The Case:  John Kohl & Co. P.C. v. Dearborn & Ewing, 977 S.W.2d 528 (Tenn. 1998).

The Basic Facts:  Plaintiff sued lawyer and law firm alleging that it received improper advice concerning certain business matters.

The Bottom Line:

·         “The statute of limitations for legal malpractice is one year from the time the cause of action accrues.  Tenn. Code Ann. § 28-3-104(a)(2).  When the cause of action accrues is determined by applying the discovery rule.  Under this rule, a cause of action accrues when the plaintiff knows or in the exercise of reasonable care and diligence should know that an injury has been sustained as a result of wrongful or tortious conduct by the defendant.  Shadrick v. Coker, 963 S.W.2d 726, 733 (Tenn. 1998); Stanbury v. Bacardi, 953 S.W.2d 671, 677 (Tenn. 1997).”  977 S.W.2d at 532.

·         “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 or negligent conduct.  Carvell v. Bottoms, 900 S.W.2d 23, 28-30 (Tenn. 1995).  An actual injury occurs when there is  the loss of a legal right, remedy or interest, or the imposition of a liability.  See LaMure v. Peters, 924 P.2d 1379, 1382 (N.M. App. 1996).  An actual injury may also take the form of the plaintiff being forced to take some action or otherwise suffer ‘some actual inconvenience,’ such as incurring an expense, as a result of the defendant’s negligent or wrongful act.  See  State v. McClellan, 85 S.W. 267, 270 (Tenn. 1905) (‘[A negligent act] may not inflict any immediate wrong on an individual, but . . . his right to a remedy . . . will [not] commence until he has suffered some actual inconvenience. . . .  [I]t may be stated as an invariable rule that when the injury, however slight, is complete at the time of the act, the statutory period then commences, but, when the act is not legally injurious until certain consequences occur, the time commences to run from the consequential damage. . . .’).  However, the injury element is not met if it is contingent upon a third party’s actions or amounts to a mere possibility.  See Caledonia Leasing v. Armstrong, Allen, [865 S.W.2d 10, 17 (Tenn. Ct. App. 1992)].”  Id.

·         “The knowledge component of the discovery rule may be established by evidence of actual or constructive knowledge of the injury.  Carvell, 900 S.W.2d at 29.  Accordingly, the statute of limitations begins to run when the plaintiff has actual knowledge of the injury as where, for example, the defendant admits to having committed malpractice or the plaintiff is informed by another attorney of the malpractice.  Under the theory of constructive knowledge, however, the statute may begin to run at an earlier date - whenever the plaintiff becomes aware or reasonably should have become aware of facts sufficient to put a reasonable person on notice that an injury has been sustained as a result of the defendant’s negligent or wrongful conduct.  Id.  We have stressed, however, that there is no requirement that the plaintiff actually know the specific type of legal claim he or she has, or that the injury constituted a breach of the appropriate legal standard.  Shadrick, 963 S.W.2d at 733.  Rather, ‘the plaintiff is deemed to have discovered the right of action if he is aware of facts sufficient to put a reasonable person on notice that he has suffered an injury as a result of wrongful conduct.’  Carvell, 900 S.W.2d at 29 (quoting Roe v. Jefferson, 875 S.W.2d 653, 657 (Tenn. 1994)).  ‘It is knowledge of facts sufficient to put a plaintiff on notice that an injury has been sustained which is crucial.’  Stanbury, 953 S.W.2d at 678.  A plaintiff may not, of course, delay filing suit until all the injurious effects or consequences of the alleged wrong are actually known to the plaintiff.  Shadrick, 963 S.W.2d at 733; Wyatt v. A-Best Company, 910 S.W.2d 851, 855 (Tenn. 1995).  Allowing suit to be filed once all the injurious effects and consequences are known would defeat the rationale for the existence of statutes of limitations, which is to avoid the uncertainties and burdens inherent in pursuing and defending stale claims.  Wyatt, 910 S.W.2d at 855.”  Id. at 532-33.

·         “Applying these principles to the record before us, we are persuaded that the lower courts correctly found that the one-year statute of limitations had expired on those claims related to the rollover and contribution of individual retirement account funds to the plaintiffs’ profit sharing plan.  The plaintiffs suffered an actual injury for purposes of the discovery rule when they began to incur expenses, or at least had to take some action, as a result of the defendants’ negligent advice.  This would have been on October 19, 1988, when their accountant had to respond to the IRS’s request for information after it noted a conflict between the amount reported by the plaintiffs on their tax returns and the amounts reported by payers.  The plaintiffs’ argument to the contrary notwithstanding, the fact that the IRS had not taken any formal action against the Kohls as of that date, such as filing suit against them or issuing a deficiency notice, is largely irrelevant because, as noted above, it was unnecessary for the plaintiffs to have suffered all the injurious effects or consequences of the defendants’ negligence in order for the statute to begin running.  Shadrick, 963 S.W.2d at 733; Wyatt, 910 S.W.2d at 855; Sec. Bank & Trust Co. v. Fabricating Inc., 673 S.W.2d 860, 864-65 (Tenn. 1983).”  Id. at 533.

·         “Regarding the discovery rule’s knowledge requirement, we conclude that attorney Kolarich’s letter of October 24, 1988 to Dearborn & Ewing demonstrates that the plaintiffs knew or should have known there was a potential problem with the rollover and contribution of retirement funds into their profit sharing plan, and that Huffstutter had advised the plaintiffs on these matters.  Again, it was unnecessary for the plaintiffs to have been aware that there had been a breach of the appropriate legal standard in order to be deemed to have discovered their right of action, but needed only to be aware of facts sufficient to put them on notice that an injury had been sustained as a result of Huffstutter’s advice.  Shadrick, 963 S.W.2d at 734; Carvell, 900 S.W.2d at 29.  Kolarich’s letter establishes that the plaintiffs had notice of a problem with the rollover and contribution of retirement funds into their profit sharing plan, especially since the letter was sent on the heels of the letter to the Kohls by the IRS.”  Id.

Other Sources of Note:  Bradson Mercantile, Inc. v. Crabtree, 1 S.W.3d 648 (Tenn. Ct. App. 1999)  (extensive discussion of the development of the discovery rule in legal malpractice cases).