Stradley Ronon Stevens & Young argued in a recent filing it is entitled to judgment on the pleadings in a malpractice case brought against it by Sovereign Bank.

The law firm said Sovereign successfully argued in a separate court action that the loan agreement Stradley drafted for it protected Sovereign’s security interest in a loan. The bank can’t now argue Stradley failed to draft an agreement that protected those interests, the law firm argued in its motion for judgment on the pleadings in Sovereign Bank v. Stradley Ronon Stevens & Young.

Stradley further argued that it could not be held liable for not including two banks on the loan agreement’s list of approved investors when Stradley asked Sovereign to confirm the list was complete before the loan agreement was finalized, according to the motion. The law firm also argued the loan agreement creates the security interest Sovereign says it was denied.

"In the end, this suit is nothing more than an attempt by Sovereign to divert blame for its own gross negligence in managing this loan for the bank group, and to shift its purported losses to a blameless law firm that did the job it was hired to do," Stradley alleged in the motion.

Stradley initially attempted to forestall the malpractice action, filed in the Philadelphia Court of Common Pleas in June 2012, by first filing a federal declaratory judgment action seeking that court declare Stradley did not commit legal malpractice. U.S. District Judge Joel H. Slomsky of the Eastern District of Pennsylvania dismissed the declaratory judgment action in January, however, ruling the firm could not use the Declaratory Judgment Act to pre-empt a state court malpractice filing.

The parties are left with the state court action in which Stradley is now seeking a ruling in its favor based on the pleadings.

The underlying facts involved in the alleged malpractice relate back to the bankruptcy filing of mortgage servicer Taylor, Bean & Whitaker Mortgage Corp.

Taylor Bean would work with mortgage lenders like Ginnie Mae and Wells Fargo on the lenders’ foreclosure actions. When a bank forecloses on a property, the homeowner still has to pay certain expenses such as property taxes and insurance premiums, Slomsky noted in his January opinion in the case. To ensure those payments are made, lenders contract with mortgage servicers, like Taylor Bean, which advance the funds into escrow accounts. The funds are known as servicer advances. The lender then owes the mortgage servicer those advances, Slomsky said.

Taylor Bean contracted to be a servicer for Freddie Mac, Ginnie Mae, Wells Fargo Bank and Bayview Loan Servicing. To be able to make the servicer advances to those banks, Taylor Bean took out a $300 million revolving line of credit with Sovereign. Stradley began working with Sovereign on the financing when the loan agreement was in its fourth amended draft in 2007, Slomsky said.

As the real estate market crashed in 2008, it became harder for Taylor Bean to pay down the Sovereign debt and the loan agreement needed to be amended a few more times. It was the sixth amended agreement in which Stradley first had actual drafting responsibilities, Slomsky said. The goal of the amendment was to accelerate the collection of Taylor Bean’s line of credit, he said.

The section outlining the collateral Sovereign could collect from Taylor Bean was reincorporated into the sixth amended agreement from the prior agreements. It stated that, in the event Taylor Bean defaulted on the loan, Sovereign would get the rights to all of Taylor Bean’s servicing contracts. Under the section outlining approved investors whose service agreements would fall under that collateral, only Freddie Mac and Ginnie Mae were listed, not Wells Fargo or Bayview, according to Slomsky’s opinion.

When Taylor Bean went into bankruptcy, creditors challenged Sovereign’s security interest in the approximately $95 million in servicer advances paid on behalf of Wells Fargo and Bayview as they were not expressly listed in the loan agreement as collateral Sovereign could go after, Slomsky said.

In letters between Sovereign in-house counsel and attorneys at Stradley, Sovereign argued Stradley should have included the other two banks in the loan agreement and asked the firm to enter a tolling agreement extending the time Sovereign could have to sue Stradley for malpractice. Stradley agreed, though the law firm said it didn’t think there were any valid claims against it. Stradley gave Sovereign a list of suggested defenses in the bankruptcy action, namely that the plain language of the definition of collateral in the loan agreement captured Wells Fargo and Bayview, according to the opinion.

In the bankruptcy proceeding, Sovereign took Stradley’s advice and argued the loan agreement protected its interests in the Wells Fargo and Bayview servicer advances. But in October 2011, Sovereign informed Stradley it would be settling with the unsecured creditors. Stradley objected to the settlement in a letter to Sovereign and said Stradley would not be responsible for losses Sovereign sustained from accepting a settlement that ignored all available defenses, Slomsky said.

After Sovereign settled with the creditors, Sovereign and Stradley spent nearly two years trying to resolve their dispute, but Stradley ended those talks and filed the declaratory judgment action in May 2012.

According to its motion for judgment on the pleadings, Stradley said the bankruptcy court ordered the Taylor Bean bankruptcy estate to pay Sovereign a total of $39 million.

"Now, after receiving a $39 million value as a result of having successfully argued that there was indeed a perfected security interest in the Wells Fargo and Bayview proceeds, Sovereign represents in verified pleadings the exact opposite to this court, claiming the loan agreement failed to establish a security interest in the Wells Fargo and Bayview proceeds," Stradley said in its filing.

Stradley said Sovereign is now looking to hold the law firm accountable for the difference between the $95 million Sovereign claimed in security interest and the $39 million it ultimately recovered.

William A. Slaughter of Ballard Spahr is representing Sovereign in the case. Robert C. Heim and Michael L. Kichline of Dechert are representing Stradley.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.