Harry D. Krause, Trustee, Richard Musgrave Bypass Trust v. Dennis R. Book and Book & Book Llp

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NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
HARRY D. KRAUSE, TRUSTEE,
RICHARD MUSGRAVE BYPASS
TRUST
Plaintiff-Appellant,
v.
DENNIS R. BOOK AND BOOK & BOOK
LLP,
Defendants-Appellees.
No. 16-15460
D.C. No. 5:15-CV-02280-LHK
MEMORANDUM*
Appeal from the United States District Court
for the Northern District of California
Lucy H. Koh, District Judge, Presiding
Submitted October 20, 2017**
San Francisco, California
Before: IKUTA and HURWITZ, Circuit Judges, and GWIN,*** District
Judge.
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
** The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
*** The Honorable James S. Gwin, United States District Judge for the
Northern District of Ohio, sitting by designation.
FILED
OCT 24 2017
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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This is an action by Harry Krause, trustee of the Richard Musgrave Bypass
Trust, against his predecessor as trustee, Peggy Musgrave, and the Trust’s former
attorney, Dennis Book, for breach of fiduciary duty, breach of trust, conversion, and
malpractice. Krause, suing as trustee on behalf of the Trust, alleges that Musgrave
and Book improperly diverted approximately $1.2 million from the Bypass Trust
before he became trustee. The district court dismissed the claims against Book as
time-barred under California Code of Civil Procedure § 340.6, but gave Krause
thirty days to file an amended complaint. On the thirtieth day, Krause moved for an
extension of time in which to amend his complaint or, in the alternative, for leave to
file the amended complaint attached to his motion. The district judge denied
Krause’s motion with prejudice. Krause then settled his claims against Musgrave.
The only claims at issue on appeal are those against Book.
After the district court entered a final judgment dismissing Krause’s claims
against Book, Krause appealed. We have jurisdiction under 28 U.S.C. § 1291 and
affirm.
1. Book argues that the district court’s December 10, 2015 order denying leave
to amend was a final judgment because it effectively “extinguished” Krause’s case,
In re Korean Air Lines Co., Ltd., Antitrust Litig., 642 F.3d 685, 698 (9th Cir. 2011)
(finding that denial of leave to amend was a final order because it “effectively
extinguished Plaintiffs’ entire case”), and that Krause’s eventual appeal from the

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later judgment was therefore untimely. But, when the district judge entered its
December 10 order, Krause’s claims against Musgrave, which were not dismissed
until January 28, 2016, remained outstanding. Thus, there was no final judgment
until February 19, 2016, when the court entered its formal order dismissing Krause’s
complaint against Book. See Fed. R. Civ. P. 54(b). Krause timely appealed less than
thirty days later, on March 17, 2016. Therefore, we reject Book’s argument that the
appeal was untimely.
2. The district court correctly found that Krause’s claims against Book are
time-barred under § 340.6, a four-year statute of limitations for attorney malpractice
claims. Because Book ceased representing Musgrave in December 2009, any claims
against Book arising out of his representation of the Trust would, absent tolling, be
time-barred after December 2013. Krause did not file this suit until May 20, 2015.
For the reasons stated below, none of the bases for tolling the statute of limitations
are applicable.
3. Krause first argues for tolling under California Code of Civil Procedure
§ 340.6(b), which provides that the statute of limitations in an attorney malpractice
action “based upon an instrument in writing, the effective date of which depends
upon some act or event of the future” begins to run only upon the occurrence of that
event. Krause contends that the Bypass Trust could not become effective until the
death of Peggy Musgrave. But, under California law, a trust becomes effective when

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assets are transferred into it. See Platt v. Wells Fargo Bank Am. Trust Co., 35 Cal.
Rptr. 377, 385 (Ct. App. 1963) (deeming irrevocable trust effective upon distribution
of assets into trust). Assets were transferred into the Bypass Trust in 2008. There is
no basis for Krause’s argument that there are multiple effective dates for tolling
purposes.
4. Krause next relies on § 340.6(a)(1), which provides for tolling until a
plaintiff suffers “actual injury.” In an attorney malpractice case, actual injury
requires “damages compensable in an action” against the attorney. Jordache Enters.,
Inc. v. Brobeck, Phleger & Harrison, 958 P.2d 1062, 1071 (Cal. 1998). Krause
argues that any damages suffered by the Trust during Musgrave’s trusteeship were
not compensable by Book because Musgrave had misallocated the funds, and she
had a duty to restore them. This argument fails. As trustee, Musgrave had an
obligation to protect trust assets, and sustained an actual injury as trustee when Book
assisted in underfunding the trust estate, even if such underfunding enriched
Musgrave personally. See Cal. Prob. Code. § 16249. Moreover, the beneficiaries of
the trust sustained actual injury when the underfunding occurred, and could have
pursued damages from both Musgrave and Book; attorneys are liable to trust
beneficiaries for breaches of fiduciary duty in which they participate. See Wolf v.
Mitchell, Silberberg & Knupp, 90 Cal. Rptr. 2d 792, 795–96 (Ct. App. 1999). If
Book participated in the alleged diversion of funds, Krause, as a beneficiary, could

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have recovered damages directly from Book after the diversion occurred.
5. Krause next argues that at least some of the damages compensable by Book
are the costs of this litigation, which were not incurred until after the statute of
limitations had run. But, even if the expense of bringing a malpractice suit gives rise
to recoverable damages, the fact that the Trust may have suffered further injury after
the statute began to run does not warrant tolling. See Foxborough v. Van Atta, 31
Cal. Rptr. 2d 525, 530 (Ct. App. 1994) (“Thus, when malpractice results in the loss
of a right, remedy, or interest, or in the imposition of a liability, there has been actual
injury regardless of whether future events may affect the permanency of the injury
or the amount of monetary damages eventually incurred.”).
6. Krause argues that the statute of limitations was tolled under § 340.6(a)(4)
because he was under a “legal disability” and unable to commence legal action until
he became trustee. A legal disability is one that denies a claimant access to the court.
See Bledstein v. Superior Court, 208 Cal. Rptr. 428, 437 (Ct. App. 1984). This
argument fails. Neither the prior nor current trustee of this trust was under a legal
disability that would have prevented filing a malpractice action against Book. See
Cal. Prob. Code § 16249. To the extent Krause raises this argument not as a trustee,
but as a beneficiary, his argument fails because he could have brought suit against
“third parties who are alleged to have committed torts against the trust,” including
an attorney who aided and abetted a trustee’s breach of fiduciary duty. Wolf, 90 Cal.

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Rptr. 2d at 795; see also Cal. Prob. Code § 17200(a), (b)(12) (authorizing a
beneficiary to bring an action “[c]ompelling redress of a breach of the trust by any
available remedy”).
7. Finally, Krause argues that the district court abused its discretion in denying
his motion for leave to file an amended complaint. The district court’s order cited
Foman v. Davis, 371 U.S. 178, 182 (1962), under which a court may deny leave to
amend for “undue delay, bad faith or dilatory motive on the part of the movant,
repeated failure to cure deficiencies by amendments previously allowed, undue
prejudice to the opposing party by virtue of allowance of the amendment, [or] futility
of amendment.”
8. The only new claim against Book in the proposed amended complaint is a
count alleging breach of fiduciary duty, based on Book’s failure to communicate
with Krause after Krause became trustee in 2014. But the statute of limitations had
run before 2014 because of the diversion of funds. And, the complaint does not
explain how the Trust was further damaged because of the alleged failure to
communicate. The proposed amendment was therefore futile.
AFFIRMED.

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