CHICAGO (CN) – Entities that loaned General Motors $1.5 billion before it went bankrupt cannot sue GM’s law firm, Mayer Brown, for accidentally canceling the collateral on the loan, the Seventh Circuit ruled.
The Chicago-based appeals court ruled Wednesday that Mayer Brown has no duty to GM’s lenders because it did not represent them.
“If plaintiffs’ theory held water, the law firm would continue to owe a duty of care to look out for the adverse party’s interests, in conflict with its duties to its client in the matter at hand,” U.S. Circuit Judge David Hamilton wrote for a three-judge panel.
More than 400 entities, including the Oakland Police and Fire Retirement System, lent GM $1.5 billion in 2006, a loan secured by GM’s equipment at all its U.S. facilities.
The loan was facilitated by JPMorgan acting as agent for the lenders.
But in 2008, when GM’s attorneys at Mayer Brown drafted a closing checklist to terminate an unrelated $150 million GM loan, the statement mistakenly terminated the collateral securing the $1.5 billion loan.
Neither Mayer Brown nor JPMorgan’s attorneys with Simpson Thacher noticed the error until GM filed for bankruptcy in 2009.
As a result, GM’s lenders substantially lost their investment in the $1.5 billion loan, and they face a lawsuit from GM’s remaining secured creditors to claw back money paid to them under the Chapter 11 reorganization.
Bankruptcy law provides for the payment of secured creditors before unsecured creditors, but the lenders’ claims are now unsecured because of the erroneous filing.
The GM lenders filed class actions in August 2015, claiming attorney malpractice put their bankruptcy claims in jeopardy.
But the Seventh Circuit ruled that, in this case, responsibility for the mistake cannot be laid solely at Mayer Brown’s feet.
“In every complex transaction like the loan and payoff between General Motors and JP Morgan, one party or another must prepare the first draft of every document,” Hamilton said “By preparing a first draft, an attorney does not undertake a professional duty to all other parties in the deal. The fact that the Mayer Brown drafts were provided to Simpson Thacher for review indicates that the drafts prepared by Mayer Brown were simply that – drafts – not a legal opinion to be relied upon by other parties. We must also note that, when provided an opportunity to review the Mayer Brown drafts, a Simpson Thacher attorney replied, ‘Nice job on the documents.’”
U.S. Circuit Judges Richard Posner and Daniel Manion joined Hamilton on the panel.