Legal Malpractice Suit Over Bad Loan Advice Moves Forward

Cadwalader Loses Bid to End Suit by Nomura Over Loan Advice
The New York Law Journal by Joel Stashenko  -  January 17, 2012

A legal malpractice claim may go forward against Cadwalader Wickersham & Taft for the firm's advice to a Japanese securities company about the safety of commercial loan investments in the 1990s, a state judge has determined. Acting Supreme Court Justice Melvin L. Schweitzer rejected Cadwalader's motion to dismiss the claim on summary judgment, ruling that triable issues of fact remain about the firm's handling of a bundle of commercial loans in 1997 worth about $1.8 billion. Primarily at issue in Nomura Asset Capital v. Cadwalader Wickersham & Taft, 116147/06, is a $50 million loan Nomura Asset Capital made to the Doctor's Hospital of Hyde Park in Chicago in 1997 and whether the firm properly attested to the fact that the loan was adequately securitized by the value of real property held by the hospital. Cadwalader issued an opinion letter to Nomura stating that the $50 million loan qualified for special tax treatment as a "real estate mortgage investment conduit," or REMIC, for federal income tax purposes, according to Justice Schweitzer. In order to qualify for that status, a loan must be securitized for the value of real property totaling at least 80 percent of the amount borrowed. Justice Schweitzer, who sits in the Manhattan Commercial Division, wrote in his Jan. 11 ruling that testimony on Cadwalader's behalf so far did not indicate that appraisals of the Chicago property were adequately made or that the law firm warned Nomura that the hospital loan "potentially ran afoul" of the 80 percent test under REMIC. Indications about the value of the property made to the firm showed it was worth just over $40 million, not $50 million, the judge said. "From a REMIC standpoint, Cadwalader had in its files a document that contained certain information about the DHL [the hospital], particularly the $40.6 million cost-based value which brought the loan perilously close to the 80 percent test, and which indeed could be viewed as a 'red flag' that this loan needed to be further scrutinized for REMIC-eligibility," Justice Schweitzer wrote. On the other hand, the judge added, a jury could conclude that the loan was prudent under the circumstances. But he said the question presents an issue for a jury to decide. The judge rejected the contention from Cadwalader that it was "universal practice," especially in 1997, for a lender to rely on its own securitization attorneys to set property appraisals as opposed to being advised by law firms hired to counsel clients about their investments. Justice Schweitzer said the testimony before him was contradictory both about the obligations of the firm on advising clients and about adherence to the 80 percent guideline for securitizing investments under REMIC. "When all of this evidence is viewed in the light most favorable to Nomura, there is no doubt that triable issues of fact have been raised requiring that a jury view all of this and come to its own conclusion," the justice wrote. In arguments before the judge last fall, lawyers clashed over whether Cadwalader's advise to Nomura violated the eligibility under REMIC and the associated tax advantages (NYLJ, Sept. 28).  The loan went into default in 2000 and its servicer, LaSalle National Bank, sued Nomura alleging it had improperly claimed the loan was eligible for REMIC tax breaks. Nomural settled the debt for $68 million following an adverse ruling from the U.S. Court of Appeals for the Second Circuit in LaSalle Bank Natl. Assoc. v. Nomura Asset Capital Corp., 424 F.3d 195 (2005). Plaintiffs are the Nomura Asset Capital Corporation and its affiliate, the Asset Securitization Corporation. David R. Mariott of Cravath, Swaine & Moore, who represents Cadwalader, said he was "disappointed" by the ruling but declined further comment, including whether the firm would appeal. Amianna Stovall of Constantine Cannon, attorney for Nomura, declined to comment. Justice Schweitzer set a status hearing for Feb. 7.  Joel Stashenko can be contacted at jstashenko@alm.com.