BigLaw Firm’s Simple $1.5 Billion Mistake

How does a simple mistake by a law firm end up costing $1.5 billion?  According to the U.S. Court of Appeals for the Second Circuit, it happens when the law firm inadvertently includes an unrelated security interest for a $1.5 billion loan in the list of security interests to be terminated in the course of a different loan payoff.  

1And, it happened to behemoth General Motors’s counsel, BigLaw firm Mayer Brown, LLP.  GM had requested that Mayer Brown prepare payoff documents for one of two unrelated loans, including documents to release the security interests held by the lenders.  The Mayer Brown partner assigned the task to an associate, and the associate asked a paralegal to prepare a list of security interests held by GM’s lenders.  Apparently unfamiliar with the matter, the paralegal undertook the search for GM’s financing statements recorded in Delaware and identified three.  Two were relevant to the loan payoff at hand, and the other was a security interest in certain GM assets for the second loan from different investors.

The Mayer Brown associate failed to catch the mistake, as did the Mayer Brown partner who assigned the matter.  The GM representative did not notice the mistake, nor did JPMorgan (the administrative agent and secured party of record for both loans), the lender, or its counsel, Simpson Thacher & Bartlett LLP, all of whom were provided copies of the documents.  GM paid off the loan, and the security interests were released, all three of them.

Shortly thereafter, GM filed for chapter 11 reorganization in the bankruptcy court.  The mistake was discovered during the bankruptcy, and the Committee of Unsecured Creditors sued JPMorgan claiming that the mistake was irrelevant to whether the termination of the security interest was valid, and that without the security interest, JPMorgan was an unsecured creditor on par with the other unsecured creditors. JPMorgan took the position that the termination was unintended, unauthorized and thus invalid.  The Court did not agree.

Transactional law routinely involves numerous documents, often with tedious boiler plate language.  Clearly a number of attorneys and corporate representatives had the opportunity to review the termination documents.  Whether they failed to review them or glossed over language and the terms of the documents, not one of them caught the mistake potentially costing JPMorgan, the lenders, and possibly the law firms, $1.5 billion.  Let this be a cautionary tale to transactional attorneys and legal consumers alike.

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If It Can Happen To Playboy . . . It Can Happen To You

Playboy Enterprises recently filed a legal malpractice lawsuit against its attorneys for failing to settle an employee whistleblower lawsuit within the insurance policy limits, thereby exposing Playboy to a verdict in excess of the policy limits.  According to an April 20, 2015 article on Courthousenews.com, titled Playboy Sues Sheppard Mullin for $7.6M, Playboy claims that the law firm projected Playboy had a 75 percent chance of winning the employee’s lawsuit, and that even if the employee prevailed, her maximum recovery would be well within the $5 million employment practices insurance policy limits.  The firm’s projections were reportedly based upon a lost wage projection and a mock jury trial.

Image courtesy of pixabay.com

Image courtesy of pixabay.com

The employee’s case proceeded to trial, and the jury awarded her $6 million.

Playboy claims in its malpractice lawsuit that the firm’s evaluation failed to account for the employee’s emotional distress and punitive damages claims.  It further claims that had the firm conducted a more thorough analysis, it would have concluded that there could be a verdict in excess of the policy limits.  In other words, Playboy claims that the law firm should have recognized the possibility of an excess verdict and should have demanded on Playboy’s behalf that the insurance company settle the lawsuit within the policy limits.  That would have protected Playboy by preserving a claim against the insurance company for failing to settle the case within policy limits and exposing Playboy to an excess judgment.

[Playboy] claims that an ‘attorney of ordinary skill and capacity’ would have advised it to settle the case and ‘demand that [the insurer] settle within policy limits to protect its insured from both an excess and a potentially uncovered compensatory and punitive damage exposure.’

The law firm denies the allegations and “expects vindication and collection of [their] unpaid fees.”

This is a cautionary tale to both legal consumers and attorneys alike.  Cases need to be properly evaluated for exposure, which at times may warrant a second opinion.  And, when there is any possibility of a verdict in excess of the applicable policy limits, the insurance carrier should be put on notice and a settlement within policy limits demanded.

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Reinventing Law Schools

Elon University School of Law Dean Luke Bierman wrote an article for The New Normal section of the ABA Journal, titled Four steps for reinventing legal education.  In his April 15, 2015 article, Dean Bierman argues that the new normal for law schools includes lower enrollment, higher debt and depressed job prospects.  He charges that there has been much chatter about changing the law school model without many tangible ideas.

Dean Luke Bierman

Dean Luke Bierman

Believing that law schools need to be “creative, bold and prescient” to improve the situation, Dean Bierman proposes four “critical elements of overhaul.”

1. Redesign the curriculum to reflect current and future law practice.

Beyond foundational law courses, students need more and better training in writing, business skills, project management, technology, data analytics, leadership development, and communication. These qualities are coveted by law firms and enable lawyers to blossom from narrow technicians into strategic thinkers, deal makers, problem solvers and community leaders.

2. Focus on real-world learning.

We need to require hands-on learning through partnerships with law firms, judges, nonprofits and government agencies – where students can learn by doing in immersive and iterative programs. We also need students to test themselves in simulations led by practicing attorneys and take part in greater numbers in clinics, trial advocacy, moot court, and mock trial programs.

3. Give students access to a network of judges and attorneys.

Rather than hoping that students will carve out a career path on their own, we should provide them with professional advisers and mentors, including faculty, attorneys, career consultants, and executive coaches who counsel them on course selections, practical experiences and custom pathways to career success. We also should provide workshops and programs that encourage networking and provide exceptional professionalism training for students in areas of ethics and leadership.

4. Overhaul the cost of law school.

[W]ith the average debt of private law school graduates reaching nearly $125,000, the fourth critical element to an overhaul is cost – we must make law school more affordable. . . . One way to do that is to realign the curriculum so that all students can accelerate their studies and graduate in less than the typical three years.

Dean Bierman acknowledges that these changes may seem “aggressive,” but he believes that it is “time for bold action.”  We wholeheartedly agree.

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Judges Who Blog

We have previously posted about judges who blog, including Judge Richard G. Kopf of the U.S. District Court for the District of Nebraska and his blog, Herculesandtheumpire.com. This week, we received an email from Judge Alan Pendleton of the Tenth Judicial District Court in Anoka, Minnesota, advising us that he reads our blog and advising us of his blog, PendletonUpdates.com.

Judge Alan Pendleton

Judge Alan Pendleton

Judge Pendleton started his Judicial Training & Education Blog in August 2014 at the request of his Supreme Court Chief Justice.  According to Judge Pendleton, his blog

serves as the official repository for a series of judicial training updates . . . and is also designed to serve as a one-stop judicial resource library with numerous hyperlinks to sites of interest.

After browsing through the blog, we note that it contains a plethora of information for Minnesota judges (and judges applying Minnesota law).  But we also saw in the blog straight-forward language that could be an informative resource for Minnesota legal consumers as well.  The blog covers many legal issues, including civil (litigation) procedure, criminal procedure, criminal law, divorce, domestic violence, eviction, evidence, and trial issues.

We are gratified that Judge Pendleton has read our blog, and we thank him for bringing his blog to our attention.

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“Hot Bench” – Judge Judy’s New Show Is Eye-Opening!

Judge Judy Sheindlin (a/k/a Judge Judy) has developed a new legal show titled Hot Bench, and according to a March 31, 2015 New York Times article (courtesy of Yahoo! Finance), “it’s a surprise hit.”  Debuting in 2014, it’s already topping the charts as the No. 1 syndicated show.

The premise: a three judge panel hears civil cases and then retires to deliberate . . . all on camera.  The panel: former New York State Supreme Court justice Patricia DiMango, Yale Law litigator Tanya Acker, and criminal defense attorney Larry M. Bakman.  The viewer watches the deliberations and how each judge views the evidence and the witnesses.

images-2

Judge Judy Sheindlin courtesy of wikipedia.org

The show is eye-opening in that the viewer can see for themselves that different judges view evidence and witness veracity differently. The show illustrates the truism that justice actually isn’t blind.

‘People rely too much on the judicial system to be perfectly calibrated,’ Judge Sheindlin said in a telephone interview. ‘Very often, it’s a crapshoot. I wanted people to see that when you go to court you can never be sure of the outcome. The people hearing and determining the cases bring all their history with them.’

On this blog, we have stated numerous times that justice is not always just, it is not blind, and the outcome of any lawsuit can be heavily dependent on the presiding judge.  Hot Bench makes that case abundantly clear.

 

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Commission on the Future of Legal Services

In August 2014, the American Bar Association Board of Governors created the Commission on the Future of Legal Services.  According to a February 2015 ABA article titled, Lots of ideas, but no single theme at Commission on the Future of Legal Services’ public hearing, the Commission held a public hearing during the ABA’s 2015 Midyear Meeting in Houston, Texas, in the hopes of eliciting ideas on how to improve access to justice for consumers with low to moderate income.  A number of people spoke, including attorneys, judges, academics, and representatives of private legal service providers (including Legal Zoom). Unfortunately, the hearing failed to identify an easy fix to the problem.

Picture courtesy of UpstateNYer via wikipedia.org

Picture courtesy of UpstateNYer via wikipedia.org

The Commission’s chair, Judy Perry Martinez, commented on the problem after the hearing:

‘I think there’s an acknowledgement that change has to happen, . . .  Lawyers realize we’re not meeting the needs of the public, and there needs to be a combination of solutions. But what’s the priority, lawyers or the public? I think those interests align. The interest of the client, the interest of the public, has got to be the guiding light.’

According to the ABA article, the Commission will hold a National Summit on Innovation in Legal Services on May 2-4, 2015 at Stanford University.

While the February hearing did not identify any silver bullet, we at LPR are encouraged that the American Bar Association admits there is a problem and are taking steps to resolve it.  Hopefully, judges, lawyers and bar associations across the country will join in and work together to effect legal reform.

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Limited License Legal Technicians

In 2012, the Supreme Court of Washington state enacted a rule allowing non-lawyers to practice law in a limited capacity after specialized training.  According to a March 13, 2015 Washington Post article titled Who says you need a law degree to practice law?, twenty-nine of Washington’s colleges offer the requisite courses in civil procedure, legal research, contracts and family law.  Once the training is completed and they pass a licensing exam, the graduates apprentice with an attorney for 3,000 hours before they can practice on their own.

waCourtsLogo‘They’re highly trained in a specific field of law,’ says Steve Crossland, who chairs the LLLT [Limited License Legal Technician] board. ‘In some ways, it’s more intensive training than what a lawyer gets.’

Washington’s program provides legal services to poor and middle class people who cannot afford traditional legal services, people who would otherwise have to represent themselves – sometimes with dire consequences.

‘The consequences can be failure to understand or enforce an order that can prevent ongoing violence or protect the safety of kids. It can mean losing the right to continue to live in one’s home.’

*     *     *

‘We have people come in who relied on a friend who thought he knew how to fill out paperwork, . . . Then they’d go to court and get creamed. They’ll come to us, and we’ll look at their paperwork and it’s a disaster.’

Given the reduction in funds for legal aid, Washington’s LLLT program is filling a void for the legal services industry.  And, California, Oregon, Colorado and New Mexico are reportedly considering similar programs.

‘We need to take a leaf from the medical profession, which has long recognized that people with health problems can be helped by a range of assistance providers with far less training than licensed physicians,’ New York Court of Appeals Chief Judge Jonathan Lippman said in his 2014 state of the judiciary report. ‘We all accept that. Why not the same in the law?’

Why not indeed.

 

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Pro Bono Requirement For Law Students Can Benefit Everyone

New York has done it, and now California is considering it too.  According to a March 14, 2015 Los Angeles Times article, titled State bar considers requiring all law students to do free legal work, the State Bar of California is considering a proposal to require all law students to complete 50 hours of free legal work or legal work at low rates during law school or within one year of receiving their law license.  The proposal is reportedly in response to the growing number of Californians who need an attorney but cannot afford one.

CalBarSealThere is no denying that there is a vast need for pro bono and low-cost legal services, and the program could be a win-win for the California law schools, law students, law firms and legal consumers.

In 2012, the [California] state bar formed a task force to examine ways to better prepare lawyers for a successful transition into the profession.

Driving the agenda were concerns that law school students needed more hands-on experience in an era of economic belt-tightening. Many large law firms and government agencies spend less money on training new legal recruits, and more than half of newly admitted lawyers work for small practices that lack the resources to provide much training.

Providing free legal work to those who can’t afford attorneys would give young lawyers the experience they need while also addressing a major gap in services to the poor, the task force decided.

But the biggest hurdle seems to be funding.

The Legal Aid Foundation of Los Angeles, one of the largest of about 100 legal aid organizations in the state, accepts only about 10% of law students who apply to volunteer because it is unable to accommodate more, said Phong Wong, the organization’s pro bono director.

“The need is definitely there. We turn away so many low-income clients because we don’t have the support, the resources to help them,” Wong said. “At the same time, there are all these law students who can be put to use. We just need to figure out how to make it work for the clients that we serve.”

Hopefully, the California bar, law firms and law schools will work with the legal aid community to pass and implement this initiative.  It would be a win-win for everyone, especially for legal consumers.

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Justice Entrepreneurs Project

If you live in Chicago and have a low to moderate income, now you have an option for obtaining “reliable and affordable legal assistance.”  The Justice Entrepreneurs Project (JEP) is one of a number of initiatives the Chicago Bar Foundation (CBF) has undertaken to provide the community with “equal access to justice.”

JEP logo

JEP logo

The CBF, through the JEP program, pairs new lawyers who want to serve the community with legal consumers who don’t qualify for free legal aid and who can’t afford traditional law firm rates.  The lawyers are chosen through a “competitive selection process,” and they “are technologically savvy,” “welcome innovation,” and “understand the need to reinvent the traditional law practice.”  The JEB website gives the following description of the program and services offered:

The Justice Entrepreneurs Project (JEP) is a network of independent lawyers who are committed to making quality legal services accessible and affordable for regular people. Lawyers in the JEP offer fixed fees and flexible representation options (like unbundled, a la carte services) to help accomplish this. Their practices seek to be client-centered and emphasize approachability and collaboration between the attorney and client.

Lawyers in the JEP currently assist clients in the following areas:

  • Family Law – including divorce, spousal support, child support, custody, visitation and orders of protection
  • Landlord/Tenant – including eviction proceedings and security deposit claims
  • Consumer Law – including debt collection issues, consumer disputes and Chapter 7 bankruptcy
  • Estate Law – including wills, probate and guardianships
  • Employment Law – including discrimination and wage claims
  • Small Business/Non-profit – including business formation, contracts and intellectual property issues
  • Real Property Law – including foreclosure proceedings and real estate purchase/sale
  • Criminal misdemeanors, traffic tickets, license suspensions and ordinance violations
  • Immigration Law – including visas, residency, naturalization and asylum

LPR applauds the CBF and all of the JEP lawyers who serve their community.  While it is unfortunate that so many people are priced out of traditional law firm assistance, the good news is that there is now what appears to be a great option for that demographic.

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Suing For Emotional Distress? You May Have To Submit To An IPE

So you plan to bring a civil suit against someone or some entity to obtain retribution for some wrong, and as part of your lawsuit, you plan to allege intentional or negligent infliction of emotional distress.  In deciding whether to allege emotional distress, you should consider that you may be required to submit to an independent psychiatric exam (IPE) and you may be required to produce documents and information regarding any counseling or other mental health care (including medication) you have received . . . ever.

Attorney Deidre Clark, a plaintiff in a sexual harassment and retaliatory discharge case against her law firm, just learned this the hard way.  Ms. Clark claimed that the firm fired her in retaliation for complaining about a partner’s unwanted sexual advances using her online posting of her erotic novel as a pretext.  According to a February 23, 2015 abajournal.com article titled Steamy novel writer will have to get psych exam in wrongful firing suit against BigLaw firm, Ms. Clark was ordered to undergo a psychiatric exam because her $15 million claim for intentional infliction of “severe” emotional distress brought her mental state into controversy.  Ms. Clark unsuccessfully argued that although she suffers from suicidal thoughts, anxiety, depression, and related reactions as a result of the defendants’ actions, she is not alleging that the defendants’ actions caused any diagnosed psychiatric condition and does not plan on presenting expert testimony to support her emotional distress claim.  The court ordered the IPE, reasoning that due to the severity of the emotional distress claim, the exam would allow the law firm to defend against the claim.  An appellate court agreed.

Legal consumers contemplating an emotional distress claim should heed this cautionary tale.  Not only is fighting a motion for an independent psychiatric exam itself emotionally draining, it can be quite expensive as well.  The decision to include an emotional distress claim should be an informed one.

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