In Hillbroom v. PricewaterhouseCoopers LLP, No. 10-CV-92 (D.C. April 7, 2011), the D.C. Court of Appeals reversed the dismissal of a lawsuit against a tax attorney and an accounting firm for professional negligence, breach of contract and breach of fiduciary duty. The alleged negligence was the failure to timely file a formal claim for refunds for federal estate taxes paid on an estate worth approximately $353 million. The trial court granted the defendant's motion to dismiss under Rule 12(b)(6) based on statute of limitations grounds. The D.C. Court of Appeals reversed.
The defendants moved to dismiss based on the three year statute of limitations under D.C. Code sec. 12-301, arguing that the period of limitations began to run at the latest by Dec. 10, 2002, when plaintiffs retained new counsel and admittedly were aware that the defendants had missed the tax refun filing deadlines. The trial court agreed with that, and further found that the plaintiffs suffered a separate injury at the same time when they incurred additional litigation expenses.
The Court of Appeals reversed, noting that D.C. precedent contemplates a flexible, case-by-case approach to determining when the period of limitations began to run. Here, the statutory deadlines for filing formal claims for federal estate tax refunds are subject to various exceptions. The Estate had utilized an informal refund claim, for which there is legal authority. The Court therefore reasoned that without reviewing the Refund Claim Memorandum and an expert opinion -- neither of which were in the record -- it could not say "whether the parties might reasonably have regarded the memorandum as comprehensive enough, specific enough, and clear enough to preserve all the claims at issue."
The Court concluded that neither from the face of the Complaint nor from the undeveloped record can it fairly be said that, for statute of limitations purposes, plaintiffs must be charged with knowledge of their injury when the deadlines for filing of the formal refund claims passed.
The Court, however, disagreed with the plaintiffs' argument that their cause of action did not accrue until they settled the refund claim with the IRS. Rather, the Court held that at the latest, the plaintiffs knew or should have known of their injury -- and their cause of action accrued -- when they learned of the IRS's definitive position disputing the allowability of the refund claims not filed by the statutory deadline. However, the appellate record did not show when the IRS asserted its position. That determination must be based on a fuller record.
The Court also found that the retention of new counsel did not necessarily mean that the plaintiffs sustained injury at that time based on the alleged negligence, because it was possible that the new lawyers were charged with completing work that the defendants had not yet performed. The Court found that the record was insufficient on this point as well.
Thus, the end result of the motion to dismiss in this case was that the defendants incurred all the litigation expenses of the motion and the appeal, and now find themselves remanded to the trial court for further proceedings. In the process, plaintiffs' counsel have acquired a blueprint of the intricacies of the statute of limitations defense prior to discovery. This is not to be critical in the least of the defendants or the defense attorneys for choosing to file the motion to dismiss, which after all was initially successful and resolved a multi-million dollar claim.
Rather, this case illustrates the difficult tactical decisions that must be made by the defense as to how and when to file a dispositive motion. One lesson is that in very technical areas of the law, such as tax or patent law, the question of when a cause of action for legal malpractice accrued for limitations purposes should be the subject of early review by an expert in the field, even when there seems to be strong grounds for a motion to dismiss. There is also a risk/benefit analysis that must be made in each case, weighing the liability exposure of the claim, the chances of success of the motion, and in some instances the possibility that disclosure of the defense will lead to a reasonable settlement, against the costs of the motion and subsequent appeal, and the risk that by fully disclosing the theory of defense, if the motion is denied it might make any subsequent depositions less productive for the defense.