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Jones v. Westbrook

Supreme Court of Alaska

September 23, 2016


         Appeal from the Superior Court No. 3PA-14-01350 CI of the State of Alaska, Third Judicial District, Palmer, Gregory Heath, Judge.

          Paul D. Kelly, Kelly & Patterson, Anchorage, for Appellant.

          Patricia R. Hefferan, Wasilla, for Appellee.

          Before: Stowers, Chief Justice, Winfree, Maassen, and Bolger, Justices. [Fabe, Justice, not participating.]


          MAASSEN, Justice.


         A client personally financed the sale of his business corporation. His attorney drafted documents that secured the buyer's debt with corporate stock and an interest in the buyer's home. Over seven years later the government imposed tax liens on the corporation's assets; according to the client, it was only then he learned for the first time that his attorney had not provided for a recorded security interest in the physical assets. The client sued the attorney for legal malpractice and violation of the Alaska Unfair Trade Practice and Consumer Protection Act (UTPA).

         The superior court held that the statute of limitations barred the client's claims and granted summary judgment to the attorney. But we conclude that it was not until the tax liens were filed that the client suffered the actual damage necessary for his cause of action to be complete. We therefore reverse the judgment of the superior court and remand the case for further proceedings.


         A. Facts

         Timothy Jones owned Northern Heating & Air Conditioning, Inc., which did business under that name. In 2003 he retained attorney Randall Westbrook, who had done work for him in the past, to represent him in the sale of the corporation. According to Jones, Westbrook told him that he had been involved in a number of similar transactions and was confident he could handle this one.

         Jones decided to sell Northern Heating to his service manager, Mike Grunwald. Grunwald was unable to secure outside financing, so Jones decided to finance the sale himself. Westbrook prepared a stock purchase agreement, deed of trust, promissory note, and security agreement. The stock purchase agreement conveyed Northern Heating's 1, 000 shares of issued stock to Grunwald for $280, 000. Grunwald gave Jones a $ 10, 000 down payment and executed a promissory note for the remaining $270, 000 at 8% interest with monthly payments of $3, 816.90. The security agreement secured Grunwald's payment of the promissory note with the "1, 000 shares of common stock, " while the deed of trust gave Jones additional security in the home owned by Grunwald and his wife. Jones and the Grunwalds signed the documents on July 13, 2004.

         Jones and Westbrook both agree that they discussed "the perils of owner financing, " but they remember the conversation differently. According to Jones, he believed Westbrook would ensure that "the business assets [were] tied up in the sale" and that he would have "everything tied up, the stock, inventory, equipment, the assets of Northern Heating" as security. But according to Westbrook, Jones instructed him not to take a security interest in the physical assets because another creditor already had an interest in them. Westbrook also testified that he "would have encouraged [Jones] to take a security interest in those assets" if he had known that in fact no other security interest existed.

         Grunwald made payments on his debt to Jones, but he "was short" on some payments and requested extensions on others. Jones testified that when Grunwald missed payments the two men would meet, talk about the business, and work out a partial payment. Jones testified that the first time Grunwald came up short, in "mid[-]2005, " Jones "walked through the warehouse and offices, and noted the inventory and equipment, and knowing that the assets were secure, [he] felt comfortable with [the parties'] agreement." On October 18, 2005, the manager of the escrow account through which Grunwald made his payments sent Jones his first official notice that Grunwald had missed one. But Grunwald continued to make payments of varying amounts through February 2012.

         In August 2008 the Internal Revenue Service filed a tax lien against Northern Heating, but it released the lien in October of that year. According to Grunwald, he learned in 2009 that his bookkeeper had not been paying withholding taxes. He negotiated with the IRS and eventually thought he was "making . . . good headway on paying the back taxes, " but the IRS placed two more liens on the corporation's assets in October and November 2011. In February 2012 the IRS notified Grunwald it was closing Northern Heating and selling its assets. Grunwald informed Jones, who later attested that this "was the first time I heard that Northern Heating had any tax problems."

         According to Jones, he met with Grunwald's accountant the next day, and the two of them called the IRS. The IRS told Jones the amount of the tax lien and informed him it had no record that he had a security interest in Northern Heating's physical assets. Jones contacted Westbrook, who confirmed the absence of a security interest. Jones asserts that this was when he first learned that Grunwald's debt was not secured by the corporation's physical assets. In August 2012, after Northern Heating was liquidated by the IRS, Jones terminated the escrow account. Grunwald still owed him $330, 316.69, including interest.

         After Jones filed a complaint against Westbrook for legal malpractice, Westbrook admitted that he probably did not have malpractice insurance while representing Jones. Jones asserted that he would have found a different lawyer had he known Westbrook was uninsured but that Westbrook never gave him notice of that fact. Westbrook testified in a deposition that he could not find a written fee agreement signed by Jones and that he could not say whether he had provided his client with written notice that he lacked malpractice insurance, as required by the attorney ethics rules.[1]

         B. Proceedings

         Jones filed his complaint against Westbrook on December 19, 2013, alleging: (1) legal malpractice and violation of the Unfair Trade Practices and Consumer Protection Act (UTPA) based on Westbrook's alleged failure to properly document the sale of Northern Heating; and (2) violation of the UTPA based on Westbrook's alleged deception in holding himself out as experienced in selling businesses. Westbrook raised the statute of limitations as a defense. Jones later amended his complaint to claim that Westbrook also violated the UTPA when he failed to disclose his lack of malpractice insurance. The parties cross-moved for summary judgment; Jones requested an evidentiary hearing on the statute of limitations.[2]

         The superior court conducted an evidentiary hearing on the statute of limitations over two days in February and March 2015; both Jones and Westbrook testified. The court then granted Westbrook's motion for summary judgment, holding that Jones's claims had been filed too late. The court found that the date of injury for Jones's UTPA and legal malpractice claims was July 13, 2004, the date he and Grunwald signed the sale documents. The court further found that the discovery rule tolled the statute of limitations until October 18, 2005 - the date the escrow manager first notified Jones of a late payment. At that point, the court reasoned, a "prudent businessman ... would have reread the terms of the transaction to assure the assets were secured" and, finding that they were not, would have contacted his attorney. The court concluded that Jones's claims accrued once he was on inquiry notice that Grunwald's payments were not secured by the corporation's physical assets. The court therefore held that Jones's UTPA claim expired on October 18, 2007 (because of the two-year statute of limitations for UTPA claims[3]) and his legal malpractice claim expired on October 18, 2008 (because of the three-year statute of limitations for professional malpractice claims[4]).

         Jones appeals from the superior court's grant of summary judgment, arguing that his claims did not accrue until he learned in February 2012 that the IRS was asserting a security interest in Northern Heating's assets. He also appeals the superior court's denial of summary judgment in his favor.


         We review a grant of summary judgment de novo.[5] A claim's accrual date "is a factual question, which we review for clear error."[6] "When the superior court holds an evidentiary hearing to resolve factual disputes about when a statute of limitations began to run, " we review those findings for clear error.[7] Clear error exists when the record as a whole "leaves us with 'a definite and firm conviction that a mistake has been made.' "[8] But "we review de novo the legal standard used to determine accrual dates."[9]


         A. Jones's Legal Malpractice Claim Did Not Accrue Until He Suffered An Appreciable Injury.

         A legal malpractice claim has four elements: duty, breach, causation, and damages.[10] A plaintiff bringing such a claim must show:

(1) that the defendant has a duty "to use such skill, prudence, and diligence as other members of the profession commonly possess and exercise, " (2) that the defendant breached that duty, (3) that the breach proximately caused the injury, and (4) that ...

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