Amended April 22, 2015 Ahmad S. Vossoughi and C, N, & A, Inc. v. Joseph A. Polaschek and Michael J. Meloy ( 2015 )

IN THE SUPREME COURT OF IOWA
No. 13–1381
Filed February 13, 2015
Amended April 22, 2015
AHMAD S. VOSSOUGHI and C, N, & A, INC.,
Appellants,
vs.
JOSEPH A. POLASCHEK and MICHAEL J. MELOY,
Appellees.
Appeal from the Iowa District Court for Scott County, David H.
Sivright Jr., Judge.
Plaintiffs appeal from an adverse summary judgment ruling
dismissing legal malpractice claims against two attorneys. REVERSED
AND REMANDED.
Steven E. Ballard and Michael J. Harris of Leff Law Firm, L.L.P,
Iowa City, for appellant.
Robert V.P. Waterman Jr. and Joshua J. McIntyre of Lane &
Waterman, LLP, Davenport, for appellee Polaschek.
John T. Flynn of Brubaker, Flynn & Darland, P.C., Davenport, for
appellee Meloy.
2
HECHT, Justice.
Vossoughi and a company owned by him brought this legal
malpractice action against attorneys who prepared documents in
connection with the sale of real and personal property. Vossoughi
appeals from a district court ruling granting summary judgment to both
attorneys. Because we conclude the summary judgment should not have
been granted in favor of either attorney, we reverse and remand for
further proceedings.
I. Factual Background and Proceedings.
A reasonable fact finder viewing the evidence in the light most
favorable to Vossoughi and C, N, & A, Inc. could find the following facts
from the summary judgment record. Ahmad Vossoughi was the sole
owner of C, N, & A, Inc. The company owned and operated Cigarette
Oasis, LLC (Oasis). Oasis was located on real estate Vossoughi owned in
Davenport, Iowa. In September 2006, Vossoughi and C, N, & A, Inc.
entered into a set of agreements with Mark Polaschek (Mark), who
managed BVM Enterprises LLC (BVM) and PPM Properties, Inc. (PPM).
The contracting parties were represented by counsel; Vossoughi and
C, N, & A, Inc. were represented by Michael J. Meloy, and Mark was
represented by his brother Joseph Polaschek (Polaschek).
After five or six hours of negotiations, the parties executed three
separate agreements on September 15, 2006: (1) an “Asset and Business
Name Purchase Agreement,” setting out that BVM would pay C, N, & A,
Inc. the sum of $261,281.98 to acquire Oasis; (2) a “Noncompetition
Agreement,” requiring PPM to pay Vossoughi an additional $70,000; and
3
(3) a “Real Estate Contract,” setting out that PPM would pay Vossoughi
$40,000 for the real property. 1
An “Addendum to the Real Estate Contract” contained language
purporting to cross-collateralize the three agreements. Paragraph 3 of
the addendum provided that any default under the Noncompetition
Agreement or Asset and Business Name Purchase Agreement would also
constitute default under the Real Estate Contract. Paragraph 5 of the
addendum authorized PPM to prepay the balance due on the Real Estate
Contract without penalty, but provided that the payment obligations
under the other two agreements would remain secured by the real
property until fully paid. 2 Paragraph 6 of the addendum included the
following language addressing the consequences of prepaying the real
estate purchase price:
If Buyer elects to prepay under the terms of this real estate
purchase contract, Seller shall convey the real property to
Buyer subject to the full payment of said contract and
expressly subject in the warranty deed for said conveyance
stating that the Buyer is restricted and can sell said real
estate only upon the full payment and completion of the
terms of the Non-compete Agreement and the Asset Purchase
Agreement.
If the Buyer is unable to re-convey the real property in
the event of default by Buyer of either the Non-competition
Contract or the Asset Purchase Agreement, then the Buyer
and Seller agree that the value of damages would be difficult
if not impossible to calculate at this time and as such, the
Buyer shall be obligated to pay to Seller as liquidated
1The contract called for a $10,000 down payment. The $30,000 balance was to
be paid in monthly installments over the next twenty years.
2Paragraph 5 read, in part, as follows:
In the event that the Buyer sells, assigns or pays off this contract before
the due date, Buyer shall remain responsible to re-convey the real
property in the event there is any default on either the Non Competition
Contract or on the Asset and Business Name Purchase Agreement.
4
damages on the failure of the Buyer to re-convey the “market
value” on the real property with any improvements.
Vossoughi believed the payments due on all three of the agreements were
secured by a lien on the real property created by language in the
addendum. However, the agreements and addendum did not provide for
perfection of a security interest securing the sellers’ interests in the
personal property, nor did they provide for a mortgage against the real
estate securing the contractual right to receive payments under two of
the agreements in the event PPM exercised its right to prepay the
purchase price on the real estate contract.
The buyers took possession of Oasis and the real property, and
began making installment payments to Vossoughi. Six months later, in
March 2007, Mark contacted Meloy, stating he wanted to pay in full the
balance owed on the real estate contract. On March 28, 2007, Meloy
contacted Vossoughi and informed him of Mark’s offer to prepay the real
estate contract obligation. When told there would be a fee for Meloy’s
legal services in connection with the closing of the real estate
transaction, Vossoughi terminated the attorney–client relationship.
Meloy did no further work for Vossoughi or C, N, & A, Inc.
Vossoughi appeared the very next day at Polaschek’s office and
executed a warranty deed transferring title to the real estate to PPM.
Polaschek had prepared the deed, and he charged Vossoughi $500 for
his legal services. Vossoughi told Polaschek he was concerned the
warranty deed contained no reference to the cross-collateralizing
language of the addendum and no mention of the buyers’ remaining
payment obligations under the other two agreements. Polaschek assured
Vossoughi that after he signed the warranty deed, an additional page
incorporating the provisions of the addendum would be added to ensure
5
the remaining payment obligations would remain secured by the real
property. Vossoughi signed the warranty deed, and despite Polaschek’s
promises, the deed was later recorded without any additional language
and without a second page referencing the cross-collateralized
agreements.
In February 2008, the buyers stopped making payments on the
two other contract obligations. Vossoughi’s investigation revealed the
warranty deed he signed had been recorded on April 9, 2007, without the
additional page incorporating the provisions of the addendum. Worse
yet, Vossoughi discovered Mark had borrowed $184,000 from American
Bank & Trust Company and secured the loan with a mortgage on the
Oasis real estate.
Vossoughi and C, N, & A, Inc. filed a breach of contract action
against BVM, PPM, and Mark. The action produced no remedy for the
plaintiffs, however, because BVM had already been involuntarily
dissolved by the Illinois Secretary of State, and both PPM and Mark had
filed for bankruptcy under Chapter 7 of the Bankruptcy Code, 11 U.S.C.
§§ 701–84 (2006). American Bank & Trust foreclosed its mortgage.
Vossoughi and C, N, & A, Inc. filed a petition in the bankruptcy
court seeking a determination that the contract obligations of PPM and
Mark arising from the Asset and Business Name Purchase Agreement
and the Noncompetition Agreement were nondischargeable in
bankruptcy. The bankruptcy court denied the requested relief, however,
because it found no evidence the debtors had committed any malicious
or fraudulent act within the meaning of 11 U.S.C. § 523(a)(2) or (6).
Accordingly, the bankruptcy court ruled the debts arising from the two
agreements were dischargeable. See Vossoughi v. Polaschek (In re
Polaschek), No. 08–81311, 2012 WL 1569611, at *8 (Bankr. C.D. Ill. May
6
3, 2012). Vossoughi and C, N, & A, Inc. were left with $210,000 in
unsecured, nonpriority, fully dischargeable claims—and took nothing
from the bankruptcy.
Vossoughi and C, N, & A, Inc. filed a petition alleging legal
malpractice claims against both Meloy and Polaschek on June 16, 2010.
The petition asserted the defendant attorneys were negligent in
connection with the preparation of the warranty deed and conveyance in
March 2007. After Meloy filed an affidavit disclaiming any involvement
in the March 2007 transaction, Vossoughi dismissed the action against
Meloy without prejudice on April 18, 2011.
Vossoughi and C, N, & A, Inc. sued Meloy a second time, however,
on June 26, 2012. In an amended petition filed in this action, the
plaintiffs alleged Meloy negligently performed legal services in
negotiating, drafting, and providing legal advice in connection with the
three agreements executed in September 2006. 3 Each of the defendants
filed a motion for summary judgment.
II. Summary Judgment on Claims Against Meloy.
Meloy’s motion for summary judgment raised the statute of
limitations as an affirmative defense. The district court found this
defense meritorious and granted summary judgment. The district court
noted the limitations period of five years for legal malpractice actions
does not begin to run until the plaintiff discovers the injury. See Iowa
Code § 614.1(4) (2005); Venard v. Winter, 524 N.W.2d 163, 166 (Iowa
1994); Franzen v. Deere & Co., 377 N.W.2d 660, 662 (Iowa 1985).
However, the district court held the plaintiffs were deemed to have
3Because Vossoughi filed the second petition against Meloy more than six
months after dismissing the first petition, the present claim is not considered a
continuation of the same action under Iowa Code section 614.10 (2005).
7
discovered the injury on March 29, 2007, when Vossoughi signed the
warranty deed. The discovery occurred on that date, the district court
concluded, because Vossoughi’s signature on the deed imputes to him
knowledge of the deed’s contents. See Huber v. Hovey, 501 N.W.2d 53,
55 (Iowa 1993) (“[F]ailure to read a contract before signing it will not
invalidate the contract. Absent fraud or mistake, ignorance of a written
contract’s contents will not negate its effect.” (Citation omitted.)).
The district court further held in the alternative that the plaintiffs
discovered the injury when the warranty deed was recorded on April 9,
2007. See Iowa Code § 558.55 (“[T]he filing and indexing [of deeds in the
recorder’s office] shall constitute constructive notice to all persons of the
rights of the grantees conferred by the instruments.”). Thus, the district
court concluded the limitations period for filing the instant claim against
Meloy expired on either March 29, 2012, or April 9, 2012, and granted
summary judgment to Meloy because the plaintiffs’ petition asserting the
instant claim against him was not filed until June 26, 2012.
The plaintiffs filed a motion to amend the court’s ruling,
contending there was no injury as a result of Meloy’s actions in drafting
the original agreement until Mark and PPM stopped making payments in
February 2008. The motion asserted that although Meloy’s negligence
may have left the contract payment obligations unsecured as early as
September 2006, the failure to secure the sellers’ interests represented
only a prospect of future harm at that point, and a mere prospect of
harm could not have given rise to an actionable claim for legal
malpractice. The district court considered this argument, but rejected it:
[T]he Iowa Supreme Court . . . has adopted the rule that the
date of injury “coincides with the last possible date when the
attorney’s negligence became irreversible.” Neylan v. Moser,
400 N.W.2d 538, 542 (Iowa 1987). In Neylan, the Court was
8
distinguishing between the date of an adverse trial court
verdict and the date of its final appeal, deciding the statute
of limitations was tolled until the later date. Id. Applying
this rule here, any negligence by Meloy became “irreversible”
when the deed was signed and recorded. At that point,
plaintiffs became insecure and had no remedy in the event
the buyers defaulted. Thus, based on the holding in Neylan,
the statute of limitations commenced to run in April 2007.
III. Summary Judgment on Claims Against Polaschek.
Polaschek’s motion for summary judgment asserted his acts and
omissions could not have been the cause of any damages. Even if it is
assumed he breached his duty by recording the warranty deed without
incorporating the restrictive terms of the addendum, Polaschek posited
the only consequence was the unavailability of the addendum’s
liquidated damages remedy. The bankruptcy discharges of the plaintiffs’
contract claims were, Polaschek contended, independently sufficient
causes of their inability to collect damages.
The district court granted Polaschek’s motion, reasoning that a
judgment in favor of Vossoughi and C, N, & A, Inc. would not have been
collectible absent Polaschek’s alleged negligence. Because it determined
any judgment entered against Mark or PPM would have been
uncollectible as a consequence of their bankruptcy discharges, the
district court concluded any breach of duty by Polaschek could not have
been a “but for” cause of the claimed damages.
Vossoughi and C, N, & A, Inc. appealed, and we retained the
appeal.
IV. Standard of Review.
We review the district court’s summary judgment ruling to correct
errors at law. Boelman v. Grinnell Mut. Reins. Co., 826 N.W.2d 494, 500
(Iowa 2013); SDG Macerich Props., L.P. v. Stanek Inc., 648 N.W.2d 581,
584 (Iowa 2002). Summary judgment is appropriate when the moving
9
party demonstrates that no genuine issue of material fact exists and that
the movant is entitled to judgment as a matter of law. Boelman, 826
N.W.2d at 501; Murtha v. Cahalan, 745 N.W.2d 711, 713 (Iowa 2008).
We afford the nonmoving party “every legitimate inference that can be
reasonably deduced from the evidence”—and if the review of the evidence
pertaining to a particular issue shows “reasonable minds can differ on
how the issue should be resolved,” an order entering summary judgment
on that issue must be vacated or reversed. Hills Bank & Trust Co. v.
Converse, 772 N.W.2d 764, 771 (Iowa 2009).
V. Analysis.
A. Claims Against Meloy. We first turn to the question of
whether the district court correctly ruled the claims of Vossoughi and
C, N, & A, Inc. against Meloy are time-barred. To resolve this issue, we
must determine when the injuries claimed by Vossoughi and C, N, & A,
Inc. gave rise to a cause of action. If the cause of action accrued more
than five years before the plaintiffs filed their amended petition against
Meloy on June 26, 2012, we must then evaluate whether the discovery
rule extended the limitations period.
1. Actual injury. Legal malpractice claims sound in negligence.
Claims based on negligence do not accrue, and the statute of limitations
does not begin to run, until the injured plaintiff “has actual or imputed
knowledge of all the elements of the action.” Franzen, 377 N.W.2d at
662; accord Buechel v. Five Star Quality Care, Inc., 745 N.W.2d 732, 736
(Iowa 2008); Stanley L. & Carolyn M. Watkins Trust v. Lacosta, 92 P.3d
620, 628 (Mont. 2004) (“[T]he statute of limitations in a legal malpractice
action does not begin to run until . . . all elements of the legal
malpractice claim, including damages, have occurred.”). To establish a
prima facie claim of legal malpractice, the plaintiff must produce
10
evidence showing the attorney’s breach of duty caused “actual injury,
loss, or damage.” Ruden v. Jenk, 543 N.W.2d 605, 610 (Iowa 1996).
Until the attorney’s act or omission that breached the applicable duty
“produces injury to claimant’s interest by way of loss or damage, no
cause of action accrues.” Wolfswinkel v. Gesink, 180 N.W.2d 452, 456
(Iowa 1970). The injury must be concrete; “an essential element to a
legal malpractice cause of action is proof of actual loss rather than a
breach of a professional duty causing . . . speculative harm, or the threat
of future harm.” 7A C.J.S. Attorney & Client § 303, at 337 (2004). No
matter what the plaintiffs knew or when they knew it, the statute of
limitations could not have begun to run any earlier than the date an
actual injury occurred.
The district court relied on Neylan in concluding the date of the
plaintiffs’ injuries was either March 29, 2007 (the date the deed was
executed), or April 9, 2007 (the date the deed was recorded), and in
concluding this action against Meloy was time-barred. The plaintiffs in
Neylan brought a legal malpractice action alleging their attorneys had
“negligently failed to present adequate evidence to support [the plaintiffs’]
claim of damages” at trial. Neylan, 400 N.W.2d at 542. In the
malpractice action, the plaintiffs sued their attorneys for the damages
they believed should have been recoverable. Id. The defendants asserted
the district court’s decision entered against their former clients prior to
appeal “should mark the time when a legal malpractice cause of action
accrue[d], because the claimant [was] then formally advised of an adverse
ruling and resulting damage.” Id. However, we adopted a different view
and held the legal malpractice claim accrued when this court affirmed
the trial court’s decision on appeal. Id. At that moment, when all
avenues to recovery were exhausted and the underlying claims were
11
extinguished, the injury caused by the alleged breach of duty became
actual rather than potential. See id.
Our decision in Neylan was undergirded by the principle that each
client “has a ‘right to rely upon the superior skill and knowledge of his
attorney’ ” until that reliance results in actual injury. Id. (quoting
Millwright v. Romer, 322 N.W.2d 30, 34 (Iowa 1982)). We also reasoned a
litigant who believes she may have been injured through her attorney’s
negligence should not be forced to choose between (a) sabotaging her
relationship with her attorney during ongoing representation by filing a
legal malpractice claim, and (b) waiving her opportunity to bring the
claim before the statute of limitations extinguishes it. Id.; accord Dudden
v. Goodman, 543 N.W.2d 624, 629 (Iowa Ct. App. 1995) (“[I]t would be
palpably unjust and quite unreasonable to require a client of a lawyer to
obtain a second opinion on every professional decision the lawyer
makes.”); see also Amfac Distrib. Corp. v. Miller, 673 P.2d 795, 799 (Ariz.
Ct. App.) (“Under our rule, a client will not have to challenge and
question every decision made by his attorney or routinely double check
his attorney’s conduct . . . . Thus, the client will have peace of mind to
allow the legal process to work fully and finally in hopes that his position
will ultimately be vindicated and will not be forced to disrupt his
relationship with his lawyer to preserve what he thinks may be a valid
malpractice claim.”), approved as supplemented, 673 P.2d 792 (Ariz.
1983) (en banc).
We conclude Neylan does not justify summary judgment in Meloy’s
favor under the circumstances presented here. The core teaching of
Neylan is that speculative injury does not give rise to a legal malpractice
claim. See Neylan, 400 N.W.2d at 542. An injury arising from legal
malpractice is actionable when it is actual but not when it is merely
12
potential. See, e.g., Huber v. Watson, 568 N.W.2d 787, 790 (Iowa 1997)
(requiring as an element of legal malpractice that “the [client] sustained
actual injury, loss, or damage” (emphasis added)); Ruden, 543 N.W.2d at
610 (same); Vande Kop v. McGill, 528 N.W.2d 609, 611 (Iowa 1995)
(same); Schmitz v. Crotty, 528 N.W.2d 112, 115 (Iowa 1995) (same);
Dessel v. Dessel, 431 N.W.2d 359, 361 (Iowa 1988) (same); Burke v.
Roberson, 417 N.W.2d 209, 211 (Iowa 1987) (same). To be sure, Neylan
did not establish that a legal malpractice claim accrues when a client has
not yet suffered actual injury. See Neylan, 400 N.W.2d at 542.
Many other jurisdictions follow this rule. See, e.g., Greater Area
Inc. v. Bookman, 657 P.2d 828, 829 n.3 (Alaska 1982) (“[I]f the client
discovers his attorney’s negligence before he suffers consequential
damages, the statute of limitations will not begin to run until the client
suffers actual damages.”); Amfac Distrib. Corp., 673 P.2d at 798–99
(adhering to “the time-honored principles of law which require that the
plaintiff be damaged or injured in some way as a predicate to bringing an
action for negligence”); Jordache Enters., Inc. v. Brobeck, Phleger &
Harrison, 958 P.2d 1062, 1070 (Cal. 1998) (“The mere breach of a
professional duty, causing only . . . speculative harm, or the threat of
future harm—not yet realized—does not suffice to create a cause of
action for negligence.”); Romano v. Morrisroe, 759 N.E.2d 611, 614 (Ill.
App. Ct. 2001) (“No cause of action accrues without actual damages, and
damages are only speculative if their existence itself is uncertain.”);
Pancake House, Inc. v. Redmond, 716 P.2d 575, 579 (Kan. 1986)
(recognizing one theory of accrual is that “the client does not accrue a
cause of action for malpractice until he suffers appreciable harm or
actual damage as a consequence of his lawyer’s conduct”); Mass. Elec.
Co. v. Fletcher, Tilton & Whipple, P.C., 475 N.E.2d 390, 391 (Mass. 1985)
13
(“[T]he electric companies knew immediately of the alleged negligence of
the defendant attorneys, but it was not then clear that the alleged
negligence had caused or would cause the companies any appreciable
harm.”); Watkins Trust, 92 P.3d at 630 (“[T]he mere threat of future harm
does not constitute actual damages.”); Semenza v. Nev. Med. Liab. Ins.
Co., 765 P.2d 184, 186 (Nev. 1988) (“[W]here damage has not been
sustained or where it is too early to know whether damage has been
sustained, a legal malpractice action is premature . . . . [I]t follows that a
legal malpractice action does not accrue until the plaintiff’s damages are
certain and not contingent.”); Grunwald v. Bronkesh, 621 A.2d 459, 464–
65 (N.J. 1993) (“[T]he statute of limitations begins to run only when the
client suffers actual damage . . . . Actual damages are those that are real
and substantial as opposed to speculative.”); Jaramillo v. Hood, 601 P.2d
66, 67 (N.M. 1979) (“[T]he cause of action accrues when actual loss or
damage results . . . .”); Kituskie v. Corbman, 714 A.2d 1027, 1030 (Pa.
1998) (“An essential element to [legal malpractice] is proof of actual loss
rather than a breach of a professional duty causing only . . . speculative
harm or the threat of future harm.”); Ameraccount Club, Inc. v. Hill, 617
S.W.2d 876, 878 (Tenn. 1981) (“The Court of Appeals erred in holding
that the plaintiff's cause of action accrued and the statute of limitations
began to run when the plaintiff became aware of the negligence of the
defendant attorneys; still more was required, viz., damage or injury to the
plaintiff resulting from that negligence.”); Hennekens v. Hoerl, 465
N.W.2d 812, 816 (Wis. 1991) (“A tort claim is not ‘capable of present
enforcement’ until the plaintiff has suffered actual damage. . . . Actual
damage is not the mere possibility of future harm.”).
We also find support for the principle that a legal malpractice claim
does not arise until actual injury results in the Restatement (Third) of the
14
Law Governing Lawyers, which focuses on pragmatic policy concerns like
those we found persuasive in Neylan:
[T]he statute of limitations does not start to run until the
lawyer’s alleged malpractice has inflicted significant injury.
For example, if a lawyer negligently drafts a contract so as to
render it arguably unenforceable, the statute of limitations
does not start to run until the other contracting party
declines to perform or the client suffers comparable injury.
Until then, it is unclear whether the lawyer’s malpractice will
cause harm. Moreover, to require the client to file suit before
then might injure both client and lawyer by attracting the
attention of the other contracting party to the problem.
Restatement (Third) of the Law Governing Lawyers § 54 cmt. g, at 406
(2000).
The statute of limitations cannot require legal malpractice claims
to be brought while “the record is uncertain and speculative whether a
party has sustained damages.” Crookham v. Riley, 584 N.W.2d 258, 266
(Iowa 1998). Put another way, the statute of limitations cannot sensibly
be applied in a way that forces parties to file suit before an actual injury
has been sustained on penalty of losing the opportunity to file a claim at
all. See Cannon v. Sears, Roebuck & Co., 374 N.E.2d 582, 584 (Mass.
1978). Accordingly, we reaffirm the statute of limitations does not begin
to run on a legal malpractice claim until the cause of action accrues.
The cause of action accrues when the client sustains an actual,
nonspeculative injury and has actual or imputed knowledge 4 of the other
elements of the claim. Franzen, 377 N.W.2d at 662 (“[T]he statute of
limitations does not begin to run until the injured person has actual or
4Knowledge could be imputed through the doctrine of inquiry notice. We have
said “[t]he [limitations] period begins at the time the [plaintiff] is on inquiry notice.”
Franzen, 377 N.W.2d at 662. “A party is placed on inquiry notice when a person gains
sufficient knowledge of facts that would put that person on notice of the existence of a
problem or potential problem.” Buechel, 745 N.W.2d at 736.
15
imputed knowledge of all the elements of the action.” (Emphasis added.));
see Watkins Trust, 92 P.3d at 628.
2. Whether insecurity constitutes an actual injury. The question
remains, however, whether the plaintiffs’ insecurity arising from the
absence of a mortgage lien against the real estate and a perfected
security interest in the personal property constituted an actual injury.
We hold insecurity alone does not constitute an actual injury. Until
Mark and PPM stopped making payments in February 2008, it was
entirely possible the plaintiffs would have continued collecting contract
payments without disruption. Accordingly, it was entirely possible the
decision to structure the transaction without the protection of a
mortgage on the real estate or a perfected security interest in the
personal property would cause the sellers no actual injury. See 16
Gregory C. Sisk & Mark S. Cady, Iowa Practice Series: Lawyer and
Judicial Ethics § 13:2(b)(2), at 1088 (2014) (“[U]ntil the final bell is rung
and the match is truly over, the possibility persists that an
unsatisfactory outcome could be avoided . . . because an opponent fails
to take advantage of the error.”); see also David B. Lilly Co. v. Fisher, 18
F.3d 1112, 1117–18 (3d Cir. 1994) (determining when an attorney
negligently structured a business acquisition transaction by failing to
preserve Lilly’s “small business eligibility,” a legal malpractice claim did
not accrue until several years later when a competitor challenged Lilly’s
small business status); Fritz v. Ehrmann, 39 Cal. Rptr. 3d 670, 676 (Ct.
App. 2006) (finding a promissory note with negligently drafted
prepayment and interest provisions created only speculative injury
because the promisors “might never have had the funds or the
inclination to prepay principal, and they might have paid . . . without
regard to any ambiguity” in the document). In other words, until the
16
payments stopped, the plaintiffs suffered only the prospect of future
harm. See Rayne State Bank & Trust Co. v. Nat’l Union Fire Ins. Co., 483
So. 2d 987, 995 (La. 1986) (“Damage was not sustained by the bank by
virtue of the mere existence of defects in the mortgages. At this point,
the possibility of damage to the bank was merely speculative, uncertain
and contingent on the possibility of an attack on the validity of the
mortgages by a third party, or on the possibility that the debtors would
declare bankruptcy. In the event that neither of these contingencies
occurred, and the debtors continued payment of their indebtedness, no
harm at all would have resulted to the bank.”); see also Dearborn Animal
Clinic, P.A. v. Wilson, 806 P.2d 997, 1003 (Kan. 1991) (“[T]he alleged
negligent act of Wilson occurred at the time he prepared the . . .
agreement, and arguably the plaintiffs suffered injury at that time when
they did not get the agreement that Dearborn hired Wilson to prepare.
However, no actionable injury had occurred because [a third party] might
have elected to exercise his option in which case the plaintiffs would have
suffered no injury even though Wilson was negligent in preparing the
agreement.” (Emphasis added.)); cf. Callahan v. Gibson, Dunn & Crutcher
LLP, 125 Cal. Rptr. 3d 120, 133–34 (Ct. App. 2011) (finding no actual
injury arose from an executed partnership agreement until its negligently
drafted succession provisions became operative).
An Idaho case provides an apt illustration. In Parsons Packing, Inc.
v. Masingill, 95 P.3d 631, 632–33 (Idaho 2004), the plaintiff alleged its
attorney had negligently failed to draft an effective security agreement
and failed to file a financing statement to secure its interest in debtor
Pro-Ag’s industrial onion bins. The Idaho Supreme Court determined the
abstract and theoretical injury Parsons suffered from being placed in a
weaker position by the attorney’s failure to secure its interest in the
17
collateral was not the injury that truly gave rise to the legal malpractice
claim, and thus was not the injury that controlled the applicable statute
of limitations. See id. at 634. Rather, the requisite injury—which, under
Idaho law, is “some damage”—only occurred when Pro-Ag defaulted and
recovery became impossible:
Parsons entered into the Agreement as part of a normal lease
and sale transaction and had Pro–Ag not defaulted, each
party would have received the intended benefit of the
bargain. The onion bins were exchanged for a promise on
the part of Pro–Ag to make the agreed payments, which they
did until 1998. Although it is true that steps could have
been taken to secure Parsons’ interest in the bins in the
event of Pro–Ag’s insolvency, bankruptcy was not
contemplated and would have been mere speculation in
1992 when the Agreement was executed. Although they
were subjected to a greater risk, the Parsons were not
damaged by the lack of security in the bins until Pro–Ag’s
bankruptcy. . . . For application of the statute of limitation
some damage did not occur in 1992. Some damage occurred
the date of default, April 14, 1998.
Id.
A Kentucky Supreme Court decision provides another relevant
illustration of the importance of actual injury in our analysis:
In April and again in October of 1990, appellee
Wheatley conducted a title examination relating to certain
real property upon which appellant proposed to make a first
mortgage loan to its customers, the Pearmans. His opinion
failed to disclose a recorded mortgage. Within a few months
after the loan was made, the Pearmans defaulted and
appellant commenced preparations to bring an action to
enforce its mortgage lien. The prior mortgage lien was then
discovered and appellant realized that its loan might be in
jeopardy.
....
In the present case, the time allowed [for the filing of
the legal malpractice action] began to run as of the date of
the foreclosure sale. Prior to that date, Appellants had only
a fear that they would suffer a loss on the property. Their
fear was not realized as damages until the sale of the
property in June of 1992. At that time, what was merely
18
probable became fact, and thus commenced the running of
the statute.
Meade Cnty. Bank v. Wheatley, 910 S.W.2d 233, 234–35 (Ky. 1995).
Here, even after the deed from Vossoughi to PPM was recorded, the
plaintiffs’ injuries were merely speculative because Mark and PPM
continued to make payments, and may have continued to do so until
their obligations under the Noncompetition Agreement and Asset and
Business Name Purchase Agreement were satisfied. The plaintiffs’
injuries became actual and nonspeculative no earlier than February
2008, when Mark and PPM stopped making payments. 5 “At that time,
what was merely probable became fact . . . .” Id.; see also Pioneer Nat’l
Title Ins. Co. v. Sabo, 432 F. Supp. 76, 76–77, 79, 81–82 (D. Del. 1977)
(finding an insurance company whose hired attorney negligently drafted
a title insurance policy to expand the insurance company’s liability
suffered injury not when the policy was initially issued, but later, when
the overinclusive coverage was actually implicated); Jeansonne v. Att’y’s
Liab. Assurance Soc’y, 891 So. 2d 721, 728 (La. Ct. App. 2004)
(“Mr. Jeansonne did not sustain damages by the mere existence of the
alleged defects in the Promissory Note and Stock Purchase Agreement
. . . . The possibility of damage to Mr. Jeansonne was merely speculative,
uncertain and contingent on the clause Mr. Jeansonne believed was
incorporated into the promissory note and stock purchase agreement. In
5Moreover, because Vossoughi could potentially have recovered the balance of
the payment obligations on the remaining two agreements through his action against
Mark and PPM for breach of contract, the actual injury might not have arisen until
Mark and PPM filed for bankruptcy on May 15, 2008. But further analysis on this
temporal question is unnecessary; whether the actual injury occurred in February 2008
when the payments stopped, in May 2008 when Mark and PPM filed for bankruptcy, or
even at some later time—perhaps when the bankruptcy court discharged Vossoughi’s
contract claims—the amended petition against Meloy on June 26, 2012 was
indisputably timely.
19
the event that this contingency did not occur, no harm at all would have
resulted . . . .”). 6
3. The discovery rule. The discovery rule can extend the applicable
deadline for filing legal malpractice actions. It is “an ameliorative device
favoring the right to bring suit” in situations where laypeople rely on
professionals and later discover misplaced reliance caused injury. Poole
v. Lowe, 615 A.2d 589, 592 (D.C. 1992). “The rule is based on the theory
that a statute of limitations should not bar the remedy of a person who
has been excusably unaware of the existence of the cause of action.”
Franzen, 377 N.W.2d at 662.
6We acknowledge a few courts have decided insecurity alone constitutes an
actual injury for claim accrual purposes. See Ladner v. Inge, 603 So. 2d 1012, 1015
(Ala. 1992) (concluding the plaintiff suffered an actual injury “when she accepted . . .
unsecured promissory notes” in exchange for real estate); Vision Mortg. Corp. v. Patricia
J. Chiapperini, Inc., 722 A.2d 527, 530 (N.J. 1999) (per curiam) (“[T]he cause of action
should accrue when the mortgagee knows or has reason to know that its collateral has
been impaired or endangered by the negligen[ce] . . . .”). However, we do not find
Ladner persuasive, and we choose instead to follow the numerous authorities we have
cited above holding negligently-drafted documents must cause an actual injury more
tangible than insecurity before a legal malpractice claim accrues.
Further, our decision today is consistent with Vision Mortgage. The issue
decided there was when the complete cause of action accrued, not merely when the
element of actual injury occurred. See Vision Mortg. Corp., 722 A.2d at 529–30. The
elements of any negligence claim are (1) existence of a duty, (2) breach of that duty, (3)
causation, and (4) damages. Ruden, 543 N.W.2d at 610; see also, e.g., Raas v. State,
729 N.W.2d 444, 447 (Iowa 2007); Yates v. Iowa W. Racing Ass’n, 721 N.W.2d 762, 774
(Iowa 2006); Trobaugh v. Sondag, 668 N.W.2d 577, 580 n.1 (Iowa 2003). In Vision
Mortgage, the court concluded a lender’s negligence claim accrued when a second
appraisal revealed the possibility that a previous appraisal was negligently performed by
the defendant. Vision Mortg. Corp., 722 A.2d at 530. It is crucial to note, however, that
the second appraisal was obtained long after the borrowers defaulted and actual injury
was suffered by the plaintiff. See id. at 528, 530 (noting the borrowers defaulted in
1989, yet the claim did not accrue until 1991). In other words, the lender suffered
actual injury (element 4) when the borrowers defaulted, but did not discover that injury
was caused by negligence (elements 1 and 2) until much later. Thus, Vision Mortgage
stands for the proposition that a negligence claim accrues when all the elements of the
negligence claim are provable. Id. at 530. We follow the same rule here.
20
However, the discovery rule only lengthens the time to file. See
Millwright, 322 N.W.2d at 33. Because the plaintiffs did not suffer a
concrete injury before Mark and PPM stopped making payments in
February 2008, the amended petition filed in June 2012 by Vossoughi
and C, N, & A, Inc. asserting claims against Meloy was plainly not time-
barred. Therefore, the timeliness of the plaintiffs’ action is clearly
established, and the discovery rule is inapplicable in this case.
4. Disposition of claims against Meloy. Until at least February
2008, Vossoughi and C, N, & A, Inc. had suffered only the prospect of
potential future harm. When they actually suffered damage, their claims
accrued and only then did the limitations period begin to run. Because
they filed their amended petition against Meloy in June 2012, we
conclude their claims are not time-barred. The district court erred in
granting summary judgment to Meloy.
B. Claims Against Polaschek. Turning to the second issue
before us, we are asked to determine whether the district court correctly
ruled Polaschek’s failure to include in the deed the substance of the
addendum and record the deed with those additions was, as a matter of
law, not a factual cause of the plaintiffs’ damages. To satisfy the “proof
of causation” requirement in legal malpractice cases, plaintiffs must
often make a “showing of the money or rights that the plaintiff would
have collected in the absence of the lawyer’s negligence, which we [have]
referred to as proof of ‘collect[a]bility.’ ” Woods v. Schmitt, 439 N.W.2d
855, 864 (Iowa 1989) (quoting Burke, 417 N.W.2d at 212). The district
court granted Polaschek’s motion for summary judgment based on the
conclusion that Mark and PPM’s bankruptcy would have prevented the
plaintiffs from recovering anything from the buyers’ default even absent
any alleged legal malpractice. Put another way, the district court
21
concluded the plaintiffs cannot show Polaschek’s acts or omissions
caused any damage and therefore cannot state a claim for legal
malpractice.
In resolving this issue, we consider whether a reasonable fact
finder could find on this record that if Polaschek had incorporated the
substance of the addendum with the deed as he promised (and recorded
it), American Bank & Trust might not have loaned money to Mark and
taken a mortgage on the real estate. We further consider whether the
fact finder could find that if the real estate had not been mortgaged to
American Bank & Trust as a consequence of the recording, the contract
forfeiture remedy could have been available to prevent or mitigate the
plaintiffs’ losses.
Collectability need not be shown if a plaintiff alleges legal
malpractice directly caused actual loss; but collectability is a critical
element of any legal malpractice claim alleging legal malpractice
prevented the plaintiff’s recovery. This distinction is illustrated best by
Pickens, Barnes & Abernathy v. Heasley, 328 N.W.2d 524, 525 (Iowa
1983), in which we addressed an appeal from a jury verdict awarding
damages to Heasley for legal malpractice. Heasley claimed damages
arising from the defendant lawyers’ legal malpractice during a prior trial.
Id. at 525. In particular, Heasley alleged her former lawyers negligently
prosecuted her underlying claim and caused her to fail to recover, and
negligently defended against a counterclaim and caused her to pay
damages on it. See id. The district court refused in the malpractice
action to instruct the jury as to any collectability requirement, and
Heasley “did not introduce substantial evidence from which a jury could
reasonably find that a judgment [in her favor in the underlying action]
would [have] be[en] collectible in full or in an ascertainable part.” Id. at
22
526. We noted the district court’s failure to instruct the jury on
collectability did not invalidate the jury verdict or the damages award on
the counterclaim because actual loss from negligent defense against the
counterclaim had been shown in the amount that Heasley had paid in
damages. Id. at 526–27. But we reversed and granted the defendants’
motion for judgment notwithstanding the verdict as it pertained to lost
recovery stemming from negligent handling of Heasley’s underlying claim
because “when the loss arises from negligently prosecuting a prior case
the client has the burden of proving not only the amount of the judgment
he would have obtained but for the negligence, but also what he would
have collected.” Id. at 525–27.
Accordingly, under the rule stated in Pickens, Vossoughi and C, N,
& A, Inc. have a burden at trial in this case to prove by a preponderance
of the evidence that the negligence of Meloy, Polaschek, or both caused
the plaintiffs’ inability to recover contract damages from Mark, PPM, or
both. In other words, the plaintiffs in this case must produce evidence
“affording a reasonable basis for ascertaining the loss.” Id. at 526. But
to withstand the defendants’ motions for summary judgment, the
plaintiffs need only engender a genuine dispute of material fact on the
collectability issue.
“[I]t is a rare case when an issue of collect[a]bility in a malpractice
case is so clear that it can be decided as a matter of law.” Burke, 417
N.W.2d at 213; see also Crookham, 584 N.W.2d at 265 (“It is well
established the questions of negligence . . . and proximate cause are
generally for the jury and only in exceptional cases can they be decided
as a matter of law.”). We conclude the parties’ conflicting expert
testimony bearing upon collectability engendered a genuine dispute of
material fact on this issue. Vossoughi’s resistance to Polaschek’s motion
23
for summary judgment relied in part on deposition testimony from expert
witness Elaine Gray:
Q: . . . [I]ncluding the requested language from the
contracts wouldn’t have been sufficient to create a lien on
the Oasis property, correct? A: Correct, but it may also
have deterred any other lien from being perfected on the
Oasis property.
Q: And what do you mean by that? A: If I were
examining an abstract for a bank who wished to take a first
priority security interest in property and included in a
warranty deed was language restricting the owner’s ability to
sell, I don’t believe that if I set that information out, the bank
would have believed themselves to be secure in the first
priority and would therefore not likely have granted a
mortgage against the property, at least without further
showing as to what was required to negate the ability or the
restriction on sale.
Polaschek supported his motion for summary judgment in part
with testimony of his own expert witness, Stephen T. Hunter. Hunter
opined Polaschek’s failure to record the addendum caused no injury
because even if it had been recorded, the addendum would not have
prevented Mark from mortgaging the property.
After reading Hunter’s opinion on causation, Gray responded that
no matter the legal effect, the practical consequences of recording the
addendum or its substance with the deed may have been different.
Specifically, Gray opined recording would have created a practical
impediment to a bank considering a loan based on the property as
collateral:
Q: . . . [T]he final sentence [of Hunter’s report states],
“The mortgage of the real estate by the buyer is not restricted
by such omitted language by its terms as affirmed in the
opinion.” A: From a legal standpoint, I think that’s true; but
from a practical standpoint, I think a mortgage is restricted.
Q: And what do you mean by that? A: Again, my
involvement with banks is that they are very conservative
24
about lending money against collateral in which they may
not have a clearly defined first priority security interest; and,
in my opinion, had Mr. Polaschek or one of his companies
obtained that real estate with that language in the deed,
which would in turn have been included in the abstract, the
proper opinion to a bank would not enable an attorney to
pass on title . . . if what the bank wanted to do was obtain a
clearly defined first priority security interest.
We conclude Gray’s deposition testimony engenders a genuine dispute of
material fact on the issue of factual causation—collectability.
Polaschek contends the addendum did not create any legal limit on
PPM’s right to mortgage the Oasis property, and that the plaintiffs cannot
prove no mortgage lender would have acquired a lien on the Oasis
property and foreclosed on it even if American Bank & Trust had not.
We conclude this contention misconstrues the plaintiffs’ burden at the
summary judgment stage. To defeat Polaschek’s motion for summary
judgment, the plaintiffs need not prove as a matter of law that recording
the substance of the addendum would have rendered title to the real
estate unmerchantable, as Polaschek suggests. Rather, to prevail at the
summary judgment stage, Polaschek must carry the burden of proving
no genuine dispute of material fact on the collectability element is
engendered from the evidence in the record. This he has failed to
accomplish. 7
The experts’ competing visions of the potential practical
consequences of incorporating and recording the language from the
addendum in the warranty deed requires a trial of the factual causation
issue. Therefore, we reverse the district court’s order entering summary
judgment for Polaschek.
7Polaschek may be able to persuade a fact finder at trial that a bold mortgage
lender might not have been deterred from making a loan to Mark and PPM even if the
substance of the addendum had been recorded with the deed. However, this is a fact
question that cannot be resolved on this record at the summary judgment stage.
25
VI. Conclusion.
Vossoughi and C, N, & A, Inc. did not suffer actual damage until at
least February 2008 when the buyers defaulted on their contract
payments. Accordingly, summary judgment in favor of Meloy should not
have been granted. The district court also erred in granting summary
judgment to Polaschek because a fact question remains for trial on the
question whether the substance of the addendum, if recorded, may have
deterred a risk-averse lender from extending credit to Mark and PPM and
taking a mortgage on the subject real estate. Accordingly, we reverse the
district court’s summary judgment order and remand for further
proceedings.
REVERSED AND REMANDED.
All justices concur except Waterman, J., who takes no part.