New case-time to file malpractice action for alleged negligently drafted partnership agreement

David Tate, Esq., http://davidtate.us

Callahan v. Gibson, Dunn & Crutcher LLP (California Court of Appeals, Second District, B221338)

This case may cause attorneys who draft business and estate planning documents to pause for thought.

Law firm Gibson, Dunn & Crutcher drafted a partnership agreement for two brothers Oliver Inge and Robert Inge in 1988.  Each brother was a general partner with a 2% interest in the partnership.  The Oliver E. Inge Trust and the Robert E. Inge Trust were each 48% limited partners.  Oliver died in 2003.  Bank of the West became the executor of his estate.  In 2004 the Bank discovered that the remaining brother Robert was disabled and unable to run the business.

In pertinent part, the partnership agreement provided:

Paragraph 1.6, “The term of this Partnership shall commence on the Effective Date of this Agreement, and, unless extended by agreement of all of the Partners or terminated earlier pursuant to this Agreement, shall continue until December 31, 2038.”

Paragraph 9.5, “Anything in this Agreement to the contrary notwithstanding, the General Partners shall have no authority, without the unanimous vote of the Limited Partners, to: [¶]… [¶] (f) After the death, retirement or insanity of a General Partner, to continue the business of the Partnership with Partnership property, except as is provided in this Agreement.”

Paragraph 13.1, “The Partnership shall be dissolved upon the happening of any of the following events: [¶] (a) The death, disability, insanity, incompetency, dissolution, bankruptcy, retirement, resignation or expulsion of all of the General Partners[.]”

Paragraph 13.3, “Notwithstanding anything to the contrary provided in this Agreement, upon the death of any of the General Partners, the following provisions shall control: [¶] (a) If either Oliver V. Inge (‘Oliver’) or Robert E. Inge (‘Robert’) predeceases the other (such predeceasing Partner being referred to as the ‘deceased brother’), the deceased brother’s interest as a General Partner shall be converted to an interest as a Limited Partner…. [¶] (b) Upon the death of the survivor of Robert and Oliver, each of the Limited Partners hereby agrees that, if so requested by either of Robert’s or Oliver’s respective surviving wives, they shall vote to continue the Partnership on the same terms and conditions as are contained in this Agreement and elect such requesting wife or wives as the sole successor General Partner(s) of the Partnership. Either such surviving wife may make such a request by delivering to each of the Partners a written notice stating the same within thirty (30) days after the death of the survivor of Robert and Oliver.”

The partnership agreement provided that the partnership was to be dissolved in the event of the death, disability, insanity, incompetency . . . of all of the general partners.  Robert’s wife was prepared to run the business but the agreement did not allow for a family member to take over the business so long as either of the brothers was alive.

Bank of the West initiated a probate action, a petition for instructions that sought, among other things, dissolution of the partnership. The parties ultimately settled the action a year and a half later.  In 2007 Robert’s family members sued Gibson, Dunn for malpractice based on its faulty drafting of the partnership agreement.

The trial court granted summary judgment for the law firm finding that the case was time barred by the statute of limitations, finding that the statute of limitations expired in 1992, four years after the partnership agreement was drafted and the law firm’s fees were paid.

The court of appeal reversed, holding that Robert’s family members did not suffer actual injury until 2004 as the law firm’s allegedly negligent drafting of the partnership agreement caused only speculative or contingent harm (or a threat of future harm) until time Oliver died and Robert became disabled.  Had Robert survived Oliver’s death and then died himself while fully engaged in managing the business as its sole general partner, the limited partnership agreement would have provided for the election of Robert’s surviving spouse as the successor general partner. In that event, the partnership would have continued on the same terms and conditions as before, and law firm’s alleged negligence in failing to provide a succession plan in the event of the retirement or incapacity of the surviving general partner would have never ripened into actual injury. But when Robert became incapacitated the partnership agreement required dissolution whereas the provision authorizing the surviving partner’s spouse to succeed him as the general partner, and permitting the partnership to continue, could not come into play while Robert as the surviving partner was still alive.  Thus, Robert’s family members first suffered actual injury when Robert became incapacitated but did not die.

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David Tate, Esq., San Francisco

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