Daily Blast February 11, 2014

The California Court of Appeal, Second Appellate District, Division One (Los Angeles) issued an opinion in Prakashpalan, et al. v. Engstrom, Lipscomb & Lack, et al. (Feb. 11, 2014, B244236) __ Cal.App.4th __, analyzing whether the statute of limitations in Probate Code section 16460 applies to client trust accounts and the disbursement of settlement funds from such accounts or whether the statute of limitations provided under Code of Civil Procedure section 340.6 for professional negligence applies. (Slip opn., p. 11.) The Court of Appeal held that Probate Code section 16460 applied to plaintiff’s fraud causes of action.

This case arose out of three separate representations undertaken by Engstrom, Lipscomb and Lack (“Engstrom”). The fraud causes of action at issue arose out of a matter in which Engstrom and two other firms represented plaintiffs and other property owners in a bad faith and property damage claim against their insurer when their home was damaged by the Northridge Earthquake (“the Allegro Matter”). Around November 1997, Engstrom entered into a settlement with the insurer, State Farm, and obtained $100 million for 93 insured families. Plaintiffs allege that Engstrom received $245,000, which was about one-third of plaintiffs’ settlement share and distributed the remaining $500,000 to plaintiffs. (Slip opn., p. 3.) In February 2012, plaintiffs contacted 17 of the other plaintiffs in the Allegro Matter and discovered that Engstrom had instructed all plaintiffs not to discuss the settlement funds with anyone. (Id. at pp. 2-3.) Plaintiffs concluded that there was over $22 million of settlement funds unaccounted for and determined Engstrom withheld funds from plaintiffs’ share of the settlement funds. (Id. at p. 3.) Plaintiffs’ filed a complaint on June 6, 2011, alleging causes of action relating to professional negligence and fraud. Engstrom demurred and moved to strike plaintiffs’ claims. (Id. at p. 6.) The trial court sustained the demurrer without leave to amend. The trial court found the statute of limitations did not bar the claims, but the claims were barred because for the lawsuit to reach complete resolution, Engstrom would have to reveal confidential information relating to all the Allegro plaintiffs’ settlement, which would breach the attorney-client privilege. (Id. at p. 8.) Plaintiffs appealed.

The Court of Appeal reversed in part. According to the court, Code of Civil Procedure section 340.6 provides two alternative limitation periods, one year after actual or constructive discovery or four years after occurrence. (Slip opn., p. 10.) Section 340.6 applies to malpractice and breach of fiduciary duty arising out of the performance of an attorney’s professional duties, but it does not apply for actions of fraud. (Ibid.) With respect to trust accounts, Probate Code section 16460 applies to a fiduciary’s duty to provide an accounting to a beneficiary and provides a three-year limitations period that is triggered by the trustee’s accounting duty or if no accounting is provided, the action must be filed within three years of the discovery of the claim. The Court of Appeal applied Probate Code section 16460 to plaintiffs’ fraud-based claims based on the rule of statutory construction. (Id. at p. 15.) Therefore, because plaintiffs alleged they did not discover the claim until February 2012, the Court of Appeal held that the complaint was timely under the principles of Probate Code section 16460. Thus, plaintiffs should be permitted to amend their complaint to set forth delayed discovery entitling them to a tolling of the statute of limitations on the Allegro matter. (Ibid.)

In dissent, Justice Rothschild stated that all of plaintiffs’ claims concerning the settlement of the Allegro Matter arose from defendants’ performance of professional services for plaintiffs. Therefore, the claims are subject to the statute of limitations provided by Code of Civil Procedure section 340.6, subdivision (a). According to Justice Rothschild, plaintiffs’ did not sufficiently allege fraud and their theory about unaccounted settlement funds was purely speculative because the 17 families plaintiffs included in their calculation are not representative of the 93 families included in the settlement. Therefore, Justice Rothschild concluded that because the plaintiffs did not adequately allege fraud, their claims were untimely under Code of Civil Procedure section 340.6.

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