Arizona Court of Appeals Division One Holds That An Attorney’s Alleged Negligence While Representing a Creditor in Non-Adversarial Portions of Bankruptcy Proceedings Does Not Occur in the Course of “Litigation” as that Term Is Used For Purposes of the Accrual of an Attorney Malpractice Action.

In May 2004 Cannon retained Hirsch to protect her interests as a creditor in a Chapter 13 bankruptcy action filed by the Vaughns.  Hirsch attended the meeting of creditors on Cannon’s behalf and filed a stipulation for relief from the automatic stay in bankruptcy court, which would allow Cannon to foreclose upon her secured collateral.  Hirsch then engaged auctioneers to retrieve and sell the collateral at a public auction.  The collateral was sold on September 30, 2004, and Hirsch delivered the funds to Cannon.  From that date through November 5, 2004, Hirsch sent Cannon correspondence related to the sale of the collateral.  During the same time frame, the Vaughn’s Chapter 13 was converted to a Chapter 7.  October 25, 2004, a meeting of creditors on the Chapter 7 petition was held, and the deadline to file a complaint objecting to the discharge of the debtor expired on December 27, 2004.  January 4, 2005, the Vaughns were granted a discharge.  Hirsch did not file any objection to the discharge.

Cannon filed a lawsuit on January 3, 2007, alleging legal malpractice. The trial court granted Hirsch’s motion for summary judgment, noting that Cannon’s malpractice claim was barred by the two-year statute of limitations.  In so ruling, the trial court made a preliminary finding that the alleged malpractice did not occur “during the course of litigation” and thus Cannon’s cause of action accrued when she found out about the sale of the printing equipment in November of 2004.

On de novo review, Division One reversed and remanded.  The Court began by noting that generally, a claim for malpractice accrues when the client knows or should know of his attorney’s negligent conduct.  When the alleged malpractice occurs during the course of litigation, however, Arizona courts have held that the injury is not ascertainable until the appellate process is completed or is waived by a failure to appeal.  Thus, it is only in the context of “litigation” that accrual of the cause of action is deferred until the litigation is finally resolved. 

The Court examined the nature of a bankruptcy proceeding, found that a bankruptcy does not involve adversarial proceedings until “a creditor files a complaint,” and determined that Hirsch’s alleged negligence did not occur in the course of “litigation” because no complaint had been filed.

The Court remanded, however, on issues relating to the “discovery rule,” i.e. determining when the actionable negligence existed and when Cannon discovered or should have discovered that she had been injured by the negligence.  In this regard, the Court held that the negligence was actionable when Cannon sustained non-speculative and non-contingent damages – on December 27, 2004, when the Vaughns were granted a discharge.  As to the second issue, the Court noted that the record was silent regarding when Cannon knew or should have known that Hirsch failed to file an objection before December 27, 2004.  For this reason, the Court held there was no sufficient basis to conclude as a matter of law that Cannon knew or should have known, before January 4, 2005, of Hirsch’s failure to file an objection on December 27, 2004. 

Judge Barker authored the opinion, with Judge Weisberg, Presiding Judge, concurring, and Judge Gemmill specially concurring.