Legal News

Will ?Clerical Error? Bite Lenders to Heller Ehrman?

By Ashby Jones

Given the events of the past six months, it’s probably the least of their worries. Still, the beleaguered Citibank and Bank of America have found themselves in the middle of a fracas involving the bankruptcy of Heller Ehrman, the Bay Area law firm that went belly up at the end of last year.

The Heller estate and its creditors made clear on Friday that they were likely to sue the banks, two former lenders to the firm, to get back $50 million Heller paid them leading up to the firm’s failure in December. Click here for the story, from the Recorder, and here for an earlier Recorder story, further outlining the debate. On Friday, the estate and creditors asked a bankruptcy judge in San Francisco if they had standing to sue the banks. The judge, Dennis Montali, has yet to rule.

The Heller estate and Heller creditors are seeking to file a so-called “preference” action against the banks. Such a suit would be made much easier if the Heller bunch could prove that the banks’ loans were unsecured, an issue which appears up in the air. Because of what the banks claimed was a “clerical error” in 2007, the banks failed to secure their loan with Heller. Bank of America, the main lender, attempted to correct the error in October, but both that action and the $50 million in payments fall in the 90-day “preference” period before the bankruptcy and can be tossed out by the judge.

“We need to know this fact. Is there a preference action or not? And many other things fall in the rest of the case based on this fact,” said Thomas Willoughby, a lawyer for the creditors, at a hearing on Friday. With that decided, the parties can arrive more quickly at a bankruptcy-ending liquidation plan, they said, and speed up settlements.

Full post as published by Law Blog - WSJ.com on March 30, 2009 (boomark / email).