Statute of Limitations on Legal Malpractice in Handling Bankruptcy Action

Torts—Legal Malpractice in Handling Creditor's Claim in Bankruptcy Statute of Limitations

Cannon v. Hirsch Law Office, P.C., 222 Ariz. 171, 213 P.3d 320 (App., Div. I, July 14, 2009)(J. Barker)

STATUTE OF LIMITATIONS ON LEGAL MALPRACTICE IN HANDLING CREDITOR'S CLAIM IN BANKRUPTCY IS NOT AN ADVERSARIAL PROCEEDING SO “ONGOING LITIGATION” RULE DOES NOT APPLY

Plaintiff hired defendant lawyer to protect her interests in a bankruptcy action filed by her debtor. Defendant secured an auction of the property plaintiff had secured by a note and sent her $956.04 in proceeds and thereafter let the debtor discharge the debt. Plaintiff sued defendant for legal malpractice and the trial court dismissed the claim based upon the running of the statute of limitations.

The Court of Appeals first noted that ARS sec. 12-542, a two year statute of limitations governed legal malpractice actions and that the statute begins to accrue on the date the plaintiff discovered or reasonably should have discovered the negligent conduct and the plaintiff's damages are ascertainable, not speculative or contingent. When the malpractice occurs in the litigation process the damages are not ascertainable until the appellate process is completed or is waived by a failure to appeal.

Bankruptcy proceedings may be adversarial as when the debtor files the action and a creditor files a separate complaint contesting the discharge of the debt in bankruptcy. Conversely, where there is not complaint contesting the discharge the bankruptcy is nonadversarial. Because the hallmark feature of litigation is its adversarial nature, where the proceeding is nonadversarial the “ongoing litigation” rule will not apply. Therefore, here the defendant's alleged negligence did not occur in the course of litigation so as to toll the accrual of the statute of limitations. The failure to file a complaint contesting the discharge by the defendant was tantamount to missing a statute of limitations.

However, because the record before the court was silent on when the plaintiff knew or reasonably should have known of the defendant's failure to contest the discharge, a question of fact exists as to when the discovery rule would require accrual of the statute of limitations.