Whether speaking of doctors, lawyers, or other various professionals, one of the most litigated issues in professional liability claims is the statute of limitations. Most people generally understand that a statute of limitations is a time frame within which the professional negligence claim must be brought. The more interesting issue, and the issue which will be examined in this report, is when the statute of limitations begins to run or when the claim “accrues.” Depending on the type of professional liability claim, there are several theories as to when the statute of limitations should begin to run. Take, for example, a medical claim wherein the surgeon has accidentally and unknowingly left a piece of medical equipment (say...a sponge) in the patient following surgery. Four years later the patient begins to develop severe medical complications of an unknown origin. Two years after the medical complications begin, the patient learns that the festering sponge is the culprit. Under this scenario, when would the statute of limitations on the patient’s malpractice claim begin to run: on the date of the negligent act (leaving the sponge in); on the date the injury was discovered (unknown medical complications); or on the date the patient learned his original surgeon’s negligence was the cause?
Fortunately for some professionals, such as title agents and real estate appraisers, Ohio courts are holding that the statute of limitations begins to run on the date that the sponge is left in; that is, the date that the negligent act was committed. The following two cases analyze these issues concerning the accrual of the statute of limitations for professional liability claims against miscellaneous professionals, such as title agents and appraisers.
Flagstar Bank v. Airline Union’s Mortgage Company
In Flagstar Bank, F.S.B. v. Airline Union’s Mortgage Company, et al., 2011-Ohio-1961, the Ohio Supreme Court recently examined these traditional notions for the “accrual” of a claim or, when the statute of limitations begins to run on a claim. Putting an end to much debate amongst lower courts, the court ruled that the statute of limitations begins to run on a professional negligence claim against an appraiser on the date the allegedly negligent act was committed.
In the Flagstar case, a property appraiser performed appraisals on three properties that served as collateral for three separate mortgage loans made by Airline Union’s Mortgage Company (“AUM”). The loans were later purchased by Flagstar Bank, which subsequently sold two of the loans on the secondary market. After foreclosure on the secured properties created a deficiency on the secondary market loans, the secondary creditors sought reimbursement from Flagstar.
Nearly six years after the last appraisal was completed, Flagstar filed a professional negligence action against the appraiser, alleging that he negligently inflated the property values. Relying on the four-year statute of limitations in R.C. 2305.09(D), the appraiser filed a motion for summary judgment, arguing that Flagstar’s negligence claim was untimely. Flagstar responded that the statute of limitations did not begin to run until it sustained a compensable injury, i.e., when the properties were sold at foreclosure and a deficiency balance was left on the loans. The trial court construed Flagstar’s argument as a request to apply the discovery rule: i.e., that a cause of action does not arise until the plaintiff knows or should have known that he or she has been injured. Because the Ohio Supreme Court in Investors REIT One v. Jacobs (1989), 46 Ohio St.3d 176, had previously refused to apply the discovery rule to professional negligence claims, the trial court granted summary judgment to the appraiser, which the First District Court of Appeals affirmed.
On appeal to the Ohio Supreme Court, the bank urged the Court to rely upon two Ohio appellate court decisions that allowed the statute of limitations to extend beyond four years from the date of the alleged negligent act. These appellate court decisions relied on the delayed-damages rule, which stands for the proposition that a cause of action for negligence is not complete – and the statute of limitations not triggered – until there has been actual damage or injury incurred. As such, Flagstar urged the adoption of both the discovery rule and delayed-damages rule, arguing to the Court that the inflated appraisals were not discovered until it actually sustained a loss by having to indemnify the secondary creditors for the insufficient collateral. In other words, Flagstar claimed that it could not have known of any negligence when the three appraisals were originally performed.
The Supreme Court, however, rejected Flagstar’s arguments and declined to endorse either the discovery or delayed-damages rules. In its reasoning, the Court found that relying on the discovery or delayed-damages rules could lead to an unending statute of limitations period, which would be entirely inconsistent with the purpose of a statute of limitation. Rejecting the use of these rules, the Court expressly held that “a cause of action for professional negligence accrues on the date that the negligent act is committed, and the four-year statute of limitations commences on that date.” Because Flagstar’s complaint was not filed within four years of the completed appraisals, its claims were barred by R.C. 2305.09(D).
Union Savings Bank v. Lawyers Title Ins. Corp.
In a similar case, Union Savings Bank v. Lawyers Title Ins. Corp. (2010), 191 Ohio App.3d 540, 2010-Ohio-6396, the Tenth Appellate District also examined the triggering of the statute of limitations; albeit in the contest of a title agent negligence claim. In Union Savings Bank, two homeowners sought to refinance the mortgage on their home in early 2003. The plaintiff, Union Savings Bank (“USB”), relied on its long-time escrow agent, Lawyers Title Insurance Co. (“Lawyers Title”), to perform the title search, loan subordination, and closing on the loan. Although Lawyers Title allegedly failed to subordinate one of the liens on the property, USB closed the loan in August, 2003. The exclusion of the lien from the subordination agreement created a time bomb in the refinanced mortgage for
USB, which detonated two years later when the borrowers defaulted on the note. Following default, the unsubordinated lien was determined to have priority over the lien held by USB, which resulted in a substantial deficiency to USB after the foreclosure sale in March of 2008.
USB sued Lawyers Title in 2008, alleging breach of contract1, breach of fiduciary duty, and professional negligence. Lawyers Title moved for summary judgment arguing, in part, that the negligence and fiduciary duty claims were barred by the four-year statute of limitations for professional negligence claims pursuant to R.C. 2305.09(D). The trial court granted summary judgment to Lawyers Title finding that the claims were time-barred since the statute of limitations began to run on the date of the negligent act, or 2003, in this case.
On appeal, USB argued that the court should apply the delayed-damages rule in analyzing the statute of limitations. As noted above, the delayed- damages rule holds that a cause of action in negligence is not complete until an actual injury occurs, at which time the statute of limitations begins to run. The delayed-damages theory, USB argued, would cause the accrual of the claim and triggering of the statute of limitations to have occurred on the date that the proceeds of the foreclosure sale were paid out and USB suffered damages as a result of the unsubordinated lien, which occurred in March of 2008. Lawyers Title, on the other hand, argued that the causes of action for these claims accrued either at the time of the alleged negligent act (the August, 2003 closing), or at the latest when USB executed the subordination agreement (September, 2003), thus placing the expiration of the statute of limitations no later than September of 2007.
The Court of Appeals noted that USB was essentially attempting to garb its “discovery rule” argument as a “delayed-damages” theory for the accrual of the claim. The discovery rule, of course, provides that the cause of action does not arise until a plaintiff becomes aware of an injury caused by the negligent act of the defendant. However, the Ohio Supreme Court had previously ruled in Investors REIT One v. Jacobs (1989), 46 Ohio St.3d 176, that the discovery rule is not appropriate in claims of professional negligence against accountants, and there was no reason to apply a different rule in the instant claims against a title agent. The court further noted that the Supreme Court of Ohio has consistently circumscribed the application of the delayed-damages rule to construction cases. As such, the court held that the statute of limitations begins to run at the time of the alleged negligent act in a case of professional negligence against an escrow agent, and USB’s claim was therefore time-barred.
Practical Impact of Union Savings Bank and Flagstar
There are a myriad of miscellaneous professionals, aside from doctors and lawyers, who fall under the ambit of R.C. 2305.09(D)’s statute of limitations provisions. Although the Investors case denied a “discovery rule” theory of accrual in an accountant malpractice case, plaintiffs continued to test the bounds of accrual under this four-year statute of limitations. In light of the recent decisions, however, these miscellaneous professionals can seemingly rest assured that the four-year statute of limitations will begin to run on the date of the alleged negligence. In other words, for miscellaneous professionals, the statute of limitations begins to run when the professional leaves the proverbial sponge in the patient, regardless of when the actual injury or damage is discovered.
Of course, the shortened one-year statute of limitations for lawyer malpractice claims recognizes a trade off and places the accrual of a claim at the later of either the termination of the attorney-client relationship, or when a reasonable person would have been alerted to the attorney’s error or omission. Although other professionals have a “bright line” rule for the accrual, they do not reap the benefit of the abbreviated one-year limitations period. The lack of a “bright line” accrual date for legal malpractice claims has been the subject of constant debate and litigation. Perhaps the courts’ holdings in USB and Flagstar signify a change in the paradigm of all professional liability statute of limitations issues. Only time will tell.
If you would like more information regarding the above cases, the statute of limitations for professional liability claims, or any other information regarding professional liability defense issues, please contact one of the members of our Professional Liability Practices Group.
