A Lawyer’s Error Could Cost $1.5 Billion: Business of Law

A lawyer’s error -- not caught by bankers or more senior attorneys at two firms -- could result in a huge loss for JPMorgan Chase Bank NA.

A federal appeals court in Manhattan on Wednesday ruled that creditors of the predecessor to General Motors Co. may be entitled to $1.5 billion stemming from a mistake in the recording of security interests in JPMorgan’s financing.

An associate at Mayer Brown LLP, using information from a paralegal, made the initial error, but it went undiscovered by senior lawyers at the firm as well as attorneys at Simpson Thacher & Bartlett LLP, which represented JPMorgan, according to the appeals court. Employees at the bank also didn’t find the error.

While the blunder isn’t surprising, the potential size of the fallout is startling. It’s not the first time a seemingly simple error by a big-firm lawyer could prove costly for a client.

In 1989, Prudential Insurance Co. of America, a unit of Prudential Financial Inc., sued three law firms, including Dewey, Ballantine, Bushby, Palmer & Wood, for a clerical mistake in a lien that reduced a $92,885,000 interest to $92,885, according to the New York Times. Two of the firms, including Dewey, ultimately settled. The case against the third was dismissed.

More recently, an error on one page of a dense offering document prepared by Stroock & Stroock & Lavan LLP for a real estate developer permitted approximately 40 potential condominium purchasers to rescind their contracts because a closing date was listed as 2008, not 2009 as intended.

Lost Battle

The developer, CRP/Extell, ultimately lost its battle to overturn the rescissions based on a legal doctrine that can provide forgiveness for a “scrivener’s error.”

Robin Wagge, a spokeswoman for Stroock, said the firm declined to comment on the matter.

These are the kinds of cases that cause corporate lawyers to fret. Typos and transpositions are easy to make but not always so easy to spot.

The JPMorgan case involved GM’s attempt to repay $300 million in “synthetic lease financing.”

Lawyers for JPMorgan and GM mistakenly filed documents that, on their face, also terminated the security interest for a separate $1.5 billion financing that was supposed to remain on the books.

The mistake was discovered during GM’s Chapter 11 reorganization, and the creditors’ committee claimed the mistake meant JPMorgan didn’t have a valid lien to secure the $1.5 billion loan. Without the lien, the bank would become an unsecured creditor, equivalent to GM’s other unsecured creditors.

Unintended Error

U.S. Bankruptcy Judge Robert E. Gerber ruled for the bank in March 2013, saying the loan’s secured status survived because the error was unintended.

In reversing, the U.S. Court of Appeals in Manhattan found that while the Mayer Brown associate made the initial mistake, the firm prepared a closing checklist containing the error that was sent to both a JPMorgan managing director for review as well as to Simpson Thacher.

“Neither directly nor through its counsel did JPMorgan express any concerns,” the appeals court found.

In fact, the court said an unnamed Simpson Thacher attorney responded simply as follows: “Nice job on the documents. My only comment, unless I am missing something, is that all references to JPMorgan Chase Bank, as Administrative Agent for the Investors should not include the reference ‘for the Investors.’”

It’s too early to tell how this will play out.

Legal Theories

Stephen Gillers, a professor at New York University School of Law and an expert in legal ethics, said in an e-mail that because Mayer Brown was counsel to GM, the debtor, and not to JPMorgan, “without more facts, we cannot say that an error by it can support liability to the bank syndicate or JPMorgan, which was not its client but a creditor.”

He added that while there may be theories under which Mayer Brown would be liable to the bank syndicate providing the financing, of which JPMorgan was a part and acted as the administrative agent, according to the opinion, Gillers said he hadn’t “seen facts to support that.”

In addition, he said, the bank had its own counsel and, as a result, “Mayer’s liability is doubtful,” although it could wind up in litigation. He didn’t say whether he thought Simpson Thacher might have any liability.

It’s not yet clear what steps the bank and the firms will take.

Considering Options

“We’re still reviewing the decision and looking at our options,” Andrew Gray, a spokesman for JPMorgan, said in an interview Wednesday.

John D. Tuerck, the director of public relations at Mayer Brown, in an e-mail declined to comment because the litigation isn’t over.

Amanda Smith, a spokeswoman for Simpson Thacher, didn’t respond to phone and e-mail messages seeking comment.

If the firms wind up shouldering some of the loss, malpractice insurance will certainly come into play. But Gillers said insurance for even the biggest firms “rarely exceeds $100 million.” He added that future revenue “can be a source of recovery if there is a judgment or settlement in excess of the policies.”

The oversight in this case, with its outsize repercussions, may cause firms to adopt tighter practices and procedures -- “belt and suspenders,” in old-school parlance.

Jason Cyrulnik, a partner at Boies Schiller & Flexner LLP, represented CRP/Extell in the litigation that ensued from the error in the condominium offering document. He said in a phone interview that “courts over the last century have generally permitted parties to correct unintended errors.”

“But in the worst case, a court may decide not to correct an error and millions or more can go to an undeserving party because of a mistake like this,” he said.

Before it's here, it's on the Bloomberg Terminal.