S.C. Rules on Time Limit to Sue for Return of Unearned Fees

Friday, August 21, 2015

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S.C. Rules on Time Limit to Sue for Return of Unearned Fees

One-Year Limit Only Applies When Suit Concerns ‘Professional Obligation,’ Justices Rule

By KENNETH OFGANG, Staff Writer

The one-year statute of limitations for suits over the “performance of professional services” by an attorney does not necessarily apply to an action for failure to return unearned fees, the state Supreme Court ruled yesterday.

In a 5-2 decision, the justices affirmed a Fourth District Court of Appeal ruling in favor of Nancy F. Lee, who claims that Newport Beach attorney William B. Hanley told her she had an unexpended advance payment of more than $46,000, but then refused to return the money.

“We hold that [Code of Civil Procedure] section 340.6(a) applies to a claim when the merits of the claim will necessarily depend on proof that an attorney violated a professional obligation — that is, an obligation the attorney has by virtue of being an attorney — in the course of providing professional services,” Justice Goodwin H. Liu wrote for the court. “Such claims brought more than one year after the plaintiff discovers or through reasonable diligence should have discovered the facts underlying the claim are time-barred by section 340.6(a) unless the plaintiff alleges actual fraud.”

The statute applies to an action based on “a wrongful act or omission, other than for actual fraud, arising in the performance of professional services.” Because Lee’s complaint might be construed “to allege a claim for conversion whose ultimate proof at trial may not depend on the assertion that Hanley violated a professional obligation,” it was error for Orange Superior Court Judge Robert Moss to sustain Hanley’s demurrer, Liu said.

Amended Complaint

Lee filed suit on Dec. 21, 2011. Her second amended complaint alleges that the case in which Hanley represented her settled on Jan. 25, 2010, and that she received a letter and an invoice from Hanley about a week later.

Both the letter and invoice stated that she had a credit balance of $46,321.85, she alleged. But when she called and asked for her refund, she said, she was told that she wouldn’t get one.

She then retained her current attorney, Walter J. Wilson, and both she and he sent letters on Dec. 6, 2010 demanding return of the credit balance, plus nearly $10,000 in unexpended expert witness fees. The latter was returned, she said, but no part of the unexpended attorney fees was refunded.

Hanley argued that because the action arose from legal representation, and there was no allegation of fraud, the one-year statute applied on the face of the complaint.

But such a strict view goes beyond the purpose of the one-year statute, Liu said, explaining that the purpose of the law, which was enacted in 1977, was to respond to a significant increase in malpractice premiums.

That increase, he said, was a product of uncertainty generated by high court decisions holding that a cause of action for legal malpractice does not accrue until the client discovers, or should have discovered, the facts establishing the elements of the cause of action, as well as by the application of different limitations periods depending on whether a claim was for breach of a written contract, fraud, breach of an oral contract, or a tort affecting intangible property.

‘Open-Ended Time Frame’

The legislation’s sponsor, then-Assemblyman Willie Brown, Liu noted, said in a letter urging the governor to sign it that it “creates a new statute of limitations for legal malpractice actions in an effort to close off the present open-ended time frame allowed for such actions.”

That purpose would not be served, the justice said, by applying the shortened limitations period to “garden-variety” claims, such as a hypothetical attorney’s theft from his client’s unattended purse. Such a claim “does not require proof that the attorney has violated a professional obligation, even if the theft occurs while the attorney and the victim are discussing the victim’s legal affairs,” he postulated.

In the case of Lee’s suit against Hanley, he elaborated, the facts must be developed in the trial court before a determination can be made as to whether the one-year statute applies.

“At this stage, we do not know whether Hanley disputes that he owes Lee the money she claims (perhaps they had previously agreed that Hanley could keep any leftover portion of the advance), whether Hanley made a bookkeeping error in handling Lee’s money, or whether Hanley misspent Lee’s money or decided to keep it for no good reason,” the jurist wrote. “If, for example, Lee’s claim turns out to hinge on proof that Hanley kept her money pursuant to an unconscionable fee agreement…or that Hanley did not properly preserve client funds…, her claim may be barred by section 340.6(a).”

Liu was joined by Chief Justice Tani G. Cantil-Sakauye and Justices Kathryn M. Werdegar, Mariano-Florentino Cuéllar and Leondra R. Kruger.

Dissenting Opinion

Justice Carol A. Corrigan, joined by Justice Ming Chin, dissented.

Corrigan argued that the majority had paid too little attention to what the statute actually said that its ruling would be difficult to apply.

“From a plain reading of the statutory language, I would hold that section 340.6 governs any claim against an attorney, except for actual fraud, that is based on the attorney’s wrongful conduct in performing professional services,” she wrote. “It does not matter how the claim is specifically pleaded or what proof is ultimately necessary to support it. What matters is the nature of the alleged wrongdoing: Was the conduct logically encompassed in the attorney’s performance of professional services? If so, section 340.6 requires that any claim based on that conduct be brought within one year of discovery or four years of the conduct. If not, some other limitations period applies.”

Lee v. Hanley, 15 S.O.S. 4289, was argued in the Supreme Court by Wilson, of Long Beach, for the plaintiff; Irvine attorney Dimitri P. Gross for the defendant; and Harry W.R. Chamberlain II of Buchalter Nemer in Los Angeles for the Association of Southern California Defense Counsel, defendant’s amicus.