Malpractice, Private Equity, Wall Street

Lawsuit of the Day: Cerberus v. Paul Hastings

Cerberus Capital Management v Paul Hastings Janofsky Walker.JPG‘Tis the season for… litigation between law firms and their ex-clients? What happened to the holiday spirit of peace and good will for all?
First Simpson Thacher (malpractice), then Debevoise (last item — unpaid fees), and now, Paul Hastings (malpractice). From the New York Law Journal:

A financing unit of Cerberus Capital Management L.P. has sued Paul, Hastings, Janofsky & Walker, claiming the law firm gave it bad advice in connection with a loan the private equity firm made last year to a company looking to bring retailer Steve & Barry’s out of bankruptcy.

Ableco Finance LLC, a unit of Cerberus with more than $6 billion under management, filed an amended complaint Friday in Manhattan Supreme Court against its former lawyers seeking more than $55 million it said it lost because of the $125 million loan. Ableco claims it would never have made the loan last year if the Paul Hastings team had advised it that the buyer would not have rights to all of Steve & Barry’s inventory, which Ableco understood would back the loan.

“No competent, diligent finance lawyer would have put his client in such a vulnerable position,” Ableco’s complaint reads in part.

Ouch. We agree with Ashby Jones of the WSJ Law Blog: “It’s never good for a law firm to get sued by one of its clients. But when the client is a deep-pocketed heavyweight like private-equity giant Cerberus, the news is probably especially unwelcome.”
But Paul Hastings is fighting back, with the help of high-powered counsel.

The firm has hired Paul Spagnoletti and Davis Polk & Wardwell. It’s planning to fight the charges. A PH spokesperson told the New York Law Journal:

Paul Hastings adheres to the highest standards of professionalism and integrity in the representation of its clients, and its representation of Ableco in this matter was no exception. It’s unfortunate that Ableco has chosen to sue its longtime legal adviser to recoup business losses caused by the economic downturn.

You can check out a copy of the complaint over here (PDF). Readers, what do you think of the merits of the case?
Ableco Finance LLC v. John F. Hilson [PDF]
Ex-Client Sues Paul Hastings for $55 Million in Soured Loan [New York Law Journal]
Cerberus Sues Paul Hastings Over Alleged Bad Advice, Seeks $55M [WSJ Law Blog]
Cerberus Suing Paul Hastings For $55 Million Over Loan Advice [Business Insider / Law Review]

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