The Statute of Limitations for Equitable Accounting Claims

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					practice tips                                                                                      BY THEODORE P. BYRNE AND ARMANDO M. GALVAN

The Statute of Limitations for Equitable Accounting Claims

SHOULD AN ATTORNEY BE CONCERNED about a letter from a former                 needs to state that 1) a former attorney-client relationship exists, which
client indicating that the client has filed a complaint for accounting        creates an agency and fiduciary relationship, and 2) an unknown bal-
regarding services that ceased years earlier? The lawyer may think the       ance is due from the former attorney. One way that a plaintiff could
complaint is obviously time barred. In the equitable world of account-       fail to properly plead is to allege facts that show that the sum being
ing claims, however, nothing is obvious, particularly in attorney-client     sued for can be made certain by calculation.9 Although this mistake
relationships. Under current law, as complicated by various streams          is unlikely, if it were made the case would be subject to demurrer, since
of case law, it is possible for overzealous plaintiffs’ attorneys to craft   a complaint does not state a cause of action for an accounting when
a complaint that survives demurrer and probably even summary                 it shows that none is necessary.10
judgment and assert a stale, frivolous contract claim under the guise             After the pleading stage, however, facts may show that the plain-
of an accounting action.                                                     tiff has sufficient information so that no accounting is necessary. This
    The rule for pleading an accounting claim is simple enough: 1) the       was the situation in Caldwell v. Caldwell,11 in which the court held
fiduciary relationship or other circumstances appropriate to the rem-         that the evidence fell short of “proving this [accounting] cause of
edy must be established, and 2) a balance must be due from the defen-        action.”
dant to the plaintiff that can only be ascertained by an accounting.1             The plaintiff at all times had full and free access to his own
The “other circumstances appropriate to the remedy” of an account-                money, through bank accounts in his name and with full
ing include nonfiduciary contractual relationships requiring pay-                 access to and control over the books and records concerning
ment by one party to another of profits or moneys received.2 This right            the accounts in his name and with full access to and control
can be derived simply from the implied covenant of good faith and                 over the books and records concerning the receipts and expen-
fair dealing inherent in every contract in cases in which it can be said          ditures of the property.12
that, without an accounting, there may be no way by which a party
entitled to a share in profits or specified funds could determine            Statute of Limitations
whether there were any profits or amounts due.3                               Whether the value of a claim can only be ascertained by an account-
    A fiduciary relationship can arise between a trustee and a bene-          ing is one element of an accounting claim. Another is the statute of
ficiary,4 a principal and agent,5 among partners in a partnership, and        limitations, which may vary. In an action for an accounting, “the
joint venturers in a joint venture.6 Illustrative of agency cases is         nature of the right sued upon, not the form of action or relief
McRaven v. Dameron,7 a case involving a suit by former clients for           demanded, determines the applicability of the statute of limita-
an accounting against their former attorney.                                 tions.”13 The applicable statute of limitations will be the four-year
    In McRaven, the clients brought an action against their former           period provided in Code of Civil Procedure Section 343, the catch-
attorney to recover money that was received by the attorney while            all limitations period, unless a different statute is warranted by the
acting in a fiduciary capacity but that he failed to deliver or account       specific form of action.14 For example, if the primary purpose of the
for to the plaintiffs. The clients alleged that, after the attorney was      action is to recover money under an oral contract, then the two-year
paid to handle two lawsuits that were later dismissed, “upon infor-          limit under Code of Civil Procedure Section 339(1) may apply.15
mation and belief…[the attorney] received about” $8,000 “on account              An attorney defendant can defeat a former client’s accounting claim
of said dismissals.” The trial court entered judgment in favor of the        by presenting evidence that no money or property is owed to the client.
plaintiffs, and the California Supreme Court affirmed. The court             If the lawsuit requests an accounting based on the accounting rela-
held that although “[t]he complaint may not be as specific with               tionship—that is, a relationship whereby one party clearly has the duty
regard to the contract as it might be…it is sufficient according to a        to handle, safeguard, and keep track of another’s moneys—without
number of decisions of the court.” The court concluded that the com-         more, it should fail on the authority of Union Bank v. Superior
plaint sufficiently pleaded and the clients sufficiently proved that 1)      Court (Demetry).16
the action was to recover money received by the attorney while act-              As the court in Union Bank made clear, “No California decision
ing in the fiduciary capacity under a contract between the attorney           holds that the existence of a complicated accounting relationship
and client, 2) the attorney received as the fruit of his representation      between parties by itself permits the maintenance of a lawsuit between
certain moneys owed to the plaintiffs, and 3) the attorney failed to         them when no money is owed or property must be returned.”17 In
deliver or account for the funds to the clients. In the opinion, there       Union Bank, the plaintiff fatally admitted that the defendant took no
is no mention that the clients sued other than “for an accounting of         inappropriate role in connection with the accounting relationship aris-
moneys” of which “plaintiffs were not informed…until within two              ing out of the defendant’s administration of loan collections and
years before the commencement of the action.” At trial, “it was              repossession of office equipment. The defendant was thus able to estab-
expressly stipulated that the two year statute of limitations did not”
bar maintenance of the suit.8                                                Theodore P. Byrne is a licensed CPA and an attorney practicing in Redondo
    To file an accounting claim against a former attorney, a plaintiff        Beach, and Armando M. Galvan is an attorney practicing in Los Angeles.

                                                                                                                           Los Angeles Lawyer April 2010 19
lish on summary judgment that it engaged in         accounting action accrued and whether the          no triable issue of fact regarding a defen-
no misconduct, because the plaintiff was            written or oral agreement was in force at the      dant’s contention that the suit is time barred.
never deprived of moneys or profit, thereby          time of the breach. Since the statute of limi-     A defendant many times can indisputably
precluding a right to an accounting.18              tations generally begins to run at the time of     establish when he or she received money
    One complicating fact pattern arises when,      the breach, facts are necessary to determine       from the plaintiff. If the date of receipt of
as is often the case, the attorney-client rela-     whether a claim for breach of oral or written      funds is more than four years prior to the date
tionship begins with a written agreement to         contract is time barred.19                         the attorney ceased to work for and com-
provide specific services but the relationship           Another complication occurs if the plain-      municate with the client, and if the breach and
expands beyond them. In one common sce-             tiff claims that the attorney mistakenly or        related limitations period are based on a writ-
nario, an attorney agrees to prosecute a law-       intentionally took a garnishment check dur-        ten contract, the defendant may be able to
suit, is later asked to perform postjudgment        ing the collections phase of the litigation. In    establish that the claim is time barred. In
collection work without an additional writ-         that instance, the three-year statute of limi-     addition, courts have held that when services
ten agreement, and receives garnishment             tations for an action for relief on the ground     are rendered intermittently, the court may
checks as part of the collection work. It is        of fraud or mistake may apply. “Fraud” in          consider each service performed to be com-
unclear whether the oral or written contract        this context includes actions for construc-        plete and independent of the others, thereby
statute of limitations should apply when a          tive fraud or mistake, which exists when con-      leading to the conclusion that the statute
portion of the legal services is provided pur-      duct, though not actually fraudulent, has the      runs from the date each service is rendered.24
suant to a written agreement and a subsequent       same consequences and effects of actual            This date-of-service rule could apply when all
portion is provided under an oral contract.         fraud.20 This rule has been applied in at least    services under a written agreement have been
    The applicable statute of limitations will      one action to obtain an accounting.21 In such      completed, but collections work outside the
often depend on the specific allegations in a        a case, the accounting action would be time        contract is later undertaken. In such a case,
complaint. For example, a complaint may             barred if filed more than three years after         the date of accrual for a suit for an account-
state that the alleged wrongdoing is that cer-      the alleged wrongful breach of duty.22             ing of moneys that the attorney collected
tain moneys received during the attorney-                                                              would be the date that the attorney rendered
client relationship were not accounted for,         Date of Accrual                                    the collections work.
placing at issue the reasonable value of the ser-   This analysis becomes more complex when                 Other accrual rules might apply depend-
vices provided by the attorney. With this alle-     the diverse accrual rules are considered. The      ing on the circumstances. When a contract
gation, the plaintiff may argue that a bal-         key question is when each underlying breach        fixes the time for performance, the statute of
ance is due from the defendant to the plaintiff     of contract accrued. For a service contract, the   limitations does not begin to run until the
that can only be ascertained by an account-         date of accrual is ordinarily when the defen-      expiration of that specific time.25 In contrast,
ing. Questions will arise as to the time of         dant received the money.23 Application of          if no time is specified in the contract, the
breach, which will determine when the               this rule could warrant a finding that there is     statute begins to run after the expiration of
                                                                                                       a reasonable period.26
                                                                                                            Alternatively, if the oral agreement to per-
                                                                                                       form collections work is for an indefinite
                                                                                                       period, the statute of limitations does not
                                                                                                       begin to run until the services end.27 A plain-
                                                                                                       tiff’s claim may thus be time barred if the last
                                                                                                       invoices demonstrate that the most recent
                                                                                                       collection work was more than two years
                                                                                                       before the filing of the complaint. Under
                                                                                                       these circumstances, the plaintiff is unable to
                                                                                                       rely on contacts with the attorney that
                                                                                                       occurred after the collection work was com-
                                                                                                            An action for an accounting is equitable.
                                                                                                       A suit may be brought to require the defen-
                                                                                                       dant to account for missing money or prop-
                                                                                                       erty received or held by the defendant.
                                                                                                       However, if the accounting results in a find-
                                                                                                       ing that an overpayment of a certain sum of
                                                                                                       money was made by the client to the attor-
                                                                                                       ney, can the court award damages in that
                                                                                                       amount against the attorney, effectively con-
                                                                                                       verting the case to a breach of contract case
                                                                                                       at law, even after the suit was tried in equity
                                                                                                       in a bench trial?
                                                                                                            Historically, courts have held that due
                                                                                                       process requires notice to the defendant of the
                                                                                                       degree of financial liability faced in a legal
                                                                                                       action.28 It would seem that no damages
                                                                                                       could be awarded in a suit in equity—such as
                                                                                                       a claim for an accounting—if the complaint
                                                                                                       has failed to allege a suit at law.

20 Los Angeles Lawyer April 2010
    An attorney wishing to limit exposure to
an equitable accounting claim should clearly
delineate the services to be provided to the
                                                                                                                       Does LACBA have
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client through a written agreement. If subse-                                                                             your current
quent work is to be performed, a separate
written agreement should be created that
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from any prior work performed for the client.                                                                          for information delivered via e-mail
Finally, at the conclusion of each scope of                                                                                on a number of subjects that
                                                                                                                               impact your practice.
work covered by a written agreement with the
client, the attorney should send the client a let-                                                                         Update your records online at
ter confirming that all services pursuant to the                                                               or
agreement have been performed and that the                                                                             call Member Services at 213.896.6560.
attorney-client relationship has ended. The let-
ter should also include a detailed accounting
of all moneys received and expended during
the engagement, and request the client’s
prompt response if the client has any ques-
tions.                                          ■

1 See, e.g., Stillwell v. Trutanich, 178 Cal. App. 2d 614

2 McClain v. Octagon Plaza, LLC, 159 Cal. App. 4th

784, 805 (2008), review denied (2008).
3 Id.
4 Green v. Brooks, 81 Cal. 328, 333 (1889).
5 McRaven v. Dameron, 82 Cal. 57, 62 (1889).
6 April Enters. v. KTTV, 147 Cal. App. 3d 805, 818

(1983) (partnership dissolution); Menefee v. Oxnam,
42 Cal. App. 81, 85 (1919) (joint venture).
7 McRaven, 82 Cal. at 62.
8 Id.
9 Saint James Church of Christ Holiness v. Superior

Court, 135 Cal. App. 2d 352, 359 (1955).
10 Id.; see also Union Bank v. Superior Court (Demetry),

31 Cal. App. 4th 573, 593-94 (1995) (citing Saint
James Church of Christ Holiness, 135 Cal. App. 2d at
11 Caldwell v. Caldwell, 80 Cal. App. 2d 378, 383

12 Id.
13 Jefferson v. J. E. French Co., 54 Cal. 2d 717, 718

14 People v. Taliaferro, 149 Cal. App. 2d 822, 825

(1957), disapproved on other ground (to extent case
implies that four-year statute always applies to account-
ing claim); Jefferson, 54 Cal. 2d at 719.
15 See Estate of Peebles, 27 Cal. App. 3d 163, 166

(1972) (quoting and restating the rule in Jefferson, 54
Cal. 2d at 718).
16 Union Bank v. Superior Court (Demetry), 31 Cal.

App. 4th 573, 593-94 (1995) (citing Saint James
Church of Christ Holiness v. Superior Court, 135 Cal.
App. 2d 352, 359 (1955)).
17 Id. at 594.
18 Id.
19 United Pacific Reliance Ins. Co. v. DiDominico, 173

Cal. App. 3d 673, 675 (1985).
20 Day v. Greene, 59 Cal. 2d 404, 406 (1963) (If con-

structive fraud is the gravamen of an action, the fact
that a breach of contract is involved is not decisive.).
21 Lataillade v. Orena, 91 Cal. 565, 566 (1891).
22 CODE CIV. PROC. §338(d).
23 Tabata v. Murane, 24 Cal. 2d 221, 223 (1944).
24 Johnstone v. E & J Mfg. Co., 45 Cal. App. 586, 588

25 Richter v. Union Land & Stock Co., 129 Cal. 367,

368 (1900).
26 Brennan v. Ford, 46 Cal. 7, 9 (1873).
27 Wax v. Adair, 16 Cal. App. 2d 393, 394 (1936).
28 Ely v. Gray, 224 Cal. App. 3d 1257, 1262 (1990).

                                                                                                                                      Los Angeles Lawyer April 2010 21

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