Commercial Division Blog

Posted: March 24, 2014 / Categories Commercial, Statute of Limitations/Laches, Law Firms and Professional Ethics

Claim For Legal Malpractice Accrues When Client Receives Negligent Work Product

On March 6, 2014, Justice Bransten of the New York County Commercial Division issued a decision in XE Partners, LLC v. Skadden Arps Slate Meagher & Flom LLP, 2014 NY Slip Op. 30668(U), dismissing an action for attorney malpractice under the applicable three-year statute of limitations.

XE Partners arose from legal advice the defendant law firm provided to the plaintiff LLC, in 2008, regarding the withdrawal of certain members from the LLC. The withdrawing members brought an arbitration against the LLC claiming that "Plaintiff failed to follow a key provision of the LLC Agreement and used an inappropriate business valuation." In 2010, the arbitration panel ruled in favor of the withdrawing members. In 2013, the LLC brought a legal malpractice action against the law firm that had advised it in 2008, alleging that "the work performed by [the law firm] was at the heart of the [ ] Members' action against [the LLC]." Justice Bransten granted the law firm's motion to dismiss, concluding that the claim accrued when the allegedly negligent advice was provided in 2008 and was therefore time-barred because the claim was not brought within the 3-year limitations period:

Under New York law, it is well settled that a legal malpractice claim accrues when all the facts necessary to file the cause have occurred and the injured party can obtain relief in court. What is important is when the malpractice was committed, not when the client discovered it.

As explained by the Court of Appeals in the accounting malpractice context: the claim accrues upon the client's receipt of the accountant's work product since this is the point that a client reasonably relies on the accountant's skill and advice and, as a consequence of such reliance, can become liable for tax deficiencies. Receipt of the accountant's advice is the time when all the facts necessary to the cause of action have occurred and an injured party can obtain relief.

The reasoning of Ackerman has been extended to attorney malpractice claims. For example, in Proskauer Rose Goetz & Mendelsohn LLP v. Munao, 270 A.D.2d 150 (1st Dep't 2000), the First Department cited Ackerman in holding that a client's legal malpractice counterclaims accrued when the client received defendant's purportedly negligent work product. The First Department likewise held in Nuzum v. Field, 106 A.D.3d 541, 541 (1st Dep't 2013), deeming legal malpractice claims brought in connection with the drafting of promissory notes time-barred where brought more than three years after the allegedly defective documents were prepared.

Viewed in this framework, Plaintiffs legal malpractice cause of action is clearly barred by the statute of limitations. Plaintiffs' claim accrued when Defendants' allegedly negligent work product was received by Defendants. To paraphrase Ackerman, this was the time when all the facts necessary to the cause of action occurred and when Plaintiff was able to obtain relief. Since the advice was given in 2008, Plaintiffs’ 2013 filing was untimely.

(Internal quotations and citations omitted) (emphasis added).

The plaintiff argued that it did not suffer actionable injury (and its claim therefore did not accrue) until the arbitration panel ruled against in 2010. There is a certain logic to that argument (since it was arguably not until that adverse ruling that the plaintiff's economic injury materialized), and the plaintiff cited a Second Department decision that appears to support that position. See Frederick v. Meighan, 75 A.D.3d 528 (2d Dep't 2010) ("inasmuch as the plaintiff did not sustain 'actionable injury' until this Court awarded the buyers specific performance in the underlying action, the plaintiff's legal malpractice cause of action against them was not time-barred."). However, Justice Bransten concluded that, “[e]ven accepting Plaintiff’s reading of Frederick as correct for the sake of argument, this reading is in conflict with Ackerman and its First Department progeny and therefore is not controlling."

This decision illustrates that a legal malpractice claim must be diligently pursued, lest it become time-barred. Indeed, if an attorney gives negligent advice that creates a liability for the client more than three years later, it is possible that the claim could become time-barred before the client suffers significant damages to prompt a malpractice lawsuit.