To paraphrase Count Ciano, Success has many fathers and failure has many targets. You may recall a while back I wrote about how a loan to old General Motors (worth $1.5 billion) was accidentally rendered un-secured. When GM entered bankruptcy, the loan was ultimately determined to be unsecured and lenders (presumably) lost billions. As you might expect, some people were sued as a result. One of those folks was the attorneys for GM. Recently the 7th Circuit entered an opinion in their lawsuit.
By way of brief recap, prior to bankruptcy, GM had (among others) two secured loans. The first was for $300MM and the other for $1.5B. About a year prior to bankruptcy, the $300MM was up for maturity and GM was preparing to refinance.
In the $300MM refi GM was represented by Mayer Brown, LLP, a large and well respected law firm. On the other side, JP Morgan was the agent for the lender syndicate and was represented by another well respected large law firm.
It turns out that at the same time, JP Morgan was also the agent for the $1.5B secured loan. Both loans were perfected by separate UCC1. Mayer Brown prepared the documents for the refi transaction. Unfortunately, on the closing check list and closing documents sent to JP Morgan’s attorneys, the documents contained a release of the $1.5B UCC1.
In what might be the understatement of the year, the 7th Circuit writes:
“The big mistake was that the closing papers for the [$300MM] deal accidentally also terminated the lender’s security interest in the collateral securing the [$1.5B] loan.”
Apparently, all the parties missed the error (save one lone Mayer Brown paralegal, who was ignored). The important part here is that JP Morgan’s attorney’s affirmatively approved the checklist and loan documents – which included the $1.5B release documents. JP Morgan’s attorneys even went to far as to tell Mayer Brown “Nice job on the documents”. (Again, a lesson on your emails being an exhibit).
Despite the colossal oversight and high stakes litigation that followed, no one bothered to tell the syndicate lenders until years later. At which time several brought their own lawsuits.
Strangely, despite the “easy to see” claims against JP Morgan and counsel (7th Circuit’s words, not mine), the lenders sued Mayer Brown. The arguments are essentially 3 fold:
- Mayer Brown was an attorney for JP Morgan in other matters, and therefore was acting as an attorney for JP Morgan in this matter,
- Mayer Brown drafted the documents and therefore owed a duty to JP Morgan, and
- Mayer Brown had an duty because the purpose of the documents were for JP Morgan’s loan.
In the recently released opinion by the 7th Circuit, Oakland Police, et al. v. Mayer Brown, LLP, the Court affirmed that all three arguments are not supportable and the claims must be dismissed.
There is a lot going on in the background of this case which makes it interesting, but the opinion is a great cite for the transactional lawyers who paper up complex transaction. Specifically, the Court holds:
“By preparing the first draft, an attorney does not undertake a professional duty to all other parties in the deal”
The lender’s strongest argument (in my humble opinion) was that it relied on Mayer Brown not to misrepresent the effect of the documents. While everyone seems to agree that the error was simply a mistake, the ruling appears to insulate a non-mistake from liability in exchanging documents. This puts added pressure on all sides to review (and re-review) all turns of draft to ensure nothing new suddenly appears.
That lack of a complete review of a huge stack of documents on the 8th turn is usually a cost saving endeavor. However, one should be mindful of such an argument. The opinion points out that the original inclusion of the wrong release was based on an older UCC search which was used as a “cost-saving” measure by a Mayer Brown paralegal. (on a $300MM refi).
As a side note, the Court also considers whether Mayer Brown became an “attorney of the transaction” similar to an attorney for a title company. The Court found that was not the case, but it serves as a reminder that if the law firm holds money in “trust” as part of the transaction the law firm might inadvertently have became an “attorney of the transaction” and thus owe duties beyond its client.
In this case, for some reason, the lenders decided to sue a lawyer who didn’t represent them for malpractice without suing the actual attorneys representing them. Surely something is going on in the background, but in this case, the alleged failure is on one party and the litigation target was on another.
Oakland Police & Fire Retirement Systems, et.al. v. Bayer Brown, LLP, cause no. 16-2983, In the United States Court of Appeals for the Seventh Circuit. Decided June 28, 2017.