861 F.3d 644 (7th Cir. 2017), 16-2983, Oakland Police & Fire Retirement System v. Mayer Brown, LLP
|Citation:||861 F.3d 644|
|Opinion Judge:||Hamilton, Circuit Judge.|
|Party Name:||OAKLAND POLICE & FIRE RETIREMENT SYSTEM, et al., Plaintiffs-Appellants, v. MAYER BROWN, LLP, Defendant-Appellee|
|Attorney:||For OAKLAND POLICE AND FIRE RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, CITY OF OAKLAND, Plaintiff - Appellants: Edward F. Haber, Attorney, Michelle H. Blauner, Attorney, SHAPIRO, HABER & URMY LLP, Boston, MA; Michael J. Freed, Attorney, Robert J. Wozniak, Atto...|
|Judge Panel:||Before POSNER, MANION, and HAMILTON, Circuit Judges.|
|Case Date:||June 28, 2017|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued March 30, 2017
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 C 6742 -- Robert W. Gettleman Judge.
Oakland Police & Fire Ret. Sys. v. Mayer Brown, LLP, (N.D. Ill., June 22, 2016)
For OAKLAND POLICE AND FIRE RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, CITY OF OAKLAND, Plaintiff - Appellants: Edward F. Haber, Attorney, Michelle H. Blauner, Attorney, SHAPIRO, HABER & URMY LLP, Boston, MA; Michael J. Freed, Attorney, Robert J. Wozniak, Attorney, FREED KANNER LONDON & MILLEN LLC, Bannockburn, IL; Kathryn Schubert, Attorney, SCHUBERT JONCKHEER & KOLBE LLP, San Francisco, CA.
For EMPLOYEES' RETIREMENT SYSTEM OF THE CITY OF MONTGOMERY, individually and on behalf of all others similarly situated, Plaintiff - Appellant: Edward F. Haber, Attorney, Michelle H. Blauner, Attorney, SHAPIRO, HABER & URMY LLP, Boston, MA; Michael J. Freed, Attorney, Robert J. Wozniak, Attorney, FREED KANNER LONDON & MILLEN LLC, Bannockburn, IL.
For MAYER BROWN, LLP, Defendant - Appellee: Timothy J. Miller, Attorney, Stephen Novack, Attorney, Andrew P. Shelby, Attorney, Amanda M.H. Wolfman, Attorney, NOVACK & MACEY LLP, Chicago, IL.
Before POSNER, MANION, and HAMILTON, Circuit Judges.
Hamilton, Circuit Judge.
This appeal began with a $1.5 billion (with a " b" ) mistake in documenting a commercial transaction. The central question is who might be held legally responsible for that mistake. General Motors, represented by the Mayer Brown law firm, entered into two separate secured transactions in which the JP Morgan bank acted as agent for two different groups of lenders. The first loan (structured as a secured lease) was made in 2001 and the second in 2006. In 2008, the 2001 secured lease was maturing and needed to be paid off. The closing for the 2001 payoff required the lenders to release their security interests in the collateral securing the transaction. The big mistake was that the closing papers for the 2001 deal accidentally also terminated the lenders' security interests in the collateral securing the 2006 loan. No one noticed--not Mayer Brown and not JP Morgan's counsel.
But after General Motors filed for bankruptcy protection several months later in 2009, General Motors and JP Morgan noticed the error. Although the security for the plaintiffs' 2006 loan had been terminated, the plaintiffs in this case (members of the consortium of lenders on the 2006 loan) were not informed until years later. These lenders brought this suit asserting legal malpractice and negligent misrepresentation.
But they sued not JP Morgan or its law firm, who would seem to be the most obvious defendants under the circumstances, but borrower General Motors' law firm--Mayer Brown. The district court dismissed for failure to state a claim, holding that Mayer Brown did not owe a duty to plaintiffs, who are third-party non-clients. Oakland Police & Fire Retirement System v. Mayer Brown, LLP, No. 15 C 6742, 2016 WL 3459714, at *6 (N.D.Ill. June 22, 2016). Plaintiffs appealed, arguing that Mayer Brown owed them a duty of due care. Plaintiffs offer three theories: (a) JP Morgan was a client of Mayer Brown in unrelated matters and thus not a third-party nonclient; (b) even if JP Morgan was a third-party non-client, Mayer Brown assumed a duty to JP Morgan by drafting the closing documents; and (c) the primary purpose of the General Motors-Mayer Brown relationship was to influence JP Morgan. We agree with Judge Gettleman that Mayer Brown did
not owe a duty to plaintiffs under any of these theories. We affirm the judgment dismissing the case.
Factual and Procedural History
We begin with the terms of the two transactions that led to this case and the mistake that might cost plaintiffs a great deal of money. We then review briefly the relevant portions of other lawsuits associated with this case.
The 2001 Synthetic Lease
A syndicate of lenders represented by JP Morgan entered into a secured financial agreement with General Motors in 2001 for $300 million. We call this transaction the 2001 Synthetic Lease. General Motors was represented by Mayer Brown in negotiating, documenting, and closing the deal. JP Morgan was represented by the Simpson, Thacher, and Bartlett law firm. The arrangement required General Motors to sell twelve real estate properties to the lenders, who then leased those same properties back to General Motors. In essence, General Motors secured a loan with its real estate properties. The security interests were perfected by UCC-1 financing statements. On October 31, 2008, the lease matured, and General Motors was scheduled to pay the remaining balance of the lease--$150 million.
The 2006 Term Loan
In 2006, General Motors borrowed $1.5 billion from a different group of over 400 lenders, including plaintiffs Oakland Police and Fire Retirement System and the Employees' Retirement System of the City of Montgomery. Again, JP Morgan acted as agent and held the security interests. The collateral for the loan was recorded in a UCC-1 financing statement. We refer to this as the 2006 Term Loan. The 2001 Synthetic Lease and 2006 Term Loan were secured by different real estate properties for the benefit of two different groups of lenders.
Mayer Brown's Mistake
In the month leading up to the maturity date, General Motors instructed Mayer Brown to prepare the documents to pay off the 2001 Synthetic Lease. At closing, when General Motors paid the $150 million balance, JP Morgan, as agent for the lenders, would release the real estate serving as security. Mayer Brown prepared a closing checklist and drafted the relevant documents, including a UCC-3 termination statement. A termination statement is a filing required to terminate a security interest that has been perfected by a UCC-1 filing. See 6 Del. Code § § 9-509 & 9-513 (Delaware enactment of Uniform Commercial Code § § 9-509 & 9-513). According to plaintiffs' complaint, Mayer Brown mistakenly included the unrelated 2006 Term Loan UCC-1 document as one of the financing statements to be terminated in paying off the 2001 Synthetic Lease.
Mayer Brown thus prepared a UCC-3 termination statement for the collateral for the $1.5 billion Term Loan. Mayer Brown provided the draft to JP Morgan's counsel to review. Without catching the error, JP Morgan authorized the release of the collateral. Consequently, the $1.5 billion security interest for the plaintiff's 2006 Term Loan was released along with the security interests for the remaining $150 million in the 2001 Synthetic Lease.
The plaintiffs' complaint offers the following autopsy of the error, which we accept for purposes of the motion to dismiss: a senior Mayer Brown partner was responsible for supervising the work on the closing. He instructed an associate to prepare the closing checklist. The associate, in turn, relied on a paralegal to identify the relevant UCC-1 financing statements. As a
cost-saving measure, the paralegal used an old UCC search on General Motors and included the 2006 Term Loan. Another paralegal tasked with preparing the termination statements recognized that the 2006 Term Loan had been included by mistake and informed the associate of the problem, but he ignored the discrepancy. The erroneous checklist and documents were then sent to Simpson Thacher for review. The supervising partner at Mayer Brown never caught the error, nor did anyone else. With JP Morgan's authorization, the 2001 Synthetic Lease payoff closed on October 30, 2008.
The General Motors Bankruptcy
In June 2009, less than a year after the 2001 Synthetic Lease payoff, General Motors filed for bankruptcy protection. Between October 2008 and June 2009, however, General Motors continued to follow the terms of the 2006 Term Loan. Only during the bankruptcy proceedings did someone discover that the UCC-3 termination statement had been filed in error for the collateral securing the 2006 Term Loan. Plaintiffs allege that JP Morgan chose not to tell the lenders. However, the bankruptcy court ordered General Motors to repay the 2006 Term Loan with interest, and General Motors complied in July 2009. The bankruptcy court thus treated the lenders as if they were still secured lenders, subject to the Creditors' Committee's right to challenge the perfection of the security interest. Official Comm. of Unsecured Creditors v. JP Morgan Chase Bank, N.A. (
In re Motors Liquidation Co. I ), 486 B.R. 596, 615, 617-18, 648 (Bankr. S.D.N.Y. 2013).
Adversary proceedings followed in the bankruptcy case. General Motors creditors alleged that the 2006 Term Loan security interest had been terminated so that the lenders for the 2006 Term Loan (plaintiffs) were not secured lenders and should have to repay the money they had received. The bankruptcy court found that the security interest had not been terminated, and the decision was appealed to the Second Circuit.
Second Circuit Decision
In 2015, after certifying the key issue of state law to the Delaware Supreme Court, the Second Circuit reversed the bankruptcy court and held that the 2006 Term Loan security interest had in fact been terminated when the UCC-3 statement was filed. Official Comm. of Unsecured Creditors v. JP Morgan Chase Bank, N.A. ( In re Motors Liquidation Co. II ), 777 F.3d 100, 105-06 (2d Cir. 2015). The court held that JP Morgan knowingly terminated the security interest when it approved the filing. Thus, while the release...
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