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The “Actual Fraud” Exception to the One-Year Statute of Limitations on Claims by Clients Against Their Lawyers – How Far Does it Go?

November 28, 2023

California Code of Civil Procedure section 340.6 says that an action against an attorney “for a wrongful act or omission, other than for actual fraud, arising in the performance of professional services” must commence within one year after the client learns of the malpractice, or four years from the date of the malpractice, whichever occurs first. If the action is for fraud, then the three-year statute of limitations set forth in Code of Civil Procedure section 338(d) applies.

One reason the California Legislature enacted Section 340.6 was to “eliminate the former limitation scheme’s dependence on the way a plaintiff styled his or her complaint.”Lee v. Hanley(2015) 61 Cal. 4th 1225, 1236. The old rule tied the applicable statute of limitations for malpractice claims to the nature of the cause of action pled (such as breach of contract or fraud). This ambiguity generated uncertainty, especially regarding malpractice insurance, as to when the limitations period for allegations of malpractice expired. So, the Legislature drafted section 340.6 to provide a one-year limitation period for all allegations against lawyers that arise from disputes over their professional services, regardless of how the claims are styled (e.g., negligence, breach of contract, breach of fiduciary duty, etc.).

Section 340.6 expressly carves out actions for “actual fraud” from the one-year period. So, can legal malpractice plaintiffs skirt the one-year limitations period by simply restyling their malpractice claims as fraud?

The California Supreme Court provided some color to this question inLee v. Hanley(2015) 61 Cal. 4th 1224. There, the Court held that “section 340.6(a)’s time bar applies to claims whose meritsnecessarily dependon proof that an attorney violated a professional obligation in the course of providing professional services.” (Emphasis added.) 1236–37. The Court defined the term “professional obligation” as one that “an attorney has by virtue of being an attorney, such as fiduciary obligations, the obligation to perform competently, the obligation to perform the services contemplated in a legal services contract into which an attorney has entered, and the obligations embodied in the Rules of Professional Conduct.” 1237.

In contrast, the Court noted that section 340.6’s time bar does not apply to claims that do “not require proof that the attorney has violated a professional obligation . . . .”Ibid. So, for example, “claims that an attorney stole from or sexually battered his client while the attorney was providing legal advice” are not covered.& 1238. The Court reasoned that “[t]he obligations that an attorney has by virtue of being an attorney are varied and often overlap with obligations that all persons subject to California’s laws have.”Ibid. So it explained that “[f]or purposes of section 340.6(a), the question is not simply whether a claim alleges misconduct that entails the violation of a professional obligation. Rather, the question is whether the claim, in order to succeed, necessarily depends on proof that an attorney violated a professional obligation as opposed to some generally applicable nonprofessional obligation.”Ibid.

TheLeeCourt cautioned against “artful pleading” to circumvent section 340.6 and said California’s pleading rules would ferret out miscast causes of action.Ibid. For example, if a plaintiff tried to restyle a claim for professional negligence as a conversion claim, then “the facts stated in the complaint [would] show that the basis for the plaintiff’s conversion claim is that an attorney provided deficient legal services” and so “the plaintiff’s claim [would] depend on proof that the attorney violated a professional obligation in the course of providing professional services and [would] thus be time-barred.” 1239.

Ultimately, theLeeCourt permitted a client’s claim for conversion against her former lawyer for failure to return unearned fees to survive section 340.6’s time bar. The Court reasoned that the alleged conversion claim “does not necessarily depend on proof that [the Lawyer] violated a professional obligation” even though the “allegations, if true, may also establish that [the Lawyer] has violated certain professional obligations . . . .” 1240. The Court noted that if the client’s claim hinged on the fee agreement being unconscionable or the lawyer’s failure to properly preserve client funds, then the conversion claim would be time-barred because the claim would necessarily require proof that the lawyer violated a professional obligation.Ibid. As pled, it did not.Ibid.

California courts have tried to hold that line and distinguish between legitimate cases of actual fraud and garden variety professional negligence claims dressed up as fraud. If a plaintiff is simply alleging a professional negligence claim as fraud to skirt the statute of limitations, then courts will probably dismiss the claim. For example, inNguyen v. Ford(2020) 49 Cal. App. 5th 1, 17 the client styled her claims against the lawyer as fraud. But the fraud claim was based on allegations that the lawyer breached her fiduciary duty by failing to inform the client of significant developments in the case. The court found that the “actual fraud” exception did not apply because the plaintiff could not show that her lawyer “violated a ‘generally applicable nonprofessional obligation.’”Ibid. Instead, the fraud claim arose from the lawyer’s violation of a professional obligation, which is subject to the limitations period set forth in Section 340.6.Ibid.

If a plaintiff pleads that a lawyer committed intentional fraud, which does not require proof that the lawyer committed a professional violation to be actionable, then courts apply the “actual fraud” exception under Section 340.6 and apply the three-year statute of limitations from Section 338.See, e.g.,Acres Bonusing, Inc. v. Marston(N.D. Cal. 2022) 605 F. Supp. 3d 1278 (applying the “actual fraud” exception to allegations of intentional fraud);Flynn v. Love(D. Nev. 2023) 653 F.Supp.3d 823 (applying California law to exclude a claim for conversion from Section 340.6’s time bar). Notably, the exception applies to “intentional fraud, not constructive fraud resulting from negligent misrepresentation.”Quintilliani v. Mannerino(1998) 62 Cal. App. 4th 54, 69.

Stueve Bros. Farms, LLC v. Berger Kahn(2013) 222 Cal. App. 4th 303 provides a good example of when California courts will enforce the “actual fraud” exception. There, a client sued his former attorneys for setting up a complex scheme to defraud him, including allegations that the attorneys set up trusts that gave themselves discretion to liquidate trust assets which the attorneys used to enrich 310-311. The Court held this conduct constituted “actual fraud” for purposes of Section 321-322. So, while California courts will not permit plaintiffs to shoehorn their run-of-the-mill legal malpractice claims into claims for intentional fraud, courts take the “actual fraud” exception seriously when the allegations sufficiently show such a claim.

Accordingly, legal malpractice plaintiffs should consider whether the allegations against their former lawyer might constitute fraud vis-à-vis the violation of a “generally applicable” obligation as opposed to an obligation that “an attorney has by virtue of being an attorney[.]”Lee v. Hanley(2015) 61 Cal. 4th 1225, 1237. If the claims arise from facts unrelated to obligations arising from the attorney-client relationship, then they will probably fall into the “actual fraud” exception.

Mark B. Wilson, P.C. is a partner of Klein & Wilson. Mr. Wilson is a certified specialist in legal malpractice law. Manoah Marton, an attorney at Klein & Wilson, is a co-author of this article.