Althaus v. Penn-America Ins. Co.

• Court: Court of Appeals of Arizona
• Decided: December 12, 2002
• Docket: 2 CA-SA 2002-0107
• Status: Published

Opinion

IN THE COURT OF APPEALS STATE OF ARIZONA DIVISION TWO

THOMAS R. ALTHAUS, TARA ) 2 CA-SA 2002-0107 ALTHAUS, husband and wife; ) DEPARTMENT B DUFF IELD, MILLER, YOUNG, ) ADAMSON & ALFRED, P.C., an Arizona ) OPINION professional corporation, lately known as ) DUFFIELD, YOUNG, ADAMSON & ) ALFRED, P. C., ) ) Petitioners, ) ) v. ) ) HON. CARMINE CORNELIO, Judge of ) the Superior Court of the State of Arizona, ) in and for the County of Pima, ) ) Respondent, ) ) and ) ) PENN-AMERICA INSURANCE ) COMPANY, a wholly owned company of ) PENN-AMERICA GROUP, INC., a ) Pennsylvania corporation, ) ) Real Party in Interest. ) )

SPECIAL ACTION PROCEEDING

Pima County Cause No. C20012600

Humphrey Law Firm, P. C. By Marshall Humphrey III and Andrew J. Petersen Tucson Attorneys for Petitioners

Turley, Swan & Childers, P.C. By Kent E. Turley Phoenix Attorneys for Real Par ty in Interest P E L A N D E R, Judge.

¶1 This petition for special action arises from an attorney malpr actice action filed by

real party in interest Penn-America Insurance Company against petitioners (collectively, Althaus).

Althaus previously repr esented Penn-America’s insured, Pena Blanca Lake Resort, Inc., in a

wrongful death action brought by Peter and Rita Wolfe for the death of their minor son.

¶2 In this petition for special action, Althaus contends the respondent judge err ed in

two respects: (1) in denying Althaus’s motion for summary judgment, in which Althaus had

contended the attorney malpractice action was time barred, and (2) in granting Penn-America’s

cross-motion for summary judgment, thereby striking Althaus’s statute of limitations defense,

particularly, without permitting Althaus to depose, as he had requested, various persons who had

been involved in the wrongful death action or whose affidavits Penn-America had submitted in

support of its cross-motion.

¶3 The respondent judge’s order is not appealable, and Althaus has no equally plain,

speedy, and adequate remedy by appeal. See Ariz. R. P. Special Actions 1, 17B A. R. S. In

addition, the issues raised involve mixed questions of fact and law that appear to be of first

impression in Arizona, and addressing them now will serve the interests of judicial economy. See

Montano v. Browning, 202 Ariz. 544, ¶ 2, 48 P.3d 494, ¶2 (App. 2002); Harris Trust Bank v.

Superior Court, 188 Ar iz. 159, 162, 933 P.2d 1227, 1230 (App. 1996). Therefore, we accept

jurisdiction of the special action.

¶4 On the merits, we conclude that the respondent judge did not abuse his discretion

or otherwise err in denying Althaus’s motion for summary judgment, at least at this juncture. See

Ariz. R. P. Special Actions 3(c). But we further conclude that the respondent judge did abuse his

2 discretion in granting Penn-America’s cr oss-motion for summary judgment and striking Althaus’s

limitations defense. See Files v. Bernal, 200 Ar iz. 64, ¶2, 22 P.3d 57, ¶ 2 (App. 2001) (“ [A]

court abuses its discretion where the record fails to provide substantial support for its decision or

the court commits an error of law in reaching the decision. ”). Genuine issues of material fact

preclude that ruling, and Althaus’s request for further discovery bearing on the limitations issue

is warranted. See Ariz. R. Civ. P. 56(f), 16 A.R. S., Pt. 2. Although future discovery may affect

final disposition of the limitations defense, neither the record nor applicable law supports a finding

as a matter of law that Penn-America timely filed its malpractice action. Accordingly, we grant

relief by vacating that portion of the respondent judge’s order of June 19, 2002, that granted Penn-

America’s cross-motion and struck Althaus’s defense.

BACKGROUND

¶5 With respect to Penn-America’s cross-motion, we view the facts and all reasonable

inferences therefrom in the light most favorable to the nonmoving party, here, Althaus. See Walk

v. Ring, 202 Ar iz. 310, ¶3, 44 P.3d 990, ¶ 3 (2002). So viewed, the record r eflects that, on June

3, 1999, counsel for the Wolfes and several newly retained attorneys for Penn-America met and

reached a settlement of approximately $2.6 million in the wrongful death action. That case

previously had been tried to a jury, which had returned a net ver dict of approximately $6. 5 million

in favor of the Wolfes and against Pena Blanca on May 13, 1999. As of June 3, however , the

verdict had not yet been reduced to judgment. On June 4, counsel in the wrongful death action

informed the trial court in that case that “the parties ha[d] reached a stipulation as to settlement

3 terms” and would be “filing the Stipulation with the Court after approval by the Bankruptcy

Court” in which Pena Blanca was seeking a debtor’s discharge. 1

¶6 A handwritten note from the June 3 meeting, signed by the Wolfe attorneys, stated

that the settlement was “[s]ubject to confidentiality agreement” and “ approval of bankruptcy

court. ” Similarly, a June 7 memor andum by Penn-America’s Pennsylvania counsel stated that,

on June 3, “ we settled the case for an agreed $1. 3 million for each plaintiff” and that “[t]he

settlement is contingent upon approval by the bankruptcy court and extinguishment of all claims,

both contractual and extra-contr actual.” A June 7 Penn-America internal memorandum authored

by the company’s senior vice president for claims stated that, after ten hours of negotiations on

June 3, he “ was able to settle this case,” deemed it “an excellent result,” and noted that “[w]e will

secure all necessary releases prior to the distribution of any monies.” Finally, Penn-America

acknowledged in its statement of facts below that “the conditional settlement was reached, rather

than litigate and file post-trial motions, because in balance, it made the most sense to Penn-

America, and so was done.”

¶7 Following the June 3 settlement meeting, counsel for the Wolfes and Penn-America

negotiated, drafted, and ultimately agreed on a settlement agreement and release, which the

Wolfes and their attorneys executed on June 11. As did the June 3 handwritten note, the

settlement agreement stated that it was subject to and contingent on the approval and final order

of the bankruptcy court in Pena Blanca’s Chapter 7 bankruptcy proceeding. The agreement also

was subject to and contingent on the release of Penn-America from any bad faith claims by the

debtor, Pena Blanca, and its trustee in bankr uptcy.

1 Counsel for the bankruptcy tr ustee also attended the June 3 settlement meeting, and Penn- America reached an agr eement with him as well.

4 ¶8 The bankruptcy court appr oved the settlement by order on July 9, 1999. On

August 20, the under lying wrongful death action against Pena Blanca was dismissed with

prejudice. Penn-America filed its malpractice action against Althaus on June 7, 2001. Thus, that

action was timely filed unless it accrued before June 7, 1999. See A.R. S. § 12-542.

DISCUSSION

¶9 The respondent judge found, and the record could support such a finding, that

“Penn-America knew or should have known of Mr. Althaus’ claimed malpractice on or before

June 3, 1999. ” But the respondent judge then ruled that, “as a matter of law, . . . an enforceable

Settlement Agreement, without contingencies, did not occur until June 11, 1999, at the earliest, ”

and, therefore, “the curr ent [malpractice] claim did not begin to accrue until that date.” The

ruling was based on the so-called final judgment accrual rule of Amfac Distribution Corp. v.

Miller, 138 Ariz. 155, 673 P.2d 795 (App. 1983) (Amfac I), which our supreme court later

approved. Amfac Distribution Corp. v. Miller, 138 Ariz. 152, 673 P.2d 792 (1983) (Amfac II);

see also Taylor v. State Farm Mut. Auto. Ins. Co., 185 Ar iz. 174, 179, 913 P.2d 1092, 1097

(1996); Glaze v. Larsen, ___ Ar iz. ___, 55 P.3d 93 (App. 2002). Althaus contends that rule

“should have no application after a settlement or where there is evidence that the plaintiff has

waived the right to appeal.” We generally agree with that premise, but its application here is

complicated by the settlement conditions in the Wolfes’ wrongful death case and Pena Blanca’s

bankruptcy proceeding.

¶10 In Amfac II, our supreme court appr oved the court of appeals’ holding in Amfac I

that “a cause of action for legal malpractice occurring in the course of litigation accrues when the

plaintiff knew or should reasonably have known of the malpractice and when the plaintiff’s

damages are certain and not contingent upon the outcome of an appeal.” 138 Ariz. at 156, 673

5 P.2d at 796, approved, Amfac II, 138 Ar iz. at 153, 673 P.2d at 793. On its face, that holding

does not apply here because Penn-America’s damages, unlike Amfac’s damage claims against its

attorney, were “ not contingent upon the outcome of an appeal.” Id. Rather , by settling the

underlying wrongful death action, Penn-America avoided the entry of judgment in that action and

obviated the need for any appeal. Moreover, as noted below, on this record, a trier of fact could

find that Penn-America’s damages were “certain” as of June 3, when it arguably reached a

binding and enforceable settlement with the Wolfes. In view of that settlement, the policy reasons

for adopting the Amfac rule in a nonsettlement context are either inapplicable or much less cogent

here.

¶11 For example, when the underlying case is not settled, a malpractice plaintiff’s

injury or damages may not be fully “ascertainable until the appellate process is completed or is

waived by a failure to appeal. ” Amfac II, 138 Ariz. at 154, 673 P.2d at 794. But that concern

evaporates when a settlement of the underlying case effectively waives any appeal therein and,

thus, eliminates any possibility of the malpractice damages changing. Id. at 154 n.2, 673 P.2d

at 794 n.2. In other words, when the underlying case is settled, there is no prospect of

“successful prosecution of an appeal [in that case] and ultimate vindication of the attorney’s

conduct by an appellate court. ” Amfac I, 138 Ar iz. at 156, 673 P.2d at 796.

¶12 Moreover, in a nonsettlement context, it generally “is only when the litigation is

terminated and the client’s rights are ‘fixed’ that it can safely be said that the lawyer’s misdeeds

resulted in injury to the client.” Id. at 157, 673 P.2d at 797. In a case such as this, however, a

trier of fact might find that a binding and enforceable oral settlement of the underlying case

“‘fixed’” the client’s rights and immediately “resulted in injury to the client,” notwithstanding the

6 need for future documents, filings, procedures, and even bankruptcy court appr oval to finalize the

settlement. Id.

¶13 Finally, the concerns in Amfac I about “pr eserv[ing] the essential element of trust

in the attorney-client relationship” are dubious here, inasmuch as Penn-America retained and

utilized several new attorneys to represent itself and Pena Blanca in conjunction with the

settlement meeting on June 3, for follow-up negotiation and drafting of settlement documents and

for securing bankruptcy cour t approval. Id. at 159, 673 P.2d at 799. Moreover, after June 3,

Penn-America used Althaus only for a few ministerial tasks in finalizing the settlement and

obtaining dismissal of the wrongful death action.

¶14 We therefore agr ee in principle with Althaus that Amfac’s final judgment rule does

not necessarily control a malpractice case such as this in which the underlying case has been

settled. That conclusion, however, does not fully resolve the statute of limitations issue here. In

our view, the dispositive issue is whether, more than two years before Penn-America filed its

malpractice action against Althaus, Penn-Amer ica and the Wolfes had reached a binding,

enforceable settlement in the wrongful death case, notwithstanding the need to formalize and

finalize the settlement. On this recor d, that issue cannot be deter mined as a matter of law.

¶15 Viewed in the light most favorable to Althaus, Walk, the r ecord supports a finding

that the Wolfes and Penn-America reached a settlement in the wrongful death case on June 3 in

an amount that was certain, ascertainable, and nonspeculative, albeit subject to several

contingencies noted in ¶¶6-7 above, including the dr afting and execution of a formal settlement

agreement with acceptable release and confidentiality provisions and bankruptcy court approval

of the settlement. Notwithstanding those conditions, all of which ultimately were satisfied, a trier

of fact could find that both the fact and amount of Penn-America’s damage caused by Althaus’s

7 alleged malpractice were established on June 3 and that Penn-America had actual knowledge of

such damage on that date. Thus, at least in its present posture, this case “presents the factual

question whether the parties intended the [June 3] oral agreement to be binding and enforceable

at that time,” with the subsequent settlement documents and bankruptcy court approval mer ely

required to memorialize and finalize the oral agreement. Tabler v. Industrial Comm’n, 202 Ariz.

518, ¶7, 47 P.3d 1156, ¶ 7 (App. 2002); see also Schade v. Diethrich, 158 Ariz. 1, 760 P.2d 1050

(1988); AROK Constr. Co. v. Indian Constr. Servs. , 174 Ar iz. 291, 848 P.2d 870 (App. 1993);

Fotinos v. Baker, 164 Ar iz. 447, 793 P.2d 1114 (App. 1990).

¶16 We also disagree with the respondent judge’s conclusion that, as a matter of law,

the June 3 settlement agreement “made clear that approval was a contingency and not a condition

subsequent.” Unlike the respondent judge, we do not view the record as supporting only that

conclusion. “‘A condition is an event, not certain to occur, which must occur, unless its non-

occurrence is excused, before performance under a contract becomes due. ’” AROK Constr. Co.,

174 Ariz. at 296 n.4, 848 P.2d at 875 n.4, quoting Restatement (Second) of Contracts § 224

(1981). Although bankruptcy court approval clearly was required to trigger the settlement parties’

obligations to perform, when the record is viewed in the light most favorable to Althaus, a trier

of fact could find that the parties had reached a binding, enforceable settlement on June 3, with

performance delayed until bankruptcy court approval. 2 Cf. Taylor v. State Farm Mut. Auto. Ins.

2 Although the respondent judge’s ruling did not address Penn-America’s arguments that any alleged settlement on June 3, 1999, was unenforceable because it failed to comply with either the statute of frauds, A.R. S. § 44-101(4), or Rule 80(d), Ariz. R. Civ. P., 16 A.R. S., Pt. 2, we find those contentions unpersuasive. The underlying case is not an action “brought . . . [u]pon a contract to sell or a sale of goods or choses in action.” § 44-101(4). Moreover, Penn-America fully performed its settlement obligations. Cf. Gene Hancock Constr. Co. v. Kempton & Snediger Dairy, 20 Ariz. App. 122, 125, 510 P.2d 752, 755 (1973) (“ [I]n a proper case part performance can remove the prohibition of the statute [of frauds]. ”). And, although Rule 80(d) generally

8 Co., 175 Ariz. 148, 159, 854 P.2d 1134, 1145 (1993) (because contract language was reasonably

susceptible to differing interpretations and “extrinsic evidence established controversy over what

occurred and what inferences to draw from the events, the matter was properly submitted to the

jury” ); Muchesko v. Muchesko, 191 Ar iz. 265, 268, 955 P.2d 21, 24 (App. 1997) (“ Courts may

look at the writing, the conduct of the parties, and the surrounding cir cumstances in deciding

whether a contract existed or whether a meeting of the minds occurred.” ). And, if such approval

were not obtained, the agr eement would not necessarily lack binding and enforceable effect in the

first instance.

¶17 “The standard for contract enforceability is not whether the agreement included a

resolution of every matter and anticipated every contingency. ” AROK Constr. Co. , 174 Ariz. at

297, 848 P.2d at 876. Indeed, “‘[t]he fact that one of [the parties], with the knowledge and

approval of the other, has begun per formance is nearly always evidence that they regard the

contract as consummated and intend to be bound thereby. ’” Schade, 158 Ar iz. at 10, 760 P.2d

at 1059, quoting 1A Corbin, Corbin on Contracts § 95 at 407 (1963) (emphasis in Schade). On

this record, a trier of fact could find that the performance of counsel for the Wolfes and Penn-

America after June 3, including their execution of the settlement and release agreement, the

procurement of bankruptcy court approval, and the dismissal with prejudice of the wrongful death

action, demonstrated their understanding and intent that they had reached a binding, enforceable

settlement on that date.

applies to settlement agreements, this is not a situation in which the parties disputed the existence and terms of the settlement agreement or the authority of the parties’ representatives to settle the wrongful death case. Compare Canyon Contracting Co. v. Tohono O’Odham Housing Auth., 172 Ariz. 389, 837 P.2d 750 (App. 1992), with Hays v. Fischer, 161 Ariz. 159, 777 P.2d 222 (App. 1989).

9 ¶18 In cases such as this, in which “ a professional’s services have failed to produce the

desired result or may even have brought about an adver se result, ” “ it is often the rule that . . .

the question of accrual is for the jury. ” Walk, 202 Ar iz. 310, ¶17, 44 P.3d 990, ¶ 17. And,

in cases in which the parties to an oral agreement contemplate the later execution of a written document, the fact-finder must resolve whether the parties intended the written document to be a mere memorialization of an already binding oral agreement, or whether they intended to be bound only upon execution of a formal, written instrument.

Tabler, 202 Ariz. 518, ¶ 11, 47 P.3d 1156, ¶ 11. The same can be said when, as here, the oral

settlement is to be followed by the parties’ execution of formal settlement, release, and dismissal

documents and obtaining of court approval. Concluding that this record does not at this stage

permit summary resolution of the limitations issue as a matter of law, we vacate that portion of

the respondent judge’s order of June 18, 2002, granting Penn-America’s cross-motion for

summary judgment and striking Althaus’s limitations defense.

_______________________________________ JOHN PELANDER, Judge

CONCURRING:

_______________________________________ PHILIP G. ESPINOSA, Chief Judge

_______________________________________ WILLIAM E. DRUKE, Presiding Judge