Thursday, February 20, 2014


Prakashpalan v. Engstrom, Lipscomb & Lack, No. B244236 (D2d1, as modified Feb. 26, 2014)

The court of appeal affirms in part and reverses in part a trial court’s order sustaining a law firm’s demurrer to a bunch of claims brought by a former client. It holds that certain of plaintiff’s claims are subject to a statute of limitations that applies to fiduciaries, and accordingly, that those claims are not barred due to the statute’s generous tolling rule. But as to plaintiffs’ claims for failure to disclose a conflict of interest and failure to maintain confidentiality, the court affirms dismissal because the complaint did not explain how these failures resulted in the harm allegedly suffered by the plaintiffs

This is an attorney-client dispute arising from two, entirely separate, representations. In the first, the Engstrom, Lipscom & Lack law firm represented plaintiffs—along with 93 other families—in a long-ago-settled bad faith property insurance dispute over claims related to the Northridge earthquake. Plaintiffs alleged that Engstrom embezzled settlement funds and never properly disclosed how the funds were ultimately allocated. Plaintiffs contend that they did not discover the embezzlement for many years after it occurred. 

The second matter was a property dispute between plaintiffs and their neighbor, which happened years after the Northridge case. Engstrom attorneys represented the neighbor, but allegedly hid that fact from plaintiffs. During the course of the litigation, an Engstrom attorney purportedly disclosed to his client certain confidential information that Engstrom learned from plaintiffs while representing them in yet another lawsuit that was proceeding at the same time as the Northridge case. Plaintiffs contend that this resulted in their accepting a cut-rate settlement to resolve the dispute, even though the claims were worth much more.

Engstrom demurred to the whole complaint. It argued that the claims about the Northridge settlement were time-barred and that the claims regarding the property dispute failed to explain how the disclosure actually caused plaintiffs’ injury. The court sustained the demurrer and plaintiffs appealed.

On the statute of limitations, the court holds that plaintiffs’ embezzlement claims based on theories of malpractice and fiduciary breaches were time-barred under Code of Civil Procedure § 340.6, which governs client claims against attorneys, other than claims of fraud. Although § 340.6 includes a built-in discovery rule, its four-year outside limit is tolled only while a plaintiff has not sustained actual injury. Because Plaintiffs’ injury occurred in 1997 when the Northridge settlement—and any alleged embezzlement—occurred, these claims were clearly barred. 

But plaintiffs’ fraud-based claims were a different story because § 340.6 has a carve out for fraud. The court holds these claims are controlled by the statute of limitations in Probate Code § 16460, which governs a fiduciary’s duty to provide accounting for trusts. Under § 16460, if a fiduciary fails to provide an accounting, a claim is timely if filed within three years of its discovery. Because Engstrom never gave plaintiffs sufficient information to evaluate whether all settlement monies were distributed and whether they received the sums to which they were entitled, it appeared that Engstrom had never provided them with an adequate accounting. Under § 16460(a)(2)’s plaintiff-friendly tolling rule, plaintiffs’ duty of inquiry was never triggered. As plaintiffs claim they did not discover their claims until February 2012 when they conducted a survey of some of the other settling Northridge plaintiffs, their fraud-based embezzlement claims are all potentially timely. The court thus reverses the demurrer on these claims and directs the trial court on remand to permit Plaintiffs to amend their complaint with allegations establishing delayed discovery under § 16460.

Turning to the claims based on Engstrom’s conflict and improper disclosure in the property matter, the court finds that they fail due to lack of causation and thus that the demurrer was properly sustained. Plaintiffs failed to explain how or why the allegedly confidential information that Engstrom disclosed—the source of some fill dirt used on their property—would not have inevitably been disclosed in discovery at some point in the litigation. They provided no basis for their allegation that their claims were actually worth many times more than what they settled for. And they did not provide any plausible* explanation of how the disclosure of the information about the fill so harmed their position in the litigation that they were left with no choice but to accept a lowball settlement. Further, the court concludes that although there was a disclosable conflict of interest, plaintiffs failed to explain how that would have warranted vacating the judgment in the property case, even had they known of the conflict. 

Affirmed in part, reversed in part, and remanded.

Justice Rothschild dissents in part. He thinks the trial court ruling should have been affirmed in its entirety because the claim that some portion of the Northridge settlement monies was unaccounted for is speculative.  Because plaintiffs did not allege actual fraud, he would have applied Code of Civil Procedure § 340.6 to all of their claims. And as the majority agrees, under section 340.6, such claims would be untimely.

*Note: This is an interesting development, since it arguably applies a somewhat higher pleading standard. This case appears to be fairly citable for the proposition that a plaintiff needs to plead a theory of causation with sufficient specificity to make sense. The court even uses the word “plausible” in describing the demurrer standard. It does not purport to adopt the federal standard from Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which applies to the federal analogue of a demurrer. But it nonetheless affirms a dismissal for inadequately pleaded causation, even though plaintiffs alleged that Engstrom’s disclosure of the confidential information about the fill dirt led plaintiffs to accept a $500,000 settlement when their claims were really worth $4 million. These seem like the kind of “ultimate facts” that often withstand demurrers, but the court here holds they too lacking in detail to be plausible. 

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