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Bond traders may not pursue a legal malpractice suit against attorneys whose representation of a bond issuer’s trustees allegedly resulted in the depreciation of corporate assets, a New York state appeals panel ruled this week in a case of first impression. The unanimous Appellate Division, 1st Department, panel also said that the trustees of the issuer’s collateral could not be sued by the traders. The effect of asset depreciation on the value of the bond issuer’s debt cannot be quantified, said Justice Israel Rubin, in Bluebird Partners v. First Fidelity Bank, 2349. The appeals court ruled that Wilentz, Goldman & Spitzer of Woodbridge, N.J., lawyers for the trustees handling assets of the bond issuer, Continental Airlines, were entitled to summary judgment and dismissal of malpractice charges. Also granted summary judgment were the trustees, First Fidelity Bank and United Jersey Bank, now known as Summit Bank. The malpractice allegations flowed from Wilentz, Goldman & Spitzer’s representation of the collateral trustees appointed in connection with Continental Airlines’ bankruptcy proceedings beginning in December 1990. The plaintiffs, investors now doing business as Bluebird Partners, purchased Continental Airlines bonds in 1991 and 1992. The bonds were purchased for an average price of 32 cents on the dollar, and eventually liquidated for 70 cents on the dollar. Justice Rubin noted that the plaintiffs made a nice profit on the bonds. But Bluebird Partners argued that it failed to realize value because attorneys and trustees of Continental Airline’s collateral failed to file motions that would have protected assets such as airplanes and engines from depreciation. The plaintiffs alleged that $22 million to $117 million in asset value was lost because of the error. The court did not address questions of whether federal bankruptcy or securities law preempted the plaintiffs’ claim, staking its decision on basic principles of tort law and holding that there were no real damages, only theoretical damages. “The salient point is not the measure of plaintiff’s injury but the very existence of injury,” Rubin wrote. He noted that the bondholders had no interest in the airplanes and engines held by trustees as collateral. VALUE OF BONDS Moreover, he said, the value of bonds is supported by many factors, only one of which was the value of the collateral held by the trustees. “The market price of a security is determined by forces that are only partly rational and which can be largely psychological, with the result that the financial condition of the enterprise is merely one component in the valuation of its securities in the marketplace,” Rubin wrote. For that reason, it is “impossible to assess” the net effect of any decline in the value of collateral on the price of Continental Airlines’ bonds, the judge wrote. Any assessment attempted by the court would be speculative, he said. Joining Rubin in the opinion were Justices Milton L. Williams, Betty Weinberg Ellerin and Alfred D. Lerner. The panel reversed a decision by Manhattan Supreme Court Justice Beatrice Shainswit to deny summary judgment. Representing the bond traders was Michael C. Harwood, of Kasowitz, Benson, Torres & Friedman. Arguing before the 1st Department as defense counsel to the attorneys and trustee First Fidelity Bank was Marc Wolinsky, of Wachtell, Lipton, Rosen & Katz. Summit Bank was represented by Lester M. Kirshenbaum and Gregory R. Fidlon, of Kaye, Scholer, Fierman, Hays & Handler.

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