Sharts v. Natelson

881 P.2d 690, 118 N.M. 330

• Court: New Mexico Court of Appeals
• Decided: June 30, 1993
• Docket: No. 12121
• Status: Published

Opinions

OPINION

ALARID, Judge.

Wallace G. Sharts (hereinafter “Sharts”) sued Stephen Natelson and Natelson and Ross (hereinafter “Natelson”) for legal malpractice. Natelson moved for summary judgment on the basis that the action was barred by the four year statute of limitations, NMSA 1978, §§ 37-1-1 and -4 (Repl.Pamp.1990). Relying on Jaramillo v. Hood, 93 N.M. 433, 601 P.2d 66 (1979), the trial court denied the motion, finding a genuine issue of fact existed as to whether harm or loss in fact sufficient to accrue a cause of action in legal malpractice existed at a time which would make Sharts’ claim vulnerable to the statute of limitations. The trial court certified its ruling for interlocutory appeal and this court granted the application. The question of law presented by this appeal is when may a trial court rule, as a matter of law, that harm or loss in fact exists sufficient for a cause of action in legal malpractice to accrue and begin the running of the four year limitation period provided by Sections 37-1-1 and -4. We affirm.

I. FACTS

The pleadings, depositions, and exhibits establish that this case involves restrictive covenants Natelson drafted for property owned by Sharts. The property in question is a sixty-acre tract of land located in Taos County. Sharts contends he asked Natelson to draft restrictive covenants for a thirty-acre portion (Tract One) of the sixty-acre tract. The relevant portion of the covenants purported to restrict the size of the individual lots on Tract One to a three-acre minimum. Several lots within Tract One were acquired by individual purchasers after the restrictive covenants were recorded.

After the sale of these lots, Sharts decided to develop the remaining thirty acres (Tract Two) into a residential subdivision. He planned to divide Tract Two into half-acre lots. However, in May 1981, Sharts received a letter from an attorney threatening to take legal action to enforce the restrictive covenants on Tract Two which Sharts contended only governed Tract One. During 1983, while preparing to close loans for purchasers in the planned subdivision, a title company involved in the transactions informed Sharts that it interpreted the restrictive covenants as applying to both Tract One and Tract Two. Because the proposed subdivision lots were smaller than permitted in the restrictive covenants, the title company considered the covenants an impermissible cloud on the title of lots within Tract Two. Without title insurance, the bank refused to fund the loans. In addition, on approximately April 14, 1983, Sharts received a letter from attorneys for owners of lots in Tract One threatening to take legal action to enforce the three-acre lot restriction on Tract Two.

Between 1983 and 1984, to cure the problem, Natelson suggested that waivers and modifications of the restrictive covenants be obtained from purchasers of lots in Tract One. However, Natelson was unable to obtain the necessary waivers or modifications. Natelson then suggested that Sharts seek a declaratory judgment action establishing that the restrictive covenants did not apply to Tract Two. Sharts authorized Natelson to proceed, and Sharts filed the action on December 17, 1984.

On April 3, 1985, while the declaratory judgment action was pending, Sharts wrote Natelson a letter complaining about the course of the litigation. In the letter, Sharts essentially made two admonitory statements. First, Sharts stated that even if he prevailed in the declaratory judgment action, he would sue Natelson for approximately $35,000. Sharts justified this figure as damages resulting from interest payments made while waiting for Natelson to cure “legal errors” he should have corrected two years earlier when he became aware of the problem. Sharts also threatened to sue Natelson for malpractice for approximately $800,000 to $2,000,000 if the declaratory judgment action was unsuccessfrd. Sharts characterized these damages as direct, provable, and caused by Natelson’s carelessness. Sharts also warned that he was bringing to New Mexico very expensive and professional “family” attorneys who were interested in the case.

At his deposition, Sharts testified that he sent the letter to Natelson to “rattle Steve’s cage” because he was frustrated with the slow pace of the litigation and perceived the problem as “foot dragging” on Natelson’s part. Sharts also testified that, if he won the declaratory judgment action, he did not intend to sue Natelson for the $35,000. Sharts added that he never contacted the attorneys referred to in his letter.

Despite the threatening letter, Natelson continued to represent Sharts in the declaratory judgment action and in other matters. Sharts testified that he continued to rely on Natelson’s counsel and believed that Natelson would ultimately succeed in lifting the cloud from the Tract Two titles. On June 20, 1985, the court entered an order disqualifying Natelson from representing Sharts in the declaratory judgment action because Natelson was a potential witness in the case. The court gave Sharts fifteen days to obtain new counsel.

On July 10, 1985, attorney Daniel Marlowe entered his appearance on behalf of Sharts in the declaratory judgment action. On September 22, 1986, the declaratory judgment action was decided against Sharts, and the three-acre lot restriction was held applicable to Tract Two. This Court affirmed the declaratory judgment in that case on June 14, 1988, in Sharts v. Walters, 107 N.M. 414, 759 P.2d 201 (Ct.App.1988). On July 10, 1989, exactly four years after Marlowe entered his formal appearance in the declaratory judgment action, Sharts filed the present legal malpractice action against Natelson.

II. DISCUSSION

We first note the trial court’s decision in this case was made within the limitations of a summary judgment motion. See SCRA 1986, 1-056. In a motion for summary judgment, the trial court must view the evidence, and construe all reasonable inferences therefrom, in the light most favorable to the nonmoving party. State v. Integon Indem. Corp., 105 N.M. 611, 612, 735 P.2d 528, 529 (1987); Wheeler v. Board of County Comm’rs, 74 N.M. 165, 171, 391 P.2d 664, 670 (1964). On appeal, this Court must review the record in the light most favorable to support a trial on the merits. North v. Public Serv. Co., 97 N.M. 406, 408, 640 P.2d 512, 514 (Ct.App.1982); see also Gaston v. Hartzell, 89 N.M. 217, 549 P.2d 632 (Ct.App.1976). the “discovery rule” analysis adopted by the Jammillo Court, a legal malpractice cause of action accrues, for the purposes of the statute of limitations, when (1) the occurrence of harm or loss arises in fact, and (2) the act of negligence out of which the harm complained of is ascertainable and discoverable by the complaining party. Jaramillo, 93 N.M. at 434, 601 P.2d at 67 (citing Budd v. Nixen, 6 Cal.3d 195, 98 Cal.Rptr. 849, 491 P.2d 433 (1971) and Neel v. Magana, Olney, Levy, Cathcart & Gelfand, 6 Cal.3d 176, 98 Cal.Rptr. 837, 491 P.2d 421 (1971) (en banc)); see Annotation, When Statute of Limitations Begins to Run upon Action Against Attorney for Malpractice, 32 A.L.R.4th 260 (1984).

The Jammillo Court rejected the date the will was negligently drafted as the date the harm or loss occurred. Jaramillo, 93 N.M. at 434, 601 P.2d at 67. The date that the document was negligently drafted did not fix the date of loss because, had the error been detected prior to the death of the testatrix, reformation rather than a malpractice action would have been required. See 2 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 18.18, at 145 (3rd ed. 1989). More importantly, the Jammillo Court found, “[t]he harm or damage in this case arose at the time the testatrix died.” Jaramillo, 93 N.M. at 434, 601 P.2d at 67; see also 2 Ronald E. Mallen & Jeffrey M. Smith, § 18.11 at 102, 106; Connecticut Junior Republic v. Sharon Hosp., 188 Conn. 1, 448 A.2d 190 (1982) (court followed traditional rule and refused to reform a will despite obvious and egregious error); see generally 1 William J. Bowe & Douglas J. Parker, Page on the Law of Wills §§ 13.7-.8 at 672, 676 (1960).

Concluding that, upon the death of the testatrix, the misdrafted will constituted harm or loss in fact, the Jaramillo Court held the cause of action discoverable thereaf ter on the dates that any one of the plaintiffs several new attorneys entered their appearances and when the order admitting the will to probate was set aside. Jaramillo, 93 N.M. at 434, 601 P.2d at 67. Despite the sparseness of the Jaramillo analysis, we conclude that the quantity of harm or loss in fact that must exist to satisfy the first prong of the Jaramillo two-prong test is more than nominal and also greater than the mere existence of an allegedly misdrafted legal document.² See also George v. Caton, 93 N.M. 370, 377, 600 P.2d 822, 829 (Ct.App.1979) (not every error or mistake at law is a breach of professional duty); First Nat’l Bank of Clovis v. Diane, Inc., 102 N.M. 548, 553, 698 P.2d 5, 10 (Ct.App.1985) (litigation caused by attorney’s advice not necessarily a breach of professional duty).

Under the two-prong analysis of Jaramillo, the parties urge this case presents the question of when, under the first prong of the discovery rule, harm or loss in fact sufficient to accrue the cause of action occurred. Sharts argues his cause of action did not accrue under the Jaramillo rule before the adverse ruling in the declaratory judgment action and Natelson argues harm not only existed, but was discovered and already fixed at a minimum, certain value prior to the initiation of the declaratory judgment action and was certainly no longer speculative harm as of the date of the 1985 threatening letter. See Nosker v. Western Farm Bureau Mut. Ins. Co., 81 N.M. 300, 302, 466 P.2d 866, 868 (1970) (recovery precluded only where it is fact of harm rather than extent of harm that is in issue). Under the facts of this case, we agree with Sharts.

B. Harm and Injury Contrasted

In order to determine the quantity of harm or loss in fact that satisfies the first prong of the Jaramillo analysis, we note that

A. New Mexico Statute of Limitations and Attorney Malpractice

For breaches of unwritten contracts and torts affecting property, inter alia, the relevant statutory sections prescribe a four-year period of limitation. See §§ 37-1-1 and -4. Section 37-1-1 provides, “[t]he following suits or actions may be brought within the time hereinafter limited, respectively, after their causes accrue, and not afterwards, except when otherwise specially provided.” Section 37-1-4 provides, “[tjhose founded upon accounts and unwritten contracts; those brought for injuries to property or for the conversion of personal property or for relief upon the ground of fraud, and all other actions not herein otherwise provided for an specified within four years.” As noted above, the procedural limitation provided by Sections 37-1-1 and -4, as it relates to legal malpractice, was first discussed by our Supreme Court in Jaramillo.

In that case, the defendant attorney (hereinafter “Hood”) was accused of negligently drafting and supervising the execution of a will. Shortly after the testatrix’s death, the will was admitted to probate. Over the next four years, several different attorneys entered appearances on the plaintiff’s behalf. During this time the order admitting the will to probate was set aside nunc pro tunc. Approximately five years after the will had been set aside, the will was finally denied probate, and three years after that, the malpractice action was filed.

Jaramillo followed California precedent, abandoned the traditional accrual rule, and adopted a general two-step approach to the question of when a cause of action accrues against an attorney for malpractice.¹ Under useful guidance is found in the discussions of “harm” and “injury” appearing in Lovelace Medical Center v. Mendez, 111 N.M. 336, 805 P.2d 603 (1991), and in the Restatement of Torts. While distinguishing the terms “harm” and “injury,” the Lovelace Court cited Restatement (Second) of Torts § 7(1), at 12 (1965), for the general proposition that “harm” is a definite loss in fact and “injury” is an invasion of a legally protected interest.

Accordingly, in the present case, we believe Sharts’ “injury” was the alleged negligent drafting of the restrictive covenants by Natelson. Moreover, we believe negligent document drafting by an attorney constitutes an invasion of a client’s' legally protected interest in professional competence. However, as in Jaramillo, the harm or loss in fact which flowed from the alleged negligent document drafting did not trigger the statute of limitations at that time.³ Jaramillo and its underlying authority teaches that an invasion of a legally protected interest (an injury), without actual loss (harm), is insufficient to accrue a cause of action in legal malpractice for purposes of Section 37-1-4. See also W. Page Keeton, et al., Prosser & Keeton on the Law of Torts § 30, at 143-44 (5th ed. 1984) (negligence action developed out of old action on the case and rule of that action required harm in fact be proved); but see Budd v. Nixen, 491 P.2d at 436 (cause of action arises before client suffers all or even the greater part of the harm caused by attorney malpractice).

Under the facts of this ease, we believe that until the time of the adverse declaratory judgment action, Sharts’ rights were not diminished under the law, only challenged. In other words, the full benefit of the proposed real estate development still remained available and no legal action constrained its advancement. However, at the time of the adverse ruling in the declaratory judgment action, Sharts’ legal entitlement to develop his land in the manner he had intended was severely diminished if not completely lost. See Aragon & McCoy v. Albuquerque Nat’l Bank, 99 N.M. 420, 424, 659 P.2d 306, 310 (1983) (trial court ruling reducing approval to build dwelling units from 287 units to 83 units is clear “occurrence resulting in loss” and marks the latest date upon which the cause of action could accrue under Tort Claims Act); Chisholm v. Scott, 86 N.M. 707, 526 P.2d 1300 (Ct.App.1974) (cause of action in professional negligence accrued at time legal liability materialized under contract); see also First Nat’l Bank of Clovis v. Diane, Inc.

C. Occurrence Resulting in Loss under the Tort Claims Act

In Aragon & McCoy, our Supreme Court considered the question of when an “occurrence resulting in loss” is sufficient to accrue a cause of action under the Tort Claims Act, NMSA 1978, §§ 41-4-1 to -15(A) (Repl.Pamp.1989). That Court said:

The plain language of the statute indicates that the period of limitations began to run when an “occurrence resulting in loss” took place. Until such a loss took place, the statute of limitations could not begin to run.

Like the trial court, we agree that the date of accrual could have begun on several dates when Aragon suffered loss or injury. In October 1976, the neighbors filed suit which eventually resulted in the invalidation of Aragon’s site development plan. On February 3, 1977, Aragon’s application for a Phase II building permit was denied. Aragon submits that injury or loss occurred when the Supreme Court ruled on March 31, 1978. In our opinion, the very last event which might be characterized as a loss or injury was the district court’s February 8, 1977 order which vacated the 1972 decision approving the construction of 287 dwelling units. As a result of this order, Aragon’s approval to build dwelling units was reduced in number from 287 to 83 units. In our view, this is a clear “occurrence resulting in loss” and thus marks the last date on which the statute could have begun to accrue.

Aragon v. McCoy, 99 N.M. at 424-25, 659 P.2d at 310-11.

The quotation illuminates several points. First, where the issue turned on the legal significance of an action or document, the Court clearly rejected the completion of the appellate process as necessary to mark an “occurrence resulting in loss.” Second, the Court apparently embraced the policy of relying on the latest rather than the earliest possible event which might begin the running of the limitation period. And third, the Court clearly distinguished the trial court determination of the rights of the parties from the other events that appear to be occurrences resulting in loss. We employ analogous reasoning to the present ease and now turn to the events cited by the parties as dispositive to the statutory limitation issue.

III. ACCRUAL OF THE CAUSE OF ACTION AS A MATTER OF LAW

A. Sharts’ Threatening Letter

Natelson contends that the statute of limitations began to run as a matter of law when Sharts sent the April 3, 1985, threatening letter. Natelson argues that Sharts’ letter demonstrates he had irremediable business losses of at least $35,000. Natelson further argues that, although Sharts did not know the full extent of the harm, he knew Natelson’s carelessness could cost him approximately $800,000 to $2,000,000.

However, we believe Natelson’s reliance on Sharts’ threat of a $35,000 lawsuit is misplaced. First, Sharts’ sworn testimony indicates that his threat related only to his frustration over the pace of the declaratory judgment action, his perception that Natelson was foot-dragging, and the interest costs that were resulting from the delay. The statements indicate that Sharts may have been harmed as a result of Natelson’s slow pace in litigation. Moreover, harm or loss in fact as a result of Natelson’s pace of work is distinguishable from the harm or loss in fact resulting from Natelson’s negligent drafting of the restrictive covenants. It is true that Sharts’ reference to “legal errors” could refer to negligent draftsmanship involving the covenants. However, the reference could also be to the “legal errors” other attorneys had made in interpreting the covenants or to Natelson’s pace of correcting the problem. Thus, according to the law controlling this appeal and given the conflicting inferences that can be made from the evidence, the issue should be decided in Sharts’ favor at the summary judgment stage.

Natelson’s reliance on Sharts’ threat of a larger malpractice suit is similarly misplaced. Sharts’ threat was explicitly conditioned on whether Natelson was successful in the declaratory judgment action. At his deposition, Sharts testified that he still believed in Natelson and believed that Natelson could lift the cloud from the title of his property. Therefore, because this evidence is also controverted, summary judgment would be inappropriate. See Eoff v. Forrest, 109 N.M. 695, 699, 789 P.2d 1262, 1266 (1990); Koenig v. Perez, 104 N.M. 664, 666, 726 P.2d 341, 343 (1986) (substantial dispute as to a material fact forecloses summary judgment).

Natelson also contends that the threat of legal action by other attorneys concerning the application of the covenants to Tract Two demonstrates that Sharts knew or should have known that Natelson committed malpractice and, as a result, harmed Sharts. However, Natelson’s reliance on notice to Sharts from legal counsel obtained by the owners of lots in Tract One that the covenants may have a meaning contrary to that held by Sharts is mistaken. Even a properly prepared set of covenants cannot prevent a party from challenging the application of the covenants under particular circumstances. See Farner v. Fireman’s Fund Ins. Co., 748 F.2d 551, 555 (10th Cir.1984). To the extent that such threats put Sharts on notice of anything other than a potential dispute, on the facts of this case, are insufficient to begin the running of the limitation period as a matter of law.

B. Entry Date of Attorney Marlowe

Natelson next contends that Sharts’ cause of action accrued, as a matter of law, the date attorney Marlowe entered an appearance on behalf of Sharts in the declaratory judgment action because Sharts should have known then that he was the victim of legal malpractice. We disagree. Natelson’s Brief-in-Chief indicated that he believed the threatening letter satisfied the harm or loss in fact prong of the Jaramillo test and that the Marlowe entry date argument was offered to satisfy the discovery prong. See Jaramillo. However, as we noted above, we do not believe Sharts’ threatening letter satisfied the first prong of the Jaramillo test. Therefore, because we resolve this appeal under the harm or loss in fact prong of analysis, reliance on the entry date of appearance of Attorney Marlowe is erroneous because it is meaningless to say that Sharts could have discovered a harm or loss in fact which had not yet accrued.

C. The Declaratory Judgment Action

In Sharts v. Walters, 107 N.M. 414, 759 P.2d 201 (Ct.App.1988), this Court affirmed the September 1986 trial court decision denying Sharts and Natelson their interpretation of the covenants. Sharts’ complaint revealed that the declaratory judgment action and other attempts to clear the cloud from the title of the property caused Sharts to incur costs and legal fees more than four years prior to the July 10, 1989, commencement of the present action.

However, it is also clear that during that time it could not yet be determined that these costs were caused by the negligent drafting of the covenants by Natelson rather than a misapprehension on béhalf of those asserting the legal rights of the owners in Tract One. Without the underlying ambiguity resolved by a court of competent jurisdiction, we are unwilling to find the challenges to the covenants and Sharts’ attempts to resolve the difficulties arising from those challenges as constituting the necessary harm or loss in fact requirement as a matter of law. Moreover, we believe the prima facie causal connection requirement between the costs incurred and the alleged misdrafting of the covenants is inadequate to accrue a cause of action in malpractice in the present case. See Holland v. Lawless, 95 N.M. 490, 495, 623 P.2d 1004, 1009 (Ct.App.) (one element of a legal malpractice cause of action is for there to be a reasonable, close causal connection between the conduct and the resulting injury), cert. denied, 95 N.M. 593, 624 P.2d 535 (1981).

We are so persuaded for several reasons. First, had Sharts prevailed on the declaratory judgment action, he would not ordinarily be in a position to claim that negligent drafting of the covenants by his attorney was the cause of his alleged costs and business losses and, in the absence of any other proof to the contrary, such losses may be transactional costs of doing business in real estate. See Restatement Second of Judgments 2d § 33, cmt. (a) at 332 (1982) (declaratory judgment permits parties to have their rights declared before a claim has accrued; before coercive remedy available).

A second reason why we decline to find this cause of action barred by the statute of limitations is because we do not wish to further encourage legal malpractice litigation when other possible remedies are available. For example, if Sharts had filed an action against Natelson immediately upon receiving the first letter from lot owners in Tract One challenging his interpretation of the covenants, he would have eliminated the opportunity to receive waivers and modifications from the purchasers of lots in Tract One. However, Sharts continued to rely on Natelson’s assurances and advice that a solution to this problem could be found. We think this the better course. Our cases do not require, nor does it seem prudent, to encourage the filing of provisional, preemptory legal malpractice actions. See id. cmt. (c) at 335 (where litigant seeks declaratory judgment rather than coercive remedy, factual inference may arise that litigant is in quandary as to what his rights are and how to secure their adjudication).

Third, we also note that had Sharts brought his malpractice suit prior to the completion of the declaratory judgment action, he would be in the unenviable position of maintaining in one suit (the declaratory judgment action) that the covenants had been properly drafted, while in the other suit (the malpractice action) that the covenants had been negligently drafted, contrary to his intention and that they did not mean what he had intended. Such sworn testimony could create a legitimate credibility issue precluding summary judgment. See Charles A. Wright, et al., Federal Practice & Procedure Civil 2d § 2726, at 118 (1983) (where evidence produced in support of motion for summary judgment creates a credibility issue, summary judgment inappropriate); see also United States Nat’l Bank of Oregon v. Davies, 274 Or. 663, 548 P.2d 966 (1976); St. Paul Fire & Marine Ins. v. Speerstra, 63 Or.App. 533, 666 P.2d 255 (1983) (inconsistent positions to be avoided).

Accordingly, we hold that until the time of the adverse declaratory judgment ruling in the trial court, whatever costs and delays were incurred as a result of the language in the covenants were insufficient to satisfy the harm or loss in fact prong of the Jaramillo analysis as a matter of law.

V. CONCLUSION

New Mexico cases have long noted the law favors the right of action over the privilege of limitation. See Gaston v. Hartzell, 89 N.M. at 220, 549 P.2d at 635. This is particularly so where a statutory bar is invoked on a motion for summary judgment. See Johnson v. J.S. & H. Constr. Co., 81 N.M. 42, 43, 462 P.2d 627, 628 (Ct.App.1969); Sanders v. Smith, 83 N.M. 706, 709, 496 P.2d 1102, 1105 (Ct.App.), cert. denied Rupert v. Sanders 83 N.M. 698, 496 P.2d 1094 (1972). Further, we take this opportunity to relay the trial judge’s comments given at the close of the motion for summary judgment hearing with which we concur:

I think to interpret [Jaramillo ] as [Natelson] urges would be fostering a policy of requiring an individual to obtain other counsel, [and] file an early lawsuit in order to protect [the individual’s] rights. I think we need to have a policy which is reflected in interpreting [Jaramillo ] whereby an attorney is encouraged to take curative actions to try to avoid any damages. So I’m going to deny the motion for summary judgment because I think there is a genuine question of fact as to whether or not ascertainable damages existed prior to the rendition of the declaratory judgment.

Therefore, we decline to find this cause of action barred by the statute of limitations and affirm the trial court’s ruling denying the motion for summary judgment.

IT IS SO ORDERED.

APODACA, J., specially concurs. HARTZ, J., dissents.

1 . Although as a general rule, the statute of limitations against an attorney begins to run when the plaintiff discovers or reasonably should have discovered the negligence, the prescription period is tolled where the plaintiff has not suffered harm in fact. This differs from the traditional liability rule which presumed nominal damages coincided with the occurrence of the attorney’s negligent act or omission and the cause of action accrued for statute of limitations purposes at the time of the occurrence. See 2 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 18.10, at 94 (1989).

2 . It is unsettled in the jurisdictions whether there has to be only the fact of harm or whether there needs to be a specific quantity of harm. See 2 Ronald E. Mallen & Jeffrey M. Smith, § 18.11 at 103. The underlying authority tor Jaramillo initiated a specific quantity requirement, declaring nominal harm insufficient for accrual purposes and adopting an "actual and appreciable” harm standard. Budd v. Nixen, 491 P.2d at 436. Jaramillo did not expressly adopt language describing the quantum of harm; we note however that the harm or actual loss in Jaramillo was irremediable.

3 . See also 2 Ronald E. Mallen & Jeffrey M. Smith, i 18.11, at 106 and 107. Whether a defect in title causes harm only if and when challenged by an adverse claimant has been inconsistently treated in the courts. See Succession of LaSalle v. Clark, 503 So.2d 694 (La.App.1987) cert. denied, 505 So.2d 1146 (1987); Graham v. Holler, 499 So.2d 62 (Fla.App.1986).