Opinion by Justice CARTER.
Taylor H. Jobe died March 20, 2008. His will named his children, Everette Dean Jobe and Laura Jobe Kelly, co-executors of his estate. To assist them in their role, Dean and Kelly retained attorney, John F. Berry, and his firm, John F. Berry, P.C.
Berry advised Dean and Kelly that they were required to file, by December 20, 2008,
As a result of the late filing, the IRS assessed penalties and interest against the Estate. On May 1, 2012, Dean and Kelly sued Berry on behalf of the Estate for legal malpractice allegedly arising out of the late filing of the Form 706. Berry asserted the statute of limitations as an affirmative defense and filed a motion for summary judgment based on that defense. The trial court agreed with Berry that the Estate's malpractice claims were time-barred and granted summary judgment in Berry's favor.
On appeal, Dean and Kelly contend that the discovery rule and the Hughes
Dean and Kelly believed Berry was involved in the preparation of the Form 706 and remained responsible for advising them about whether estate taxes were owed and when they would be due. Dean and Kelly sued Berry for legal malpractice on behalf of the Estate, alleging that (1) Berry incorrectly advised them that the Estate would have no tax liability, (2) Berry failed to ensure that the Form 706 was timely filed, and (3) Berry concealed his malpractice in the handling of the Estate's tax return.
The timeline of events, as established by the summary judgment proof, is critical to an understanding of the claims and arguments raised in this case.
On March 24, 2008, four days after Jobe's death, Dean e-mailed Berry with the intention of securing Berry's legal representation. Dean made the following statements in that e-mail:
Berry agreed to represent Dean and Kelly in their capacity as co-executors of the Estate.
On April 15, 2008, Jobe's will (the Will) was admitted to probate. The Will (1) left
On May 8, 2008, Berry's firm sent a letter to Dean and Kelly advising that the Estate would likely owe taxes "[s]ince the estate is likely to exceed the available Estate Tax Exemption." The letter identified the steps that had to be taken before the Estate's assets and claims could be properly inventoried and reminded Dean and Kelly that the return, "unless extended, is due on December 20, 2008." Berry advised Dean and Kelly to seek the advice of a CPA regarding the tax return and offered to recommend a CPA for that purpose.
On December 18, 2008, two days before the Form 706 deadline, Dean e-mailed Berry, writing, "Whether we can trace all the recent proceeds is a separate question of proof. Obviously we need to get the accountant involved. He will need to get started on tax returns soon, and we should pay him to help us document and trace."
The December 20, 2008, deadline for filing the Form 706 passed. Neither the tax return nor a request for an extension of the filing deadline was filed.
On April 2, 2009, Berry filed a probate inventory in County Court at Law No. 2 of Gregg County showing that the value of the Estate exceeded $2,700,000.00. Again, this confirmed that a Form 706 was due.
On April 24, 2009, Berry wrote an e-mail that is especially important in determining if summary judgment was proper. The e-mail addressed to Dean and Kelly warned, "We need to file the estate tax return, and I would recommend that we use an accountant to do so. Forbis doesn't do that type of work.... We should do this as soon as possible as we are already late, and part of the problem was Rose's delay in filing the disclaimer." On May 15, 2009, Berry sent another e-mail to Dean and Kelly asking, "Do we have an accountant lined up to do the estate tax return?" Dean replied, stating that he would soon "confirm on CPA choice or offer someone else ...."
On May 26, 2009, Dean informed Berry via e-mail that he was inclined to use Forbis to handle the Estate's tax return. In a separate e-mail sent on that day, Dean stated that Forbis "is agreeable to handling tax returns for the estate. Although I'm certain he doesn't have the expertise of your neighbor, in my view the estate is not large enough to require seeking out top-notch expertise.... At your convenience we need to sends [sic] him the information he will need."
On June 19, 2009, Berry acknowledged Forbis' retention in a letter to him. The letter (1) stated, "I understand that you are going to prepare the estate tax return, and I am pleased to hear this"; (2) communicated Berry's willingness to coordinate the funding of a family trust with Forbis and "assist [Forbis] in the preparation
Almost three months passed without activity.
On September 9, 2009, Berry informed Dean via e-mail that he had received a draft copy of the Form 706 from Forbis, but stated that he needed additional time to review it because he did not agree with the numbers shown and wanted to make sure the return followed the Will and codicil.
On October 12, 2009, Berry reported to Dean:
On August 6, 2010, Berry sent Forbis a letter pointing out the changes that needed to be made to the Form 706 to reflect Berry's interpretation of the Will and codicil and warned, "I am trying to wrap up the Jobe Estate and understand that we need to get the estate tax return completed." The letter included the following:
Sometime in August 2010, Dean and Kelly terminated their attorney-client relationship with Berry and hired attorney Steve Saunders to replace him. The Form 706 was completed and signed on January 18, 2011, and was subsequently filed with the IRS. On April 4, 2011, the IRS notified Dean and Kelly that the Estate owed $58,550.00 in penalties and interest due to the late filing of the Form 706. The Estate paid that sum to the IRS. On May 1, 2012, Dean and Kelly sued Berry on behalf of the Estate for legal malpractice.
In the Estate's petition, Dean and Kelly alleged that
The petition acknowledged the two-year statute of limitations for malpractice claims, but argued that the limitations period was tolled through application of the discovery rule. Dean and Kelly claimed,
Berry answered the suit raising several defenses, including limitations.
Specifically, Berry argued that the evidence proved that Dean and Kelly knew or should have known that the Form 706 was late and that penalties and interest could be owed when Berry reminded them on April 24, 2009, that the Form 706 was past due. As additional support for his motion for summary judgment, Berry introduced evidence demonstrating that he was not dealing with unsophisticated parties. The summary judgment evidence established that, at all times relevant to this matter, Dean was a licensed attorney eligible to practice law in Texas, that he was then employed by the TDB, and that he had been a registered CPA from 1985 until 1998. Berry argued that Dean possessed
Dean and Kelly argued that the statute of limitations did not begin to run "until April 4, 2011, the date that the Estate received notification from the IRS that penalties and interest were owed." In support of their claim that Berry actively participated in the estate tax return process and in the retention of a CPA to prepare the Form 706, Dean and Kelly filed documents, already discussed above, demonstrating Berry's involvement in these matters after the deadline to file the Form 706 had already passed.
Additionally, Dean filed an affidavit claiming that he and Kelly "relied on John Berry as our attorney to handle the estate taxes for the Estate in a competent matter." In the affidavit, Dean swore that Berry failed to "indicate that the Estate would be responsible for paying estate tax penalties and interest," that Berry did not "make [him] aware that there was a nine month deadline for the filing of the estate tax return,"
Addressing the April 24, 2009, email, Dean's affidavit continued,
Kelly filed an affidavit containing similar statements.
In addressing the argument that he was a sophisticated party, Dean swore, "From my education as an attorney and as a CPA, I know that the laws applicable to estate taxes and estate tax returns change on a regular basis. I do not stay current on those laws as either an attorney or an inactive CPA." Importantly, Dean did not comment on whether he was aware that filing a late tax return could result in penalties or interest.
Dean and Kelly also attached the affidavit of Steve Saunders, the attorney hired to represent them after Berry was terminated. Saunders' affidavit stated,
The trial court granted Berry's motion for summary judgment and dismissed the Estate's claims.
"`[T]he question when a cause of action accrues is a judicial one, and to determine it in any particular case is to establish a general rule of law for a class of cases, which rule must be founded on reason and justice ....'" Willis v. Maverick, 760 S.W.2d 642, 644 (Tex.1988) (quoting Fernandi v. Strully, 35 N.J. 434, 173 A.2d 277, 285 (1961)).
Legal malpractice claims are subject to a two-year statute of limitations. See Isaacs v. Schleier, 356 S.W.3d 548, 557 (Tex.App.-Texarkana 2011, pet. denied); see TEX. CIV. PRAC. & REM.CODE ANN. § 16.003(a) (West Supp.2012). "`A defendant moving for summary judgment on the affirmative defense of limitations has the burden to conclusively establish that defense.'" Friddle v. Fisher, 378 S.W.3d 475, 483 (Tex.App.-Texarkana 2012, pet. denied) (quoting KPMG Peat Marwick v. Harrison Cnty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex.1999)).
Here, Berry was required to "(1) conclusively prove that the cause of action accrued before the commencement of the statute of limitations period,"
In reviewing the trial court's entry of a traditional summary judgment for Berry, we take as true all evidence favorable to Dean and Kelly, indulge every reasonable inference and resolve any doubts in their favor, and disregard all contrary evidence and inferences. Id. at 479 (citing Limestone Prods. Distribution, Inc. v. McNamara, 71 S.W.3d 308, 311 (Tex.2002); Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex.1999); Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 711 (Tex.1997)).
"The discovery rule has generally been applied in two types of situations: 1) in cases where the nature of the injury incurred is inherently undiscoverable and the evidence of the injury is objectively verifiable; and 2) in cases of fraud and fraudulent concealment."
The discovery rule applies to legal malpractice cases because "`it is unrealistic to expect a layman client to have sufficient legal acumen to perceive an injury at the time of the negligent act or omission of his attorney.'" Willis, 760 S.W.2d at 645 (quoting Ward, Legal Malpractice in Texas, 19 S.Tex. L.J. 587, 613 (1978)). Similarly, "it is most unlikely that a client would know that tax advice was faulty at the time he received it."
In deciding whether to apply the discovery rule to legal malpractice cases for the first time, the Texas Supreme Court concluded, "In sum, we believe that any burden placed upon an attorney by application of the discovery rule is less onerous than the injustice of denying relief to unknowing victims." Willis, 760 S.W.2d at 646. Berry argues that Dean, who was a CPA and is an attorney, is not an unknowing victim. Thus, Berry argues that the reason
However, whether an injury is inherently undiscoverable is a question decided on a categorical, rather than a fact-specific basis. Apex Towing Co. v. Tolin, 41 S.W.3d 118, 122 (Tex.2001); Clear Lake Ctr., L.P. v. Garden Ridge, L.P., 416 S.W.3d 527, 543 (Tex.App.-Houston [14th Dist.] 2013, no pet.); Dike v. Peltier Chevrolet, Inc., 343 S.W.3d 179, 187 (Tex.App.-Texarkana 2011, no pet.). The issue at this stage is not whether "a particular injury was actually discovered in any particular case, but rather whether that case is the type to which the discovery rule applies, based on whether the policy reasons behind the rule are served by applying the rule in that type of case." Apex Towing, 41 S.W.3d at 122.
Berry's argument regarding Dean's experience helps resolve the question of whether Berry negated the discovery rule, not whether the discovery rule applied to the Estate's legal malpractice claims. Because faulty or omitted tax advice is inherently undiscoverable to a person relying on another to provide sound tax advice, we find that the discovery rule applies to actionable claims of legal malpractice arising from the provision or omission of tax advice. See Murphy, 964 S.W.2d at 271.
Because the discovery rule applied to the Estate's claims, Berry was required to conclusively establish that "the nature of the injury [wa]s discovered or should have been discovered in the exercise of reasonable care and diligence" before May 1, 2010. Isaacs, 356 S.W.3d at 560 (citing Willis, 760 S.W.2d at 647). Berry argues that the discovery rule should not apply because (1) the evidence established that Dean knew of the December 20, 2008, deadline, (2) the evidence established that Dean knew the return was late, and (3) Dean, knew or should have discovered, as a former CPA and current attorney, that filing a late tax return could result in penalties and interest.
Dean and Kelly argue that the injury was not known and that the cause of action did not accrue until the IRS assessed a tax penalty. Dean and Kelly complain that, in order to accept Berry's argument, the trial court must have presumed that penalties and interest would flow from the missed deadline. They posit that such a presumption was inappropriate in this summary judgment case because it favored the movant. Dean and Kelly assert that "[i]t was impossible for the Estate to discover a legal injury more than two years before it sued because at that time no injury had occurred or would have appeared likely to the executors." In support of that position, they cite three cases, which we address below.
The first case cited by Dean and Kelly is Philips v. Giles, 620 S.W.2d 750, 751 (Tex. Civ.App.-Dallas 1981, no writ). In Philips, Wife's ex-husband, as part of a negotiated divorce settlement, executed a promissory note in her favor for $500,000.00 as compensation for her community property interest in a jointly-owned business. Id. at 750. Wife's attorney told her that there would be no tax consequences arising from a divorce settlement with her ex-husband, including the note payments. Id. Wife's accountant disagreed and encouraged her to file income tax returns which reported the monthly note payments from her ex-husband as income. Id. Relying on the accountant's advice, Wife filed the tax returns and sued the defendant for legal
Philips did not involve a limitations issue. There, the Dallas Court of Appeals ruled that the trial court correctly abated the case because the suit for malpractice was premature, no damages had been established, and it was possible that none would ever be established. Simply put, there was no certainty of any injury-causing conduct on the part of the attorney. Here, as further discussed below, the late-filing was injury-causing conduct because it immediately subjected the Estate to risk of economic harm in the form of penalties and interest.
The second case cited by Dean and Kelly is Atkins v. Crosland, 417 S.W.2d 150, 151 (Tex.1967), which was referenced in Philips. In Atkins, plaintiff filed suit against an accountant who had prepared the plaintiff's tax returns for several years. Id. at 151. The returns were prepared using the cash receipts and disbursements method of accounting rather than the accrual method. Id. This increased plaintiff's tax liability, depriving plaintiff of a considerable $12,297.32 in tax savings. Id. at 152. Realizing this, the accountant used the accrual method the following year. Id. However, he failed to obtain the IRS's consent to change the method of valuation. As a result, plaintiff was assessed a tax deficiency of $12,297.32 based on the cash receipt method of valuation. Id. Plaintiff sued, alleging, among other things, that the accountant failed to obtain the required permission to change the method of accounting and failed to inform plaintiff of the situation in time for plaintiff to pay off his accounts payable prior to the year's end in order to reduce his tax liability. Id. Plaintiff further claimed that the accountant fraudulently concealed his negligent conduct from plaintiff. Id. The lawsuit was filed more than two years after the alleged acts of negligence. Id.
In Atkins, the court held that the statute of limitations did not begin to run until the tax deficiency was assessed. Id. Atkins quoted the following test from "54 C.J.S. Limitations of Actions § 168, pp. 122-123," as it was then written:
Id. at 153. Atkins reasoned that the use of the cash method, as opposed to the accrual method "was not in itself the type of unlawful act which, upon its commission, would set the statute in motion. In short, in the absence of assessment, injury would not have inevitably resulted." Id.
Atkins was decided on a layperson's claim that wrongdoing was fraudulently concealed from him. Id. Atkins further pointed out that, in the absence of an assessment, there would be no injury at all. Id. In Atkins, the use of a different accounting method in a timely-filed tax return was not itself unlawful and did not subject the plaintiff to risk of injury until the accounting method was found to be unlawful. Here, the late-filing was in and of itself a wrongful act and was a fact known to Dean.
Actual knowledge of damages is not required to start the statute of limitations clock. The relevant inquiry is whether the plaintiff possessed enough facts to put him on notice that he should have conducted an investigation and, if so, whether he exercised diligence in doing so. See 54 C.J.S. Limitations of Actions §§ 87, 167, pp. 123-24, 214 (West 1987), § 222 (2013).
The third case cited by Dean and Kelly is Ponder v. Brice & Mankoff, 889 S.W.2d 637 (Tex.App.-Houston [14th Dist.] 1994, writ denied). Ponder rejected the notion that Atkins held that a cause of action does not accrue as a matter law until a tax deficiency is noted in all cases. Id. at 642. The plaintiff in Ponder alleged that he was given improper advice from a tax attorney suggesting that the IRS would allow certain partnership deductions for the partnership's investments. Id. at 643. Ponder found that the plaintiff's cause of action accrued on the date of the first notice of adjustment (based on the IRS's rejection of the partnership investment deduction), not from the date of the assessment of the adjustment, because that was the date the plaintiff first became aware that he might be subject to certain tax liabilities. Id. Ponder approvingly cited to Hoover v. Gregory, which wrote:
Hoover v. Gregory, 835 S.W.2d 668, 673 (Tex.App.-Dallas 1992, writ denied). Again, Ponder sheds light on the proper inquiry that should be conducted. However, Ponder is distinguishable from our case because here, unlike in Ponder, the late-filed return was injury-causing conduct, Dean knew that the Form 706 was late, and the claims of malpractice were not brought by a layperson.
"[A] cause of action for legal malpractice accrues when the nature of the injury is discovered or should have been discovered in the exercise of reasonable care and diligence." Isaacs, 356 S.W.3d at 560 (citing Willis, 760 S.W.2d at 647).
A cause of action accrues on a fact-specific basis when the client discovers a risk of harm to his or her economic interests. Brents v. Haynes & Boone, L.L.P., 53 S.W.3d 911, 915 (Tex.App.-Dallas 2001, pet. denied) (citing Ponder, 889 S.W.2d at 641-42). "The attorney's conduct must raise only a risk of harm to the client's legally protected interest for the tort to accrue; the harm need not be finally established or an inevitable consequence of the conduct." Id. at 914-15 (citing Zidell v. Bird, 692 S.W.2d 550, 557 (Tex.App.-Austin 1985, no writ)); see Hall v. Stephenson, 919 S.W.2d 454, 465 (Tex. App.-Fort Worth 1996, writ denied).
Dean and Kelly argue that their affidavits created a fact issue precluding summary judgment. However, their affidavits were silent as to whether they were aware that a late-filed return could subject the Estate to penalties and interest. Also, although Dean and Kelly said they were not aware of a deadline to file the Form 706 return, the summary judgment evidence establishes that Berry's office advised them by letter that the return "unless extended, [was] due on December 20, 2008."
Dean and Kelly next cite to Saunders' affidavit, in which he writes,
Saunders' affidavit is based on his speculation as to what Berry felt, which was presumably developed through review of the summary judgment evidence.
The discovery rule is "a very limited exception to statutes of limitations." Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex.1996). "The discovery rule tolls limitations only when discovery of an injury is impossible,
The inquiry into whether the plaintiff should have discovered the injury is objective and "not an inquiry into the plaintiff's subjective belief as to whether the injury could be remedied affordably." J.M.K. 6, Inc. v. Gregg & Gregg, P.C., 192 S.W.3d 189, 197 (Tex.App.-Houston [14th Dist.] 2006, no pet.).
Here, the summary judgment evidence shows that Dean (1) was made aware of the necessity to file the Form 706 since the value of the Estate exceeded the estate tax exemption, (2) was made aware that he would need to hire a CPA to prepare the return, (3) was made aware on May 8, 2008, of the December 20, 2008, deadline for filing the Form 706, (4) was warned on December 18, 2008, that the accountant needed "to get started on tax returns soon," and (5) was again told by Berry on April 24, 2009, that the Form 706 was past due.
Dean knew that the Form 706 was past due. The late filing was wrongful, injury-causing conduct.
We conclude that Berry has shown that the nature of the injury was discovered or should have been discovered in the exercise of reasonable care and diligence before May 1, 2010. Therefore, we find that Berry met his burden to negate the discovery rule on the unique facts and circumstances of this case. We also find that Dean and Kelly's summary judgment evidence
Dean and Kelly next argue, for the first time on appeal, that the Hughes tolling provision should apply on the facts of this case. However, the provision does not apply to the Estate's claim. In Isaacs v. Schleier, we wrote,
356 S.W.3d at 562-63. Here, as in Isaacs, because the alleged malpractice was not committed in the prosecution or defense of a claim, Hughes does not apply.
For these reasons, we conclude that the trial court's summary judgment in Berry's favor was proper.
We affirm the trial court's judgment.
