SHARTS V. NATELSON, 1994-NMSC-114, 118
N.M. 721, 885 P.2d 642 (S. Ct. 1994)
CASE HISTORY ALERT: see ¶2 - affects
1993-NMCA-082
WALLACE G. SHARTS and STAKEOUT
PROPERTIES, INC.,
Plaintiffs-Respondents,
vs.
STEPHEN NATELSON and NATELSON & ROSS,
Defendants-Petitioners.
SUPREME COURT OF NEW MEXICO
1994-NMSC-114, 118 N.M. 721, 885 P.2d 642
ORIGINAL PROCEEDING ON CERTIORARI.
Stanley F. Frost, District Judge
Rodey, Dickason, Sloan, Akin & Robb,
P.A., Joseph J. Mullins, Charles K. Purcell, Albuquerque, NM, for Petitioners.
Bosson & Canepa, P.A., Richard C.
Bosson, Santa Fe, NM, for Respondents.
MONTGOMERY, BACA, FRANCHINI
{1} The issue in this case,
as framed by our Court of Appeals in one of its opinions below,
Sharts v.
Natelson, 118 N.M. 330,
881 P.2d 690 (Ct. App. 1993) [No. 12,121, filed
June 30, 1993], is: "When may a trial court rule, as a matter of law, that
harm or loss in fact exists sufficient for a cause of action in legal
malpractice to accrue and begin the running of the four year limitation period
provided by [NMSA 1978,] Sections 37-1-1 and -4 [(Repl. Pamp. 1990)]"?
Id.
at 341, 881 P.2d at 200. The trial court answered this question by holding
that, on the materials presented in connection with Defendants' motion for
summary judgment, there was "a genuine issue of material fact regarding
that point in time at which the damages . . . first existed sufficient for the
accrual of the instant cause of action for legal malpractice . . . ." The
court accordingly denied the motion for summary judgment; however, the court
certified its ruling for interlocutory appeal. The Court of Appeals accepted
the appeal and in three separate opinions--one by each of the three judges
participating in the decision--affirmed, two-to-one, the trial court's order.
See
id. at 332, 881 P.2d at 698 (Alarid, J., ruling that costs and delays
incurred as result of negligently drafted covenants were not sufficient to
cause malpractice claim to accrue until claimant's rights were fixed by entry
of adverse declaratory judgment);
id. at 332-333, 881 P.2d at 698-699
(Apodaca, J., specially concurring in result on ground that harm to claimant
was not discoverable as matter of law until new attorney entered appearance on
claimant's behalf in declaratory judgment action, but disagreeing with Judge
Alarid that harm or loss did not occur until trial court entered declaratory
judgment);
id. at 341-344
, 881 P.2d at 700-704 (Hartz, J.,
dissenting on ground that essential facts of claimant's claim were discoverable
well before four years prior to claimant's filing of malpractice
{*723} action, though agreeing with Judge
Apodaca that harm occurred when claimant's legal rights were fixed by sales of
land through deeds containing restrictive covenants permitting purchasers to
enforce covenants against claimant's land).
{2} We granted certiorari to
resolve the issues in this case and in the Court of Appeals' divergent
opinions. We now reverse the Court of Appeals' decision and remand to the trial
court with instructions to enter summary judgment in Defendants' favor.
{3} In 1975 Wallace G. Sharts
purchased sixty acres of undeveloped land in Taos County, New Mexico. He
subsequently conveyed the northerly parcel of thirty acres (Tract One) through
separate sales to several individual purchasers. Most of the deeds in these
sales specifically incorporated by reference a Declaration of Restrictive
Covenants prepared by his attorney, Stephen Natelson, and filed in 1978. The
covenants restricted development to single-family residences on lots no smaller
than three acres.
{4} In the early 1980's
Sharts began developing the southerly thirty acres (Tract Two) as a residential
subdivision on half-acre lots. Questions soon arose over whether the covenants
applied to both Tract One and Tract Two, so as to restrict the lot size in
Tract Two to a minimum of three acres. Between 1981 and 1983 Sharts received at
least two letters from attorneys representing property owners in Tract One,
threatening legal action to enforce the covenants as to Tract Two. In 1983, as
Sharts was attempting to obtain financing to develop the first unit in Tract
Two, he was informed by a title company that the covenants applied to all sixty
acres of his property. The covenants, said the title company, constituted an
impermissible cloud on the title to any lots developed smaller than three acres
and that the title insurance company could not issue title insurance on those
lots. The bank, of course, would not fund the purchasers' loans without title
insurance.
{5} Sharts and Natelson
attempted unsuccessfully to negotiate with the property owners in Tract One to
secure a waiver and modification of the covenants. On Natelson's suggestion,
Sharts agreed to seek a declaratory judgment to establish that the covenants
did not apply to Tract Two. On December 17, 1984, Natelson filed suit on
Sharts' behalf for a declaratory judgment.
{6} On April 3, 1985, while
the declaratory judgment action was pending, Sharts wrote a letter to Natelson
as follows:
This letter is to inform you that if you can get a DECLARATORY
JUDEGEMENT [sic] in my favor, I'm only going to sue you for approximately $
35,000 which represents the extent of the damages I've suffered so far, in the
form of interest payments I've had to pay while waiting for you to
correct the legal errors you should have corrected two years ago when
you were made aware of them.
If you lose, the Declaratory Judgement to set
the record straight, I intend to bring a MALPRACTICE SUIT against Natelson and
Ross for a minimum of $ 800,000 to $ 2,000,000 which represents the direct and
provable damages you have caused me by your carelessness.
I am bringing to New Mexico some very expensive and
very professional "family" attornies [sic] who are very interested in
the case. [Capitalization and emphasis in original.]
{7} Natelson continued to
represent Sharts in the declaratory judgment action and in other matters after
receiving this letter. On June 20, 1985, the law firm of Natelson and Ross was
disqualified from representing Sharts in the declaratory judgment action
because Natelson was a potential witness in the case. The disqualification was
effective upon issuance of the order, and Sharts was given fifteen days to
retain new counsel. On July 10, 1985, attorney Daniel Marlowe entered his
appearance in the declaratory judgment action on Sharts' behalf. Sharts
testified at his deposition that he had engaged Marlowe to represent him
several days before July 10.
{8} The declaratory judgment
action was decided against Sharts on September 22, 1986, and the covenants were
held applicable to
{*724} Tract Two. The
Court of Appeals affirmed the declaratory judgment on June 14, 1988, in
Sharts
v. Walters, 107 N.M. 414,
759 P.2d 201 (Ct. App. 1988).
{9} On July 10, 1989, Sharts
and Stakeout Properties, Inc. (Plaintiffs), filed a complaint against Natelson
and his law firm, Natelson and Ross (Defendants), alleging legal malpractice in
Natelson's preparation of the covenants. Defendants moved for summary judgment
on the ground that the action was barred by the four-year statute of
limitations in Section 37-1-4. The trial court denied the motion and the Court
of Appeals affirmed. We granted Defendants petition for a writ of certiorari to
consider the question stated at the beginning of this opinion.
{10} Our first--and
only--discussion of the statute of limitations for legal malpractice claims is
in
Jaramillo v. Hood, 93 N.M. 433,
601 P.2d 66 (1979). In that case we
adopted a two-step approach for determining when a cause of action for legal
malpractice accrues, following the California cases of
Neel v. Magana,
Olney, Levy, Cathcart & Gelfand, 6 Cal. 3d 176, 491 P.2d 421, 98 Cal.
Rptr. 837 (Cal. 1971) (in bank), and
Budd v. Nixen, 6 Cal. 3d 195, 491
P.2d 433, 98 Cal. Rptr. 849 (Cal. 1971) (in bank). In
Neel, the
California Supreme Court adopted the discovery rule, holding that "a cause
of action for legal malpractice does not accrue until the client discovers, or
should discover, the facts establishing the elements of his cause of
action." 491 P.2d at 433. A cause of action for legal malpractice is
established when the client can allege the following facts: "(1) the
employment of the defendant attorney; (2) the defendant attorney's neglect of a
reasonable duty; and (3) the negligence resulted in and was the proximate cause
of loss to the [client]."
Hyden v. Law Firm of McCormick, Forbes,
Caraway & Tabor, 115 N.M. 159, 162-63,
848 P.2d 1086, 1089-90 (Ct.
App.),
cert. denied, 115 N.M. 60,
846 P.2d 1069 (1993). Thus, the
statute of limitations does not begin to run until the client discovers, or
should discover, that he or she has suffered a loss and that the loss may have
been caused by the attorney's wrongful act or omission.
See 2 Ronald E.
Mallen & Jeffrey M. Smith,
Legal Malpractice § 18.15, at 137 (3d ed.
1989 & Supp. 1993) [hereinafter
Legal Malpractice].
{11} The California Supreme
Court also held, in the companion case
Budd v. Nixen, that the cause of
action does not accrue until the allegedly negligent conduct has caused
"appreciable and actual harm." 491 P.2d at 436. In 1977 the
California legislature replaced the "appreciable and actual harm"
test in
Budd with the requirement that the client must have suffered
"actual injury."
See Cal. Civ. Proc. Code § 340.6 (West 1982).
We believe that the "actual injury" standard more accurately
describes the nature of the harm the client must suffer before the statute of
limitations begins to run.
See 2
Legal Malpractice, supra, §
18.11, at 34 (discussing California approach to nature of damage necessary for
accrual of cause of action). Thus, the limitations period for legal malpractice
commences when (1) the client sustains actual injury
1
and (2) the client discovers, or through reasonable diligence should discover,
the facts essential to the cause of action.
See, e.g., Jaramillo, 93
N.M. at 434, 601 P.2d at 67;
Laird v. Blacker, 2 Cal. 4th 606, 828 P.2d
691, 693 (Cal.) (in bank),
cert. denied, 121 L. Ed. 2d 584, 113 S. Ct.
658 (1992);
{*725} Grunwald v.
Bronkesh, 131 N.J. 483, 621 A.2d 459, 464 (N.J. 1993).
{12} In the lead opinion for
the Court of Appeals below, Judge Alarid reasoned that the first prong of this
test could only be met by a showing of "more than nominal" harm. We
believe that it is not particularly helpful to describe the nature or degree of
the injury or harm required in terms of any particular quantum of damage;
"the focus of the statute of limitations for legal malpractice should be
on discovery of the
fact of damage, not the amount."
Laird,
828 P.2d at 694;
see also 2
Legal Malpractice, supra, 18.11, at 35
n.13 (citing cases supporting prevailing rule "that there only need be the
fact of some damage rather than a specific quantity, even though significant
damages may not occur until the future, if at all"). "Thus, 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."
Foxborough v. Van Atta, 26 Cal. App.
4th 217, 31 Cal. Rptr. 2d 525, 530 (Ct. App. 1994). A client may suffer injury
through loss of a legal right or harm to a legal interest even though the
client has not yet ascertained the amount of his or her damages,
see, e.g.,
Finlayson v. Sanbrook, 10 Cal. App. 4th 1436, 13 Cal. Rptr. 2d 406, 410
(Ct. App. 1992),
review denied (Jan. 28, 1993);
Hennekens v. Hoerl,
160 Wis. 2d 144, 465 N.W.2d 812, 816 (Wis. 1991); or injury may take the form
of consequential or incidental damages, such as attorney's fees or costs
incurred as a result of the alleged malpractice, even though these sums may be
relatively minor compared with the main damage claim,
see, e.g., Royal Crown
Cola Bottling Co. v. Aetna Casualty & Sur. Co., 438 F. Supp. 39, 46
(W.D. Okla. 1977); 2
Legal Malpractice, supra, § 18.11, at 36.
{13} In this case Sharts
suffered injury when he lost his legal right to subdivide part of his land into
lots smaller than three acres--that is, in 1978 when he sold land in Tract One
pursuant to deeds containing restrictive covenants that permitted purchasers to
enforce those covenants on land in Tract Two.
2
Cf. Jaramillo, 93 N.M. at 434, 601 P.2d at 67 (damage from alleged legal
malpractice in drafting will arose when testatrix died and loss of legal rights
occurred). The legal costs Sharts assumed in attempting to resist imposition of
the covenants on Tract Two, beginning with the declaratory judgment action
filed in 1984, likewise constituted actual injury--injury that was, moreover,
actually
known when the costs were incurred.
See Massachusetts Elec.
Co. v. Fletcher, Tilton & Whipple, 394 Mass. 265, 475 N.E.2d 390, 392
(Mass. 1985) (cause of action for legal malpractice accrued when client was
forced to incur legal expenses in action based in part on alleged negligent
conduct of attorney). The date of actual injury, therefore, was well before
July 9, 1985--the date by which the statute must have begun running in order to
bar the claim.
{14} In his opinion below
Judge Alarid concluded that the "harm or loss" prong of the test
could not be satisfied as a matter of law until Sharts' rights were fixed by
entry of the adverse declaratory judgment. 118 N.M. at 334, 881 P.2d at 694. We
respectfully disagree.
The judicial process does not create liabilities or
destroy rights, but only declares what is present through the process of
determining the facts and applying the law. Thus, a right, remedy or interest
is usually lost, or a liability is imposed at the time of a lawyer's error,
even though a court does not so declare until a later date. Although the
unpredictability in resolution through the judicial process may excuse
discovery of the injury, a judicial determination does not "create"
the injury.
2 Legal Malpractice, supra, § 18.11, at 42-43
(footnotes omitted); see also, e.g., Levin v. Berley, 728 F.2d 551, 554
(1st Cir. 1984) (cause of action did not accrue upon court's ruling; client
suffered injury in form of legal fees to remove or alleviate harm caused by
error at beginning of litigation); Magnuson v. Lake, 78 Ore. App. 620,
717 P.2d 1216, 1219-20 {*726} (1986)
(injury occurred when clients were forced to defend declaratory judgment
action, not when judgment was entered against them).
{15} As we have said,
however, a cause of action for legal malpractice does not accrue until the
client discovers, or through reasonable diligence should discover, the facts
essential to the client's claim. The question when a client is deemed to have
discovered an attorney's malpractice and the resulting injury is generally a
question of fact, but "where the undisputed facts show that [the client]
knew, or should have been aware of the negligent conduct on or before a
specific date, the issue may be decided as a matter of law."
Brunacini
v. Kavanagh, 117 N.M. 122, 127,
869 P.2d 821, 826 (Ct. App. 1993),
cert.
denied, 117 N.M. 215,
870 P.2d 753 (1994).
{16} Sharts based his claim
on his alleged request that Natelson draft the restrictive covenants so as to
be applicable only to Tract One, not Tract Two. It is undisputed that Sharts
received letters from attorneys in 1981 and 1983 contending that the covenants
were applicable to both Tract One and Tract Two; that in 1983 a title company
informed him that the covenants were an impermissible cloud on the title of
lots smaller than three acres and that title insurance could not be issued on
those lots; that in 1984 he brought a declaratory judgment action attempting to
remove the cloud on his title to Tract Two; and that in April 1985 he wrote a
letter to Natelson in which he accused Natelson of carelessness and threatened
him with a lawsuit for damages already incurred as the result of his
"legal errors."
{17} By the time the
declaratory judgment action was filed on December 17, 1984, Sharts either knew
or should have known, as a matter of law, that Natelson may have been negligent
in drafting the covenants and that he (Sharts) had suffered loss or harm as a
result.
See Levine v. Diamanthuset, Inc., 722 F. Supp. 579, 590 (N.D.
Cal. 1989) (commencement of legal action put clients on notice of attorney's
claimed negligence),
rev'd on other grounds, 950 F.2d 1478 (9th Cir.
1991);
Salin v. Shalgian, 18 Mass. App. Ct. 467, 467 N.E.2d 475, 477
(Ct. App.),
review denied, 393 Mass. 1102, 469 N.E.2d 830 (Mass. 1984)
(same);
Cherokee Restaurant, Inc. v. Pierson, 428 So. 2d 995, 1000 (Ct.
App.),
cert. denied, 431 So. 2d 773 (La. 1983) (same). In addition,
Sharts showed actual knowledge of the facts essential to his claim by April 3,
1985, when he wrote the threatening letter to Natelson.
See Levin v. Berley,
728 F.2d at 553 (client knew or should have known of attorney's alleged
negligence at time letter was sent on client's behalf to attorney regarding
intention to hold attorney responsible for "alleged errors made in
will");
Kabbe v. Miller, 226 Cal. App. 3d 93, 275 Cal. Rptr. 893,
895 (Ct. App. 1990),
review denied (Mar. 20, 1991) (client's complaint
to state bar accusing attorney of mishandling funds showed discovery of alleged
misconduct);
Melgard v. Hanna, 45 Ore. App. 133, 607 P.2d 795, 797 (Or.
Ct. App. 1980) (statement by client that he had suffered business losses as
result of "bad advice" from attorney showed sufficient knowledge for
claim to accrue). Thus, the statute of limitations in this case had begun to
run by April 3, 1985, at the latest.
{18} Sharts urges us to adopt
the "continuous representation" doctrine as a principle that tolls
the statute of limitations for legal malpractice. We are not inclined to adopt
the doctrine at this time (and in this case); but even if we were to adopt it,
the doctrine would not have tolled the running of the statute so as to permit
Sharts to bring his malpractice claim against Defendants.
{19} Under the continuous
representation doctrine, running of the statute of limitations is tolled until
the representation terminates with respect to the matters that underlie the
malpractice action.
Stevens v. Lake, 615 So. 2d 1177, 1182 (Miss. 1993).
The purpose of the doctrine is "to avoid unnecessarily disrupting the
attorney-client relationship." 2
Legal Malpractice, supra, § 18.12,
at 115. Sharts argues that, under the doctrine, running of the statute would
have been tolled until July 10, 1985, when attorney Marlowe entered his
appearance in the declaratory judgment action on Sharts' behalf. The inquiry,
however, does not concern the point in time when there is a change of counsel
but rather the date when "the attorney's representation concerning a
particular
{*727} transaction is
terminated."
Grago v. Robertson, 49 A.D.2d 645, 370 N.Y.S.2d 255,
259 (App. Div. 1975);
see also 2
Legal Malpractice, supra, §
18.12, at 119 ("The inquiry is not whether an attorney-client relationship
still exists but when the representation of the specific matter
terminated."). Natelson's representation was terminated by the court on
June 20, 1985. "An attorney discontinues serving a client, for the
purposes of the statute of limitations, when the attorney is relieved of the
obligation to serve by either the client or the court."
Hooper v.
Lewis, 191 Mich. App. 312, 477 N.W.2d 114, 116 (Mich. Ct. App. 1991).
Therefore, even if applied to this case, the continuous representation doctrine
would only have tolled the statute until June 20, 1985; and Sharts' action
would still have been barred.
{20} The decision of the
Court of Appeals is reversed, and the cause is remanded to the district court
with instructions to enter summary judgment in Defendants' favor.
SETH D. MONTGOMERY, Justice
JOSEPH F. BACA, Chief Justice
GENE E. FRANCHINI, Justice
1
The terms "damages" and "injury" are used interchangeably
by many courts to refer to the "actual injury" a client must suffer
before the client has a claim for relief against his or her attorney. See,
e.g., Laird v. Blacker, 2 Cal. 4th 606, 828 P.2d 691, 695-96 (Cal.). cert.
denied, 121 L. Ed. 2d 584, 113 S. Ct. 658 (1992); Hennekens v. Hoerl,
160 Wis. 2d 144, 465 N.W.2d 812, 816 n.7 (Wis. 1991); 2 Legal Malpractice,
supra, § 18.11, at 38-39. We recognize that these terms have distinct
meanings. See Lovelace Medical Center v. Mendez, 111 N.M. 336, 342, 805
P.2d 603, 609 (1991); Restatement (Second) of Torts §§ 7, 12 (1965). The terms
"damages" and "injury," however, are used interchangeably
in this opinion where necessary for consistency with the language in the cases
and commentators cited. We read "damages" in these passages as
"injury." In addition, in the context of legal malpractice claims, we
define "injury" as "the loss of a right, remedy or interest, or
the imposition of a liability." See 2 Legal Malpractice, supra, §
18.11, at 39 (suggesting that Restatement definition of injury is too
"confining" in this context and that definition should be replaced
with foregoing definition).
2
This is not to say that the statute of limitations began to run in 1978.
Defendants made no showing in connection with their motion for summary judgment
that Sharts knew or should have known that he had suffered this harm at the
time he made the initial sales.