Legal malpractice claim barred by Illinois statute of limitations despite tolling of limitations period by “discovery rule”

by Christopher Graham and Joseph Kelly

Steinmetz v. Wolgamot, et al, 2013 IL App (1st) 121375 (Aug. 12, 2013)

Plaintiff physician sued various professionals, including defendant attorney and law firm for legal malpractice, relating to advice given to him to enroll in an asset protection and tax savings program called AEGIS. Instead of asset protection and tax savings, Plaintiff incurred significant tax penalties from the IRS and Illinois Department of Revenue.

The attorney and firm defendants successfully moved for summary judgment arguing the claims against them were barred by Illinois two-statute of limitations for legal malpractice claims. Plaintiff appeals and the appellate court affirmed.

Defendant attorney advised plaintiff in October 1997 about AEGIS and encouraged plaintiff to join. In October 1999, plaintiff received a letter from the IRS informing him it would audit his tax returns from 1997 and 1998. Sometime later in 1999, plaintiff received a notice of deficiency from the IRS relating to his participation in AEGIS that stated he owed the IRS “large sums of money” in back taxes. Plaintiff then contacted defendant attorney would told plaintiff he was “going to deal with” the IRS and plaintiff should contact AEGIS officials. Defendant attorney also recommended plaintiff contact defendant law firm regarding the IRS notice. Defendant law firm worked with a legal researcher to prepare documents to challenge the IRS notice. The IRS found the arguments in the challenge documents “frivolous.” Despite many more notices from the IRS and consultations with AEGIS and other professionals, plaintiff continued with AEGIS. Plaintiff ultimately owed the IRS and Illinois Department of Revenue over $3 million in penalties and interest.

The appeals court statute of limitations analysis started with 735 ILCS 5/13-214.3(b) which provides:

“[a]n action for damages based on tort, contract, or otherwise ***| against an attorney arising out of an act or omission in the performance of professional services” must be commenced within two years “from the time the person bringing the action knew or reasonably should have known of the injury for which damages are sought.”

The court noted how the two-years “professional services” limitations period incorporates the “discovery rule” which provides that the limitations period is postponed “until the injured party knows or reasonably should know of the injury and knows or reasonably should know that the injury was wrongfully caused.” Khan v. Deutsche Bank AG, 2012 IL 112219.

Here, the appeals court held that the two-year limitations period began to run when plaintiff received the notice of deficiency in 1999. The court stated “[t]he notice of deficiency alerted plaintiff he had suffered an injury by his participation in the AEGIS program and that the injury was wrongfully caused, thereby putting him on inquiry to determine whether he had an actionable claim.”

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