Dallas’ Highland Financial Partners LP and two related companies filed suit in state court on Jan. 25, alleging “legal malpractice/negligence” against Orrick, Herrington & Sutcliffe in connection with how Orrick handled a financial transaction.
In the petition filed in the 68th District Court in Dallas County, Highland Financial, Highland CDO Opportunity Master Fund LP and HFP CDO Construction Corp. (collectively Highland) allege Orrick, Herrington & Sutcliffe LLP of Los Angeles and Orrick, Herrington & Sutcliffe (Europe) LLP of London were negligent in connection with a “proposed multimillion-dollar collateralized debt obligation (‘CDO’) transaction between Highland as borrower and Royal Bank of Scotland plc (‘RBS’) as lender.” [See the Highland petition.]
But Baker Botts partner Rod Phelan of Dallas, who represents the defendants, collectively referred to as Orrick in the petition, writes in a statement that “Orrick’s advice was correct, thoughtful, and well within the standard of care.”
Highland alleges it hired Orrick in 2007 and 2008 to review two amendments aimed at extending a deadline to close the CDO transaction. The plaintiffs allege Orrick knew Highland paid RBS more than $65 million for the “purported extensions” but Orrick “committed a critical error when it failed to advise Highland that the Amendments did not remove a provision in the original agreements that permitted RBS to terminate the CDO transaction at will.” They allege that, as a result, they paid RBS tens of millions of dollars for “meaningless extensions.”
In Highland CDO Opportunity Master Fund LP, et al. v. Orrick, Herrington & Sutcliffe LLP, et al., the plaintiffs allege that RBS “capitalized on Orrick’s negligence” and terminated the transaction in October 2008 to take advantage of an international accounting standard that allowed RBS to report a $30 million windfall profit when it foreclosed on the underlying assets. As a result, Highland lost the $65 million it paid to RBS and now faces an approximately $30 million “alleged deficiency.”
Highland seeks actual damages of about $95 million plus interest.
In his statement, Phelan notes that “Highland’s attempts to blame others for its miscalculation of the market for mortgage-backed securities — first RBS and now Orrick — will not succeed.” Highland was “well aware” of the provision allowing RBS to terminate the transaction, he writes. “It’s customary, and Orrick had just reminded Highland of a similar provision in another deal. Aware of this standard provision, Highland didn’t ask Orrick about it on the RBS deal,” Phelan writes.
Orrick answered Highland’s questions on the deal and “did not discuss the business risks Highland took when it chose to bet on a market turnaround rather than refusing to post more collateral, which would have killed the deal but stopped Highland’s bleeding,” Phelan notes.
Plaintiffs’ lawyers William Reid IV and Lisa Tsai, partners in Reid Collins & Tsai in Austin, each decline comment.