Friday, February 14, 2014

Securitization Malpractice Claim Survives

The New York Appellate Division for the First Judicial Department has held that a legal malpractice claim may continue.

The issue on appeal was whether a document should have triggered further review by the defendant law firm.

In this legal malpractice action, plaintiffs allege that defendant law firm failed to provide them with the appropriate legal advice, and rendered a legal opinion without performing the necessary due diligence, in connection with the securitization of a pool of commercial mortgage loans. When one of the loans went into default, the trustee of the trust holding the mortgages brought an action against plaintiffs in federal court alleging that they had breached various warranties in the securitization agreements. Plaintiffs maintain that the alleged breach of the warranties was the result of the law firm's malpractice leading up to and during the securitization process. Plaintiffs claim that they were forced to settle the federal lawsuit for millions of dollars, and that they would not have suffered these damages but for the law firm's negligence. The motion court denied the law firm's motion for summary judgment dismissing the malpractice cause of action. We now modify to dismiss that part of plaintiffs' claim alleging that the law firm failed to provide appropriate legal advice, and to limit plaintiff's claim that the law firm did not perform the requisite due diligence before rendering its legal opinion on the securitization.

The majority opinion notes and disputes a dissent

In concluding that the malpractice cause of action against Cadwalader should be dismissed in its entirety, the dissent misperceives that the majority is reaching out to create an issue of fact. We emphatically reject this contention, and it does not become true simply because the dissent continually repeats it. As noted, the motion court, in its decision, addressed the significance of the Deal Highlights document in denying Cadwalader's motion for summary judgment. In light of the motion court's reliance upon this critical document, it is disingenuous for the dissent to accuse the majority of creating fact issues for trial. In upholding Nomura's malpractice claim on a narrow basis, we fully adhere to our role of "issue-finding, rather than issue-determination" (citation omitted)

From the dissent:

If I agreed with the majority that, on this record, the information in the Deal Highlights document could reasonably be found to constitute a "red flag" that should have prompted Cadwalader to make further inquiry, I would join in affirming the denial of summary judgment. After all, even while they took the position (with which the majority agrees) that Cadwalader was not responsible for conducting due diligence, Cadwalader's expert witnesses and its senior REMIC partner, Charles Adelman, Esq., agreed in their testimony that it would have been appropriate for the firm to raise an issue with Nomura if any information came to Cadwalader's attention that reasonably put in question the qualification of any of the loans for REMIC treatment. Nothing in the record, however, supports the majority's conclusion — a conclusion that Nomura itself has not asked us to draw — that the Deal Highlights document, merely because it stated that the appraisal included the hospital's value as a going concern, should have alerted Cadwalader to a potential problem with the loan, given that Cadwalader had already properly advised the client about the REMIC rules (as determined by the majority). To reiterate, if there was any red flag in this case, it was a document that Nomura, but not Cadwalader, had in its possession when the securitization closed, namely, the August 1997 appraisal of the hospital, which had been prepared as the basis for the underwriting of the Doctor's Hospital loan.

(Mike Frisch)

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