Legal Malpractice Can Come Out of Bankruptcy Court

Legal malpractice cases can arise out of the context of a company’s bankruptcy filing. A lawyer’s negligence may cause a company to go bankrupt, which might lead to a legal malpractice case. A bankruptcy lawyer may mishandle an aspect of a company’s bankruptcy, leading to a possible legal malpractice claim. And bankruptcy trustees looking to collect assets for a bankrupt company’s estate may look to hire counsel to pursue a legal malpractice claim.

At Stanford, Ryan & Associates, APC we have successfully handled a number of significant cases arising out of a bankruptcy court filing, including representing the company itself, or representing certain principals of the company, or representing bankruptcy trustees, or even representing the new owners of the company after it emerges from bankruptcy. In many cases, it is important to note that the bankruptcy filing will likely extend any statute of limitations applicable to legal malpractice claims, but a professional evaluation is necessary.

The GM bankruptcy provides an example of a legal malpractice claim with damages in the billions! A filing mistake rendered a $2.5 billion loan no longer secured, which of course mattered greatly in the bankruptcy proceeding.

A filing mistake by attorneys that rendered a secured loan from JP Morgan to General Motors unsecured left a group of creditors free to pursue a clawback of some $1.5 billion in the GM bankruptcy case. The U.S. Court of Appeals for the Second Circuit held that it did not matter that neither GM, nor its counsel at Mayer Brown, nor JP Morgan or its counsel at Simpson Thatcher & Bartlett, intended a mistake that changed the secured status of a $1.5 billion loan to GM when preparing for and making a filing under the Uniform Commercial Code. The Court said, “We conclude that although the termination statement mistakenly identified for termination a security interest that the lender did not intend to terminate, the secured lender authorized the filing of the document, and the termination statement was effective to terminate the security interest,” the Second Circuit said in In Re Motors Liquidation Company.

General Motors had entered into a synthetic lease to obtain $300 million in financing from a syndicate that included JP Morgan in 2001. The lease was secured by liens on 12 pieces of real estate.

In 2006, GM obtained an unrelated term loan for about $1.5 billion that was secured by GM, including equipment and fixtures at 42 facilities in the United States.

In 2008, GM told its counsel responsible for the 2001 synthetic lease, a now-retired Mayer Brown partner, to prepare the documents to repay the lease and terminate the security interests associated with it. The partner assigned some of the work to as associate, who, in turn, asked a paralegal at the firm to perform a search of UCC-1 initial financing statements that had been recorded against General Motors in Delaware.

The paralegal came up with three security interests that ultimately ended up on the closing checklist. The problem was that only two of the security interests applied to the synthetic lease and the third applied to the $1.5 billion term loan. So when Mayer Brown prepared draft UCC-3 amendment termination statements, it included a draft termination statement for the term loan, even though the unrelated UCC-3 statement never used the words “term loan”. This mistake could potentially cost GM over $1.5 billion.

If your company has been forced to file bankruptcy and serious mistakes by lawyers are involved- either before or after filing- you should consult with a certified legal malpractice expert to determine your rights. We at Stanford, Ryan & Associates, APC would be pleased to speak with you.