by Joel M. Pores

The Supreme Court of California interpreted California Civil Procedure Code Section 340.6(a) to be applicable “when the merits of the claim will necessarily depend on proof that an attorney violated a professional obligation the attorney has by virtue of being an attorney.” Lee v. Hanley, 61 Cal. 4th 1225 (2015). In a split decision, the majority accepted the court of appeals’ ruling that Lee’s second amended complaint “could be construed to advance a cause of action for conversion” that was not within the one-year limitations period of Section 340.6(a). Id. at 1229. The action commenced by Lee sought the return of unearned attorney fees from Hanley who had been paid prior to performance after the matter had settled. Hanley first told Lee that she had a credit of over $46,000, but later said there would be no refund. Lee filed suit after the expiration of the one-year statute of limitations, for actions “against an attorney for wrongful acts and omissions arising in the performance of professional services,” as set forth in Code of Civil Procedure Section 340.6(a). Lee’s second amended complaint alleged that Hanley “provided appropriate legal services ... and [Lee] did not suffer any injury from said services ... .” The trial court sustained the demurrer, stating that “the funds were advanced in connection with the performance of professional services and the attorney was required to return them upon his discharge.” The trial court allowed Lee to file an amendment to state a cause of action for actual fraud, but Lee did not amend and the action was dismissed with prejudice.

The Court’s Opinion
The Supreme Court discussed the legislative intent in enacting Section 340.6 in 1977, and found that it was to reduce the cost of legal malpractice insurance and to eliminate the open-endedness and uncertainty created by the discovery rule, as adopted in cases like Neel v. Magana, Olney, Levy, Cathcart, & Gelfand, 6 Cal.3d 176 (1971), and Budd v. Nixen, 6 Cal.3d 195 (1971), holding the cause of action for legal malpractice does not accrue until the plaintiff discovers or should have discovered “the facts establishing the elements of the cause of action.” The enactment of Section 340.6 in 1977 was supposed to do away with creative or artful pleading intended to avoid application of the statute. See Sen. Comm. on Judiciary, Analysis of Assem. Bill No. 298 (1977-1978).

The Lee court noted that Section 340.6(a) does not bar an action for “wrongdoing” such as conversion, or “garden-variety” theft, but that if Lee’s claims depended on proof that Hanley kept her money pursuant to an unconscionable fee agreement (Cal. R. Prof. Conduct 4-200), or that Hanley did not properly preserve funds (Cal. R. Prof. Conduct 4-100), the claim may be barred. The court needed more facts to determine that Section 340.6(a) barred Lee’s claims and observed that “misconduct does not arise in the performance of professional services for purposes of Section 340.6(a) merely because it occurs during a period of legal representation or because the representation brought the parties together and thus provided the attorney the opportunity to engage in the misconduct.” Lee, 61 Cal. 4th at 1237. The majority points out that the obligations of an attorney often overlap with the obligations all persons have, and that the lawyer provides legal and non-legal services such as accounting, bookkeeping, and holding property in trust. Id.

The court held that Section 340.6(a) applies if the claim, in order to succeed, necessarily depends on proof the attorney violated a professional obligation. Even if the facts also proved that the lawyer violated a professional obligation, it did not prevent proof of the types of wrongdoing that were not contemplated by Section 340.6, such as garden-variety theft and sexual battery. Id. at 1238.

Some of the obligations an attorney has by virtue of being an attorney are enumerated by the supreme court, such as fiduciary obligations, the obligation to perform competently, the obligation to perform the services contemplated in a legal services contract into which the attorney has entered, and the obligations embodied in the State Bar Rules of Professional Conduct. “Ordinary fee disputes” the court stated, “cannot evade the statute.” Id. at 1239. The court relied upon the fact that at least one cause of action did not necessarily depend upon proof that Hanley violated a professional obligation. Id.

This is a pleading case and the majority states they do not suggest Hanley is in fact liable for conversion. They do not know if Hanley disputes that he owes the money or if they had another agreement for the leftover funds, or whether Hanley misspent it, or decided to keep it for no good reason. The majority upholds the court of appeal’s reversal of the sustaining of the demurrer and remands the case back to the trial court, so that the trial court can address a possible conversion, or any other cause of action that might survive the one-year limitations period of Section 340.6.

The Strong Dissent
The dissenting opinion by Justice Corrigan points out that it does not matter how the claim is specifically pleaded or what proof is ultimately used to support it; what matters is the nature of the alleged wrongdoing. She states that the legislative history is inconsistent with the majority’s interpretation and indicates that the statute was intended to apply broadly to any claim concerning an attorney’s violation, regardless of how those claims were styled in the complaint, in order to instill certainty and reduce malpractice premiums. The dissent claimed the legislature drafted Section 340.6 to focus on the nature of the attorney’s alleged wrongdoing, rather than how it is labeled in a cause of action, and that “in defining the test of when Section 340.6 is to apply, the majority went astray by re-creating dependence on how a claim is pleaded, exactly what the Legislature sought to remove from the limitations scheme.” Id. at 1241.

The dissent also objected to the majority’s addition of the element of proof to the test as it suggests that claims must necessarily depend on proof that the attorney violated a professional obligation for Section 340.6 to be applicable. Id. at 1242. Exemptions are by statute, and the only one stated in this statute is for actual fraud. If not set forth, exceptions may not be implied, as the majority has done here. See Sierra Club v. State Board of Forestry, 7 Cal. 4th 1215, 1230 (1994).

Civil Procedure Code Section 340.6(a) titled “Attorneys; wrongful professional act or omission; tolling of period” states, in relevant part:

An action against an attorney for a wrongful act or omission, other than for actual fraud, arising in the performance of professional services shall be commenced within one year after the plaintiff discovers, or through the use of reasonable diligence should have discovered, the facts constituting the wrongful act or omission, or four years from the date of the wrongful act or omission, whichever occurs first.

Actual fraud is defined in Civil Code Section 1572 as acting with intent to deceive another party thereto, or induce him to enter into the contract: (1) The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; (2) The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (3) The suppression of that which is true, by one having knowledge or belief of the fact; (4) A promise made without any intention of performing it; or (5) Any other act fitted to deceive.

Constructive fraud, as set forth in Civil Code Section 1573, is excluded from the statutory scheme, and deals with any breach of duty which, without any actual fraudulent intent, gains an advantage to the person at fault or anyone under him, by misleading another to his prejudice or anyone claiming under him, or in any such act or omission as the law specifically declares to be fraudulent, without respect to actual fraud.

Conversion is defined as “the wrongful exercise of dominion over the property of another,” requiring proof of three elements: (1) Ownership or right to possession, (2) A conversion by wrongful act or disposition of property, and (3) Damages. Walco Electronics v. Mora, 223 Cal. App. 4th 202, 208 (2014).

The Opinion Creates Uncertainty and Confusion
This supreme court decision seems to say that with an artful pleading one may now be able to avoid the application of the one-year statute of limitations if the facts alleged meet a new test. Section 340.6(a) will apply if the case depends upon proof that the attorney violated a professional obligation, one the attorney has by virtue of being an attorney.

The court construed the phrases “wrongful acts and omissions” and “arising in the performance of professional services” as chosen for the statute by the legislature, to mean professional obligations that are separate and apart, and distinct from, the myriad obligations we owe to each other as ordinary citizens and human beings. The court implied that what happened to Lee did not necessarily arise in the performance of Hanley’s professional services as an attorney, just as a “sexual battery” or “garden-variety theft” may take place, and not be a violation of some professional duty. It is not clear whether the court is referring to shoplifting or being a pickpocket, or a lawyer who has in fact stolen client’s funds intentionally.

The decision also appears to have gutted the gatekeeper purpose of the demurrer, injecting the element of what might be proved through discovery, at trial, or at summary judgment into the analysis of what may pass. The court would appear to judge the sufficiency of the pleading after the fact, and the proof of all possible facts. The court has inferred a possible conversion, to escape the statute, given that Lee’s money was paid to and was still in the possession of Hanley, who told Lee there was a refund due. Perhaps the court is addressing the public need to facilitate recovery given a potential serious wrongdoing not within the exceptions for fraud. But it is hard to see how this case does not hinge on proof of duties imposed by virtue of being the attorney acting as her lawyer. The disclaimer by the majority that it may turn out to be something else, and not conversion, and thus time barred by Section 340.6(a), creates uncertainty in terms of what types of conduct are included under the new test.

Just because one can imagine a scenario where theft does not arise out of an attorney-client relationship does not make the inference of conversion proper under these facts. The cause of action here was contrived by the court of appeal solely to avoid the application of Section 340.6(a) after plaintiff refused to amend to allege actual fraud. The mystery is how the court disjoined the alleged failure to return unearned fees from the violation of a professional duty owed “by virtue of” professional obligations as an attorney. The dissent states this point succinctly when it says “the greatest problem with the majority’s interpretation of Section 340.6 is how little it differs from the pleadings-based triggers that Section 340.6 was intended to replace.” Id. at 1242.

Section 340.6(a)’s language is broad enough to encompass much more than negligence. In my view, this opinion is incorrect in creating a new exception, added to the only one listed, for actual fraud. The intent of the legislature is found in the specific change in the language of the proposed statute that was made before it passed. The words “In any action for damages against an attorney based upon the attorney’s alleged professional negligence” were changed to “An action against an attorney for a wrongful act and omission, other than for actual fraud, arising in the performance of professional services ... .” The Assembly replaced the words “professional negligence” with the phrase “acts and omissions” in Bill No. 298 (1977-1978 Reg. Sess. as amended May 9, 1977) in order to include all of the duties and obligations of an attorney. The breadth was intended to cut down on the number of claims and reduce insurance rates and premiums.

Breach of fiduciary duty claims have been held to be covered by Section 340.6. Prakashashpalan v. Engstrom Lipscomb, & Lack, 223 Cal. App. 4th 1105, 1121-22 (2014); Levin v. Graham & James, 37 Cal. App. 4th 798, 804-05 (1995). The holding of David Welch Co. v. Erskine & Tully, 203 Cal. App. 4th 884, 893 (1988) that such claims are subject to the four-year catch-all set forth in Civil Code Section 343 was disapproved by the holding in Lee. Id. at 1239.

The court’s reliance on a duty imposed solely by virtue of being an attorney also seems misplaced. The civil obligation to act competently stems from both tort and contract principles, and the statute of limitations as set forth in Section 340.6(a) is designed to deal with each area of the law. There is an implied duty of competent performance in every contract. Whether a painter, bus driver, doctor, or lawyer, the services performed must meet the standard of that industry. Using the supreme court’s logic, if the lawyer’s conduct might be judged by a different standard, it matters not that the person is an attorney and he or she must face a longer period of limitations.

The words “actual fraud” found in Section 340.6 should be expanded. There should be some clear indication as to the kind of wrongful conduct that is not automatically included in the job of an “attorney” so as not to fall under Section 340.6’s limitation period. It is not at all clear why conversion, not a species of fraud, is the new exception, yet constructive fraud is not. Legislation will provide lawyers needed guidance. The vagueness of this opinion leaves me guessing.

Also confusing and troubling is the majority’s conclusion that “ordinary fee disputes” are covered by Section 340.6, a one-year statute. While the client must bring an action against the attorney within one year, it would appear that the lawyer may sue for fees two or four years later. A lawyer should not be shielded from a refund after one year for a simple breach of contract, not involving negligence, where every other written contract allows four years to be sued. This is especially true if the lawyer is to be the beneficiary of the four-year rule. The apparent injustice is puzzling and needs to be remedied.

These cases raise a range of questions for plaintiff’s attorneys facing a statute of limitations issue. Do we now consider filing for breach of fiduciary duty under the Probate Code or some other code that is not specifically designed for lawyers? Do we now allege a breach of contract, asking for no more than fees back, for services not performed, due to the failure of consideration as between any two persons, with no law degree required? If an accountant or plumber or bus driver did not perform as contracted, they are held to a standard and responsible, and the duty to refund is not relegated to attorneys as a class. It does not require a lawyer to have a contractual obligation to perform, and to breach it. It seems no different than the conversion construed by the court of appeal as applicable to all persons, and so not included within the Section 340.6(a). All acts or omissions that can be construed as possibly more than a violation of one of the professional duties as an attorney are exempt from Section 340.6(a), if the same logic is followed.

The legislature needs to amend Section 340.6 to clarify the definitions used, such as the words “wrongful acts and omissions,” and the phrase “arise out of the performance of professional services.” There is a new problem for the common practitioner, the legal malpractice bar, and the legal malpractice insurance industry: How do we apply Lee v. Hanley’s interpretation of Civil Procedure Code Section 340.6(a)?

Joel M. Pores is a member of the OCBA Professionalism & Ethics Committee, and a sole practitioner in Irvine focusing on Legal Malpractice, Ethics, and Fee Disputes. He may be reached at JPores@Poreslaw.com.