Legal Malpractice – Statute of Limitations – Discovery Rule

In Credential Leasing Corp. of Tenn., Inc. v. White, No. E2015-01129-COA-R3-CV (Tenn. Ct. App. May 17, 2016), plaintiff lender brought various claims against defendant lawyer, including claims for professional negligence and fraudulent misrepresentation, related to the drafting of a deed of trust. Defendant attorney prepared a 2010 deed of trust in favor of plaintiff, conveying title to a parcel of land owned in part by defendant’s brother. Defendant stated that he would do the title work, prepare the deed of trust, and issue title insurance for the property at issue, though he never actually issued any title insurance.

The property was actually owned by the brother and another man as tenants in common. In 2007 a deed of trust had been executed on the same property to secure a loan from another bank, and defendant attorney had notarized the signatures of the grantors (and correct property owners) on that deed. Despite the fact that the brother only owned a half interest in the property, the 2010 deed of trust did not mention the other owner’s interest. Instead, it listed the brother and the brother’s wife as grantors, even though the wife had no interest in the property. Further, while the warranty deed and previous deed of trust used a “lot and block” description of the property, the 2010 deed of trust described the property by metes and bounds.

In 2011, the brother declared bankruptcy. Plaintiff received a notice of the bankruptcy filing, which showed the other creditor having a first lien, which plaintiff was already aware of. Almost two years later, however, plaintiff learned that the property had been sold at foreclosure, and plaintiff had not received notice. Only after learning of this sale did plaintiff find out that the brother had only owned a one-half interest in the property, and that their deed of trust thus had not covered the entire property.

Based on these facts, the lender brought this action in 2013. The trial court granted summary judgment to plaintiff on the professional negligence claim, and after a bench trial also found for plaintiff on the fraudulent misrepresentation claim. The Court of Appeals affirmed these two holdings.*

On appeal, defendant asserted that the professional negligence claim was time-barred, as it was asserted outside the one-year statute of limitations. The Court rejected this argument, noting that the discovery rule applies to the professional negligence limitations period:

In legal malpractice cases, the discovery rule is composed of two distinct elements: (1) the plaintiff must suffer legally cognizable damage—an actual injury—as a result of the defendant’s wrongful or negligent conduct, and (2) the plaintiff must have known or in the exercise of reasonable diligence should have known that this injury was caused by the defendant’s wrongful conduct.

(internal citation omitted).

Defendant argued that plaintiff lender was put on notice of its injury when it received the bankruptcy filing, as the filing showed the plaintiff as having a second mortgage on the property. The Court pointed out, though, that plaintiff already knew it had a second mortgage, but was led to believe it had a second mortgage on the entire property. The bankruptcy filing “did not put [plaintiff] on notice of a defect in the 2010 Deed of Trust because it did not provide information of which [plaintiff] was unaware.”

In analyzing whether the legal malpractice claim was timely, the Court pointed out that the trial court “credited the testimony of [plaintiff] and determined that [defendant’s] actions were an intentional attempt to mislead [plaintiff].” The trial court specifically found that defendant did not tell plaintiff that the deed of trust was for only one-half of the property interest, and “by adding [the wife] to the 2010 Deed of Trust as a grantor, [defendant] helped to create an appearance that it was a different parcel of property.” The addition of wife, “coupled with the change in the property description, would hinder a title examiner from relating the two deeds of trust” and led to plaintiff not being notified of the foreclosure sale. Ultimately, the Court of Appeals held:

Based upon the trial court’s credibility assessments and our thorough review of the record, we conclude that the evidence preponderates in favor of the trial court’s determination that [defendant] made fraudulent misrepresentations through the manner in which he drafted the 2010 Deed of Trust. Furthermore, nothing in the bankruptcy filings would have caused [plaintiff] to discover the nature of its injury suffered by reason of the defective and improper drafting of the 2010 Deed of Trust. Therefore, as the trial court found, [plaintiff’s] action was timely filed within the applicable statutes of limitations.

Although it was unclear whether defendant was appealing the fraudulent misrepresentation finding, the Court also specifically affirmed for plaintiff on that claim.

Of note, however, is the fact that the Court overturned the trial court’s finding for plaintiff on its Tennessee Consumer Protection Act (TCPA) claim. The Court held that because this case was based on the practice of law, it could not support a TCPA claim. The Court stated that “[a]lthough our Supreme Court has not yet spoken on the subject, federal courts applying Tennessee law have held that the TCPA does not apply to attorneys practicing law.” In response to defendant’s argument that defendant was not actually practicing law here, the Court noted that “Tennessee precedent regarding this issue provides that the practice of law relates to the rendition of services for others that call for the professional judgment of a lawyer, such that the drafting of pleadings and legal documents or the selection and completion of form documents constitutes the practice of law.” (internal citations and quotations omitted). The Court held that since defendant was practicing law here, even if he was not doing so “properly or carefully,” defendant could only be liable for professional negligence and not a TCPA violation.

The lesson here is twofold. First, especially when statute of limitations questions might arise due to the time lapse between the action and the suit, give the Court the information and evidence it needs to rule in the claimant’s favor. The trial court here found the defendant’s actions to be “unconscionable” and stated that he “intended to perpetrate a fraud with and/or for his brother.” Luckily, plaintiff lender and its attorney had done a good job of building their case and supporting their claims with enough evidence to allow the Court to reasonably rule that the case was timely filed pursuant to the discovery rule. Second, when you sue a lawyer based on actions he took or failed to take as a professional, the case will most likely fall under a professional negligence claim, and a plaintiff must plead and prepare his case accordingly.



*Note: The Court of Appeals reversed the trial court’s ruling for plaintiff on a breach of contract claim, as the trial court had granted summary judgment to defendant before trial on that claim but then reversed that finding after the trial with no notice to defendant that the issue would be tried.

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