by Christopher Graham and Joseph Kelly

You’re a lawyer. Your client’s brother dies. Client is executor of brother’s estate and successor trustee of brother’s trust. You tell client he’ll need to file an estate tax return with tax man. There’s a deadline. You get an extension. It’s until August 16, 2006. But you don’t file. And there’s no further extension.

Client is very unhappy. He hires new lawyer. New lawyer files the return a year and five months after the deadline.

Client thinks about suing you. But he’s willing to hold off until the situation plays out with tax man. You say great. But new lawyer wants you to agree to toll the limitations period for suing you until September 21, 2009. You agree. Is there any complication? You don’t think so.

In March 2008, two weeks after you sign the tolling agreement, tax man assesses over $191,000 in late-filing penalties and interest against client’s brother’s estate. That’s a lot of bread, says client. Why didn’t you just file the return on time?

Client has the tolling agreement. So he doesn’t sue you right away. Instead he waits until September 18, 2009. That’s just three days before the tolling agreement extension for suit expires. And then on October 10, 2009 you’re served with summons and complaint. Yikes!

Client didn’t sue any accountants. Nor did client have a tolling agreement with any accountants. On September 19, 2011, two years and a day after client sued you, but less than two years after you were served, you sue two accounting firms for contribution. They’re the ones to blame, at least in part, so you say.

Is your contribution claim timely? You think so. So does your lawyer. But the accountants say you waited too long.

What does the court say? In Kadlec v. Sumner, 2013 IL App (1st) 122802 (Nov. 19, 2013), generally involving the scenario above, the accountants win, you lose!

Why? There’s an Illinois statute of limitations for contribution claims, namely, 735 ILCS 5/13-204(b). But it has two requirements. You met the first requirement, by filing your contribution claim within two years of the time client served you with the summons and complaint. See 735 ILCS 5/13-204(b) (“no action for contribution or indemnity may be commenced more than 2 years after the party seeking contribution or indemnity has been served with process in the underlying action”).

But, per the court, you didn’t meet the second requirement. And under that requirement, you could seek contribution from the accountants only if when your client sued you the time for your client to sue the accountants hadn’t expired. See Id. (“but only to the extent that the claimant in an underlying action could have timely sued the party from whom contribution or indemnity is sought at the time such claimant filed the underlying action”).

Why should the second requirement matter? Well, you’re really trying to get a jury or judge to allocate to accountants a share of responsibility for damages client may recover from you for the same late-filed estate tax return. If when client sued you, it was too late for client to sue the accountants, we’re not going to let you sue the accountants either – so say the Illinois law makers. The time limit for those claims passed. Allowing you to sue would defeat the purpose of the time limit. We’ll treat the situation differently only if client sued you within the time limit.

But when client sued you, why was it too late for client to sue the accountants? The two-year limitations period for client’s claims against accountants (725 ILCS 5/13-214.2(a)) began when the extended deadline for filing the estate tax return expired with no return filed–namely, on August 16, 2006. So client had until August 16, 2008 to sue the accountants. But client didn’t. Client didn’t sue you by then either.

But why did the accountants-claim limitations period begin running on the August 2006 tax filing deadline? Because, says the court, the limitations statute says claims against accountants must be filed “within 2 years from the time the person bringing an action knew or reasonably should have known of such act or omission.”

But how is it that on August 2006 the client knew or reasonably should have known of the accountants’ act or omission concerning the late filing? That was the same day the deadline passed with no filing. Why not when client learned of tax man’s assessment of penalties and interest, in March 2008?

Well, per the court, “the law is not that [client] must know the full extent of [its] injuries before the statute of limitations is triggered, Rather, [we] adhere to the general rule that the limitations period commences when [client] is injured, rather than when [client] realizes . . . the full extent of [the] injuries.” [internal quotations omitted]. Plus “damages, i.e., penalties, began to accrue for the estate immediately upon the failure to file the estate tax return.” This was different than a case against an accountant about a negligently prepared tax return, where tax man discovers the error upon reviewing the faulty return and gives taxpayer notice of a deficiency. There, the time to sue runs from taxpayer’s receipt of the deficiency notice. Here, client knew or reasonably should have known that “something was amiss” when the return filing deadline passed with no return filed.

Why was the tolling agreement a problem for you? By entering into the tolling agreement, you gave client more time to sue you. So by the time client sued you, in September 2009, the time for client to sue accountants, two years from the August 2006 filing return filing deadline, had passed. Under the Illinois contribution limitations period statute, that meant you couldn’t sue client for contribution. If you hadn’t agreed to toll the limitations period, client would have had to sue you earlier. And presumably it would have done so within the deadline for suing the accountants. So your contribution claim against them would have been timely filed.

Why were you having to sue the accountants anyway? Why didn’t the client sue them? The court thought the accountants shouldn’t have been sued at all: “Although this case is presented as a contribution case that was not brought within the applicable statute of limitations, we are troubled by the official record in this case which does not factually support a claim of any kind against the named third-party accounting firms.” “[T]here . . . is no proof that the accountants . . . were involved in the preparation of the estate tax returns . . . .” So that the contribution claim was late evidently made no difference. There was none to begin with.

Moral of the story: We’ve seen complications with tolling agreements before, in insurance claims as an example. See blog post here. You’d ordinarily expect a tort claimant to sue every potentially responsible party timely. Or include them in a tolling agreement. But that doesn’t always happen. And if it doesn’t and you’re sued, your contribution claim may be in jeopardy. Here it made no difference. There apparently wasn’t any claim against the accountants, per this court.

Tags: lawyer malpractice, attorney malpractice, Illinois, discovery rule, accountant malpractice, accounting malpractice, tolling agreement, contribution, tax malpractice, estate tax return, estate planning. statute of limitations, limitations period