Legal Malpractice

A Highly Technical Partial Dismissal in Legal Malpractice

By (Andrew Lavoott Bluestone)

Large scale legal malpractice cases (greater than $ 10 Million dollars) often engender highly technical motion practice.  Here, in Ableco Fin. LLC v Hilson ;2011 NY Slip Op 00566 ;Decided on February 1, 2011 ;Appellate Division, First Department  we see the aftermath of a bankruptcy - reorganization - take over gone bad.  The figures are staggering,  although we must admit that big number legal malpractice cases seem to be more and more prevalent.
 

Plaintiffs won this motion before Justice Kornreich, but now lose one arm of the negligence claims.  The AD1 decision surgically dissects out whether a certain loan and security transaction potentially violated bankruptcy rules, and if it did not, why it should be dismissed.

"The allegations that defendants failed to advise plaintiff that the acquisition documents permitted the borrower to have credit card sales proceeds deposited into bank accounts over which the retailer retained control and that there was a significant risk that the retailer would use these deposits to set off its own expenses rather than to repay the loan are sufficient to allege that defendants "failed to exercise the reasonable skill and knowledge commonly possessed by a member of the legal profession" (Arnav Indus., 96 NY2d at 303-304; Camarda, 167 AD2d at 152). Defendants' contention that the alleged "improper conduct" of the retailer was an unforeseen intervening cause of plaintiff's loss is unavailing at this juncture (see Garten v Shearman & Sterling LLP, 52 AD3d 207 [2008]).

However, documentary evidence establishes a conclusive defense to the allegation that defendants' failure to include in the original security agreement an express obligation that the borrower sign control account agreements raised the "specter" of a preferential transfer challenge to a $28.5 million loan repayment the borrower made within 90 days of filing for bankruptcy. [*2]The documents show that on August 26, 2008, the borrower granted plaintiff a security interest in all its deposit accounts and cash, and that on September 12, 2008, plaintiff executed an agreement that required the bank to honor all instructions it received from plaintiff, but not from the borrower, concerning that account. Thus, a security interest in the account was transferred to plaintiff on August 26, 2008 and was perfected on September 12, 2008 — within 30 days of the transfer. Pursuant to bankruptcy law, if the security interest is perfected within 30 days of the transfer, then the transfer is deemed to have been made when the security interest was created (see 11 USC § 547[e][2][A]). Since the transfer is deemed to have been made on August 26, 2008, it was not "for or on account of an antecedent debt owed by the debtor before such transfer was made" — one element required to establish a voidable preference (see id. § 547[b][2]). Thus, no voidable preference was established (id. § 547[b]). "

Full post as published by New York Attorney Malpractice Blog on February 03, 2011 (boomark / email).