Opinion
No. 108,559.
2013-11-4
Cheryl DIXON, f/k/a Cheryl Davies, Appellant, v. KLENDA, MITCHELL, AUSTERMAN & ZUERCHER, L.L.C., Gary Austerman, and Julie Ariagno–Moore, Appellees.
Appeal from Sedgwick District Court; Philip L. Sieve, Judge. Timothy W. Monsees, of Monsees, Miller, Mayer, Presley & Amick, a Professional Corporation, of Kansas City, Missouri, for appellant. Lee H. Woodard, of Woodard, Hernandez, Roth & Day, L.L.C., of Wichita, and Timothy J. Finnerty, of Wallace, Saunders, Austin, Brown & Enochs, Chartered, of Wichita, for appellees.
Appeal from Sedgwick District Court; Philip L. Sieve, Judge.
Timothy W. Monsees, of Monsees, Miller, Mayer, Presley & Amick, a Professional Corporation, of Kansas City, Missouri, for appellant. Lee H. Woodard, of Woodard, Hernandez, Roth & Day, L.L.C., of Wichita, and Timothy J. Finnerty, of Wallace, Saunders, Austin, Brown & Enochs, Chartered, of Wichita, for appellees.
Before STANDRIDGE, P.J., HILL, J., and KNUDSON, S.J.
MEMORANDUM OPINION
HILL, J.
The question in this appeal is whether the statute of repose bars Cheryl Dixon from suing her former lawyers for legal malpractice and breach of fiduciary duty. Dixon's claims center on a property settlement agreement she signed during the pendency of her divorce case. Because more than 10 years have elapsed since the property settlement agreement was approved by the divorce court, we hold her claims are indeed barred by law. We affirm the district court.
The division of marital assets is at the core of this claim.
Cheryl Dixon and Scott Davies were divorced on April 16, 2001. The court approved their property settlement agreement in the journal entry of divorce on that same day. The law firm Klenda, Mitchell, Austerman & Zuercher, L.L.C. represented Dixon during the divorce. At the time, Davies held interests in some Saturn automobile dealerships. Then, something unforeseen happened; General Motors ended the Saturn brand.
This decision by GM affected Dixon and Davies. Not being able to agree on what Davies owed Dixon now under their agreement, the parties sought guidance from the divorce court. In the divorce case, Dixon and Davies filed competing motions for summary judgment asking the Reno County District Court to interpret the terms in their property settlement agreement regarding the division of interests in the automobile dealerships and operations. Stated plainly, Dixon contended she was entitled to $1.9 million as her share of the business assets. Davies argued Dixon was entitled to only one half of the net proceeds of the “forced sale” of the dealership, a considerably smaller sum. Paragraph VII of their agreement provided:
“Husband is hereby awarded any and all interest in [ sic ] parties may have in the businesses listed under Section VI above, specifically the Saturn dealerships, Scott Davies L.L.C, Scholfield Body Shop and Saturn of Wichita (warranty income). In the event that Husband still owns the dealership on May 1st, 2011, then on that day, Husband will begin to pay Wife $10,000.00 per month as property settlement to buy out Wife's interest in the parties' businesses. Husband will pay out to Wife $1,900,000, as her interest in those businesses, making minimum monthly payments of $10,000.00 per month on the 1st day of each month....
“In the event Husband sells the business prior to May 1st, 2011, he will pay out to Wife one-half of the net proceeds from the sale of the Saturn dealership, upon his receipt of the same.”
In July 2011, the Reno County District Court granted Davies' partial summary judgment over Dixon. The court noted that General Motors had terminated Davies' Saturn dealership in 2009. Given that this “unforeseeable” fact had occurred prior to May 1, 2011, the court ruled that under the agreement Dixon was only entitled to one-half of the net proceeds that Davies received from GM as compensation for the termination.
In December 2011, Dixon filed a lawsuit in Sedgwick County District Court against the law firm and two of its attorneys, Gary Austerman and Julie Ariagno–Moore, for legal malpractice and breach of fiduciary duty. In her claims against the law firm, Dixon alleged that (1) the law firm had represented Davies in various business matters prior to the divorce; (2) the settlement agreement was ambiguous and did not adequately list all of Dixon's and Davies' assets; and (3) Dixon did not receive property settlement payments from the sale of the certain automobile dealerships Davies sold. Dixon specifically alleged that Austerman or Ariagno–Moore in their capacity as employees of the law firm had committed legal malpractice and breached their fiduciary obligations.
In response, the law firm filed a motion to dismiss because all of Dixon's alleged causes of action against the law firm were committed before April 16, 2001, or more than 10 years before the present action commenced on December 16, 2011. The law firm asserted that the statute of repose in K.S.A. 60–513(b) barred all of Dixon's claims. The two individual lawyers joined in the motion, also contending Dixon was barred from making her claims.
After an exchange of responses, Dixon asked to amend her petition to add two additional counts “based on the same facts that were originally pled in the initial Petition.”
Count III of the proposed amended petition, alleging fraud, asserted in part:
“26. At all times relevant herein, [the law firm] owed a duty to [Dixon] in the form of an attorney/client relationship.
“27. [The law firm] owed [Dixon] a duty of loyalty, honesty and good faith and in all respects owed ... Dixon a duty to attend to her legal wants and needs.
“28. [Dixon] reasonably relied on the representations implicit in an attorney/client relationship, that said legal wants and needs would be met.
“29. [The law firm] failed to reveal to [Dixon] the full nature and extent of the conflict of interest they had in representing her legal needs. Moreover, [Dixon] was assured by [the law firm] that there was no practical conflict of interest and that her needs would be fully attended irrespective of any current or previous representation of [Dixon's] husband, Scott Davies. or Mr. Davies's [ sic ] other business interests.”
At this point, Dixon set forth five specific allegations by which the law firm “intentionally or negligently” had deceived her. The first four allegations are identical to the four allegations set forth in Count I (legal malpractice) and Count II (breach of fiduciary duty) of both the original and amended petition. For the fifth allegation, Dixon alleged being deceived by the law firm “[c]ontinuing to represent [Davies] in his business ventures, despite the knowledge that the business' assets were the very assets at the heart of the Property Settlement Agreement.”
Count IV of the proposed amended petition first asserted the general existence of an attorney/client relationship with the owed legal duties of loyalty, honesty, and good faith. Dixon then alleged that the law firm's “ongoing and continuous representation of [Davies] and other business entities of [Davies] that had a vested financial interest in [Davies'] preservation of assets, before, during, and after the Property Settlement Agreement was entered in to [ sic ], violates the duty owed to [Dixon].” Dixon further alleged that the law firm failed to alert her to a conflict of interest that “was so insidious that it could not have been waived” and that the law firm “actively concealed” the nature and extent of the conflict after the decree of divorce was filed by “falsely” asking her to sign a conflict waiver.
The law firm and the two individual lawyer defendants resisted Dixon's request to amend her pleadings by claiming: (1) the proposed amendment did not assert circumstances with particularity sufficient to support a cause of action for fraud; (2) the statute of repose barred both the original claim of negligence and the proposed claim of fraud; (3) Dixon's allegation of fraud was nothing more than the breach of the standard of care for an attorney or action for legal malpractice; and (4) Dixon had provided no basis to estop the law firm from relying on the statute of repose as a defense.
After entertaining arguments on the various filings, the district court granted the law firm's motion to dismiss and denied Dixon's motion for leave to amend. In the journal entry, the district court found the parties did not dispute the fact that “all of the allegations of [the law firm's] wrongful conduct as alleged in the petition were committed on or before April 16, 2001,” when the settlement agreement was filed with the journal entry of divorce. The district court held that Dixon's allegations of legal malpractice and breach of fiduciary duty in Count I and Count II of her petition were causes of action subject to the statute of limitations set forth in K.S.A. 60–513(a) and thus barred by the statute of repose under K.S.A. 60–513(b).
In denying Dixon's motion for leave to amend, the district court held that Dixon's motion failed “to set forth with particularity the averments of fraud necessary to support a cause of action for fraud pursuant to K.S.A. 60–209(b).” The district court further held that the statute of repose similarly barred the claim of fraud Dixon sought to assert in her amended petition.
In this appeal Dixon claims the district court should have disregarded the statute of repose because of equitable estoppel. For her second point on appeal, Dixon contends the district court abused its discretion when it denied her the opportunity to amend her petition and raise claims of fraud against the law firm and the two individual lawyers.
The statute of repose works in tandem with the statute of limitations.
Stale claims are not preferred under the law. Our legislature has established time limits for filing civil actions that vary according to the various causes of action. The applicable statute of limitation for Dixon's causes of action is K.S.A. 60–513. It provides a limitation of 2 years within which to bring an action for injury on grounds not arising on contract or any other ground not enumerated. K.S.A. 60–513(a)(4). The statute, however, goes on to establish a period of repose provision:
“[T]he causes of action listed in subsection (a) shall not be deemed to have accrued until the act giving rise to the cause of action first causes substantial injury, or, if the fact of injury is not reasonably ascertainable until sometime after the initial act, then the period of limitation shall not commence until the fact of injury becomes reasonably ascertainable to the injured party, but in no event shall an action be commenced more than 10 years beyond the time of the act giving rise to the cause of action.” (Emphasis added.) K.S.A. 60–513(b).
In other words, if you are injured or should reasonably know you are injured, a plaintiff should make his or her claim before 2 years has expired. After the passage of 10 years the cause of action expires entirely.
The Kansas Supreme Court has distinguished a statute of repose from a statute of limitations as follows:
“ ‘A statute of limitations extinguishes the right to prosecute an accrued cause of action after a period of time. It cuts off the remedy. It is remedial and procedural. A statute of repose limits the time during which a cause of action can arise and usually runs from an act of a defendant. It abolishes the cause of action after the passage of time even though the cause of action may not have yet accrued. It is substantive.’ [Citation omitted.]” Bonin v. Vannaman, 261 Kan. 199, 205, 929 P.2d 754 (1996).
Actually, Dixon does not dispute that the allegations of legal malpractice and breach of fiduciary obligations in her original petition were filed more than 10 years beyond the approval of the settlement agreement in the divorce action. Thus, her causes of action were barred by the statute of repose provisions under K.S.A. 60–513(b).
After quoting K.S.A. 60–513(b), Dixon concedes: “In the absence of equitable estoppel or some factor tolling the running of the statute of repose, this provision would preclude Plaintiff's claims as the Defendants drafted the Property Settlement Agreement in April 2001 and this action was not filed until December 2011.”
Some time ago, a divided panel of this court allowed the doctrine of equitable estoppel to negate the statute of repose. In Robinson v. Shah, 23 Kan.App.2d 812, 936 P.2d 784 (1997), the plaintiff patient brought suit less than 2 years after discovering her physical problems were caused by surgical sponges left in her abdomen but more than 10 years after her doctor began concealing the presence of the sponges. A divided court held:
“[T]he defendant in a malpractice case cannot take advantage of a defense based on the statute of limitations or the statute of repose where the defendant's own fraudulent concealment has resulted in the delay in discovering the defendant's wrongful actions.” Under such facts, a defendant is equitably estopped from raising the defenses of the statute of limitations and the statute of repose.” (Emphasis added.) 23 Kan.App.2d at 832.
A thoughtful dissent expressed a different view in Robinson. The dissenter pointed out that the legislature meant what it said when it used the statutory language “ ‘but in no event’ [shall an action be commenced more than 10 years beyond the time of the act giving rise to the cause of action]” in K.S.A. 60–513(b) and that such clear language leaves no room for equitable estoppel to bar application of the statute of repose. 23 Kan.App.2d at 834 (Knudson, J., dissenting in part).
More recently, the validity of the Robinson majority ruling has been called into question by a different panel. In Dunn v. Dunn, 47 Kan.App.2d 619, 281 P.3d 540 (2012), rev. denied 296 Kan. –––– (March 28, 2013), the court discussed Robinson when addressing whether the theory of equitable estoppel prevented the application of the statute of repose to the plaintiffs tort-based claims of conversion and vicarious liability. Pointing to Judge Knudson's dissent in Robinson, the Dunn panel noted that “[w]hether the doctrine of equitable estoppel is even available to toll a statute of repose is a debatable issue in Kansas .” Ultimately, the Dunn panel declined to “weigh in on that debate” because the plaintiff had not pled a valid claim to invoke equitable estoppel. 47 Kan.App.2d at 642.
We harbor no such reluctance to enter the forum. In our view, the majority ruling in Robinson nullifies a plainly worded statute and is thus legally incorrect. We will not follow its reasoning. K.S.A. 60–513(b) clearly states that “in no event shall an action be commenced more than 10 years beyond the time of the act giving rise to the cause of action.” Had the legislature wished to allow equitable estoppel to prevent application of the statute of repose, it could have said so in the statute. After all, the legislature clearly provided for a tolling of the statute of limitations until the fact of injury becomes reasonably ascertainable to the injured party. Similar language could have been used to toll the statute of repose. But the legislature did not do so. Obviously, the legislature has adopted a policy that after 10 years has passed, then any cause of action that was created before that time has expired.
Here, Dixon filed her action more that 10 years after the court approved the property settlement agreement. Thus, her legal malpractice and breach of fiduciary duty claims are barred by K.S.A. 60–513(b).
Additionally, we have doubts about whether equitable estoppel has even been proved here. The record clearly indicates Dixon was aware of any alleged factual basis providing a malpractice or breach of fiduciary duty cause of action at least 7 months prior to the expiration of the statute of repose period. In Ariagno–Moore's deposition taken on September 14, 2010, as part of a postdivorce proceeding in the divorce case, Dixon's attorney, with Dixon present, specifically asked Ariagno–Moore whether any claims of malpractice had been made against her or the law firm for drafting the property settlement agreement. Dixon simply did not act on this information within the prescribed time allowed under K.S.A. 60–513(b).
The district court did not err by granting the motion to dismiss Dixon's original petition for failure to state a claim.
We see no abuse of discretion by the court in denying an amendment to the pleading.
Dixon argues the district court abused its discretion in denying her motion for leave to amend her petition to add one count of fraud. The court ruled her proposed amended petition failed to state circumstances constituting fraud with particularity as required under K.S.A. 60–209(b) and the statute of repose barred any new claim.
When dealing with permitting or denying the amendment of pleadings, Johnson v. Board of Pratt County Comm'rs, 259 Kan. 305, 327, 913 P.2d 119 (1996), tells us that “[a] district court is given broad discretionary power under 60–215 to permit the amendment of pleadings. An appellate court will not find reversible error unless the amendment allowed or denied is so material it affects the substantial rights of the adverse party [Citation omitted.].” The Johnson decision further states that “[i]n the absence of any apparent or declared reason, such as ... futility of the amendment, leave to amend should be freely given.” 259 Kan. 305, Syl. ¶ 15.
According to the Kansas Supreme Court in Fischer v. State, 296 Kan. 808, Syl. ¶ 8, 295 P.3d 560 (2013), judicial discretion is abused if the judicial action is:
• arbitrary, fanciful, or unreasonable, i.e., if no reasonable person would have taken the view adopted by the trial court;
• based on an error of law, i.e., if the discretion is guided by an erroneous legal conclusion; or
• based on an error of fact, i.e., if substantial competent evidence does not support a factual finding on which a prerequisite conclusion of law or the exercise of discretion is based.
We must point out initially that we disagree with the district court's holding that the “new or additional claims [Dixon] seeks to assert in her amended petition likewise would be barred by the statute of repose.” That ruling was erroneous. Dixon's proposed amended petition asserted a claim of fraud. The Kansas Supreme Court in Hemphill v. Shore, 295 Kan. 1110, 1124–25, 289 P.3d 1173 (2012), recently reaffirmed its prior position in Jennings v. Jennings, 211 Kan. 515, 527, 507 P.2d 241 (1973), noting that “the 10–year statute of repose in K.S.A. 60–513(b) does not apply to actions for fraud.”
The law firm acknowledges Hemphill but points out that Jennings interpreted a prior version of K.S.A. 60–513(b). The law firm argues “the 1987 amendment to the statute of repose legislatively overturns Jennings, 211 Kan. 515, and renders fraud claims subject to the ten-year period of repose which runs from the date of the act giving rise to the claim of fraud.” But Hemphill was clearly decided after the 1987 amendment to K.S.A. 60–513(b). More importantly, Hemphill clearly relied on Jennings to hold that the statute of repose did not apply to the plaintiff's constructive fraud cause of action. Hemphill, 295 Kan. at 1124–25.
We must point out that the district court did not just rely on the statute of repose to deny the motion to amend. The initial reasoning of the district court on this point indicated that Dixon failed to adequately allege fraud. On this point, we agree with the district court.
Generally, the Kansas Rules of Civil Procedure only require a pleading to contain a short and plain statement of the claim showing that a pleader is entitled to relief. K.S.A. 60–208(a). This is often referred to as a notice pleading. But fraud is different. K.S.A. 60–209(b) states that a party alleging fraud “must state with particularity the circumstances constituting fraud.” The elements of fraud require proof by clear and convincing evidence that
“(1) false statements were made as a statement of existing and material fact; (2) the representations were known to be false by the party making them or were recklessly made without knowledge concerning them; (3) the representations were intentionally made for the purpose of inducing another party to act upon them; (4) the other party reasonably relied and acted upon the representations made; and (5) the other party sustained damage by relying upon them.” Kelly v. VinZant, 287 Kan. 509, 515, 197 P.3d 803 (2008).
See PIK Civ. 4th 127.40.
The district court could only focus on what was alleged. At the June 1, 2012, hearing on Dixon's motion for leave to amend, the district court judge ruled, “I don't see anything in the record before me in the filing, the pleadings or whatever, that would indicate that there was anything that amounts to fraud here.” On appeal, the law firm argues: “Dixon's motion to amend was futile because it was nothing more than an attempt to convert a legal malpractice and breach of duty claim into a claim of fraud for the sole purpose of attempting to avoid the bar of the statute of repose .”
To rebut this argument, Dixon responds that “a breach of the duties imposed by the attorney/client relationship can constitute constructive fraud.” Unlike fraud, as we defined above, “constructive fraud does not require proof of actual dishonesty or a purpose or intent to deceive.” Hemphill, 295 Kan. at 1122, where the Kansas Supreme Court noted that it “has not previously decided whether a constructive fraud cause of action is subject to K .S.A. 60–209(b)'s heightened pleading standard” similar to a cause of action for fraud; see Nelson v. Nelson, 288 Kan. 570, 583, 205 P.3d 715 (2009), where the court defined constructive fraud. But Dixon did not raise a constructive fraud cause of action before the district court. Dixon's proposed amended petition alleged only “actual” or “intentional” fraud. This late in the game reference to constructive fraud does not move us because issues not raised first before the district court cannot be raised on appeal. In re Care & Treatment of Miller, 289 Kan. 218, 224–25, 210 P.3d 625 (2009).
Fundamentally, Dixon's claim is that the law firm allegedly acted fraudulently by “intentionally” not fully disclosing the conflict of interest it had representing Davies' business interests when obtaining the waiver of conflict from her and drafting the property settlement agreement. Dixon claims this breach of duty resulted in her not receiving the proper division of assets, i.e., $1.9 million after the divorce was final.
Turning to the pleadings, we see that her claim for fraud is found in Count III of her proposed amended petition. Four of the five subparagraphs in the section simply adopt the same general allegations of legal malpractice and breach of fiduciary duty as in the original petition. This leaves the remaining subparagraph, “Continuing to represent [Davies] in his business ventures, despite the knowledge that the business' assets were the very assets at the heart of the Property Settlement Agreement,” to meet the pleading requirements under K.S.A. 60–209(b). But this subparagraph, taken in conjunction with the remaining paragraphs of Count III, is a general allegation regarding a conflict of interest the law firm had in representing Dixon. Even assuming the law firm had failed to uphold the duty to disclose fully the extent of a concurrent conflict of interest, such an allegation constitutes grounds for disciplinary action or legal malpractice, not fraud. See KRPC 1.7(a) (2012 Kan. Ct. R. Annot. 506).
The allegation of fraud raised by Dixon in her proposed amendments to her petition is insufficient under our standards for pleading fraud. We follow the rule in Newcastle Homes v. Thye, 44 Kan.App.2d 774, 788, 241 P.3d 988 (2010) where the court held that “the statutory requirement to plead fraud with particularity is strictly enforced.” Dixon failed to allege circumstances of fraud with particularity to render the statute of repose inapplicable. The district court did not abuse its discretion in denying Dixon's motion for leave to amend.
Affirmed.