Corporate & Securities Law

ECC Capital Corp. Sues Law Firms for Contract-Drafting Malpractice

By Ken Adams

The following is from this article by Drew Combs on the AmLaw Daily:

Latham & Watkins and Manatt Phelps & Phillips are the targets of a malpractice lawsuit filed by ECC Capital Corp., which accuses the firms of botching a deal to sell its mortgage-origination business and a subprime-loan portfolio to Bear Stearns & Co.

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In the suit–filed on Friday in Los Angeles Superior Court–ECC Capital claims that two law firms drafted an agreement with Bear Stearns that was flawed and incomplete. Specifically, the complaint states, provisions that should have shifted the risk of early defaults in the loan portfolio to Bear Stearns were not properly drafted.

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The complaint goes on to state that ECC Capital specifically informed Latham and Manatt that it was critical for the executed agreement between the two parties to clearly and unambiguously describe the transfer of risk this way. …

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The filing cites several instances of what it describes as malpractice, including the drafting of the agreement, which, ECC Capital claims, fails to clearly stipulate that Bear Stearns would assume the risk related to early defaults as agreed.

ECC’s complaint also says the firms failed to have the appropriate Bear Stearns subsidiary sign the agreement regarding the loan-portfolio purchase. As a result of this confusion, ECC claims, Bear Stearns refused to buy loans shortly after they were originated, and imposed requirements that borrowers make first payments before the loans would be purchased.

Although I have no notions as to the merits of ECC’s complaint, this dispute brought to mind a couple of points:

First, in the press of business it’s alarmingly easy to forget to include in a contract an important but out-of-the-ordinary deal point. To reduce the odds of that happening, I’ll usually start with a term sheet that the client signs off on, so as to ensure that the important deal points are included from the get-go. Going straight to a contract makes it harder for all concerned to do that sort of checking. A term sheet is in effect a checklist, a concept that’s generated a lot of chatter recently, with publication of Atul Gawande’s The Checklist Manifesto: How to Get Things Right. I discussed Gawande’s notions regarding checklists in this December 2007 blog post.

Second, getting the right party to sign a contract would seem a laughably basic matter, but sometimes things can be complicated. I recall the comments to this July 2008 blog post on having a company enter into a contract “on behalf of” an affiliate.

Full post as published by AdamsDrafting on February 04, 2010 (boomark / email).