JACOBY v. SCHENKEL (1995)

Plaintiffs and appellants Michel N. Jacoby, D.D.S., an individual, and Michel N. Jacoby, D.D.S., Inc., a California corporation (Jacoby) appeal an order dismissing their action against defendants and respondents Evan B. Schenkel, an individual, and the Law Offices of Evan B. Schenkel, a California corporation (Schenkel) following the sustaining of a demurrer to the first amended complaint without leave to amend.

The issue presented is whether the pleading reveals the action is time-barred.

Merely because the pleading disclosed Jacoby and Schenkel were engaged in a fee arbitration did not establish Schenkel's representation of Jacoby had ceased by that time so as to commence the running of the statute of limitations.   The order therefore is reversed.

FACTUAL AND PROCEDURAL BACKGROUND

a. The original complaint.

On August 31, 1992, Jacoby filed the original complaint for breach of fiduciary duty, constructive trust, money paid by mistake and money had and received against Schenkel, his former attorney.

Jacoby pled that on September 7, 1986, he retained Schenkel to pursue claims against a former employee who had stolen approximately $75,000 from Jacoby.   Schenkel advised Jacoby the legal fees probably would not exceed $35,000 and possibly would amount to only half of that.   In the first two months of the litigation, the legal fees amounted to $37,524.   By November 1986, the total charges were $52,555.   Jacoby told Schenkel he could not afford to go forward with the litigation at this rate.   Schenkel suggested Jacoby put up his home as collateral or borrow from a profit sharing plan to continue to pay the legal fees.   Schenkel stated he did not wish to continue to represent Jacoby and gave Jacoby a substitution of attorney form to sign and return.

Jacoby was unable to obtain other counsel.   Schenkel then presented Jacoby with a 15–page modification to their original two-page agreement.   The terms of the modification were unconscionable.   At the time of signing the agreement, Jacoby told Schenkel he did not think the agreement was fair, did not understand its terms, and it was causing Jacoby to commit well over $75,000 in total attorney fees.   Schenkel stated if Jacoby did not sign the agreement, he would be forced to drop the litigation which would expose Jacoby to a malicious prosecution action.   Jacoby signed the agreement under protest.

During the course of representing Jacoby, Schenkel on numerous occasions and as late as 1989, withdrew substantial sums from the client trust account.   Schenkel never received permission to withdraw the funds and Jacoby objected to the withdrawals.

During the period of 1991 through 1992, Jacoby and Schenkel were in the process of arbitrating their fee dispute.   Because of undue pressure being applied by Schenkel, including billing Jacoby for preparing Schenkel's defense to the arbitration, Jacoby was forced to terminate the arbitration proceeding.

Based on these allegations, Jacoby pled claims for breach of fiduciary duty, constructive trust, money paid by mistake and money had and received.

b. Schenkel's demurrer to the original complaint.

On October 16, 1992, Schenkel filed a demurrer to the original complaint asserting the entire action was time-barred.   Citing Stoll v. Superior Court (1992) 9 Cal.App.4th 1362, 12 Cal.Rptr.2d 354, Schenkel argued the one-year statute of limitations applicable to legal malpractice actions (Code Civ.Proc., § 340.6, subd. (a)) ¹ extends to all cases sounding in legal malpractice, even if styled as a breach of fiduciary duty.   Therefore, the cause of action for breach of fiduciary duty was untimely because Jacoby had knowledge of the facts constituting the alleged breach in 1989, when Schenkel withdrew funds from the trust account over Jacoby's objection, and the complaint was not filed until August 31, 1992.   As for the remaining claims, because they were based on the same facts as the cause of action for breach of fiduciary duty, they similarly were time-barred.

The demurrer was set for hearing on December 14, 1992.

c. Jacoby's first amended complaint.

On November 30, 1992, two weeks before the demurrer was to be heard, Jacoby filed a first amended complaint.

Jacoby pled he had paid approximately $108,000 in legal fees to Schenkel including the amounts taken by Schenkel without permission, and Schenkel had billed Jacoby in excess of $330,000.   Jacoby omitted the allegation made in the original complaint that during the period of 1991 through 1992, he and Schenkel were in the process of arbitrating their fee dispute.   Jacoby now pled that Schenkel continued to represent him regarding the same subject matter through March 1992 and therefore the statute of limitations for all of Schenkel's wrongdoing was tolled until March 1992.

The amended complaint sought declaratory relief, an accounting, and damages for breach of fiduciary duty, money paid by mistake, money had and received and legal malpractice.

d. The hearing on the demurrer.

Jacoby requested Schenkel take the demurrer to the original complaint off calendar on the ground section 472 allows for filing and service of an amended complaint after a demurrer is filed as long as the amended pleading is filed and served prior to the hearing on the demurrer.

Schenkel refused to take the matter off calendar.

The hearing then was continued to January 8, 1993, at which time the trial court sustained the demurrer without leave to amend “as to [both the original] Complaint ․ and First Amended Complaint.”   The ruling cited Stoll v. Superior Court, supra, 9 Cal.App.4th 1362, 12 Cal.Rptr.2d 354.   The trial court also noted the amended complaint deleted the allegation in the original complaint pertaining to the fee arbitration during 1991 and 1992.

On January 19, 1993, the trial court entered an order sustaining the demurrer without leave to amend as to both the original and first amended complaints and dismissing the action.   On February 18, 1993, Jacoby filed a timely appeal from the order of dismissal.²

CONTENTIONS

Jacoby contends the trial court abused its discretion in dismissing the first amended complaint because he had an absolute right to amend, and if Schenkel believes the amended complaint is a sham, he must demur to the amended pleading.

DISCUSSION

1. Standard of appellate review.

 A demurrer serves to test the sufficiency of a pleading by raising questions of law.  (Buford v. State of California (1980) 104 Cal.App.3d 811, 818, 164 Cal.Rptr. 264.)   When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action.  (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)   The allegations are regarded as true and are liberally construed with a view to attaining substantial justice.  (Shaeffer v. State of California (1970) 3 Cal.App.3d 348, 354, 83 Cal.Rptr. 347;  King v. Central Bank (1977) 18 Cal.3d 840, 843, 135 Cal.Rptr. 771, 558 P.2d 857.)

 Generally, when a demurrer is sustained without leave to amend, we decide whether there is a reasonable possibility the defect can be cured by amendment.   If it can, the trial court abused its discretion and we reverse;  if not, there was no abuse of discretion and we affirm.  (Blank v. Kirwan, supra, 39 Cal.3d at p. 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

 However, where a demurrer is sustained to the original complaint, denial of leave to amend constitutes an abuse of discretion if the pleading does not show on its face that it is incapable of amendment.  (King v. Mortimer (1948) 83 Cal.App.2d 153, 158, 188 P.2d 502;  Gami v. Mullikin Medical Center (1993) 18 Cal.App.4th 870, 877, 22 Cal.Rptr.2d 819.)

 2. Trial court erred in entertaining demurrer to the original complaint because the operative pleading was the first amended complaint to which no demurrer had been filed.

Jacoby was entitled to file a first amended complaint before the hearing on the demurrer to the original complaint.   Section 472 states:  “Any pleading may be amended once by the party of course, and without costs, at any time before the answer or demurrer is filed, or after demurrer and before the trial of the issue of law thereon, by filing the same as amended and serving a copy on the adverse party, ․” (Italics added.)

Once Jacoby filed the first amended complaint, that became the operative pleading.   At that juncture, the demurrer to the original complaint should have been taken off calendar.   Thus, the trial court erred in entertaining the demurrer to the superseded original complaint.   The trial court compounded its error by sustaining a demurrer to the first amended complaint, to which no demurrer had been interposed;  Schenkel's demurrer went to the original complaint.

The remaining issue is whether, in view of Jacoby's allegations, the trial court's error was prejudicial.

3. Error was prejudicial because neither the original nor amended complaint discloses the action is time-barred.

a. General principles.

 Section 340.6 states in relevant part:  “(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:  [¶] ․ [¶] (2) The attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred;  ․” (Italics added.)

An action against an attorney on a claim for breach of fiduciary duty falls within the statutory term “ ‘wrongful act or omission’ ” and must be commenced within the period applicable to legal malpractice actions.   (Stoll, supra, 9 Cal.App.4th at pp. 1363–1364, 12 Cal.Rptr.2d 354.)

b. Neither original nor first amended complaint discloses a time-bar.

 As indicated, Schenkel demurred pursuant to Stoll, supra, 9 Cal.App.4th 1362, 12 Cal.Rptr.2d 354, arguing the one-year statute of limitations applicable to legal malpractice actions (§ 340.6, subd. (a)) extends to all cases sounding in legal malpractice, even if characterized as a breach of fiduciary duty.   Therefore, the cause of action for breach of fiduciary duty was untimely because Jacoby had knowledge of the facts constituting the alleged breach in 1989, when Schenkel withdrew funds from the trust account over Jacoby's objection, and the complaint was not filed until August 31, 1992.   As for the remaining claims, constructive trust, money paid by mistake and money had and received, because they were based on the same facts as the cause of action for breach of fiduciary duty, they similarly were barred.

The argument was meritless.  Section 340.6 provides for a tolling of the statute of limitations during the period “[t]he attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred;  ․” (§ 340.6, subd. (a)(2).)

The original complaint did not indicate the date the representation ceased.   It did state that during 1991 and 1992, Jacoby and Schenkel were engaged in fee arbitration.   That allegation, however, is not inconsistent with a continuing representation of Jacoby by Schenkel.   Merely because an attorney and a client are involved in a fee dispute does not preclude the attorney from continuing to represent the client in the underlying matter.

The first amended complaint deleted the allegation regarding the fee arbitration and instead pled Schenkel continued to represent Jacoby regarding the same subject matter through March 1992.   Taking that allegation as true for purposes of demurrer, the complaint filed August 31, 1992 was timely.

 Lastly, we observe Schenkel's demurrer treated all of Jacoby's causes of action as subject to the one-year statute of limitations for legal malpractice claims.   However, the statute of limitations for money had and received is two years.  (§ 339, subd. (1);  Franck v. J.J. Sugarman–Rudolph Co. (1952) 40 Cal.2d 81, 90, 251 P.2d 949.)   The statute of limitations for money paid by mistake is three years from discovery of the facts constituting the mistake.  (§ 338, subd. (d);  Holtzendorff v. Housing Authority (1967) 250 Cal.App.2d 596, 635, 58 Cal.Rptr. 886;  Sun 'n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 701, 148 Cal.Rptr. 329, 582 P.2d 920.)

 A cause of action for money had and received may be asserted by a former client against an attorney “ ‘for money had and received by the defendant for the use of the plaintiff.’ ”  (Schultz v. Harney (1994) 27 Cal.App.4th 1611, 1623, 33 Cal.Rptr.2d 276.)   By a parity of reasoning, the former client also may state a cause of action for money paid by mistake.

Schenkel's argument that all causes of action against an attorney are governed by section 340.6 reads too much into Stoll.   That decision merely holds a claim for breach of fiduciary duty falls within the statutory term “wrongful act or omission” (§ 340.6) and therefore is subject to the same period of limitations as a claim for legal malpractice.  (Stoll, supra, 9 Cal.App.4th at pp. 1363–1364, 12 Cal.Rptr.2d 354.)   A claim for money had and received, alleging that defendant is indebted to the plaintiff in a certain sum (4 Witkin, Cal.Procedure (3d ed. 1985) Pleading, § 512, p. 546), or for money paid by mistake, is not based on counsel's wrongful act or omission and therefore is not governed by section 340.6.

DISPOSITION

The order of dismissal is reversed and the trial court is directed to reinstate Jacoby's first amended complaint.

Jacoby to recover costs on appeal.

FOOTNOTES

1.   All further statutory references are to the Code of Civil Procedure, unless otherwise specified.

2.   An order of dismissal signed by the trial court and filed in the action constitutes a judgment and is effective for all purposes.  (§ 581d.)

KLEIN, Presiding Justice.

CROSKEY and KITCHING, JJ., concur.