Just days before its January 3 trial start date, Morgan, Lewis & Bockius was successful in getting a legal malpractice case against it over an allegedly-botched real estate finance deal tossed on summary judgment.
In TCA Girard v. Morgan, Lewis & Bockius, Morgan Lewis and partners Eric Stern and Michael Pedrick renewed late last year its previously failed motion for summary judgment after Philadelphia Court of Common Pleas Judge Albert J. Snite Jr. barred plaintiff TCA Girard from using portions of expert witness Lawrence M. Goodman’s report at trial.
While TCA opposed Morgan Lewis’ summary judgment motion, the plaintiff conceded that, without Goodman’s report, it could not prove a prima facie case as to proximate cause and damages on its sole theory of liability, Snite said in his order, docketed December 24.
In a separate order, Snite noted his ruling was dispositive, and as part of it Morgan Lewis agreed to the dismissal of its counterclaims against TCA for $378,000 in unpaid legal fees. Snite noted Morgan Lewis retained the right to refile those claims if TCA appeals his rulings.
TCA was a company set up under Conshohocken, Pa.-based Trinity Capital Advisors to enter into a long-term lease agreement with the city for an area of land in Center City known as Girard Square. The land, owned in fee by the city as trustee of Stephen Girard’s will, was bounded by Chestnut, Market, 11th and 12th streets and contained 805,000 rentable square feet, according to TCA’s complaint.
In 2006, TCA entered into a long-term ground lease agreement with the city for $90 million for an initial term of 75 years. Under the agreement, TCA had the ability to improve or raze the property, make improvements, enter into subleases with subtenants and receive all rental revenue. TCA would be responsible for all expenses of the property, according to the complaint.
TCA hired Morgan Lewis and partners Stern and Pedrick to counsel the company on the negotiation and drafting of the lease agreement as well as the documentation for the financing of the deal.
In early 2007, after looking at financial projections, TCA determined it would need $118 million to finance the deal, including $5.5 million in equity and $112.5 million in debt. With the projected revenue TCA expected to come in, the company required any financing deal to allow for TCA to defer paying back a portion of the interest-only monthly payments that would be due on the $112.5 million debt financing or have access to an “interest shortfall reserve,” TCA said in its complaint.
A preliminary loan agreement contemplated allowing TCA to defer payments on $7.5 million of the debt through obtaining that portion of the debt as a separate mezzanine loan. But after some delays in signing the deals and some redrafting of the loan agreements, TCA ultimately signed a loan agreement with UBS Real Estate Securities for the entire $112.5 million in June 2007, according to the complaint.
TCA said it soon learned that the loan agreement required the monthly debt payments be paid in full every month regardless of that month’s operating revenue. TCA attempted through a separate bank to get a $7.5 million mezzanine loan to cover those costs, but UBS blocked that deal, TCA said in its complaint.
TCA said it soon learned its revenue did not cover the monthly debt obligation and the monthly operating expenses. It then found out, TCA said in the complaint, that the structure of the loan prioritized payments in a way unfavorable to TCA and denied TCA access to any shortfall reserve funds.
The company said it became impossible for it to operate Girard Square and TCA had to relinquish its rights on unfavorable terms. It claimed damages in the complaint of more than $5 million in expenditures plus loss of the opportunity to realize future profits.
In its initial motion for summary judgment filed in December 2011, Morgan Lewis argued TCA could not prove their actions were a direct cause of any damages TCA might have suffered. They argued TCA couldn’t prove UBS would have agreed to the financing terms TCA wanted.
Morgan Lewis further argued there was no evidence TCA would have walked away from the deal had UBS not agreed to give TCA access to a reserve fund. The defendants also noted that getting the deal signed by UBS’s imposed June 18 deadline was important because TCA would have otherwise lost its $2 million deposit and other costs, according to their motion.
Morgan Lewis argued there was no evidence, other than the plaintiffs’ statements, to link Morgan Lewis’ conduct with the plaintiffs’ damages. According to its summary judgment motion, Morgan Lewis said Goodman could only proffer that TCA would have been able to obtain a second-year option on the loan had it had access to the reserve fund.
The law firm said Goodman’s report ignored market realities at the time and was void of any discussion of whether TCA would have lost the property at the end of the second year.
“He never even mentions the issue or the unprecedented decline in the commercial real estate market and its devastating effect on attempts to refinance by developers like [TCA],” Morgan Lewis said in its motion.
Morgan Lewis said TCA leveraged the deal over 100 percent and had no equity to fall back on. Morgan Lewis said TCA would have lost the property regardless of whether it had access to a reserve fund, particularly given the “rapidly deteriorating” commercial real estate market.
Morgan Lewis further argued TCA was the one to negotiate the deal and Morgan Lewis lawyers simply documented it. The firm said TCA understood the terms of the loan.
“Certainly, plaintiffs could not expect that defendants were going to analyze such things as the projected parking revenue and expenses before finalizing the loan documents,” Morgan Lewis said in its motion. “At some point, a lawyer must rely on what he or she is being told by the client and here, defendants were told prior to the June 2007 closing that the transaction, as documented, worked from an economic standpoint.”
While the firm’s December 2011 summary judgment motion was denied, Morgan Lewis filed a motion in limine to bar Goodman’s testimony because he used forward-looking projections on the likelihood that TCA would have been granted an extension on the loan had the terms been more favorable.
John G. Harkins Jr. of Harkins Cunningham represented Morgan Lewis and argued Goodman should only be able to calculate damages based on TCA’s financial status around early 2008 when it went to renegotiate the loan agreement with UBS, not on forward-looking projections. Snite agreed and offered TCA the opportunity for Goodman to amend his expert report, but a new report was never submitted to the court, according to the docket and Harkins.
Morgan Lewis then renewed its summary judgment motion and Snite granted it. Harkins said he was very happy with the end result.
Timothy C. Russell of Spector Gadon & Rosen represented TCA. He said his client is still weighing its options, but will likely appeal. He declined to comment further on the case.