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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