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Mayer Brown Escapes Liability For Drafting Error in UCC Statement

Source: OAKLAND POLICE AND FIRE RETIREMENT SYSTEM v. MAYER BROWN, LLP, Dist. Court, ND Illinois 2016 – Google Scholar

This is a legal malpractice case that was dismissed because the plaintiff was not a client of Mayer Brown, LLP, a noted Chicago law firm. The plaintiff was part of a group of institutions that made a loan to General Motors before GM filed bankruptcy. Mayer Brown allegedly drafted documents which released certain UCC security interests and allegedly caused harm to the plaintiffs.

The facts of the various transactions are complex. I will do my best to accurately summarize them.

The Synthetic Lease

In 2001, GM entered into a sale and leaseback transaction with certain lenders. The transaction was structured as a sale and leaseback where GM sold 15 properties to a group of lenders (not including plaintiff) who then agreed to lease the properties back to GM. This transaction was effectively a loan to GM of $300 million. This transaction is referred to as the “Synthetic Lease.” ¬†Mayer Brown represented GM in the transaction. GM’s obligation to repay the loan was secured by UCC-1 statements filed in Delaware. A UCC-1 places a lien on certain property. That lien has a preference and the holder of the lien is referred to as a secured creditor. An unsecured creditor is one who has no UCC lien. A claim of a secured creditor has priority over the claim of an unsecured creditor.

When a loan is paid in full, it is typical for the parties to file a UCC-3 statement releasing any UCC liens on the property securing the loan.

The 2006 Loan

In 2006, GM borrowed $1.5 billion from a different syndicate of lenders (including the plaintiff). The court explains: “‘The security interest in substantially all of the collateral for the Term Loan was recorded in a UCC-1 financing statement filed in 2006 with the Delaware Department of State.” The security interest for the loan was held by JPMorgan as administrative agent for the Term Loan. “The Term Loan and the Synthetic Lease were completely unrelated to each other and were secured by completely different properties of General Motors.'”

The Payoff of the Synthetic Lease

In 2008, GM informed JP Morgan that it intended to pay off the Synthetic Lease. Mayer Brown prepared documents necessary to close the transaction. Mayer Brown prepared the documents and a closing checklist. The closing checklist erroneously included a draft UCC-3 termination statement for the unrelated Term Loan. The draft documents were circulated to JP Morgan and Simpson Thatcher, a large New York firm. No one caught the error.

The court explains: “JPMorgan authorized the filing of the UCC-3 termination statement concerning the unrelated” Term Loan UCC-1. The Synthetic Lease payoff closed on October 30, 2008, at which time defendant filed the UCC-3 termination statement concerning the unrelated Term Loan UCC-1 with the Delaware Department of State, “thereby terminating substantially all of the $1.5 billion security interest for the Term Loan.”

Shortly thereafter GM filed for bankruptcy. GM ultimately paid the Term Loan, but the inadvertent and erroneous filing of the UCC-3 statement caused the plaintiffs to be subjected to “claw-back” litigation in the bankruptcy court. Claw Back litigation asserts that a preferred creditor obtained a preferential payment.

The plaintiffs then sued Mayer Brown. Mayer Brown’s motion to dismiss was granted on the ground that the plaintiffs (members of the Term Loan syndicate) were not clients of the firm and were not among those who were intended beneficiaries of the Mayer Brown – GM attorney-client relationship. The court concluded that Mayer Brown was GM’s attorney and was working to benefit GM and that Mayer Brown did not have a duty to JP Morgan or the plaintiffs.

In sum, a complicated fact pattern but a simple holding that the plaintiff had no claim because there was no attorney-client relationship.

Edward X. Clinton, Jr.

www.clintonlaw.net