh, 131 N.J. 483, 621 A.2d 459, 464 (1993)....