Cell Tex Site Services, LTD v. Kreager Law Firm and James S. Cheslock

• Court: Court of Appeals of Texas
• Decided: December 28, 2012
• Docket: 04-12-00249-CV
• Status: Published

Opinion

Fourth Court of Appeals San Antonio, Texas MEMORANDUM OPINION No. 04-12-00249-CV

CELLTEX SITE SERVICES, LTD., Appellant

v.

KREAGER LAW FIRM and James S. Cheslock, Appellees

From the 57th Judicial District Court, Bexar County, Texas Trial Court No. 2011-CI-06884 Honorable Victor Hugo Negron Jr., Judge Presiding

Opinion by: Catherine Stone, Chief Justice

Sitting: Catherine Stone, Chief Justice Sandee Bryan Marion, Justice Rebecca Simmons, Justice

Delivered and Filed: December 28, 2012

AFFIRMED

CellTex Site Services, Ltd. appeals a summary judgment ordering that it take nothing on

its legal malpractice claim against Kreager Law Firm and James S. Cheslock. The summary

judgment was based on limitations. In arguing that limitations was tolled by the Hughes tolling

doctrine, CellTex, in essence, urges this court to reconsider our holding in Burnap v. Linnartz,

914 S.W.2d 142 (Tex. App.—San Antonio 1995, writ denied), in which we held that the Hughes

tolling doctrine is inapplicable to legal malpractice claims arising from transactional work.

CellTex also contends that Kreager and Cheslock failed to conclusively establish when CellTex 04-12-00249-CV

discovered its legal malpractice claim for purposes of determining when limitations began to run.

We affirm the summary judgment.

BACKGROUND

CellTex hired Kreager and Cheslock to represent it in drafting an agreement with

National Exchange Service QI, Ltd. pertaining to a 1031 exchange. CellTex intended to sell a

tract of real property it owned, and a 1031 exchange would allow CellTex to defer the payment

of federal income taxes that otherwise would be due following the sale. In order to conduct a

1031 exchange, the proceeds from the sale must be placed with a qualified intermediary until the

proceeds are used to buy another tract of real property within a specified time period. The

purpose of the agreement between CellTex and National Exchange was to set forth the terms and

conditions pursuant to which National Exchange would serve as the qualified intermediary. One

of those terms required National Exchange to maintain insurance with regard to the sales

proceeds.

After approximately $2,000,000 in proceeds from the sale was deposited with National

Exchange in accordance with the agreement, National Exchange went bankrupt, and National

Exchange’s bond/insurance company denied CellTex’s claim. As a result, CellTex lost its

money.

CellTex subsequently sued Kreager and Cheslock for legal malpractice, alleging they

failed to adequately structure the transaction to protect CellTex’s funds and failed to properly

analyze National Exchange’s bond/insurance coverage. Kreager and Cheslock moved for a

traditional summary judgment based on limitations. CellTex filed a response, raising the Hughes

tolling doctrine. The trial court granted summary judgment in favor of Kreager and Cheslock.

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STANDARD OF REVIEW

We review a summary judgment de novo. Provident Life & Acc. Ins. Co. v. Knott, 128

S.W.3d 211, 215 (Tex. 2003). We consider all the evidence in the light most favorable to the

respondent, indulging all reasonable inferences in favor of the respondent, and determine

whether the movant proved that there were no genuine issues of material fact and that it was

entitled to judgment as a matter of law. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548-49

(Tex. 1985).

HUGHES TOLLING DOCTRINE

A. Hughes v. Mahaney & Higgins

In Hughes v. Mahaney & Higgins, 821 S.W.2d 154, 155 (Tex. 1991), the Texas Supreme

Court addressed “the proper application of the statute of limitations in a legal malpractice case

when the attorney allegedly commits malpractice while providing legal services in the

prosecution or defense of a claim which results in litigation.” In that case, Robert M. Mahaney,

an attorney who was retained by James and Patti Hughes to assist them with an adoption,

obtained a signed affidavit of relinquishment of parental rights from the child’s biological

mother that named Mahaney, as opposed to the Hughes, as the child’s temporary managing

conservator. Id. The Hughes filed a lawsuit to terminate the mother’s rights and adopt the child;

however, the biological mother had a change of heart and filed a motion to dismiss the Hughes’

lawsuit. Id. The motion to dismiss alleged the Hughes lacked standing to bring the suit because

they were not named in the affidavit as the temporary managing conservators. Id. The trial court

denied the motion; however, the appellate court reversed, holding the Hughes lacked standing.

Id. at 156. The application for writ of error challenging the appellate court’s holding was denied,

and the motion for rehearing on the application was overruled on July 10, 1985. Id.

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On May 21, 1987, the Hughes sued Mahaney for legal malpractice, alleging they would

have had standing if they had been named temporary managing conservators in the affidavit. Id.

Mahaney filed a motion for summary judgment based on limitations, arguing the malpractice

cause of action accrued as early as February 17, 1983, the date the biological mother revoked her

affidavit of relinquishment. Id. at 157. The Texas Supreme Court concluded that the statute of

limitations was tolled until all of the Hughes’ appeals in the termination action were exhausted

regardless of when the cause of action accrued, holding, “when an attorney commits malpractice

in the prosecution or defense of a claim that results in litigation, the statute of limitations on the

malpractice claim against the attorney is tolled until all appeals on the underlying claim are

exhausted.” Id. at 157.

B. Burnap v. Linnartz

In Burnap v. Linnartz, 914 S.W.2d 142 (Tex. App.—San Antonio 1995, writ denied), this

court considered whether the Hughes tolling doctrine should be applied in a transactional

context. In Burnap, William Rork, an associate of Lawrence Linnartz, was retained to perform

the legal work necessary for the withdrawal of two partners from a partnership. 914 S.W.2d at

145-46. Willard Burnap, a partner in the partnership, was later sued in connection with a note

signed by the partnership solely based on an indemnity agreement he signed at the time the two

partners withdrew from the partnership. Id. at 146-47. Burnap subsequently sued Rork and his

law firm for legal malpractice. Id. at 147. Rork and his law firm moved for summary judgment

on the basis of limitations. Id. Burnap argued that limitations was tolled until the completion of

all appeals in the lawsuit involving the note. Id. This court disagreed, asserting, “Hughes

articulates a narrow tolling doctrine, applicable only when a lawyer commits malpractice in

litigation of a claim or defense.” Id. (emphasis added). This court reasoned:

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In the instant case there is no malpractice alleged in connection with prosecution or defense of a claim. Rather, Burnap claims appellees committed malpractice in connection with preparation and execution of partnership and corporate documents. The rationale for the Hughes tolling doctrine, to prevent the client from being forced into adopting inherently inconsistent litigation postures in the underlying case and in the malpractice case, simply is inapplicable in the present context.

Id. at 147-48 (citations omitted).

C. Gulf Coast Inv. Corp. v. Brown

CellTex challenges this court’s statement in Burnap that the Hughes tolling doctrine

applies only when a lawyer commits malpractice “in litigation of a claim or defense,” arguing

that the Texas Supreme Court applied the Hughes tolling doctrine in a transactional context in

Gulf Coast Inv. Corp. v. Brown, 821 S.W.2d 159 (Tex. 1991). In that case, a property owner

sued a creditor for wrongful foreclosure, alleging the foreclosure sale conducted by the creditor

was invalid because the foreclosure notice was improper. Id. at 160. After the wrongful

foreclosure suit was settled, the creditor sued the law firm that represented it in the foreclosure

sale. Id. With regard to limitations and tolling, the Texas Supreme Court held, “when an

attorney’s malpractice in conducting a non-judicial foreclosure sale of real property results in a

wrongful foreclosure action against the client, the statute of limitations on the malpractice claim

is tolled until the wrongful foreclosure action is finally resolved.” Id.

Although CellTex contends that Gulf Coast, applied the tolling doctrine in a transactional

context, this court interpreted Gulf Coast as matching the Hughes paradigm, asserting the tolling

doctrine was applied “to prosecution of a claim in a non-judicial foreclosure sale.” Burnap, 914

S.W.2d at 147 (emphasis in original). As another court has more recently explained, the “claim”

in Gulf Coast was the creditor’s debt claim against the property, and the law firm “prosecuted”

the claim by conducting the foreclosure sale. See J.M.K, 6, Inc. v. Gregg & Gregg, P.C., 192

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S.W.3d 189, 198 n.5 (Tex. App.—Houston [14th Dist.] 2006, no pet.). “The prosecution of the

claim resulted in litigation when the [property owner] filed a wrongful foreclosure action.” Id.

D. Apex Towing Co. v. Tolin

CellTex next contends that our holding in Burnap was criticized by the Texas Supreme

Court in Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122 (Tex. 2001). In Apex Towing, the

plaintiffs sued their law firm for mishandling the defense of a maritime personal injury lawsuit.

41 S.W.3d at 118. In holding that limitations was tolled until the conclusion of all appeals in the

maritime personal injury lawsuit, the court reaffirmed its holding in Hughes that “When an

attorney commits malpractice in the prosecution or defense of a claim that results in litigation,

the statute of limitations on a malpractice claim against that attorney is tolled until all appeals on

the underlying claim are exhausted or the litigation is otherwise finally concluded.” Id. at 119.

The court noted that it intended to establish a bright-line rule by using a categorical

approach to the “clear and strict application of the Hughes tolling rule” in order to bring

“predictability and consistency to the jurisprudence.” Id. at 122. With regard to Burnap, the

court cited it among other decisions to support this contention, “Similarly, without re-examining

whether the policy reasons behind the tolling rule apply in each legal-malpractice case matching

the Hughes paradigm, courts should simply apply the Hughes tolling rule to the category of

legal-malpractice cases encompassed within its definition.” Id. Thus, the only criticism of

Burnap was this court’s unnecessary exploration of the policy reasons for the Hughes decision.

As Apex Towing instructs, this court is simply to categorically apply the Hughes holding to

“legal malpractice case[s] matching the Hughes paradigm.” Id.

CellTex also refers to Apex Towing’s citation of Utica Ins. Co. v. Pruitt & Cowden, 902

S.W.2d 143, 147-48 (Tex. App.—Houston [1st Dist.] 1995), remanded for rendition of agreed

jdmt. and opinion withdrawn from publication, No. 01-94-00457-CV (Tex. App.—Houston [1st -6- 04-12-00249-CV

Dist.] Aug. 3, 1995, no writ) (not designated for publication), which applied the tolling rule to a

drafting error by an attorney in preparing a loan modification agreement. In The Vacek Group,

Inc. v. Clark, 95 S.W.3d 439, 445 (Tex. App.—Houston [1st Dist.] 2002, no pet.), however, the

Houston court noted the rationale in the withdrawn opinion in Utica was inconsistent with

Burnap. The Houston court then revisited whether the Hughes tolling rule applied to malpractice

claims arising out of transactional work performed by attorneys that occurs before litigation

commences. Id. at 445-47. Although the court agreed that the Texas Supreme Court’s citation

to both Utica and Burnap in Apex Towing “certainly has interjected some ambiguity,” the

Houston court believed that the supreme court would not apply the tolling doctrine to a

malpractice claim arising out of transactional work performed by attorneys that occurs before

litigation commences just as it refused to apply the tolling doctrine to instances of accounting

malpractice. Id. at 447. Other courts also have agreed that the Hughes tolling doctrine does not

apply to transactional work. Isaacs v. Schleier, 356 S.W.3d 548, 562-63 (Tex. App.—Texarkana

2011, pet. denied); J.M.K. 6, Inc., 192 S.W.3d at 198-99; Murphy v. Mullin, Hoard & Brown,

L.P., 168 S.W.3d 288, 292 (Tex. App.—Dallas 2005, no pet.).

CellTex further cites Brents v. Haynes & Boone, L.L.P., 53 S.W.3d 911, 915 (Tex.

App.—Dallas 2001, pet. denied), as holding the Hughes rule applies to transactional legal

malpractice. However, the malpractice in Brents was not based on transactional work; instead

the issue was “whether tolling of a legal malpractice action that occurs in litigation will be

extended beyond the conclusion of litigation of a claim concerning whether malpractice

allegedly occurred, to the conclusion of threatened subsequent litigation against the

‘malpracticed’ party based on that malpractice.” 53 S.W.3d at 916. Moreover, the Dallas court

clearly held in Murphy that “alleged malpractice claims based on transactional work are not

tolled under the Hughes rule.” 168 S.W.3d at 292. -7- 04-12-00249-CV

E. Conclusion

This court has been joined by several of our sister courts in holding that the Hughes

tolling doctrine does not extend to transactional work. Applying this court’s holding in Burnap,

we refuse to extend the Hughes tolling doctrine to the facts of the instant case.

DISCOVERY RULE

In its second issue, CellTex contends that Kreager and Cheslock failed to conclusively

prove when CellTex discovered its legal malpractice claim. Kreager and Cheslock attached the

following deposition testimony of Gregory Huber, the president of CellTex’s general partner, to

its motion for summary judgment to contend CellTex discovered its claim by May of 2007 at the

latest:

Q. Okay. When did it first cross your mind that Mr. Cheslock may have made a mistake in relation to his work for you on this project? A. I guess in — you know, varying times between — You know, obviously when the money was not there, it kind of crossed my mind. We filed some insurance claims, and that came back rejected, so I kind of wondered about that, you know, what was that about. I thought I had insurance; you know, how come they’re saying there’s not any. *** Q. Okay. Okay. And about the time of this e-mail, April 19th 2007, had — had you begun to think that perhaps your money had been misappropriated by National Exchange? A. Well, I thought they made an error and invested the money in a 60- day thing instead of where it was supposed to be. I didn’t think they were just lying through their teeth to me. I just thought it was an honest mistake, it was going to take a little bit longer to get the money. Q. Okay. When did you decide that — first thing that — Let me start over. When did you first think that it might not have been an honest mistake and that you might have lost your money? A. I don’t know that any particular day happened, but I guess after this time frame ran out, when calls to offices were not answered. And then sometime in May, I think, the company filed bankruptcy. So I think in May, we, you know, kind of realized that “Well, all right. There’s some bigger issues here than…” Q. Okay. So by May 2007, you — you were thinking that — that perhaps your money had been taken by National Exchange? A. Right. I mean, it was — it was somewhere other than where it was supposed to be. -8- 04-12-00249-CV

Q. And you were concerned at that time that the National Exchange had misappropriated your money in May of ’07? A. Well, we weren’t — weren’t really sure. We knew that, you know, National Exchange didn’t do with the money as they were supposed to. Q. Right. And that naturally caused you some concern, correct? A. Yes.

The record also contains a demand letter Cheslock sent to National Exchange on May 1, 2007,

demanding immediate delivery of the sales proceeds in accordance with the agreement. The

record further contains a letter from National Exchange’s bonding company dated May 2, 2007,

stating that CellTex did not have standing to assert a claim under the bond. The record reflects

that this letter was forwarded to Huber on May 2, 2007. CellTex did not file the underlying legal

malpractice claim until April of 2011.

The discovery rule is a legal principle, applicable in legal malpractice claims, which tolls

the running of the limitations period. Willis v. Maverick, 760 S.W.2d 642, 646 (Tex. 1988).

“[T]he discovery rule operates to defer accrual of a cause of action until a plaintiff discovers or,

through the exercise of reasonable care and diligence, should discovery the ‘nature of his

injury.’” Childs v. Haussecker, 974 S.W.2d 31, 40 (Tex. 1998).

“[D]iscovering the ‘nature of the injury’ requires knowledge of the wrongful act and the

resulting injury.” Id. “Thus, when the discovery rule applies, accrual is tolled until a claimant

discovers or in the exercise of reasonable diligence should have discovered the injury and that it

was likely caused by the wrongful acts of another.” Id. “[O]nce these requirements are

satisfied,” however, “limitations commences, even if the plaintiff does not know the exact

identity of the wrongdoer.” Id.; see also Pressure Sys. Int’l, Inc. v. Southwest Research Inst.,

350 S.W.3d 212, 216 (Tex. App.—San Antonio 2011, pet. denied). “That is, the plaintiff must

be aware that his injury was caused by someone’s wrongful act, but need not necessarily know

who performed the wrongful act.” Pressure Sys. Int’l, Inc., 350 S.W.3d at 217 (emphasis in

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original). Under those circumstances, limitations commences, and the plaintiff must exercise

reasonable diligence to identify the wrongdoer. Stated differently, “[o]nce a claimant learns of a

wrongful injury, the statute of limitations begins to run even if the claimant does not yet know

‘the specific cause of the injury; the party responsible for it; the full extent of it; or the chances of

avoiding it.’” Exxon Corp. v. Emerald Oil & Gas Co., L.C., 348 S.W.3d 194, 207 (Tex. 2011)

(quoting PPG Indus., Inc. v. JMB/Houston Ctrs. Partners, Ltd. P’ship, 146 S.W.3d 79, 93-94

(Tex. 2004)). “After being put on notice of the alleged harm or injury-causing actions, the

claimant must exercise reasonable diligence to investigate the suspected harm and file suit, if at

all, within the limitations period.” Id.

“Inquiries involving the discovery rule usually entail questions for the trier of fact.”

Childs, 974 S.W.2d at 44. “However, the commencement of the limitations period may be

determined as a matter of law if reasonable minds could not differ about the conclusion to be

drawn from the facts in the record.” Id.

The summary judgment evidence established that CellTex knew its money “was

somewhere other than where it was supposed to be” in May of 2007. Gruber testified that it

crossed his mind that Cheslock may have made a mistake in relation to his work “when the

money was not there.” Accordingly, by May of 2007, CellTex knew it had suffered a wrongful

injury. Although CellTex may not have identified Kreager and Cheslock as being responsible

for the injury based on their failure to perform their legal services in accordance with the

applicable standard of care, the law does not require that CellTex know the identity of the

wrongdoer before limitations commences. Accordingly, we overrule CellTex’s contention that

Kreager and Cheslock failed to conclusively prove when tolling ended under the discovery rule.

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CONCLUSION

Because the Hughes tolling doctrine does not apply to transactional work such as that

performed by Kreager and Cheslock and because CellTex knew that the loss of its money was

likely caused by the wrongful acts of another by May 2007 at the latest, we affirm the trial

court’s judgment concluding that CellTex’s legal malpractice claim was barred by limitations.

Catherine Stone, Chief Justice

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