JORDACHE ENTERPRISES, INC. et al., Plaintiffs and Appellants, v. BROBECK, PHLEGER & HARRISON et al., Defendants and Respondents.
Code of Civil Procedure section 340.6 provides that a legal malpractice action must be commenced within four years after the wrongful act or omission, or one year after the plaintiff discovers the facts constituting the wrongful act or omission, but tolls the statutory period until the plaintiff sustains “actual injury.” In this legal malpractice action, we are asked to determine when plaintiff Jordache Enterprises, Inc., et al. (collectively “Jordache”) sustained “actual injury” within the meaning of the statutory provision as a result of the negligent conduct of their lawyers, Brobeck, Phleger & Harrison (“Brobeck”).1
The question here presented is not a new one. The concept of “actual injury” has proved troublesome to the bench and bar, resulting in numerous appellate opinions in recent years which attempt to distill the meaning of the term, and to apply the “actual injury” tolling provision to the facts of the particular cases. As a consequence of the continued confusion and uncertainty surrounding the actual injury tolling provision, injured clients do not know when to file their attorney malpractice lawsuits, and the lawsuits in turn are resolved not on the merits but on the issue of timeliness. After careful review of the cases and commentary on the issue of “actual injury,” we believe that the date of “actual injury” may be consistently determined with a straightforward approach which reconciles the legislative purpose of the limitations statute as well as the Supreme Court's directives on the subject. This approach is based on the understanding that the terms “actual injury,” “harm,” and “damage,” while similar in meaning, represent discrete legal concepts whose distinctions must be recognized and observed.
We summarize the rule articulated herein as follows: Pinpointing the time when a client suffers actual injury within the meaning of Code of Civil Procedure 2 section 340.6 requires a factual determination of what legally protected interest the client claims the attorney invaded, and when that invasion occurred. If a third party lawsuit is filed, the results of which will determine whether or not the client's legally protected interest has in fact been invaded, or if the malpractice occurs during the course of litigation which will determine that issue, the client will not sustain actual injury until disposition of that third party lawsuit by settlement, dismissal or adverse judgment. If, on the other hand, an underlying lawsuit has been filed but the outcome of that proceeding will have no bearing on the existence or effect of the lawyer's malpractice, or will only serve to mitigate damages, resolution of that action will not constitute “actual injury” within the meaning of section 340.6. Finally, in so-called “missed statute” cases in which the attorney fails to timely file a third party lawsuit and takes no further action, the client will suffer actual injury upon expiration of the statute of limitations applicable to the underlying action.
The essential facts are undisputed. In 1984, Jordache retained Brobeck to defend an action filed by the Marciano brothers and Guess, Inc.? in Los Angeles Superior Court (the “Marciano Action.”) That lawsuit alleged a variety of claims arising out of the efforts of the Nakash brothers, Jordache's owners, to manufacture and market Jordache “knock-offs” of Guess apparel. Jordache did not request, and Brobeck did not offer, any advice concerning the availability of insurance coverage for the Marciano Action. Two weeks after the Marciano Action was filed, Jordache contacted its insurance broker, Advocate Brokerage, requesting advice concerning coverage of the Marciano Action. Jordache was informed that its insurance did not cover the Marcianos' claims.
Jones, Day, Reavis & Pogue (“Jones Day”) was retained by Jordache in March 1987 to replace Brobeck as Jordache's litigation counsel in the Marciano Action, and a substitution of attorney to that effect was filed in April 1987. Jones Day advised Jordache that there was potential insurance coverage in the Marciano Action. In August 1987, Jordache instructed its counsel to ask each of its insurance brokers to forward a copy of the complaint in the Marciano Action to Jordache's insurers. Brobeck was not advised about, and took no part in, these activities.
In December 1987, Jordache retained the law firm of Conkle & Olesten, giving it “exclusive authority” to make and prosecute any claims which Jordache might have against its liability insurers concerning the Marciano Action. Pursuant to such authority, Conkle & Olesten formally tendered the defense of the Marciano Action to Jordache's liability insurance carriers. Shortly thereafter, Conkle & Olesten filed six lawsuits against five insurance carriers alleging that each carrier had failed to provide a defense and had wrongfully refused to acknowledge coverage. Jordache sought reimbursement for the $30 million in attorneys' fees which it alleged it had paid to its various attorneys to defend the Marciano Action. Again, Brobeck was neither consulted nor advised about the tender letters or the filing of the coverage lawsuits on behalf of Jordache.
In May 1990, the Marciano Action settled. Shortly thereafter, the parties in Jordache's lawsuit against its excess liability carrier, National Union (the “National Union Action”) filed cross-motions for summary adjudication of issues. On July 26, 1990, the trial court, Judge Robert O'Brien presiding, ruled that (1) the Marciano Action included claims for which there was potential insurance coverage, triggering a duty to defend; (2) the December 1987 tender of defense constituted late notice as a matter of law; and (3) a triable issue of fact remained concerning whether National Union's obligations under the insurance contract were excused due to the late notice; that is to say, if National Union could demonstrate “substantial prejudice” from the delay, its obligations to defend and indemnify Jordache under the insurance contract would be excused. On July 31, 1990, Jordache settled all of the insurance coverage lawsuits for $12.5 million.
On February 14, 1991,3 Jordache sued Brobeck on several different legal theories, each based on the claim that Brobeck committed legal malpractice when it failed to tender the Marciano Action to Jordache's insurance carriers, or otherwise to alert the company to the possibility that the claims in the Marciano Action might be covered by insurance. Brobeck sought summary judgment, arguing that section 340.6, the statute of limitations for legal malpractice, precluded Jordache's prosecution of this lawsuit, since Jordache discovered the purported malpractice and sustained actual injury, in the form of defense costs, no later than 1987, well more than one year before filing this lawsuit. Jordache opposed the motion, contending that it did not suffer actual injury until it settled the National Union Action in July 1990, and that Brobeck continued to represent Jordache until November 1989, less than one year before critical date of August 15, 1990.
Brobeck prevailed on its motion for summary judgment when the trial court ruled that section 340.6 barred Jordache's lawsuit. That ruling was based on the undisputed fact that Jordache “knew of the insurance issue as early as 1987,” and that Jordache had been injured by the purported malpractice, in the form of millions of dollars of alleged lost profits and insurance benefits, more than one year prior to the effective filing date of this lawsuit. The trial court also concluded that Brobeck had ceased representing Jordache over the “subject matter” of the alleged malpractice no later than December of 1987, when Jordache gave exclusive authority over insurance coverage matters to Conkle & Olesten.
On appeal, Jordache challenges the trial court's ruling, arguing that (1) it did not suffer any “actual injury” for purposes of the statute of limitations until it settled the National Union Action on unfavorable terms, and (2) Brobeck continued to provide and bill Jordache for legal services in connection with the Marciano Action, both of which facts tolled the running of the statute of limitations, rendering this lawsuit timely filed. Jordache also maintains that the statute was tolled so long as the National Union Action was pending, on the theory that the inconsistent positions which Jordache would be forced to take in these two lawsuits constituted a “legal disability” within the meaning of section 340.6, subdivision (a)(4). Additionally, Jordache cites as error the trial court's rulings on certain evidentiary objections, as well as the modification of its summary judgment order.
STANDARD OF REVIEW
In reviewing a grant of summary judgment, this court determines de novo whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. (Section 437c, subd. (c).) The trial court's determination is accorded no deference. (Worton v. Worton (1991) 234 Cal.App.3d 1638, 1646, 286 Cal.Rptr. 410.) However, we review the ruling, not its rationale. (Aaitui v. Grande Properties (1994) 29 Cal.App.4th 1369, 1373, 35 Cal.Rptr.2d 123; Stratton v. First Nat. Life Ins. Co. (1989) 210 Cal.App.3d 1071, 1083, 258 Cal.Rptr. 721.) Accordingly, if the trial court's decision is correct on any legal theory, the judgment will be affirmed.
In conducting our review, the complaint “measures the materiality of the facts tendered in a defendant's challenge to the plaintiff's cause of action.” (FPI Development, Inc. v. Nakashima (1991) 231 Cal.App.3d 367, 381, 282 Cal.Rptr. 508.) “[T]he function of the affidavits or declarations is to disclose whether there is any triable issue of fact within the issues delimited by the pleadings.” (Orange County Air Pollution Control Dist. v. Superior Court (1972) 27 Cal.App.3d 109, 113, 103 Cal.Rptr. 410.) In this regard, the court construes the moving party's affidavits strictly, construes the opposing affidavits liberally, and resolves any doubt about the propriety of granting the motion in favor of the party opposing it. (Diep v. California Fair Plan Assn. (1993) 15 Cal.App.4th 1205, 1207, 19 Cal.Rptr.2d 591.)
The resolution of this case depends upon the interpretation and application of section 340.6. That section provides: “(a) An action against an attorney for a wrongful act or omission, other than for actual fraud, arising in the performance of professional services shall be commenced within one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first. In no event shall the time for commencement of legal action exceed four years except that the period shall be tolled during the time that any of the following exist: (1) The plaintiff has not sustained actual injury; (2) The attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred; (3) The attorney willfully conceals the facts constituting the wrongful act or omission when such facts are known to the attorney, except that this subdivision shall toll only the four-year limitation; and (4) The plaintiff is under a legal or physical disability which restricts the plaintiff's ability to commence legal action․”
In this case, pursuant to section 340.6, Jordache was required to bring its lawsuit for attorney malpractice within the first to occur of (1) four years after the date Brobeck failed to advise Jordache regarding the possibility of insurance coverage for the Marciano Action filed in November 1984, or (2) one year after discovering that failure, which occurred at least by December 1987, the time Conkle & Olesten was retained to pursue insurance coverage litigation with respect to the Marciano Action. Consequently, this lawsuit, filed after December 1988, is time-barred by section 340.6 unless one of the tolling provisions of that section applied to extend the limitations period.
Jordache contends that section 340.6, subdivision (a)(1) (hereafter section 340.6(a)(1)) tolled the limitations period since it did not suffer “actual injury,” as contemplated by the statute, until July 1990, when it settled the National Union Action for less than the full benefits to which it had been entitled under the insurance policies in 1984, when Brobeck neglected to notify the insurers of the Marciano Action. Brobeck maintains, and the trial court found, that Jordache suffered “actual injury” within the meaning of section 340.6(a)(1) well before 1990, since it had by then paid, out of its own pocket, millions of dollars in attorneys fees to defend the Marciano Action even though it had purchased insurance policies which obligated its insurers to defend that action, and even though Brobeck negligently failed to advise Jordache to tender defense of the Marciano Action to its insurance carriers. Thus, the resolution of this case turns on the meaning of the term “actual injury.”
Normally, in a case of statutory interpretation, we would look to the words of the statute and the legislative history to determine the meaning of the term “actual injury.” Here, however, in order to understand the many appellate cases which have addressed this issue, we must first start with an examination of two seminal cases which predated the enactment of section 340.6 by six years, Neel v. Magana, Olney, Levy, Cathcart & Gelfand (Neel ) (1971) 6 Cal.3d 176, 98 Cal.Rptr. 837, 491 P.2d 421 and Budd v. Nixen (Budd ) (1971) 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433.
In Neel, the Supreme Court rejected a line of cases which had held that the two-year statute of limitations set forth in section 339 for actions “upon a contract, obligation or liability not founded upon an instrument of writing, ․” commenced to run in actions for legal malpractice from the date of the attorney's negligent act or omission, even if prior to that time the client was totally unaware that the attorney's advice was deficient, and had yet to suffer any harm as a result thereof. The Neel court adopted the “discovery rule,” holding that the limitations period is tolled “until the client discovers, or should discover, his cause of action.” (6 Cal.3d at p. 179, 98 Cal.Rptr. 837, 491 P.2d 421.) In so doing, the court rejected “the peculiar rule that ․ in legal malpractice cases ․ the statute of limitations begin[s] to run before damage and before discovery.” (Id. at p. 183, 98 Cal.Rptr. 837, 491 P.2d 421.)
In Budd, a companion case to Neel, the Supreme Court addressed the question of when a cause of action for attorney malpractice accrues. Interpreting section 312, which states that “Civil actions ․ can only be commenced within the periods prescribed in this title, after the cause of action shall have accrued, ․” the court held that a cause of action for attorney malpractice accrues, and the statute of limitations therefor begins to run, when a professional duty is breached, causing actual loss or damage. (6 Cal.3d. at p. 200, 98 Cal.Rptr. 849, 491 P.2d 433.) The court noted that “The mere breach of a professional duty, causing only nominal damages, speculative harm, or the threat of future harm—not yet realized—does not suffice to create a cause of action for negligence.” (Ibid.) Consequently, the court held that “until the client suffers appreciable harm as a consequence of his attorney's negligence, the client cannot establish a cause of action for malpractice.” (Ibid.) The court further stated that the point in time when the client suffers appreciable harm is a question of fact. (Id. at p. 202, 98 Cal.Rptr. 849, 491 P.2d 433.)
Neel and Budd held that the statute of limitations commenced to run on accrual of the cause of action for legal malpractice and expired two years after accrual. The cause of action, in turn, accrued when the plaintiff discovered the negligent act or omission constituting the malpractice, and suffered “actual and appreciable harm.” As previously noted, the Legislature adopted section 340.6 in 1977, six years after the Supreme Court rulings in Neel and Budd. And in Laird v. Blacker (1992) 2 Cal.4th 606, 7 Cal.Rptr.2d 550, 828 P.2d 691, the Supreme Court stated, and it has since been oft repeated, that section 340.6 codified Neel and Budd. Consequently, appellate opinions start from the premise that the term “actual injury” appearing in the statute is synonymous with the Budd court's use of the term “appreciable harm,” and rely exclusively on Budd to discern the meaning of the actual injury tolling provision. We do not believe, however, that this reliance on Budd is justified.
Unlike Neel and Budd, section 340.6 provides that the limitation period ends one year after discovery of the negligent act or omission, but not more than four years after its occurrence, except that the statute of limitations is tolled during the time that the plaintiff does not sustain actual injury, the attorney continues to represent the plaintiff in the same matter that gave rise to the malpractice, the attorney actively conceals the malpractice, or the plaintiff suffers from a legal or physical disability which restricts his or her ability to file the malpractice lawsuit.
The earlier court-made rule and the later adopted statutory rule are only vaguely similar to each other. Indeed, the statute deviates in significant respects from the rules of Neel and Budd: In the basic approach to the issue (accrual of the cause of action versus occurrence or discovery of the facts constituting the wrongful act or omission), in the time periods adopted (two years versus one and four years), and in the circumstances which will toll the statutory period (the client's reasonable failure to discover the negligent act or omission and the absence of “appreciable harm” versus the attorney's continuous representation of the plaintiff, the attorney's intentional concealment of the malpractice, and the plaintiff's legal or physical disability). Even more significant than each of the foregoing differences is the Legislature's adoption of the “actual injury” tolling provision, a term which does not appear in either Neel or Budd, and thus could not possibly represent a codification of those cases. In our view, while Budd and Neel are instructive to the extent that they provide the historical background and policy rationales which guided the Legislature's actions in adopting section 340.6, they are of no direct assistance in interpreting the meaning of “actual injury.”
While the appellate decisions often use the term “actual injury” interchangeably with “appreciable harm,” “more than nominal or insubstantial damages” and the like (see, e.g., Adams v. Paul (1995) 11 Cal.4th 583, 588, 590, 591, 46 Cal.Rptr.2d 594, 904 P.2d 1205), in fact, these are distinct concepts in tort law. Restatement Second of Torts, section 7, defines the terms “injury” and “harm,” as follows: “(1) The word ‘injury’ is used throughout the Restatement of this Subject to denote the invasion of any legally protected interest of another. [¶] (2) The word ‘harm’ is used throughout the Restatement of this Subject to denote the existence of loss or detriment in fact of any kind to a person resulting from any cause.”
The Restatement cites several examples to explain the distinction between harm and injury. Thus, “any intrusion upon land in the possession of another is an injury, and, if not privileged, gives rise to a cause of action even though the intrusion is beneficial, or so transitory that it constitutes no interference with or detriment to the land or its beneficial enjoyment.” (Rest.2d Torts, § 7, com. a, p. 13.) Likewise, “the mere apprehension of an intentional and immediate bodily contact, whether harmful or merely offensive, is as much an ‘injury’ as a blow which breaks an arm.” (Ibid.) In the foregoing examples, the mere fact that no harm resulted from the invasion of the legally protected interest does not mean that actual injury did not occur, but only that no compensable damages resulted from the injury. Thus, “harm, as defined in this Section, is ․ the detriment resulting to [a person] from acts or conditions which impair ․ his pecuniary advantage, his intangible rights, ․ or his other legally recognized interests.” (Rest.2d Torts, § 7, com. b.) It is important to note that “[t]he term ‘harm’ implies no particular causal relation. It may result from the acts of the person harmed, the acts of other persons, the forces of nature, or a combination of any of these sources. However, it is only when the harm is legally caused by the acts or omissions of another that a person has any legal grounds for objection, or any legal rights in respect to the harm.” (Rest.2d Torts, § 7, com. c.)
In general, in a lawsuit alleging a tort, the legally protected interest which the plaintiff claims was invaded by the defendant is the plaintiff's right to be free from harm due to the lack of care of others. Thus when, due to lack of attention, a driver hits an individual on a bicycle, who sustains broken bones and requires hospitalization, the injury (invasion of the legally protected right not to be harmed by the negligence of others) and the harm (physical pain, the loss of an intact body and the loss of a functioning bicycle) are concurrent, even though the damages flowing from the injury (medical expenses, lost wages, repairs costs, and the like) may not be readily ascertainable at that time.
In legal malpractice actions, on the other hand, the injury and the harm will rarely occur simultaneously.4 Lawyers are routinely employed to protect and advance the legal interests of their clients. Whether or not the lawyer has achieved this goal will often not be immediately known. And because the legal rights and obligations of individuals and corporate entities are definitively determined in courts of law, whether or not a lawyer has succeeded in protecting the client's interests (and thus, whether or not the attorney has invaded the legal interest of the client) will often remain unclear until the rendition of a judgment, or other resolution of a lawsuit. (See, e.g., Johnson, J., dis. in Sirott v. Latts (1992) 6 Cal.App.4th 923, 935, fn. 3, 8 Cal.Rptr.2d 206 [while a surgeon attempts to cure or mitigate his or her malpractice in the operating room, the attorney does so in the courtroom].)
In light of the distinction between “harm” and “injury” set forth in the Restatement Second of Torts, as well as the unique aspects of the attorney's rendition of professional services, we believe that the Legislature intentionally, and wisely, chose the words “actual injury” rather than “appreciable harm” or some other variation of harm to invoke the tolling provision found in section 340.6(a)(1). Consequently, in our view that section states, in clear, unambiguous terms, that the statute of limitations on attorney malpractice actions is tolled so long as the plaintiff's “legally protected interest” has not been “invaded” as a result of the attorney's acts or omissions. Moreover, this conclusion is consistent with our understanding of the Supreme Court cases which consider the issue. (See, e.g., ITT Small Business Finance Corp. v. Niles (1994) 9 Cal.4th 245, 36 Cal.Rptr.2d 552, 885 P.2d 965; International Engine Parts, Inc. v. Feddersen and Co. (1995) 9 Cal.4th 606, 38 Cal.Rptr.2d 150, 888 P.2d 1279.) Having so concluded, our task is to determine whether the record establishes that the legally protected interests which Jordache alleges Brobeck impaired caused Jordache actual injury more than one year before the filing of this lawsuit. And applying the Restatement's definition of actual injury, it is clear that Jordache suffered actual injury within the meaning of section 340.6(a)(1) in July 1990, less than one year before filing this action.
The crux of Jordache's complaint against Brobeck is that as a result of the latter's negligent omissions, Jordache's contractual rights under its insurance policies were compromised—that is, due to Brobeck's omissions, it did not receive the full value of what it had bargained for when it purchased the policies of insurance. That these rights were in fact impaired was established in July of 1990, when, as a result of Judge O'Brien's ruling on summary adjudication of issues, Jordache settled its lawsuit against National Union for less than the full benefits to which it was entitled under its insurance policies. Prior to the adverse settlement, any purported injury suffered by Jordache was only speculative. That is, if Jordache had prevailed in the National Union Action by establishing that the insurance carriers received timely notice of the Marciano Action within weeks of the filing of that lawsuit, then Jordache would be entitled to receive the full benefits of the insurance policies, and Brobeck's negligence would not have caused actual injury to Jordache. Similarly, if the National Union Action resulted in a determination that Jordache's insurance provided no potential coverage for the Marciano Action, then Brobeck's failure to advise Jordache to tender the Marciano Action to its insurers would have caused Jordache no actual injury, for again, Jordache would have received the full benefits to which it was entitled under the policies of insurance—that is, no benefits. It was only when Jordache settled the National Union Action for less than its full insurance benefits that it suffered actual injury within the meaning of section 340.6(a)(1), for that was when it was first established that Jordache was harmed as a result of Brobeck's negligence.
Once the fact of injury was established in the National Union Action, Jordache was entitled, upon proof of Brobeck's negligent failure to tender defense of the Marciano Action to the insurance carriers, to recover the consequential damages which flowed from Brobeck's negligence.5 However, if the insurance policies had provided no potential coverage, Jordache would have suffered no injury, and thus it would not have been harmed as a result of Brobeck's negligence. That is to say, if the policies provided no coverage or defense duties, Jordache's legally protected interests in the insurance policies would not have been impaired by Brobeck's failure to notify the insurers of the Marciano Action. In that circumstance, while Jordache would have expended precisely the same funds in defense of the Marciano Action, and indeed would have suffered “harm” within the meaning of the Restatement (loss or detriment in fact), Brobeck's omissions would not have been the legal cause of the harm.
We do not believe that the Supreme Court's various discussions of “actual injury” can be read, as Brobeck would have us do, to mean that the statute of limitation starts to run at the time the “harm” of defense costs are incurred even if subsequent events establish that the negligent act resulted in no injury to the client at all. Such a result would be inherently unsound, since it would eliminate the necessary element of causation from the tort of legal malpractice. And indeed, in ITT Small Business Finance Corp. v. Niles, supra, 9 Cal.4th 245, 36 Cal.Rptr.2d 552, 885 P.2d 965 (ITT ), the Supreme Court explicitly rejected such a result by focusing its analysis on the causal connection between the attorney's allegedly negligent acts and the occurrence of actual injury to the client.
In ITT, attorney Niles had represented ITT regarding a loan to a third party. The debtor declared bankruptcy and commenced an adversary action contesting the documentation of ITT's security interest. ITT hired new counsel for the adversary action. Years later, ITT settled the adversary action by accepting less than the full value of its security. ITT then sued Niles for malpractice. Niles asserted the statute of limitations, claiming that ITT had incurred actual injury years earlier when it was forced to hire an attorney to defend the challenged loan documents. (9 Cal.4th at pp. 248–250, 36 Cal.Rptr.2d 552, 885 P.2d 965.)
The Supreme Court rejected this argument, stating that “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 the malpractice.” (9 Cal.4th at pp. 252–253, 36 Cal.Rptr.2d 552, 885 P.2d 965, emphasis added.) That is, even though ITT clearly suffered economic harm in paying attorney fees to defend the loan documentation, it was not until a final disposition of that lawsuit that it was determined that the attorney's negligent preparation of the loan documents caused ITT's economic damages. Until that adverse settlement, it was still possible that the court would find the loan documents to be adequate (or, for that matter, that the debtor's financial fortunes would change and he would fully satisfy his debt to ITT without resort to the security). In either case, ITT would still have incurred the “harm” of attorney fees, but there would be no nexus between those fees and the attorney's conduct.
Although the ITT court neither refers to the Restatement nor adopts its definition of actual injury, we believe that the analysis and result of ITT, as well as the court's lengthy discussion of the appellate cases which consider the actual injury tolling provision, reflect the Restatement's comments that “[t]he term ‘harm’ implies no particular causal relation. It may result from the acts of the person harmed, the acts of other persons, the forces of nature, or a combination of any of these sources. However, it is only when the harm is legally caused by the acts or omissions of another that a person has any legal grounds for objection, or any legal rights in respect to the harm.” (Rest.2d Torts, supra, at p. 14.) Indeed, this seems to us to be precisely the holding of ITT. (Accord International Engine Parts, Inc. v. Feddersen and Co., supra, 9 Cal.4th at p. 619, 38 Cal.Rptr.2d 150, 888 P.2d 1279 [“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”].)
Similar reasoning was employed in Sirott v. Latts (1992) 6 Cal.App.4th 923, 8 Cal.Rptr.2d 206. There, the plaintiff Sirott, a retiring physician, was negligently advised by his attorney that he need not purchase a coverage “tail” on his medical malpractice insurance. When Sirott was later sued for medical malpractice, the insurer refused to defend or indemnify him. While Sirott incurred the expense of hiring new attorneys to defend the medical malpractice action, he attempted to obtain insurance defense and indemnification through an arbitration proceeding. The arbitrator ruled that the insurer had no obligation to defend or indemnify Sirott, and the arbitrator's ruling was confirmed by a court judgment. (Id. at p. 928, 8 Cal.Rptr.2d 206.) Division Seven of this District held that the trial court's confirmation that the insurer had no duties to Sirott was the first “actual injury” to Sirott for purposes of commencing the statute of limitations against the attorney: “Plaintiff sustained actual damage as a result of defendants' alleged negligence upon entry of judgment confirming the arbitration award ․ because at that point it was judicially determined that plaintiff was not entitled to tail malpractice insurance coverage, and he was compelled to pay the expenses of defending the medical malpractice action regardless of the outcome of that action.” (Id. at pp. 929–930, 8 Cal.Rptr.2d 206.) That is, it was the judicial determination of no coverage which connected the attorney's negligence with Sirott's injury, resulting in actual injury to Sirott.
We note that the Supreme Court approved the reasoning of Sirott in ITT, where it stated: “In Sirott, if the plaintiff had been successful at the arbitration regarding his insurance coverage, the advice rendered by the attorney would have been correct, and no actionable malpractice would have been committed. The resolution of the arbitration necessarily included a determination regarding the attorney's advice. Therefore, the Sirott court correctly concluded that the physician's cause of action for legal malpractice accrued on entry of the adverse judgment of arbitration.” (ITT, supra, 9 Cal.4th at p. 252, 36 Cal.Rptr.2d 552, 885 P.2d 965.) In our view, this conclusion is mandated by application of the Restatement's definition of actual injury. The attorney in Sirott was retained to protect the client's interest in ensuring that he had insurance coverage for any malpractice lawsuits filed against him after he ceased practicing medicine. The trial court's confirmation of the arbitration ruling that Sirott had no insurance coverage established that the attorney had invaded Sirott's legally protected interest.6
In ITT, the Supreme Court disapproved of certain appellate cases relied on by attorney Niles (Johnson v. Simonelli (1991) 231 Cal.App.3d 105, 282 Cal.Rptr. 205; Kovacevich v. McKinney & Wainwright (1993) 16 Cal.App.4th 337, 19 Cal.Rptr.2d 692), and distinguished certain others (Sirott v. Latts, supra, 6 Cal.App.4th 923, 8 Cal.Rptr.2d 206; Hensley v. Caietti (1993) 13 Cal.App.4th 1165, 16 Cal.Rptr.2d 837). The analysis employed in the court's discussion of these cases can be understood to embrace the Restatement's concept of “actual injury.” Thus, in Johnson v. Simonelli, supra, 231 Cal.App.3d 105, 282 Cal.Rptr. 205, the attorney had prepared a promissory note which was secured by inadequate and defective collateral. The Court of Appeal had held that the client suffered “actual injury” under section 340.6(a)(1) when the obligor defaulted on the promissory note, reasoning that, “at the time of default on the note if the security was adequate, plaintiff had no cause of action; if the security was inadequate actual injury occurred and the statute of limitations commenced running.” (Id. at p. 110, 282 Cal.Rptr. 205.) The Supreme Court disapproved this analysis, reasoning that the client was not injured by the promissory note itself, but by the inadequacy of the collateral securing the note. Thus, the plaintiff suffered actual injury when he sold the collateral for less than the balance due on the note. (ITT, supra, 9 Cal.4th at p. 253, 36 Cal.Rptr.2d 552, 885 P.2d 965.) This is consistent with what we understand the term “actual injury” to mean, since the legal interest which the plaintiff hired the attorney to protect, in that case, that the note would be enforceable and would provide adequate security for the debt, was not impaired until the plaintiff sold the collateral for less than the remaining balance of the note. The earlier point in time pinpointed by the appellate court—when the obligor defaulted on the note—could not be the point of “actual injury,” since the plaintiff did not hire the lawyer to ensure that the obligor would perform under the note, but rather to ensure that the security would compensate the plaintiff in the event the obligor defaulted on the note.
In Kovacevich v. McKinney & Wainwright, supra, 16 Cal.App.4th 337, 19 Cal.Rptr.2d 692, Kovacevich, as an investor in a joint venture and on the advice of counsel, signed a personal guaranty for notes securing lines of credit to establish a new bank. After the new bank defaulted on the notes, the lender filed a complaint against the bank and its investors for breach of the line of credit and of the continuing guaranties. In December 1984, Kovacevich hired new counsel, not to challenge his liability under the guaranty, but to mitigate his losses by suing some of his fellow investors. The new counsel advised Kovacevich that his original attorneys had given him negligent advice regarding, among other things, the legal import of the guaranty.
Kovacevich's defense costs in the lender's lawsuit were paid by his insurance carrier. The lender selected Kovacevich as its “target defendant,” obtained a writ of attachment against his real property and later, in June 1985, obtained summary judgment against him in the sum of $927,000. Kovacevich paid the judgment and in March 1986, filed a legal malpractice action against his original attorneys based on their failure to properly advise him regarding the guaranty, as well as their failure to obtain contribution agreements from the other investors.
The Court of Appeal determined that Kovacevich had sustained “actual injury” when he incurred legal fees after hiring the second law firm to mitigate the harm caused by the original malpractice. (16 Cal.App.4th at pp. 343–344, 19 Cal.Rptr.2d 692.) The Supreme Court in ITT disapproved this holding, stating that actual injury did not occur until June 1985, when the summary judgment in the lender's lawsuit was entered against Kovacevich. (ITT, supra, 9 Cal.4th at p. 254, 36 Cal.Rptr.2d 552, 885 P.2d 965.) Again, we believe that this conclusion can be understood to utilize the Restatement's definition of actual injury. The legally protected interest which the first attorneys were hired to safeguard was the right not to incur liability under the personal guaranty except under the circumstances contemplated by Kovacevich when he executed the guaranty. That legally protected interest was invaded when a court ruled that Kovacevich was liable for $927,000 under the guaranty under circumstances not contemplated by him when he executed the guaranty.
Finally, the ITT court approved the reasoning of Hensley v. Caietti, supra, 13 Cal.App.4th 1165, 1175, 16 Cal.Rptr.2d 837. In Hensley, the plaintiff Hensley, represented by defendant Caietti in a marital dissolution proceeding, entered into a stipulated settlement in open court in September 1989, agreeing, among other things, to the allocation of property and debts, and waiving her rights to spousal support. After examining both Hensley and her then-husband under oath, the court approved the stipulation, informed the parties that the settlement was effective immediately, and instructed the husband's counsel to prepare a form of judgment. Hensley later disavowed the proposed judgment and dismissed her attorney. Hensley's new counsel moved unsuccessfully to set aside the stipulated settlement agreement, and judgment incorporating the settlement agreement was entered in October 1990.
Hensley then filed an action for legal malpractice in November 1990, claiming that her lawyer tortiously induced her to enter into the stipulated settlement. The trial court entered summary judgment for the defendant attorney, ruling that the one-year statute of limitations had run because Hensley suffered “actual injury” at the time she stipulated to the settlement. The Court of Appeal affirmed, holding that “Negligent legal advice which induces a client to enter into a binding contract resolving marital property and support issues results in actual injury at the point of entry. Entering a contract is a jural act which alters the legal relations of the parties and creates an obligation. The tortious inducement to enter into a contract which imposes noncontingent obligations is actionable at the time of contracting.” The Supreme Court in ITT concurred in this conclusion, remarking that “the stipulation to the marital settlement agreement acted immediately to deprive the plaintiff of certain property. Thus, once the stipulation was entered by the court, the plaintiff suffered ‘actual injury’ under section 340.6(a)(1).” (ITT, supra, 9 Cal.4th 245, 255, 36 Cal.Rptr.2d 552, 885 P.2d 965; see also, Bennett v. McCall (1993) 19 Cal.App.4th 122, 127, 23 Cal.Rptr.2d 268; Pompilio v. Kosmo, Cho & Brown (1995) 39 Cal.App.4th 1324, 46 Cal.Rptr.2d 409.) This analysis is consistent with that which we here articulate: Hensley's allegations of malpractice were premised on her attorney's invasion of her legally protected right not to be harmed by the inaccurate advice of counsel. She was in fact harmed, if at all, when she entered into a settlement agreement which changed her legal rights and obligations vis-à-vis her property and her husband. Consequently, Hensley suffered actual injury on account of her attorney's negligence when she stipulated to the settlement agreement.
Likewise, the analysis employed herein is consonant with the wide variety of cases which do not discuss “actual injury” in terms of the Restatement definition, but which fashion a result wholly consistent with the approach we adopt here. (See, e.g., Laird v. Blacker, supra, 2 Cal.4th 606, 617, 7 Cal.Rptr.2d 550, 828 P.2d 691 [statute of limitations commences when client has knowledge of “fact” of damage, in that case when underlying action dismissed as a result of attorney's negligence]; International Engine Parts, Inc. v. Feddersen and Co., supra, 9 Cal.4th 606, 618, 38 Cal.Rptr.2d 150, 888 P.2d 1279 [court explained in accountant malpractice case that “ ‘actual injury’ represents a legal term of art which recognizes that an inchoate or potential injury cannot give rise to a professional malpractice action until there has been an actual determination that the accountant's alleged negligence is related to the deficiency assessment”]; Baltins v. James (1995) 36 Cal.App.4th 1193, 1203, 42 Cal.Rptr.2d 896 [“if the propriety of an attorney's acts or advice is contingent on the outcome of a claim by or against the client, the client does not sustain actual injury until the claim is resolved adversely, which indicates both that the attorney erred and that the error caused harm”].)
Brobeck relies on Foxborough v. Van Atta (1994) 26 Cal.App.4th 217, 31 Cal.Rptr.2d 525 to support its contention that Jordache first incurred “actual injury” starting in 1984, when it paid attorneys fees in defense of the Marciano Action. In Foxborough, developer Foxborough employed attorney Van Atta to secure certain automatic development rights for the property it purchased. As a result of Van Atta's alleged negligence, the automatic development rights expired, and Foxborough had to resort to more expensive and cumbersome methods to develop the property. (Id. at pp. 222–223, 227, 31 Cal.Rptr.2d 525.) Thereafter, Foxborough sued the property's seller for not notifying it that the unrestricted development rights would expire. More than four years later, after losing that suit, Foxborough sued Van Atta for malpractice, contending that it first suffered actual injury when it lost its suit against the seller and thus failed to recoup its losses. The Court of Appeal disagreed, finding that actual injury occurred when the automatic development rights expired, stating “when malpractice results in the loss of a right, remedy, or interest, or in the imposition of a liability, there has been actual injury regardless of whether future events may affect the permanency of the injury or the amount of monetary damages eventually incurred. [Citations.]” (Id. at p. 227, 31 Cal.Rptr.2d 525.)
Brobeck likens the third party lawsuit in Foxborough, which the court held did not toll the statute of limitations, to Jordache's prosecution of the National Union Action. The two cases differ, however, in a significant respect. In the underlying action in Foxborough, the issue being litigated, whether or not the seller had a duty to disclose to Foxborough the self-terminating nature of the automatic development rights, had no bearing on the existence or the effect of Foxborough's lawyer's malpractice in failing to secure permanent development rights. The only effect which that lawsuit could have on Foxborough's attorney malpractice action was to reduce the damages resulting from the lawyer's malpractice. For Foxborough suffered actual injury when the development rights (that is, the rights which the attorney was hired to protect) expired. In the instant case, however, the issues of both coverage and notice were litigated in the National Union Action. And resolution of these issues had a direct bearing on whether Jordache was harmed as a result of Brobeck's alleged omissions, since Brobeck's failure to investigate the insurance issue could not have harmed Jordache if Jordache was in fact not entitled to any insurance benefits, or if the insurance carriers had actual, timely notice of the Marciano Action.
While most of the cases discussed above have been concerned with malpractice in the “transactional” setting, the most common form of legal malpractice is the “missed statute” case,7 that is, where the attorney either (1) files the lawsuit after expiration of the statute of limitations, or (2) fails to file the lawsuit prior to expiration of the statutory period and does nothing more. Prior to the Supreme Court's opinion in Adams v. Paul, supra, 11 Cal.4th 583, 46 Cal.Rptr.2d 594, 904 P.2d 1205, the Courts of Appeal were split on when actual injury occurs in missed statute cases. Consequently, the courts reached different conclusions as to when the statute of limitations commences to run in such cases. (See, e.g., Finlayson v. Sanbrook (1992) 10 Cal.App.4th 1436, 13 Cal.Rptr.2d 406; Pleasant v. Celli (1993) 18 Cal.App.4th 841, 22 Cal.Rptr.2d 663.)
In Finlayson v. Sanbrook, supra, the Sixth District Court of Appeal considered the “actual injury” tolling provision of section 340.6 in a “missed statute” case. There, Finlayson had been injured from exposure to asbestos materials during his 30 years as a sheet metal worker. In 1981, Finlayson hired Sanbrook to represent him on a workers' compensation claim and to pursue possible third party litigation. However, Sanbrook failed to file a third party action against the manufacturers and suppliers of asbestos. Finlayson filed a legal malpractice action against Sanbrook in 1983. In 1989, that action was dismissed after the trial court denied Finlayson's motion to extend the five-year statute.
However, also in 1983, through a new attorney, Finlayson filed a third party action against the asbestos manufacturers and suppliers which he claimed that the defendant should have filed. Several of the manufacturers raised the statute of limitations defense in their answers; two settled. In May 1988, some manufacturers obtained summary judgment on the grounds that plaintiff's suit was time-barred.
In February 1989, Finlayson filed a new legal malpractice action against his original lawyer. The allegations of the complaint in this second malpractice action were substantially the same as those in the earlier lawsuit. However, Finlayson alleged that he sustained “actual injury” in May 1988, when the court ruled that his personal injury suit was time-barred and entered summary judgment.
The Court of Appeal rejected Finlayson's argument that he did not sustain “actual injury” until the disposition of the underlying action by summary judgment. The court held that “in missed statute cases, ‘actual injury’ for purposes of section 340.6 occurs when the client's cause of action is proscribed” by expiration of the statute of limitations. (Id. at p. 1444, 13 Cal.Rptr.2d 406.) In so doing, the court limited Laird v. Blacker 's holding that “actual injury” occurs when a client suffers an adverse judgment or order of dismissal in the underlying action (2 Cal.4th at pp. 609, 615, 618, 620, 7 Cal.Rptr.2d 550, 828 P.2d 691) “to those situations in which there exists a timely filed underlying action.” (10 Cal.App.4th at p. 1444, 13 Cal.Rptr.2d 406.)
Division Two of this District of the Court of Appeal disavowed the holding of Finlayson in Pleasant v. Celli, supra, 18 Cal.App.4th 841, 22 Cal.Rptr.2d 663. Celli, the attorney defendant, undertook to investigate a potential claim of Pleasant for the death, in September 1981, of her 18–month–old daughter while under the care of the family physician. In October 1982, more than one year after the death, Celli filed a medical malpractice lawsuit. Thereafter, Pleasant retained new counsel to prosecute the wrongful death lawsuit. The medical defendants successfully demurred to the complaint on statute of limitations grounds, winning a summary judgment in December of 1985.
In June of 1986, Pleasant sued Celli for legal malpractice. Pleasant won a jury verdict, and Celli appealed, claiming that the lawsuit was time-barred. The Court of Appeal, relying on the “bright line” rule of Laird v. Blacker, held that “in attorney malpractice cases, where the attorney's wrong consists of missing the statute of limitations in the underlying suit, the plaintiff's cause of action for malpractice does not accrue until the trial court dismisses the plaintiff's underlying case or enters an adverse judgment against the plaintiff.” (18 Cal.App.4th at p. 850, 22 Cal.Rptr.2d 663.)
It is against this backdrop that the Supreme Court granted review in Adams v. Paul, supra, 11 Cal.4th 583, 585, 46 Cal.Rptr.2d 594, 904 P.2d 1205, “to determine when, in the event of such a failure or misadvice as to the applicable limitations period, the plaintiff sustains ‘actual injury’ for purposes of tolling the statute of limitations in a subsequent suit for professional negligence.”
The facts in Adams were as follows: In 1983, Katherine Adams's husband, Walter Standeven, shot and killed their son. Later the same day, Standeven died in a fire in the family home. Lawyer Aaron Paul advised Adams that she could bring a wrongful death lawsuit against Standeven's estate within 90 days after the estate formally rejected her claim. The lawyer, however, neglected to advise Adams that the statute of limitations on a wrongful death action would expire one year after October 16, 1985, the date on which the estate's letters of administration were issued. Adams filed the wrongful death action against Standeven's estate in December 1986, within 90 days after the estate rejected her claim, but more than one year after letters of administration had been issued. In March 1990, the estate moved for summary judgment on statute of limitations grounds. Adams opposed the motion, arguing that the estate was estopped from asserting the statute of limitations. Paul signed a declaration supporting Adams's position, wherein he acknowledged his failure to advise Adams on the deadline for filing the wrongful death action. The trial court denied the summary judgment motion due to remaining triable factual issues on the question of estoppel. In October 1991, the parties settled the wrongful death action. (11 Cal.4th at p. 586, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)
In October 1992, Adams sued Paul for legal malpractice, claiming that the lawyer's negligent advice and conduct resulted in the settlement of her wrongful death claim for substantially less than its actual value due to the statute of limitations issue. (11 Cal.4th at p. 587, 46 Cal.Rptr.2d 594, 904 P.2d 1205.) Paul demurred on the grounds that the malpractice action was untimely, and the trial court sustained the demurrer, finding that the client suffered “actual injury” when the statute of limitations expired on the wrongful death action, relying on Finlayson v. Sanbrook, supra, 10 Cal.App.4th 1436, 13 Cal.Rptr.2d 406.
The Court of Appeal affirmed the trial court, but for a different reason. The appellate court, relying on Kovacevich v. McKinney & Wainwright, supra, 16 Cal.App.4th 337, 19 Cal.Rptr.2d 692, ruled that Adams suffered actual injury when she was forced to oppose the estate's summary judgment motion, the point at which the integrity of plaintiff's underlying lawsuit was damaged and compromised, and she was compelled to engage an attorney specifically to handle the prior attorney's alleged error. On the facts set forth above, the Court of Appeal found that Adams sustained actual damages as a result of Paul's negligence in April 1990, when her attorney filed a 14–page opposition to the estate's summary judgment motion, and obtained Paul's declaration in support thereof. At that juncture, the Court ruled Adams suffered compensable injury, although the specific amount of damages could not be determined until the date of settlement.
All seven members of the Supreme Court rejected the conclusions of both the trial and appellate courts. They did so, however, in three opinions, lead (written by Justice Arabian and joined by Justices Baxter and Werdergar), concurring (Justice Kennard), and dissenting (written by Chief Justice Lucas, and joined by Justices Mosk and George).
In the lead opinion, Justice Arabian stated that the point in time when “actual injury” occurs for purposes of section 340.6(a)(1) is always a question of fact. For this reason, bright line rules cannot be formulated to determine in all instances when the limitations period in missed statute cases commences to run. (11 Cal.4th at pp. 588–592, 46 Cal.Rptr.2d 594, 904 P.2d 1205.) Perhaps recognizing the limited utility of the simple pronouncement that “actual injury” is a factual determination, the Justice continued: “Although affirming this central precept, the task remains nevertheless to give some contours to the pertinent inquiry to provide guidance to the trier of fact or the trial court on summary judgment if the parties agree on the material facts. To this end, Budd v. Nixen, supra, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433, provides considerable insight. To begin with, as the court reiterated in Laird v. Blacker, supra, 2 Cal.4th at page 625, 7 Cal.Rptr.2d 550, 828 P.2d 691, the fact of damage rather than the amount is the relevant consideration. (See Budd v. Nixen, supra, 6 Cal.3d at p. 201, 98 Cal.Rptr. 849, 491 P.2d 433.) In addition, the character or quality of the injury must be manifest and palpable. ‘The mere breach of a professional duty, causing only nominal damages, speculative harm, or the threat of future harm—not yet realized—does not suffice․’ (Id. at p. 200, 98 Cal.Rptr. 849, 491 P.2d 433 ․ )” (Adams v. Paul, supra, 11 Cal.4th at p. 589, 46 Cal.Rptr.2d 594, 904 P.2d 1205, footnote omitted.) Finally, Justice Arabian stated that “the determination of actual injury does not necessarily depend upon or require some form of final adjudication, as by judgment or settlement” (id. at p. 591, 46 Cal.Rptr.2d 594, 904 P.2d 1205), suggesting that in some instances, the client will suffer actual harm at the time the statute of limitations on the third party action expires “because, assuming the claim was otherwise viable, the right and/or remedy of recovery on the action has been substantially impaired.” (Id. at p. 589, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)
In her concurring opinion, Justice Kennard agreed with each of the foregoing principles with the exception of the last stated, disagreeing with the lead opinion to the extent that it could be read “as suggesting that expiration of the limitations period of the third party claim, without more, could constitute ‘actual injury.’ ” (Con. opn., Kennard, J., 11 Cal.4th at p. 596, 46 Cal.Rptr.2d 594, 904 P.2d 1205, internal citation omitted.)
The dissent, by contrast, believed that both the decisional authority of Budd, Laird, and ITT as well as sound policy considerations required articulation of the “bright line” rule that “ ‘actual injury’ in missed-statute malpractice cases involving an underlying action occurs at the point of disposition of plaintiff's underlying lawsuit, whether by settlement, dismissal or adverse judgment.” (Dis. opn. of Lucas, C.J., at p. 600, 46 Cal.Rptr.2d 594, 904 P.2d 1205.)
In its discussion, the lead opinion questioned “the reasoning if not the result” (at p. 591, fn. 4, 46 Cal.Rptr.2d 594, 904 P.2d 1205) of both Pleasant and Finlayson, suggesting that the results in these cases, which applied two different, and apparently irreconcilable, “bright line” rules in missed statute cases, were in fact correct. While the court did not explain how this could be so, an interpretation of the meaning of “actual injury” as explicated herein does.
As we mentioned earlier, “missed statute” cases fall into two categories: Those in which the attorney files the underlying third party action after the statute of limitations has lapsed, and those in which the attorney simply fails to file the underlying litigation at all. In the first example, represented by Pleasant, the issue of the statute of limitations is litigated in the underlying lawsuit itself. Consequently, the client will not sustain “actual injury,” that is, establish that the attorney's mistake caused the diminution in the value of the late-filed cause of action, until the issue has been resolved adversely to the client's interests, the very conclusion reached by the Pleasant court. In the second example, represented by the facts of Finlayson, the negligent attorney simply fails to file the underlying lawsuit. In such a situation, the client is faced with a choice: either file and prosecute the third party lawsuit, litigate the statute of limitations issue, and await judgment or settlement to determine whether actual injury has been sustained, or forgo the third party litigation and sue the lawyer for malpractice. If the client chooses this latter alternative, there is no possibility that the third party defendant will overlook the statute of limitations defense, for the client will have conceded the validity of that defense by choosing not to litigate it. In such a circumstance, the client will suffer actual injury upon the expiration of the statute of limitations in the underlying action. (See Finlayson v. Sanbrook, supra, 10 Cal.App.4th 1436, 13 Cal.Rptr.2d 406.)
Finally, both parties contend that recent appellate decisions which address the concept of “actual injury” support their respective positions. We therefore discuss the Fourth District Court of Appeal's recent interpretation of Adams v. Paul in Gailing v. Rose, Klein & Marias (1996) 43 Cal.App.4th 1570, 51 Cal.Rptr.2d 381, the Fifth District's opinion in the accountant malpractice case of Van Dyke v. Dunker and Aced (1996) 46 Cal.App.4th 446, 53 Cal.Rptr.2d 862, and this District's consideration of the issue in Moss v. Stockdale, Peckham & Werner (1996) 47 Cal.App.4th 494, 54 Cal.Rptr.2d 805.
In Gailing, Louis Bazurto retained the defendant law firm (Rose) to pursue an asbestos exposure personal injury claim, and Rose filed such a complaint in November 1986. In October of the following year, Bazurto died from asbestosis. On December 2, 1987, Rose filed a wrongful death action on behalf of Bazurto's widow and children, which case was later consolidated with the personal injury action. (Id. at p. 1572, 51 Cal.Rptr.2d 381.)
After consulting with different attorneys, the Bazurto family learned that they had a claim against Rose for legal malpractice, based upon the failure of the lawyers to file a motion for preferential trial setting in the personal injury case, resulting in the loss of damages for pain and suffering.8 The personal injury case settled in February 1990. In January of 1991, plaintiff Gailing, the administratrix of Bazurto's estate, together with Bazurto's widow and children, sued Rose for legal malpractice, the basis for the claim being Rose's alleged negligence in failing to resolve the personal injury lawsuit before Bazurto's death, losing the opportunity for general damages. (Id. at pp. 1572–1573, 51 Cal.Rptr.2d 381.)
The Court of Appeal affirmed the trial court's finding that the statute of limitations barred Gailing's suit. Applying its understanding of the wisdom of Adams, the court reasoned that the facts before it were analogous in some respects to a missed statute case: “A negligent failure to bring a case to trial before the plaintiff's death is akin to missing a statute of limitations for pain and suffering damages. [¶] But a plaintiff's death is unlike the running of a statute of limitations in an important aspect. The statute of limitations is not jurisdictional. It is an affirmative defense. The defendant must raise it or the plaintiff has every right to collect a full judgment. Conversely, the right to general damages for pain and suffering is lost as a matter of law by statute when the plaintiff dies. Even if the defendant did not raise the issue, the trial court should instruct the jury that pain and suffering damages are not available because the plaintiff died.” (Id. at p. 1577, 51 Cal.Rptr.2d 381, internal citations omitted.) Consequently, the court held that the statute of limitations barred Gailing's action. “The estate suffered damage as a matter of fact when [Bazurto] died before trial.” (Ibid.)
The Gailing court made no distinction between “actual injury” on the one hand and “harm” or “damage” on the other. Nevertheless, the court correctly identified the time when the estate suffered “actual injury,” for Bazurto's legally protected right to compensation for his pain and suffering was lost, by statute, upon his death. Thus, his attorneys invaded that right when their negligence in failing to expedite the personal injury action resulted in the loss of the right to recover pain and suffering damages. Unlike the usual missed statute case, as typified by the facts in Budd, Pleasant and Adams v. Paul, the question of the effect of the attorney's alleged negligence was not the subject of litigation in the underlying third party action. Thus, the judgment in the personal injury action could have no effect on the outcome of the malpractice lawsuit. Rather, the effect of the malpractice was determined, by statute, upon Bazurto's death.
In Van Dyke v. Dunker and Aced, supra, the court relied on attorney malpractice cases to determine when the client in an accountant malpractice action suffered “actual injury” for purposes of tolling the two-year statute of limitations contained in section 339, subdivision (1). The facts of Van Dyke were as follows: In 1989, the accountant defendants advised the plaintiffs to donate real property worth $125,000 in order to receive a tax credit of equal value on their 1989 and 1990 tax returns. After donating the property, plaintiffs learned, in September 1991, that they were not entitled to any credits against taxes for the charitable contribution, but could only deduct a portion of the property's value from their adjusted gross income. In 1993, plaintiffs hired a new accountant to prepare their 1992 tax returns. The newly retained accountant recalculated plaintiffs' tax returns for 1989 and 1990, filed amended returns for those years, and, after protracted negotiations, obtained tax refunds from the Internal Revenue Service (IRS) for those tax years. As a result of these amended returns, however, the plaintiffs' deduction for the real estate donation made in 1990 was reduced from $75,000 to $23,000. In 1994, after filing the amended returns and while negotiating with the IRS with respect thereto, the plaintiffs filed suit against their original accountants.
After reviewing the accountant and attorney malpractice cases which discuss “actual injury” for purposes of tolling the limitations period, the Court of Appeal in Van Dyke concluded: “Read together, Feddersen, Laird, and Niles hold that if the existence or effect of a professional's error depends on a litigated or negotiated determination's outcome, ‘actual injury’ occurs only when that determination is made. In other words, actual injury occurs for purposes of the statute of limitations when the client finally suffers a detriment, which is not merely potential or tentative, as a direct result of the malpractice.” (Id. at pp. 454–455, 53 Cal.Rptr.2d 862, internal citations omitted.) The court then concluded that, on the facts before it, the plaintiffs suffered actual injury no later than September 1991, when they paid unanticipated taxes as a result of their accountant's erroneous advice, for “[a]t that point, there was actual injury regardless of the outcome of the eventual IRS audit.” (Id. at p. 457, 53 Cal.Rptr.2d 862.) Thus, consistent with our analysis herein, the court found that the “underlying action,” there an IRS audit, did not toll the statute of limitations because the outcome of that action had no bearing on the existence or effect of the professional's errors, although it would be directly relevant to the issue of the damages ultimately suffered by the plaintiffs on account of the malpractice.
Division Four of this District recently considered the issue of actual injury in Moss v. Stockdale, Peckham & Werner, supra, 47 Cal.App.4th 494, 54 Cal.Rptr.2d 805. There, Moss had filed an insurance bad faith action in superior court on December 29, 1983. Her case was dismissed in early 1989 for failure to bring it to trial within five years as required by section 583.310. Moss then sued her attorneys for legal malpractice within one year after dismissal of the bad faith action, but more than a year after the five-year deadline imposed by section 583.310 had passed. The trial court concluded that the malpractice action was untimely, since Moss had suffered actual injury upon expiration of the five-year period on December 29, 1988. Moss appealed, arguing that she did not suffer actual injury until the underlying action was dismissed in February 1989. (47 Cal.App.4th at pp. 496–500, 54 Cal.Rptr.2d 805.)
Applying Adams v. Paul, the Court of Appeal concluded that there existed a triable issue of fact as to whether Moss suffered actual injury upon expiration of the five-year period, or upon entry of dismissal in the bad faith action. The court analogized the five-year statute to the statute of limitations, reasoning that “Although the five-year statute is not subject to waiver and estoppel to the same extent as statutes of limitations, it does have exceptions. Factual questions could arise which might salvage a plaintiff's case despite the passage of five years.” (47 Cal.App.4th at p. 501, 54 Cal.Rptr.2d 805.) The court determined that, on the record before it, Moss might have an argument that her attorney abandoned her, and thus engaged in positive misconduct not chargeable to her. This misconduct, in turn, might enable Moss to avoid dismissal by reason of the exceptions to the five-year statute of impossibility, impracticality, and futility set forth in section 583.340, subdivisions (a), (b), and (c). If that were so, Moss would not have sustained actual injury until her opportunity to oppose the motion for dismissal was lost. Because the record did not reveal whether Moss might have avoided dismissal had she opposed the motion for dismissal based on the positive misconduct of her attorney, the appellate court reversed the judgment for the purpose of further factual development of the question of when Moss suffered actual injury. (Id. at pp. 502–504, 54 Cal.Rptr.2d 805.)
With all due respect to our colleagues in Division Four, we interpret the Supreme Court's holding in Adams v. Paul, that the time that actual injury is sustained is always a factual question, to refer only to the events which actually occurred in the litigation, and not to what the parties might have done under the circumstances. Consequently, we think it unnecessary for the determination of when Moss suffered actual injury to inquire into what arguments she might have presented in opposition to the motion to dismiss under the five-year rule. Rather, we believe that, like the plaintiff in Laird v. Blacker, supra, 2 Cal.4th 606, 7 Cal.Rptr.2d 550, 828 P.2d 691, Moss sustained actual injury when the underlying lawsuit was dismissed and thus, on account of her attorneys' negligence, she was no longer entitled to recover damages from the third party defendants in the bad faith lawsuit, for that is the point in time when her legally protected right to compensation for the bad faith conduct of the third party defendants was invaded.9
In sum, we conclude that the statute of limitations commences to run when the plaintiff suffers “actual injury” as explained above. And, as elucidated in Adams v. Paul, the determination of that date is a factual question. The answer to that question will, in turn, depend upon the legally protected interest which the client alleges the attorney invaded, and whether or not the client litigates the existence or effect of the attorney's purported malpractice in a third party proceeding. If an underlying third party proceeding has been filed but the outcome of that proceeding will have no bearing on the existence or effect of the lawyer's malpractice, or will only serve to mitigate damages, resolution of that action will not constitute “actual injury” within the meaning of section 340.6. (See, e.g., Foxborough v. Van Atta, supra, 26 Cal.App.4th 217, 31 Cal.Rptr.2d 525; Gailing v. Rose, Klein & Marias, supra, 43 Cal.App.4th 1570, 51 Cal.Rptr.2d 381; Van Dyke v. Dunker and Aced, supra, 46 Cal.App.4th 446, 53 Cal.Rptr.2d 862; see also, Pompilio v. Kosmo, Cho & Brown (1995) 39 Cal.App.4th 1324, 46 Cal.Rptr.2d 409; Hensley v. Caietti, supra, 13 Cal.App.4th 1165, 16 Cal.Rptr.2d 837.) Likewise, where there is no underlying litigation, the “actual injury” determination will require resolution of the factual issue of what legally protected interest the plaintiff claims the lawyer impaired. (See, e.g., Heyer v. Flaig (1969) 70 Cal.2d 223, 230, 74 Cal.Rptr. 225, 449 P.2d 161 [cause of action of the intended beneficiaries of a will against the attorney who negligently prepared the will commenced to run upon the death of the testatrix, for before that time “the plaintiffs possess [ed] no recognized legal interest in the testatrix' estate”]; 10 Radovich v. Locke–Paddon (1995) 35 Cal.App.4th 946, 41 Cal.Rptr.2d 573 [attorney's negligence in advising client to sign agreement disclaiming any community property interest in wife's earnings resulted in actual injury upon execution of agreement, not upon wife's death 34 years later].) If, on the other hand, “the propriety of an attorney's acts or advice is contingent on the outcome of a claim by or against the client, the client does not sustain actual injury until the claim is resolved adversely, which indicates both that the attorney erred and that the error caused harm.” (Baltins v. James, supra, 36 Cal.App.4th 1193, 1203, 42 Cal.Rptr.2d 896; see also ITT, supra, 9 Cal.4th 245, 36 Cal.Rptr.2d 552, 885 P.2d 965; International Engine Parts, Inc. v. Feddersen and Company, supra, 9 Cal.4th 606, 38 Cal.Rptr.2d 150, 888 P.2d 1279; Tchorbadjian v. Western Home Ins. Company (1995) 39 Cal.App.4th 1211, 46 Cal.Rptr.2d 370; Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 44 Cal.Rptr.2d 339; Karno v. Biddle (1995) 36 Cal.App.4th 622, 42 Cal.Rptr.2d 318; Pleasant v. Celli, supra, 18 Cal.App.4th 841, 22 Cal.Rptr.2d 663; Sirott v. Latts, supra, 6 Cal.App.4th 923, 8 Cal.Rptr.2d 206.) For until an adverse determination is rendered, the attorney has not invaded the plaintiff's legally protected interest.
Applying these principles to the case before us, we conclude that Jordache suffered “actual injury” as a result of Brobeck's alleged negligence within the meaning of section 340.6 when it settled the National Union Action. Brobeck's purported malpractice consisted of failing to advise Jordache to notify its insurance carriers of the Marciano Action, thereby impairing the benefits to which Jordache was entitled pursuant to its insurance policies. Whether or not Brobeck's failure to advise Jordache regarding potential insurance coverage resulted in “actual injury” to Jordache within the meaning of section 340.6(a)(1) was contingent on the outcome of the National Union Action. Had Jordache succeeded in establishing that the insurance carriers had adequate notice of the Marciano Action in 1984 and that the policies provided coverage, then Brobeck would have committed no actionable malpractice. Had the insurance carriers prevailed in arguing that the policies provided no potential coverage, then Jordache would have suffered no harm on account of Brobeck's malpractice. The resolution of the National Union Action necessarily included a determination regarding the effect of Brobeck's purported malpractice. Thus, the causal connection between Brobeck's negligent advice and Jordache's damages, both components of which are necessary to give rise to actual injury, was established when Jordache settled the insurance lawsuit after the trial court found both the potential for coverage and late notice of the Marciano claims.
Because we conclude that the statute of limitations was tolled until Jordache suffered actual injury in July 1990, we need not consider whether any other tolling provision of section 340.6 applied to the facts of this case. Nor need we address Jordache's assignments of error regarding its evidentiary objections on the motion for summary judgment, and the court's jurisdiction to modify its summary judgment order “nunc pro tunc.”
The judgment is reversed. Each party is to bear its own costs on appeal.
1. Jordache also sued 110 of Brobeck's individual partners.
FN2. Further statutory references are to the Code of Civil Procedure.. FN2. Further statutory references are to the Code of Civil Procedure.
3. By stipulation, the parties tolled the statute of limitations between August 15, 1990 and February 15, 1991. Consequently, the parties agree that Jordache's lawsuit, filed on February 14, 1991, is deemed to have been filed on August 15, 1990.
4. Laird v. Blacker, supra, 2 Cal.4th 606, 7 Cal.Rptr.2d 550, 828 P.2d 691, is an example of an exception to this rule. There, the attorney's negligence consisted of failing to prosecute the client's lawsuit prior to expiration of the five-year statute. In Laird, the attorney invaded the legally protected interest of the client, and the client thus sustained actual injury, when the client's lawsuit against third party defendants was dismissed for failure to prosecute. The damages to which the client was entitled from the third party defendants, which were lost upon dismissal of the lawsuit, constituted the harm suffered as a result of the attorney's malpractice. Thus in Laird, the same act which constituted the injury directly and immediately caused the harm.
5. These damages might include, among other things, Jordache's costs in defending the Marciano Action, the amount representing the loss of use of the funds which were expended in payment of legal fees instead of being used for business or investment opportunities (which the parties refer to as “lost profits”), and costs incurred in prosecuting the National Union Action to the extent that Jordache could establish that there would have been no need to prosecute that lawsuit had Brobeck timely tendered the Marciano Action to the insurance carriers.
6. The more difficult problem revealed by Sirott concerns damages. For at the time of the judicial determination, though Sirott had been “injured” as a result of his attorney's malpractice, he had suffered no compensable damages, since his out-of-pocket expenses in defending the medical malpractice action were less than the premium he would have had to pay to obtain the insurance benefits which his attorney advised him he did not need to purchase. It was not until the medical malpractice action settled for $230,000, long after he had suffered “actual injury,” that Sirott suffered compensable damages as a result of his attorney negligence. Thus, Sirott would have had to file his malpractice action before he knew the total damages suffered, or even if he had incurred a net loss, as a result of his attorney's negligent advice. Of course, that this situation may arise is recognized in the case law (see, e.g., Adams v. Paul, supra, 11 Cal.4th at pp. 592–593, 46 Cal.Rptr.2d 594, 904 P.2d 1205; Laird v. Blacker, supra, 2 Cal.4th 606, 615, 7 Cal.Rptr.2d 550, 828 P.2d 691), and procedures are available, such as a stay of the action and amendment of the complaint, to address this specific predicament.
7. 2 Mallen & Smith, Legal Malpractice (3d ed. 1989) § 24.13, p. 481.
8. Code of Civil Procedure section 377.34 provides: “In an action or proceeding by a decedent's personal representative or successor in interest on the decedent's cause of action, the damages recoverable are limited to the loss or damage that the decedent sustained or incurred before death, including any penalties or punitive or exemplary damages that the decedent would have been entitled to recover had the decedent lived, and do not include damages for pain, suffering, or disfigurement.”
9. We note that, while the five-year statute is “mandatory” in the sense that a court must dismiss an action which has not been brought to trial within five years, a judgment rendered following a trial which did not commence within five years of the date of filing is perfectly valid and not subject to attack for failure to abide by the five year rule. The five-year statute thus differs from the rule that damages for pain and suffering are personal and do not survive the plaintiff's death. (See Gailing v. Rose, Klein & Marias, supra, 43 Cal.App.4th 1570, 51 Cal.Rptr.2d 381.)
10. The quoted language appears in a heading which reads in full as follows: “The statute of limitations does not commence to run until the testatrix' death, at which time the defendant's negligence become irremediable and before which time the plaintiffs possess no recognized legal interest․” The notion of irremediability which the Supreme Court introduced (in our view, unnecessarily) in Heyer v. Flaig was repudiated in Laird v. Blacker, supra, 2 Cal.4th at pp. 614–617, 7 Cal.Rptr.2d 550, 828 P.2d 691.
ARMSTRONG, Associate Justice.
TURNER, P.J., and GRIGNON, J., concur.