Legal Malpractice

Large Legal Malpractice Case: Mistake or a Sign of the Financial Times?

By (Andrew Lavoott Bluestone)

Nate Raymond of the NYLJ reports on a $55 Million legal malpractice case  Ableco Finance LLC v. Hilson, Ippolito and Paul Hastings Janofsky & Walker LLP arising from loans made to a large retailer, and events after the loan went sour, bankruptcy filings, and apparently a big pay back by the lender in Bankruptcy Court.

"A financing unit of Cerberus Capital Management L.P. has sued Paul, Hastings, Janofsky & Walker, claiming the law firm gave it bad advice in connection with a loan the private equity firm made last year to a company looking to bring retailer Steve & Barry's out of bankruptcy.

Ableco Finance LLC, a unit of Cerberus with more than $6 billion under management, filed an amended complaint Friday in Manhattan Supreme Court against its former lawyers seeking more than $55 million it said it lost because of the $125 million loan. Ableco claims it would never have made the loan last year if the Paul Hastings team had advised it that the buyer would not have rights to all of Steve & Barry's inventory, which Ableco understood would back the loan.

"No competent, diligent finance lawyer would have put his client in such a vulnerable position," Ableco's complaint reads in part."

We obtained the Amended Complaint which  has as its main point "Paul Hastings Failed to Advise Ableco That the Terms of the BH/S&B Agency Agreement Made it  Impossible for Ableco to Get a Perfected First Priority Lien on S&B's Entire Inventory"

The Amended Complaint has but a single claim in Legal Malpractice against all defendants.

As the NYLJ article continues: "It was a difficult time to make a loan, given "an economy that was suffering major disruptions in the housing and credit markets," Ableco said in its complaint. To ensure it got paid back in full, Ableco said it told Paul Hastings lawyers to require a first priority lien on Steve & Barry's entire inventory, which Ableco estimated to be worth $183.7 million. Language agreeing to a first priority lien made it into the commitment letter drafted by Paul Hastings, and Ableco agreed to make the loan.

But according to the complaint, Ableco had not been advised about an earlier agreement between Bay Harbour and Steve & Barry's that would have made a right to the entire inventory impossible. Bay Harbour's earlier agreement with Steve & Barry's left the retailer with control of more than 50 percent of its stores. While the estate had given Bay Harbour a lien on the assets at these stores, the estate kept priority rights to the inventory and sales proceeds that came ahead of that lien.

As a result, Ableco claimed it was in fact impossible for it to receive its lien on a large portion of Steve & Barry's inventory. Ableco said Paul Hastings did not provide a copy of the earlier agreement between Bay Harbour and the retailer's estate, nor communicated its terms, before Ableco made the loan.

With the economy worsening, the company created by Bay Harbour, BH S&B Holdings, began to struggle and it filed for Chapter 11 bankruptcy in the Southern District in November 2008. "

Full post as published by New York Attorney Malpractice Blog on December 16, 2009 (boomark / email).