By: Ted Schmidt
The Best Choice Fund, LLC v. Low & Childers, PC,
624 Ariz. Adv. Rep. 24 (App. Div. I, December 20, 2011) (J. Timmer)
STATUTE OF LIMITATIONS IN ATTY MALPRACTICE ACTION ACCRUES
WHEN PLAINTIFF REASONABLY KNOWS OF ALLEGED NEGLIGENCE AND ITS DAMAGES AND WHERE
THAT ALLEGED NEGLIGENCE OCCURS OUTSIDE THE LITIGATION CONTEXT THE ACCRUAL IS
NOT DELAYED UNTIL THE FINAL ACT IN AN ADMINISTRATIVE PROCEEDING/ENTITIES BYLAWS
MAY PROHIBIT PRESIDENT FROM RELEASING ENTITY IF CONTRARY TO BOARD’S
WISHES AND APPARENT AUTHORITY OF AGENT DOES NOT ALLOW UNREASONABLE RELIANCE ON
AGENCY BY PARTY/WAIVING UNKNOWN POTENTIAL OR FUTURE CLAIMS IS A SUFFICIENT
DETRIMENT TO PARTIES TO CONSTITUTE CONSIDERATION TO SUPPORT A CONTRACTUAL
RELEASE AND SETTLEMENT/ATTY MALPRACTICE ACTION FOR NEGLIGENCE PERFORMANCE OF
CONTRACTUAL OBLIGATIONS AS OPPOSED TO FAILURE TO PERFORM UNDER CONTRACT SOUNDS
IN TORT AND DOES NOT “ARISE OUT OF CONTRACT” SO AS TO SUPPORT ATTYS’ FEES CLAIM
UNDER ARS 12-341.01
National Transportation Holding Corporation [NT] is a
captive mutual risk insurance company providing liability insurance to taxi,
limousine and livery service providers. It retained Low & Childers
[L&C] to perform legal services regarding its formation, licensing and
regulatory compliance. On June 1, 2005 L&C filed a license
application for NT with the Arizona Department of Insurance [DOI].
Arizona law required NT as a captive insured to employ a captive manager to maintain
its books and report to the DOI. NT retained USA Risk Group, Inc. [USA]
for this purpose. On February 10, 2006 DOI suspended NT’s license for
noncompliance with check signatory requirements. On March 20, 2006 NT’s
president and USA’s vice-president executed a settlement agreement and release
of all claims terminating their relationship. Ten days later, NT’s
president on behalf of NT and L&C partner Childers on behalf of L&C
executed a settlement agreement and release of all claims between NT and
L&C. NT’s dissolution as required by the DOI was consummated when the
Arizona Corporation Commission issued a certificate of dissolution on October
31, 2008. On June 23, 2009 NT sued L&C for malpractice and USA for
breach of contract. The trial court granted both defendants summary judgment
(L&C on statute of limitations grounds and USA based upon accord and
satisfaction) and NT appealed. The Arizona Court of Appeals affirmed regarding
L&C but reversed and remanded as to USA.
First the court noted that the statute of limitations on an
attorney malpractice claim is two years and “A legal malpractice claim accrues
when "(1) the plaintiff knows or reasonably should know of the attorney's
negligent conduct; and (2) the plaintiff's damages are ascertainable, and not
speculative or contingent." While NT did not dispute that it knew of
L&C’s malpractice when its license was suspended in February 2006 it
contended that its damages were not ascertainable until October 31, 2008 when
the certificate of dissolution issued because in the interim the DOI could have
changed its mind. The court of appeals acknowledged that the statute of
limitations does not accrue for alleged legal malpractice committed in
the course of litigation until an appeal is waived or completed. However here,
the alleged malpractice did not occur “in the course of litigation.” NI did not
appeal its suspension so there was no reasonable chance of the DOI’s decision
being overturned and NI’s damages were ascertainable at the time of the suspension
because at that time it was forced to discontinue issuing certificates of
insurance and to cancel existing certificates.
NI next argued that the “continuous representation” doctrine
should toll the statute as to L&C. Under this rule a client is not required
to disrupt the attorney client relationship while the attorney continues to
represent the client by questioning the lawyer’s actions and suing the
lawyer. Here there were no alleged acts of negligence subsequent to March
2006 so regardless of whether the continuous representation doctrine should
apply to these facts, more than two years passed following the termination of
L&C’s work on the matter in question so the action was time barred
As to the defense of accord and satisfaction the court noted
“The doctrine of accord and satisfaction discharges a contractual obligation or
cause of action when the parties agree to exchange something of value in
resolution of a claim or demand and then perform on that agreement, the
'accord' being the agreement, and the 'satisfaction' its execution or
performance." NT showed here that its president was prohibited by
NT’s bylaws from executing a settlement agreement and release contrary to NT’s
board of directors’ intent and wishes. NT’s affidavit from its chairman of
the board that this agreement was “completely unauthorized and contrary to the
Board of Directors’ intent and wishes” was adequate to defeat the motion for
summary judgment based upon accord and satisfaction. Further, while
apparent authority exists when the principal engages in intentional or
inadvertent conduct that allows a third party reasonably to conclude that the
agent has actual authority, one cannot unreasonably rely upon the appearance of
apparent authority. Here a number of facts created a question of
fact as to whether NT’s president had authority to execute the release.
Most notably, NT’s president was simultaneously acting for a third party in the
process of purchasing USA and there were documents in USA’s possession which
suggested NT’s president might not have authority to execute the release.
Next the court ruled that there was consideration to support
the release. Although neither party knew of any claim it might have to pursue
against the other, by signing the release they were each incurring the
detriment of being potentially precluded from pursuing claims that might exist
or arise.
Finally, as to L&C’s claim for attorneys’ fees under ARS
sec. 12-341.01, where there was no claim that L&C failed to perform under
its contract but rather that it performed negligently, the action did not
“arise out of contract” so the statute does not apply. As to NT’s
successful defeat of the motion for summary judgment of USA, NT still had to go
back to the trial court and litigate its claim against USA and therefore was
not yet the “prevailing party” entitled to request attorneys’ fees.
