Idaho Supreme Court, No. 41663, 2015 Opinion No. 1, January 9, 2015: Statute of limitations on malpractice claim for lawyer’s failure to seek mortgage subordination before recording conservation easement runs from when IRS raised issue.
The Minnicks engaged the law firm Hawley Troxell as counsel for a real estate project. As part of the project the Minnicks granted a conservation easement to the Land Trust of Treasure Valley, Inc. The Minnicks’ mortgage on the property was not subordinated to the easement at the time of record the easement (a subordination that was, in the court’s words, “expressly required by the plain language of the easement agreement as well as the applicable federal regulations”). The Minnicks claimed large charitable deductions and tax refunds on their jointly filed tax returns for the years 2006, 2007, and 2008. The Minnicks allege Hawley Troxell knew the Minnicks wanted the easement grant to qualify as a charitable contribution for federal tax purposes. Hawley Troxell denied knowing this and said it reviewed the easement only to ensure it met local land use standards.
The IRS denied the Minnicks’ deduction claim and the matter went to Tax Court. The Minnicks say they only then discovered for the first time that Hawley Troxell failed to take the actions necessary to subordinate the mortgage to the easement. (In 2011, with Hawley Troxell’s input and assistance, the bank subordinated.)
On April 3, 2012, while the Minnicks’ case was pending before the Tax Court, it decided Mitchell v. Commissioner (Mitchell I), 138 T.C. 324 (T.C. 2012). Mitchell I held that a mortgage must be subordinated prior to the grant of a conservation easement, the “the so-remote-as-to-be-negligible” exception did not apply to that requirement, and therefore (as a decision on an issue of first impression) the failure to obtain a subordination could not be cured after recording the easement. On December 17, 2012, the Tax Court issued its decision in Minnick v. Commissioner, 2012 T.C. Memo 345, denying the Minnicks any deduction because of the untimely subordination (citing Mitchell I), and upholding penalties.
On June 7, 2012, after the Mitchell I decision but before the Minnick decision, the Minnicks, seeing they might lose in Tax Court, filed suit against Hawley Troxell for professional negligence. The Minnicks didn’t serve Hawley Troxell with the complaint until December 5, 2012. Hawley Troxell answered the complaint with affirmative defenses including the two-year statute of limitations in Idaho Code section 5-219(4). The trial court agreed with Hawley Troxell and dismissed the suit. On Hawley Troxell’s motion, the lower court awarded Hawley Troxell $66.00 in costs and $50,000 in fees. The Minnicks appealed.
On the appeal, the Idaho Supreme Court reversed the lower court, saying the Minnicks’ legal malpractice action against Hawley Troxell was not time-barred under Idaho Code section 5-219.
The court explained that while the Idaho statute indeed required a malpractice action to commence within two years “after the cause of action has accrued,” the cause of action in malpractice cannot accrue in Idaho until “some damage” has occurred. The court found that “some damage” related to untimely subordination could not have been incurred and could not have begun accruing — and therefore the Minnicks’ claim against Hawley Troxell could not been brought — until the subordination issue was formally raised. It was not until June 2011 that the IRS first requested information specifically concerning subordination and it was not until October 2011 that the IRS introduced the subordinate issue in the Tax Court. The Minnick action against Hawley Troxell was filed within two years after the subordination was first raised by the IRS and therefore was not time barred.
The court reasoned that if the IRS had never raised the subordination issue, and had the Minnicks prevailed on the other issues raised, Hawley Troxell’s failure to obtain subordination could not have harmed the Minnicks and they would not have an actionable claim for legal malpractice.
The court remanded the matter to the trial court for further proceedings. Given the holding on the statute of limitations, the court also vacated the lower court’s fee award to Hawley Troxell. The court found it premature to award attorney fees on the appeal, but awarded the Minnicks appeal costs.
Decision available at http://www.isc.idaho.gov/opinions/41663.pdf.