BigLaw’s failure to discover a paralegal’s error resulted in JPMorgan’s loss of its secured interest in a $1.5 billion loan. BigLaw
The situation arose as work that trickled down the ladder was not properly reviewed when it was sent back up the chain of command. A partner at Mayer Brown instructed an associate to prepare documents to release JPMorgan’s security interest in a financing transaction that General Motors was repaying. The associate delegated the task of searching for the financing statements documenting the security interest to a paralegal who was unfamiliar with the transaction.
The delegation ultimately resulted in the inadvertent termination of JPMorgan’s security interest in an unrelated $1.5 billion transaction. The release of lien documents were transmitted to and presumably approved by the senior lawyers at Mayer Brown, by Simpson Thacher & Bartlett, the law firm representing JPMorgan, and by JP Morgan’s in house counsel. Although the Bankruptcy court excused the error, the Second Circuit Court of Appeals, held that “although the termination statement mistakenly identified for termination a security interest that the lender [JPMorgan] did not intend to terminate, the secured lender [JPMorgan] authorized the filing of the document,” and therefore, the “termination statement was effective to terminate the security interest.”
What is the lesson for attorneys everywhere? Be extra careful when reviewing documents—especially when important tasks are delegated to assistants. ABA Model Rules 5.1, 5.2 and 5.3, and the states that have adopted versions of those rules, provide that law firms must have reasonable supervisory procedures in place to assure that both associate attorneys and nonlawyer assistants adhere to the legal ethics rules, which include the fundamental duties of competence and diligence in representing a client.
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