On June 28, 2017, the rollercoaster case with the billion-dollar mistake seems to have finally come to a close with the rendering of a decision by the Seventh Circuit Court of Appeals.
To bring you up to speed, the story begins with two transactions: (1) a secured financial agreement between a syndicate of lenders represented by JP Morgan and General Motors in 2001 for $300 million (the “2001 Synthetic Lease”) and (2) a $1.5 billion dollar loan by over 400 lenders (the “Lenders”), represented by JP Morgan, to General Motors (the “2006 Term Loan”). When the 2001 Synthetic Lease was reaching its maturity date, General Motors instructed its counsel, Mayer Brown, to prepare the documents to pay off the 2001 Synthetic Lease. Mayer Brown prepared the relevant closing documents, including a UCC-3 termination statement.
However, due to the faulty inclusion of the UCC-1 related to the 2006 Term Loan in the search by Mayer Brown paralegal, a UCC-3 termination statement was also prepared for the 2006 Term Loan. To quote the Seventh Circuit’s decision, which will be discussed momentarily, that’s a “a $1.5 billion (with a “b”) mistake.” Mayer Brown provided the draft to JP Morgan’s counsel, Simpson Thacher, for review. Simpson Thacher didn’t catch the billion (with a “b”) mistake and authorized the release. Consequently, both the remaining interest on the 2001 Synthetic Lease and 2006 Term Loan were released.
The mistake went unnoticed until General Motors’ bankruptcy proceedings in June 2009. After the mistake was uncovered, the bankruptcy court agreed to treat the Lenders as if they were still secured, since General Motors had continued complying with the terms of the 2006 Term Loan and the mistake had not led to any practical consequences. After the bankruptcy proceedings, General Motors brought suit in bankruptcy court, claiming that the security interest had been terminated and the Lenders were unsecured. Shockingly, the bankruptcy court found that the security interest had not been terminated.
General Motors appealed the decision to the Second Circuit, who reversed the decision of the bankruptcy court. The Second Circuit held that, even though the release was mistaken, the 2006 Term Loan was terminated when the UCC-3 statement was filed and JP Morgan knowingly terminated the security interest when it authorized the filing.
Unhappy with the Second Circuit’s decision, the Lenders filed a class action suit against Mayer Brown alleging that Mayer Brown committed legal malpractice and negligent misrepresentation. The Lenders alleged that Mayer Brown owed them a duty of care, breached that duty, and caused them harm. The district court disagreed and dismissed the case, holding that Mayer Brown did not owe a duty of care to the Lenders, who were not its clients but parties adverse to Mayer Brown’s client in the 2016 Term Loan transaction. The Lenders appealed to the Seventh Circuit of Appeals.
The Seventh Circuit agreed with the district court’s assertion that Mayer Brown owed no duty to the Lenders. The Seventh Circuit reasoned that Mayer Brown did not have an attorney-client relationship with the Lenders. Instead, the Lenders “were represented by counsel who were not prevented from reviewing the documents and had no valid justification for relying on Mayer Brown’s drafts.”