BARKHORDARIAN v. COOLEY GODWARD CASTRO HUDDLESON TATUM

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Court of Appeal, First District, Division 5, California.

Patrick BARKHORDARIAN et al., Plaintiffs and Appellants, v. COOLEY, GODWARD, CASTRO, HUDDLESON & TATUM et al., Defendants and Respondents.

No. A073726.

Decided: April 10, 1997

James S. Bostwick, Keith A. Shandalow, James Bostwick & Associates, San Francisco, for plaintiffs and appellants. James A. Richman, Paul A. Renne, Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, for defendants and respondents.

PROCEDURAL HISTORY AND FACTS

Patrick Barkhordarian, Keesup Choe and Bruce Felt appeal from a summary judgment in their legal malpractice action against Alan Mendelson and his law firm, Cooley, Godward, Castro, Huddleson & Tatum (collectively, Cooley).

In January 1989, Cooley was retained as counsel by the recently incorporated Renaissance Software, Inc. Renaissance Chief Executive Officer Alex Vieux and his then-wife, Chief Financial Officer Joelle Préaux, recruited Barkhordarian, Choe, Felt (appellants) and Kannan Ayyar, to the start-up project.   Initial financing was obtained from a French venture capital firm, Compagnie Financière du Scribe (CFS).   Appellants allege that sometime early in 1989, Vieux introduced Cooley's Alan Mendelson to appellants as “our attorney” and that during a lunch meeting, Mendelson encouraged Choe and other founding members to “consult with him about their concerns.”

On May 25, 1989, Renaissance and CFS signed a memorandum of understanding (MOU) covering, among other things, the funding of the corporation, the issuance of shares to the founders, the composition of the Board of Directors,1 and the designation of Mendelson as “the lawyer of the deal (not the representative of the Founders or of CFS).”   As such, Mendelson drafted certain corporate documents including a shareholders' agreement and bylaws, ostensibly based on the MOU.   Felt alleges that Mendelson “took direction from [him] in drafting the corporate documents at a time when [Felt] was neither an officer, director, shareholder or employee” of Renaissance.

In December 1989, soon after Mendelson negotiated an agreement severing Vieux and Préaux from Renaissance, Cooley resigned from its representation of the corporation.   A dispute arising out of the severance negotiations resulted in a settlement agreement and mutual release of claims executed by Renaissance and Cooley in February 1992.

At the annual shareholders' meeting on July 10, 1992, André Harari was elected as a Renaissance director over appellants' objection that the provision of the shareholders' agreement which allowed his election violated the spirit and intent of the MOU.   CFS filed in the Santa Clara Superior Court an action to determine the validity of the election (Corp.Code, § 709), which was referred for hearing to a panel of three retired judges (Code Civ. Proc.,2 § 638).   In accordance with a provision in the order of reference,3 the panel issued a preliminary statement of decision on July 27, 1992, in favor of CFS.   On July 29, the reconvened shareholders confirmed Harari's election, and the newly-elected Board of Directors terminated appellants as officers of Renaissance.   On July 30, the reference panel issued its final statement of decision.   The Santa Clara Superior Court filed its judgment based on the referees' July decision (§ 644) on December 1, 1992.   In the interim, appellants filed a wrongful termination action on July 31, 1992, against Renaissance, which was settled sometime after July 1, 1993.

On July 30, 1993, appellants filed the instant action against Cooley, alleging “legal negligence” (attorney malpractice), breach of contract, and breach of fiduciary duty.   The gravamen of their complaint was that Mendelson prepared the corporate documents in such a way that, contrary to the intent expressed in the MOU that founders and investors maintain mutual control of Renaissance, CFS was able to wrest control of the Board of Directors through the election of André Harari, as a result of which appellants lost their company and their jobs.   On November 13, 1995, Cooley filed a motion for summary judgment on three grounds:  Cooley owed appellants no duty, any claim had been released, and the action was barred by the applicable statutes of limitations.   After a hearing, the trial court granted Cooley's motion solely on statute-of-limitations grounds, stating “the Court does not rule on the issue of duty.”   Judgment was accordingly entered on February 20, 1996, and appellants filed a timely notice of appeal.

DISCUSSION

“After examining the facts before the trial judge on a summary judgment motion, an appellate court independently determines their effect as a matter of law.”  (Szadolci v. Hollywood Park Operating Co. (1993) 14 Cal.App.4th 16, 19, 17 Cal.Rptr.2d 356, citation omitted.)  “Despite this independent review, the appellate court applies the same legal standard as did the trial court.”   (Id. at p. 19, 17 Cal.Rptr.2d 356, see § 437c, subd. (c).)  “The trial court's stated reasons supporting its ruling, however, do not bind this court.   We review the ruling, not its rationale.”  (14 Cal.App.4th at p. 19, 17 Cal.Rptr.2d 356, citation omitted.)  “Thus, we must affirm so long as any of the grounds urged by [Cooley], either here or in the trial court, entitles it to summary judgment.”  (Western Mutual Ins. Co. v. Yamamoto (1994) 29 Cal.App.4th 1474, 1481, 35 Cal.Rptr.2d 698, citation omitted.)

I. Did the Trial Court Correctly Rule the Action was Time-Barred?

A. Introduction

Section 340.6 provides that a legal malpractice action shall be commenced within one year of when the client discovers or should have discovered the facts constituting the malpractice, but that the statute is tolled under section 340.6, subdivision (a)(1), during the time, inter alia, that the client “has not sustained actual injury.”  (ITT Small Business Finance Corp. v. Niles (1994) 9 Cal.4th 245, 248, 36 Cal.Rptr.2d 552, 885 P.2d 965.)

The trial court in this case found appellants sustained actual injury no later than July 29, 1992, when pursuant to the reference panel's preliminary statement of decision, “the vote [they] sought to stop went forward;  the person [they] sought to keep off the Board went on;  and [they] were terminated as officers of Renaissance.”   Appellants contend the statute was tolled until judgment was entered on December 1, 1992.

Appellants allege attorney malpractice in the preparation of the shareholders' agreement and incorporation documents, and that Cooley failed to carry out the intent of the MOU in the preparation of these documents.   In short, this claim is one of “transactional” legal malpractice.  (ITT, supra, 9 Cal.4th at p. 250, 36 Cal.Rptr.2d 552, 885 P.2d 965.)   Therefore in analyzing when “actual injury” occurs, i.e., when tolling ends and the statute of limitations begins to run, appellants urge that the holding of the Supreme Court in ITT-also a transactional malpractice case-is instructive.

Relying on ITT, appellants urge us to apply what they describe as a bright-line rule articulated in ITT, “that in transactional legal malpractice cases, when the adequacy of the documentation is the subject of dispute, an action for attorney malpractice accrues on entry of adverse judgment, settlement, or dismissal of the underlying action.   It is at this point that the former client has discovered the fact of damage and suffered ‘actual injury’ due to the malpractice under section 340.6.”  (ITT, supra, 9 Cal.4th at p. 258, 36 Cal.Rptr.2d 552, 885 P.2d 965, italics in original.)

Appellants contend that here, as in ITT, “the statute of limitations of section 340.6 was tolled until the action contesting the documentation was concluded” (9 Cal.4th at p. 258, 36 Cal.Rptr.2d 552, 885 P.2d 965) by entry of judgment.   They maintain that “according to the ITT court,” no preliminary ruling or event is sufficient to trigger the running of the statute.   Here as in ITT, appellants seek to toll the statute of limitations while the adequacy of the documents that formed the basis of the transaction is initially litigated.

We conclude that appellants' complaints were timely filed, and they did not suffer “actual injury” within the meaning of section 340.6, at the earliest, until the underlying reference panel issued its final statement of decision on July 30, 1992.

B. “Actual injury” within the meaning of section 340.6.

“Under section 340.6, a malpractice action accrues once a former client ‘discovers' the malpractice, and is tolled until the client suffers ‘actual injury’ from the malpractice.   There must be a nexus between the discovery and the harm, and without both elements the filing of the malpractice action is premature.   Thus, discovery of the facts essential to the malpractice claim and the suffering of actual harm from the malpractice establish a cause of action and begin the running of the statute of limitations.”  (ITT, supra, 9 Cal.4th at p. 250, 36 Cal.Rptr.2d 552, 885 P.2d 965;  italics in original, see also § 340.6, subd. (a)(1).)

 In accordance with the reasoning of the Supreme Court in ITT, the fact that appellants incurred attorney fees in litigating the adequacy of the incorporation documents, or the fact that plaintiffs were voted off the Board does not alone establish “actual injury.”

In ITT, as in Sirott v. Latts (1992) 6 Cal.App.4th 923, 8 Cal.Rptr.2d 206 on which ITT relies, “[t]he statute of limitations remained tolled until ITT suffered an actual loss attributable to its attorney's alleged malpractice, that is when it was forced to accept an unfavorable settlement of the adversary proceeding.”  (ITT, supra, 9 Cal.4th at p. 253, 36 Cal.Rptr.2d 552, 885 P.2d 965.)   The Supreme Court found the adversary proceeding in ITT analogous to the arbitration proceeding in Sirott.   In Sirott, a physician was negligently advised he did not need a special medical malpractice insurance policy.   When he was later sued for medical negligence, he attempted to reinstate his professional liability coverage.   In a separate proceeding on the coverage issue an arbitrator determined the liability carrier had no duty to defend or indemnify.   Only after it was thus judicially determined that the physician had no coverage, did the physician's cause of action for legal malpractice accrue.   The court in ITT observed that “[a]s in Sirott, these initial legal fees incurred by ITT were not sufficient ‘actual injury’ within the meaning of Section 340.6(a)(1) because at the time the proceeding was filed and ITT hired counsel to defend the loan documentation, there was no actual harm attributable to malpractice.”  (ITT, supra, 9 Cal.4th at pp. 252-253, 36 Cal.Rptr.2d 552, 885 P.2d 965, italics added.)

The holding of the Supreme Court in ITT is further clarified by its own reliance on its ITT decision soon thereafter in International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606, 38 Cal.Rptr.2d 150, 888 P.2d 1279 (Feddersen ).   The court in Feddersen addressed when “actual injury” occurs in an accounting malpractice case, interpreting section 339, which contains language virtually identical to section 340.6.   The Supreme Court traced the origin of the language of section 339 to attorney malpractice cases, Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 98 Cal.Rptr. 837, 491 P.2d 421, and Budd v. Nixen (1971) 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433, which were decided under the old section 339.

The court then cites and summarizes its ITT holding:  “[T]he question whether the plaintiff suffered actual injury as a result of the attorney's preparation of the loan documents is contingent on the outcome of the adversary proceeding.”  (Feddersen, supra, 9 Cal.4th at p. 619, 38 Cal.Rptr.2d 150, 888 P.2d 1279, quoting ITT, supra, 9 Cal.4th at p. 258, 36 Cal.Rptr.2d 552, 885 P.2d 965.)  Feddersen concludes that “the assessment of the tax deficiency is the equivalent of the settlement in ITT, because the question whether the taxpayer suffered actual injury as a result of the accountant's allegedly negligent preparation of the tax returns is contingent on the outcome of the audit.”  (Feddersen, supra, 9 Cal.4th at p. 619, 38 Cal.Rptr.2d 150, 888 P.2d 1279.)

In this case there are two prior “actions”-(1) the claim against Cooley concerning the severance of Vieux and Préaux, and (2) the Corporations Code section 709 action to determine the validity of the July 10, 1992 election of Harari as a director.   The section 709 action is similar to, although not precisely the same as the “underlying action” that formed the basis of the tolling analysis of ITT.   As in ITT the parties here participated in an underlying dispute resolution proceeding.   In the Corporations Code section 709 action the appellants and the competing directors litigated the validity of the vote to elect Harari as a director over appellants' objection.   Had appellants successfully argued that this vote was invalid, there would be no “harm” since appellants still would have had a controlling interest.   Until this was decided, there could be no accrual of the cause of action charging negligent failure to carry out the intent of the MOU in the preparation of the shareholder's agreement or bylaws.

In this Corporations Code section 709 action, there was an adverse ruling by the referees, tentatively, on July 27.   However, it was only a preliminary statement of decision.   The referees did not issue their final decision until July 30.   Therefore, actual injury, i.e., harm as a result of Cooley's alleged negligent preparation of the subject documents was suffered at the earliest on the date of the final decision of the reference panel in this “underlying action” (and arguably was not until the judgment was entered.)   Appellants note that they could still have moved to set aside the referees' decision after it was rendered.   In accordance with the analysis of ITT the fact of “harm”-whether it is in the form of expenditure of attorney fees or in the form of being voted off the Board on July 29-is not alone determinative.   (ITT, supra, 9 Cal.4th at p. 251, 36 Cal.Rptr.2d 552, 885 P.2d 965.)

Our decision is in accord with the analysis of the Second District, in Tchorbadjian v. Western Home Ins. Co. (1995) 39 Cal.App.4th 1211, 46 Cal.Rptr.2d 370.   In that case, the plaintiffs' legal malpractice and breach of fiduciary duty claim arose out of an unsuccessful defense of a personal injury claim.   Plaintiffs contended they were not told of a reasonable settlement offer made by their adversary after an adverse arbitration award and that their homeowner's carrier tortiously contested liability coverage, requiring a personal contribution to a larger settlement payment than was proposed by the adversary following the arbitration.   The court in Tchorbadjian notes that the case contained elements of both litigation malpractice and transactional malpractice.4  Applying the reasoning of ITT, Tchorbadjian held that the discovery by the plaintiffs that they had been “betrayed” by their former counsel was not enough to start the statute running.  “The adverse result of [their attorney's] alleged malpractice was not realized until the Tchorbadjians entered an ‘adverse settlement’ in the underlying action on [a date], less than one year before the action against [their attorney] was commenced.   Indeed, the Tchorbadjians have not as yet sustained ‘actual injury’ in regard to the insurance coverage issue, as it remains unresolved.”  (39 Cal.App.4th at p. 1224, 46 Cal.Rptr.2d 370, fn. omitted.)

Cooley urges that the rule of ITT was clearly not intended to be a “rule for all seasons,” and that in this case actual injury occurred at the latest on July 29, 1992, when they lost their board seats, lost their right to vote, lost control of Renaissance, and lost their jobs.   Citing the prescience of the Court of Appeal in Radovich v. Locke-Paddon (1995) 35 Cal.App.4th 946, 41 Cal.Rptr.2d 573 (Radovich ), Cooley argues that Radovich anticipated the subsequent decision of the Supreme Court in Adams v. Paul (1995) 11 Cal.4th 583, 46 Cal.Rptr.2d 594, 904 P.2d 1205 (Adams ) in which the court stated, “depending upon the particulars, actionable harm may occur at any one of several points in time subsequent to an attorney's negligence.   Hence, as with other causes of action, the determination is generally a question of fact.”   (Id. at p. 588, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)   In Cooley's view, the so-called bright line rule of ITT should not be applied here to avoid a statute-of-limitations bar.   Instead where “the material facts are undisputed, the court may, however, resolve the issue of when the plaintiff suffered manifest and palpable injury as a matter of law.”  (Adams, supra, 11 Cal.4th at p. 586, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)   Cooley contends the trial court properly did just that.

We disagree with Cooley's application of Radovich and Adams to this case.   First, as we have stated, ITT stands for more than the solitary proposition that in a transactional malpractice case involving the alleged negligent preparation of documents, actual injury occurs upon adverse judgment or settlement or dismissal of the underlying action.  ITT calls for an analysis of when a client suffers harm which is attributable to the alleged malpractice.

Further, the holding of ITT will have a different result when applied in different contexts.   As pointed out by the court in Tchorbadjian, “[w]ithin the transactional category [of cases], there are two different types of scenarios:  (1) those in which there is an adverse disposition in a dispute-resolution proceeding separate from the malpractice action, similar to the situation in litigation malpractice ․ and (2) those in which there is no such dispute-resolving determination in a separate proceeding.   In transactional malpractice without a separate dispute resolution process, actual injury may result when a client enters into a binding contract which is detrimental to his interests.”  (Tchorbadjian, supra, 39 Cal.App.4th at p. 1219, 46 Cal.Rptr.2d 370, citations omitted.)

In considering when “actual injury” occurs, Radovich found “some patterns have emerged from the recent cases.   The broad principle of general applicability which may be derived is that the effect of asserted legal malpractice should not be identified as actual injury until it has reached a point (on a continuum between the asserted malpractice and the point at which its injurious effects become ‘irremediable’) at which injury has been made to appear with an empirical certainty sufficient to allay the law's distaste for speculation.”  (Radovich, supra, 35 Cal.App.4th at p. 971, 41 Cal.Rptr.2d 573.)   Faced with the difficulty of applying a bright-line test in the situation where no underlying dispute resolution proceeding had occurred, Radovich articulated a vague standard which itself lacks empirical footing, is of little guidance to attorneys or litigants seeking to comply with section 340.6 and avoid legal malpractice, and is difficult, if not impossible, to apply.   We decline to apply it to the case before us for these reasons and because our case is factually distinguishable.

Regarding Cooley's reliance on Adams and the meaning which Justice Kennard adds to the Adams ' holding in her concurring opinion, we do not believe it assists us in our analysis.   Cooley urges that Adams emphasizes that the trial court must make a factual inquiry in considering a statute of limitations defense presented in a motion for summary judgment.   In Cooley's view, the fact of actual injury may be determined as a matter of law to have occurred more than one year prior to the filing of appellants' complaint.

First Adams is distinguishable because it involves a missed statute claim in a litigation malpractice case, and is not a transactional case.   Additionally, we do not believe Adams undermines the Supreme Court's clear holding in ITT that in transactional malpractice cases the fact of injury alone is not determinative.   Rather, one must look at when a malpractice plaintiff suffered actual harm as a result of the defendant attorney's professional negligence.   Moreover, Justice Kennard's vigorous argument that the question of when the cause of action has accrued is a “question of fact for the trier of fact” and the majority opinion to the same effect both fail to instruct the trier of fact as to how it should make the factual determination.   The majority suggests little more than that the injury must be “palpable”:  “If the parties agree on the sequence of events and any other material matters, the court may then determine on summary judgment the point at which the fact of damage became palpable and definite even if the amount remained uncertain, taking into consideration all relevant circumstances.”  (Adams v. Paul, supra, 11 Cal.4th at p. 593, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)

We recognize that a client who has indisputably suffered palpable damage in the course of, and allegedly as a result of, his or her attorney's conduct in the underlying proceeding in the transactional malpractice context may pursue an appeal from the adverse judgment in that proceeding in the hope of accomplishing a favorable result in the underlying proceeding and avoiding the expense of a second lawsuit for attorney's negligence.   If the client's cause of action for attorney malpractice accrues with the entry of the adverse judgment under the holding of ITT, is such a client compelled to institute the action for attorney negligence to satisfy the statute of limitations, regardless of the success on appeal?   We have little trouble imagining an unfortunate escalation of litigation costs in pursuit of a legal malpractice action which may ultimately prove to be fruitless or of minimal value.

 However, our Supreme Court has clearly answered this question in the affirmative in the litigation malpractice context.  (Laird v. Blacker (1992) 2 Cal.4th 606, 7 Cal.Rptr.2d 550, 828 P.2d 691.)   Notwithstanding the prospects of success on appeal from an underlying adverse judgment, the cause of action of the client claiming attorney malpractice is not tolled during the time the client pursues an appeal.   The client, under Laird, is compelled to file a malpractice action against his attorney despite the pendency of the appeal in the case where attorney malpractice occurred, in order to preserve that malpractice claim against a time bar.   The judgment against the plaintiff, rather than the finality of the appeal therefrom, establishes “actual injury” within the meaning of section 340.6.  “Thus, even if the former client loses the underlying action because of the attorney's malpractice, success on appeal does not negate an action for legal malpractice.”  (2 Cal.4th at p. 615, 7 Cal.Rptr.2d 550, 828 P.2d 691.)   In so holding, the Supreme Court has given clear guidance to the practitioner and litigant in the litigation malpractice context.   Nothing in ITT suggests a different result in the transactional malpractice context.  (See ITT, supra, 9 Cal.4th at p. 257, 36 Cal.Rptr.2d 552, 885 P.2d 965.)

 We are mindful that statutes of limitation represent “practical and pragmatic devices to spare the courts from litigation of stale claims, and the citizen from being put to his defense after memories have faded, witnesses have died or disappeared, and evidence has been lost.”  (Chase Securities Corp. v. Donaldson (1945) 325 U.S. 304, 314, 65 S.Ct. 1137, 1142, 89 L.Ed. 1628.)   Statutes of limitation are also obstacles to just claims, however;  and they should therefore be strictly construed to avoid the forfeiture of a plaintiff's rights.  (Sevilla v. Stearns-Roger, Inc. (1980) 101 Cal.App.3d 608, 611, 161 Cal.Rptr. 700.)   Litigants and their counsel may well decry the confusion that abounds in appellate decisions attempting to define when a statute-of-limitations bar arises in the transactional malpractice case.   Appellate courts would do well to consider practitioners' ability to understand and comply with a statute-of-limitations rule, as part of the reviewing court's analysis of whether “reasonable application [of a rule] becomes too problematic.”  (See Adams v. Paul, supra, 11 Cal.4th at p. 589, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)   We respectfully suggest that the question-of-fact rule articulated in Adams is too problematic to permit reasonable application by the practitioner or trial judge.   We strongly agree that precision is needed in defining the statute-of-limitations bar in both the transactional and litigation malpractice context to avoid inconsistent and haphazard results and the protracted litigation the disparate decisions have engendered.

In summary, we conclude that the undisputed factual showing of harm to appellants on July 29 does not establish “actual injury” as a matter of law within the meaning of section 340.6, as that statute has been interpreted by our Supreme Court.   Not until appellants suffered an adverse determination in the underlying dispute resolution proceeding can it be said as a matter of law that appellants' cause of action accrued.   This did not occur earlier than July 30, 1992, the date of filing of plaintiffs' complaint.

Accordingly, the order granting summary judgment on the ground that the action is time-barred should be reversed.   Since we review the summary judgment de novo, we must address (1) Cooley's no-duty argument, and (2) its release argument.

II.-III.**

DISPOSITION

We reverse the trial court's grant of summary judgment.   Costs are awarded to appellants.

FOOTNOTES

1.   The initial Board consisted of André and Daniel Harari of CFS, Vieux and Ayyar of Renaissance, and from one to three outside directors to be chosen unanimously by Renaissance and CFS.

FN2. All further statutory references are to the Code of Civil Procedure unless otherwise indicated..  FN2. All further statutory references are to the Code of Civil Procedure unless otherwise indicated.

3.   The order of reference provided for a decision on or before July 27, 1992.   The parties stipulated they would “welcome immediate announcement,” since the annual shareholders meeting was scheduled to reconvene to take final action based on the decision.

4.   “The appellate courts have construed the statutory tolling requirement of ‘actual injury’ in various ways in various contexts.   As addressed by the courts, the cases fall into two general categories:  litigation malpractice and transactional malpractice.”  (Tchorbadjian, supra, 39 Cal.App.4th at pp. 1218-1219, 46 Cal.Rptr.2d 370.)

FOOTNOTE.   See footnote *, ante.

JONES, Associate Justice.

PETERSON, P.J., and HANING, J., concur.