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Departing Lawyers and a Law Firm's Continuing Liability

Beal Bank, SSB v. Arter & Hadden, LLP, 42 Cal. 4th 503 (Cal. 2007)

CA.  Underlying collection practice

Student Contributor: Evan Michael Hess

Facts: Plaintiff, Beal Bank, retained Defendant law firm to collect payments on loans by debtors. The Defendant assigned associate Steven Gubner to represent Beal Bank in bankruptcy proceedings. Gubner filed a motion for summary judgment to recover the default interest, and received an unfavorable ruling. Beal Bank appealed the ruling to the District Court. Just over seven months later, Gubner left Defendant firm and began his own practice, taking with him Beal Bank. Under the representation of Gubner’s firm, the District Court affirmed the ruling of the bankruptcy court. Following appeal to the Ninth Circuit affirming the same.

Beal Bank then filed an action for legal malpractice against Gubner’s firms, and Arter & Hadden, LLP. Gubner then withdrew as counsel for the Plaintiff in bankruptcy court, and all parties entered into a tolling agreement for 15-month period. Beal Bank then dismissed the action. One day short of the end of the tolling period, Beal Bank filed an action for legal malpractice. The Respondents to the action demurred on the basis that the one-year statute of limitations had tolled upon the bankruptcy court’s entering of an adverse ruling.

Issue: When an attorney leaves a firm and takes a client with him or her, does the tolling in ongoing matters continue for claims against the former firm?

Ruling: The California Supreme Court, in reversing the judgment of the Court of Appeal and sustaining the demurrer held that:

1) there existed a conflict of authority under Beane v. Paulsen, 21 Cal.App.4th 89 (1993) and Crouse v. Brobeck, Phleger & Harrison, 67 Cal.App.4th 1509 (1998);
2) Crouse is more persuasive authority because it takes into account controlling California Code and legislative intent; and
3) “When a lawyer leaves a firm and takes a client with him, the firm’s representation of the client ceases. There is no risk the firm will attempt to run out the clock on the statute of limitations by offering reassurances and blandishments about the state of the case. Conversely, the firm loses all ability to mitigate any damage to the client.”

Lesson: “If [case law] is ambiguous, [the Supreme Court] may consider a variety of extrinsic sources in order to identify the interpretation that best effectuates the legislative intent.” The Supreme Court held that risks envisioned by the legislature in stopping the tolling period were not applicable when a firm’s representation of a client ceases.

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Posted in: California, Commercial