Cravath's David Marriott
Cravath’s David Marriott (Carmen Natale)

With a long-awaited trial on the horizon, Cadwalader, Wickersham & Taft persuaded an appeals court to trim a $70 million malpractice suit brought by former client Nomura Asset Capital Corp., a sponsor of mortgage-backed securities.

Reversing a trial judge, New York’s Appellate Division, First Department, ruled Thursday that Cadwalader is entitled to summary judgment on claims that it gave bad legal advice to Nomura in connection with a $1.8 billion mortgage-backed security it sponsored in 1997. The appeals court refused, however, to toss a claim that Cadwalader didn’t perform the requisite due diligence before giving its advice.

Back in 1997, Nomura securitized a pool of 156 mortgage loans valued at $1.8 billion in a deal known as the D5 Securitization. LaSalle Bank NA served as trustee for the MBS trust. Nomura represented to investors that all of the underlying loans qualified for special tax treatment, which required the real property securing each loan to have a fair market value of at least 80 percent of the loan amount. Cadwalader drafted the relevant documents and reviewed whether the underlying home loans met the required standards.

One of the underlying loans defaulted in 2000. LaSalle alleged that the loan didn’t meet the 80 percent test and demanded that Nomura repurchase it. Nomura defended the suit for years before finally settling for $67.5 million before a scheduled trial in 2006.

As we reported here, Nomura sued Cadwalader for malpractice in 2006, shortly after settling with LaSalle. Nomura alleged that Cadwalader bore responsibility for the LaSalle fiasco because it gave inadequate advice that the loan qualified for special tax treatment and because it failed to perform sufficient due diligence.

Cadwalader’s attorneys, David Marriott and Evan Chesler of Cravath Swaine & Moore, moved for summary judgment, arguing that Cadwalader properly relied on statements made by its client. But New York Supreme Court Justice Melvin Schweitzer refused to toss the case in 2012, setting the stage for trial.

The First Department on Thursday dismissed Nomura’s bad advice claim, but the court did allow Nomura to proceed on its claim that Cadwalader didn’t do its due diligence. The court concluded that a jury could reasonably find that one document Cadwalader had at its disposal contained “warning signs” about the loan that eventually defaulted.

The ruling drew a spirited partial dissent from Justice David Friedman, who wanted the entire case thrown out. He wrote that the majority is allowing the case go to on to trial based on a single document that Nomura “barely touched upon in its appellate brief, and that neither side mentioned at its own instance at oral argument.”

Cravath’s Marriott didn’t immediately return a call seeking comment. We also didn’t immediately hear back from Amianna Stovall of Constantine Cannon, who represents Nomura.