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MD: Discovery Rule and its Limits

Bank of New York v. Sheff, 382 Md. 235, 854 A.2d 1269

MD: Underlying Bond Issuance

Student Contributor: Vanessa L. Wachira

Facts: In a complex sale of nearly $50 million tax-exempt revenue bonds held by Prince George’s County involving numerous borrowers, Bondholders (represented by The Bank of New York (“Trustee”)), underwriters and attorneys, Piper & Marbury (“Attorneys”) was assigned the duty of drafting several critical documents. Among these, the Loan Agreement and the Trust Indenture each provided that Borrowers—the health care providers receiving the bond proceeds—would be responsible for filing all financing statements. Financing statements were needed to perfect a lien that Bondholders had placed on Borrowers’ assets as part of a security for repayment. Because the Borrowers included health-care providers located in both PG County and DC, filing was required in both locations. However, Attorneys drafted and circulated only the financing statements for filing in Maryland. Prior to the closing, a binder of all documents relating to the transaction was circulated to all parties; the binder did not contain any financing statements for DC. In 1997, Borrowers agreed to sell certain accounts receivables, which should have been subject to Bondholder’s 1993 lien, to Daiwa-Healthco-2 LLC (“Purchaser”). At some point between June and September of 1998, an analyst with one of the municipal bond funds holding the 1993 bonds became aware of and expressed concern to Trustee about Borrowers’ agreement with Purchaser. On November 20, 1998, he discovered that there were no financing statements on file in DC and that, consequently Bondholders did not have a perfected lien on the assets sold to Purchaser. On November 23, 2001, Trustee filed suit against Attorneys in DC. Finding that Maryland had a substantial interest in having the case litigated there, the DC court dismissed the action. Trustee re-filed in PG County on August 28, 2002.

Issue: Whether Bondholder were barred by the statute of limitations from asserting claims against Attorneys for their failure to perfect a lien on Borrower’s assets.

Ruling: Yes. In Maryland, a claim for legal malpractice must be brought within three years of the date upon which it accrues. Under Maryland’s “discovery rule,” an action is held to accrue, and the statute of limitations begins to run, at the moment a “plaintiff has knowledge of circumstances which would cause a reasonable person in the position of plaintiff to undertake an investigation which, if pursued with reasonable diligence, would have led to knowledge of the alleged cause of action.” Here, Attorneys argued that Trustee had knowledge of the alleged cause of action as early as 1993 when it received the binder of documents which lacked the DC paperwork. The Court, however, determined that, although the claim was statutorily barred, the statute of limitations began to run at some point between September and November 20, 1998 when Trustee was explicitly informed of the missed filing.

Lesson:  Not all states give plaintiffs the benefit of a "discovery rule" to prolong the time period for bringing claims. Check the applicable jurisdictions’ rules and cases carefully to make sure. 

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Posted in: Maryland, Privity, Wills Trusts & Estates