How long should liability last?

By Diane Karpman

There is a new appellate decision causing mass consternation in the legal community and sending shockwaves through the plaintiff’s bar. A couple of homeowners are claiming that their former lawyers failed to properly disburse a settlement engendered by that earthquake in Northridge. Yes, the one in 1994. In other words, the former clients are complaining about a confidential settlement 16 or 17 years ago. (Muruganandan Prakashpalan v. Engstrom, Lipscomb and Lack.)

Those of you thinking that is precisely the reason we have statutes of limitation are wrong. The court applied the delayed discovery doctrine to trump any reasonable statute. Generally, a legal malpractice claim, pursuant to Code of Civil Procedure section 340.6, must be commenced within four years of the date of the wrongful act or omission or within one year after the plaintiff discovers (or should have discovered) the problem, whichever occurs first. Setting clear time periods allows insurance carriers to base the cost of a legal malpractice policy on those settled and defined temporal parameters.

Justice Frances Rothschild was in the minority when she applied the statute of limitations to all the plaintiffs’ claims.

The majority in Muruganandan Prakashpalan raises the notion that liability is open-ended. The delayed discovery doctrine has been applied in other cases involving professional negligence, but more than a decade after the case was settled? Essentially, the case was an aggregate settlement claim of $100 million for 93 insured families. In March 2012, 17 families learned that they had each received about $500,000. From the 17 families, the plaintiffs inferred that there were settlement funds for which there was never an accounting. No sum or amount of damages was alleged, because it was all inferential. The entire claim was built on the speculation of the 17 families, years after the fact.

To give you a sense of how extreme the acrobatics were in reaching this decision for the first time ever, the court applied Probate Code section 16460 “in principle.” “Although no other cases have so applied Probate Code § 16460, we do not see this as a reason for not doing so here,” the majority wrote. In order to create liability, they had to reach out to a unique Probate Code section, “in principle.”

As you all know, we have well-established embedded trust account keeping regulations in our Rules of Professional Conduct, and in particular, Rule 4-100. Therefore, the court applied Probate Code section 16460 to trump what most of us thought was the fixed and solid record-keeping requirement. “Although Rules of Professional Conduct, rule 4-100 (B)(3) specifies that such accountings shall be kept for a minimum ‘of five years,’ we do not read that rule to impose an outside limit on the amount of time an attorney must keep accounting records,” the decision said (pg. 16, fn. 8). Really? This is big news to the profession, many of whom believed that if rule 4-100 said five years, that was a true statement. 

Suddenly all the document retention programs need to be fixed or recalibrated to retain documents for what, say five, 10 or 15 years? What is the magic number? Oh that’s right, at this time we can only speculate as to what the proper number is. However, we should anticipate that premiums for legal malpractice coverage will increase, because the potential period of liability has exploded.

Sidebar: Former Chief Justice Ron George has a new book titled “Chief: The Quest for Justice in California.” He is traversing the state for book signings. The book itself is structured as questions and answers. If you have a question for the chief, forward it to me and I will give you attribution if the question is used at an upcoming program at the Beverly Hills Bar Association.

Legal ethics expert Diane Karpman can be contacted at 310-887-3900 or at karpethics@aol.com.