Mayer Brown & Simpson Thacher Make Epic Screwup

Check out this tale of how an unwary paralegal ends up costing a bank millions.

Mistakes happen. It’s why pencils have erasers. But it’s also why law firms install tier after tier of increasingly senior professionals to second-guess every ounce of work product. It’s remarkably effective — and fairly lucrative on an hourly basis.

Unfortunately, the flip side of a tiered system is a tendency toward over-delegation. And that’s how an unwary paralegal ends up costing a bank millions.

J.P. Morgan loaned a good chunk of cash to General Motors as part of a $300 million synthetic loan. It also, in a completely unrelated agreement, joined other lenders in loaning GM $1.5 billion. When GM paid off the first loan, it prepared documents to release J.P. Morgan’s interest in GM property used to secure the $300 million. And that’s when this happened, according to the Second Circuit’s opinion:

A Mayer Brown partner assigned the work to an associate and instructed him to prepare a closing checklist and drafts of the documents required to pay off the Synthetic Lease and to terminate the lenders’ security interests in General Motors’ property relating to the Synthetic Lease. One of the steps required to unwind the Synthetic Lease was to create a list of security interests held by General Motors’ lenders that would need to be terminated. To prepare the list, the Mayer Brown associate asked a paralegal who was unfamiliar with the transaction or the purpose of the request to perform a search for UCC‐1 financing statements that had been recorded against General Motors in Delaware. (emphasis added)

The paralegal passed the assignment on to one of the dudes in the mailroom and the cheese stands alone.

The paralegal’s search identified three UCC‐1s, numbered 2092532 5, 2092526 7, and 6416808 4. Neither the paralegal nor the associate realized that only the first two of the UCC‐1s were related to the Synthetic Lease. The third, UCC‐1 number 6416808 4, related instead to the Term Loan.

So you see where this is going. The associate and the partner accepted the paralegal’s search, because it’s hard to doublecheck three whole items, and prepared a UCC-3 statement releasing the interest securing the $1.5 billion loan too, which is going to become a thing when GM goes bankrupt and J.P. Morgan is told it’s just another schlub in the unsecured line.

Sponsored

So it looks like Mayer Brown screwed up here. But didn’t anyone else look at these documents? Why yes they did!

No one at General Motors, Mayer Brown, JPMorgan, or its counsel, Simpson Thacher & Bartlett LLP, noticed the error, even though copies of the Closing Checklist and draft UCC‐3 termination statements were sent to individuals at each organization for review.

So after signing off on the agreement releasing its interest, J.P. Morgan asked the court to reverse the deal on the grounds of “NO CONSEQUENCES!” It was a cute trick. Amazingly, the bankruptcy court agreed with them. The Second Circuit disagreed. J.P. Morgan and Simpson Thacher looked over all the documents and unequivocally agreed to file the documents so they can’t act like they aren’t responsible for the content of the documents. What’s the point of papering a deal if the law isn’t going to stick you to it? That’s why lawyers get paid to scrutinize these things instead of just saying, “sure whatever” to every document that crosses their desks.

When Mayer Brown e‐mailed a draft of the Escrow Agreement to JPMorgan’s counsel for review, the same Simpson Thacher attorney responded that “it was fine” and signed the agreement.

Like that.

Sponsored

When it really comes down to it, at least Mayer Brown’s error worked out in its client’s favor. It may be embarrassing, but GM can’t be too angry. Meanwhile, Simpson Thacher’s inability to catch the error is so much worse. With millions on the line, Simpson just signed off with a cursory “fine” instead of checking up on it. It’s not like looking up these UCC statements would’ve been all that difficult.

After all, Mayer Brown had a paralegal do it.

The full opinion is available on the next page…

(Mayer Brown, through a spokesperson, stated that “as the matter is in active litigation, the firm will decline comment.” Simpson Thacher didn’t get back to us. Flip to the next page to read the Second Circuit opinion.)