Legal Ethics Corner: Legal Malpractice Statute of Limitations Does Not Apply to Claims Based on Misappropriation of Client Funds

Sarah Banola, Cooper White & Cooper

In Lee v. Hanley, 174 Cal.Rptr.3d 489 (2014), the Court of Appeal recently held that the legal malpractice statute of limitations does not necessarily bar a former client’s complaint against her attorney alleging the attorney refused to return unearned legal fees. The former client claimed that her attorney notified her she had a credit balance after settlement of her case, but then refused to return the balance. She brought claims for breach of contract, breach of fiduciary duty, unjust enrichment, money had and received, and an equitable right to the return of unused funds. The attorney demurred to the complaint on the ground that the legal malpractice one-year limitations period (California Code of Civil Procedure § 340.6) barred her claims.

The court held that “to the extent a claim is construed as a wrongful act not arising in the performance of legal services, such as garden variety theft or conversion, section 340.6 is inapplicable.” Even though the former client did not assert causes of action for theft, conversion, or fraud, the court liberally construed her pleading as stating facts sufficient to state claims for theft or conversion. The court emphasized the language in Section 340.6 that the wrongful act or omission must arise “in the performance of professional services.” The court found that an attorney does not perform legal services for a client by stealing the client’s money.

The court distinguished the holding in Levin v. Graham & James, 37 Cal. App.4th 798 (1995) that Section 340.6 applied to a claim of unconscionable attorneys’ fees because the plaintiff there did not assert a cause of action other than malpractice and did not suggest another applicable limitations period. The court also distinguished Prakashpalan v. Engstrom, Lipscomb & Lack, 223 Cal.App.4th 1105 (2014), which held Section 340.6 barred plaintiffs’ malpractice and breach of fiduciary duty claims based on the attorney’s alleged failure to properly distribute settlement funds. The court found that the handling of settlement funds arises in the performance of legal services in settling an action, but an attorney’s receipt of a client’s advance for future legal services does not arise in the performance of those services.

The decision in Hanley indicates that the legal malpractice limitations period will not bar breach of fiduciary duty claims based on billing improprieties, such as padding bills and overcharging, even where no separate claim for fraud, theft or conversion is pled. The appellate court in Bird, Marella, Boxer & Wolpert v. Superior Court, 106 Cal. App.4th 419, 430 (2003) noted that allegations of billing improprieties are not claims of malpractice. Although California courts have found the legal malpractice statute of limitations applies to an injury arising out of an attorney’s representation, regardless of whether it is pled in tort or contract, an attorney who bills a client for tasks not actually performed is not rendering legal services to the client.

The Hanley decision may also affect legal malpractice insurance coverage where plaintiffs claim the wrongful conduct did not arise in the performance of professional services to avoid the malpractice limitations period.

About the Author:

Sarah-BanolaSarah Banola is a senior counsel in the litigation department at Cooper, White & Cooper’s San Francisco office. She serves as vice chair of BASF’s Legal Ethics Committee.