Cadwalader Wickersham & Taft has taken a lot of lumps lately because of its heavy investment in its securitization practice. Late last month it suffered another setback when a New York state court judge refused to dismiss a malpractice suit brought by Nomura Asset Capital Corporation arising from a commercial mortgage financing that Cadwalader handled more than a decade ago. The backstory is complicated, but the litigation raises questions about whether law firms could bear some liability for soured securitizations, even if they followed common industry practices.

Nomura sued Cadwalader in 2006, claiming that it had botched a 1997 assignment to advise and assist Nomura on the origination and securitization of 156 commercial loans totaling $1.8 billion. (Cadwalader had signed a tolling agreement that extended the statute of limitations.) The most significant claims arose from a $50 million loan made to a doctors hospital that went into default in 2000. Cadwalader, representing Nomura, had drafted documents that asserted that the trust that held these loans qualified for special tax treatment as a Real Estate Mortgage Investment Conduit (REMIC), which required that the fair market value of the real property securing each loan be at least 80 percent of the loan amount. In fact, the doctors hospital loan did not meet this 80 percent test, according to Nomura’s own appraisal.

When the hospital loan went into default, LaSalle National Bank, the loan servicer, sued Nomura in 2003, citing the false representations about the loan’s REMIC qualification. After an adverse ruling by the Second Circuit, Nomura in 2006 paid LaSalle $67.5 million to settle. Nomura then turned around and sued Cadwalader for that amount. Nomura was initially represented by the now infamous Marc Dreier. After the collapse of Dreier and his firm, the case was continued by former Dreier lawyer Amianna Stovall, who is now with Constantine Cannon.

Cadwalader, represented by Evan Chesler and David Marriott of Cravath, Swaine & Moore, argued that Nomura’s claims were barred because the bank, when defending itself in the LaSalle litigation, had claimed Cadwalader’s actions were proper. It also argued that the language Cadwalader used in the securitization documents was standard for the industry, noting that it was substantially similar to sample language suggested by a Standard & Poor’s publication. Cadwalader also tried to point the finger at Dechert, which had helped originate the hospital loan for Nomura; Dechert was primarily responsible for verifying that the loan met the REMIC 80 percent test, it argued.

In an April 28 ruling, Judge Melvin Schweitzer stated that Nomura’s position in the LaSalle litigation didn’t bar it from bringing claims against Cadwalader, especially since its earlier arguments had failed. Perhaps most significantly, the judge ruled that Cadwalader’s reliance on language in the S&P manual did not create a defense for a motion to dismiss. The judge also ruled that even if Dechert was primarily responsible for assuring that the loan met the REMIC test, Cadwalader had not established that it did not have a duty to verify this fact.

The court allowed to go forward another claim against Cadwalader arising from a $2.55 million loan to the owner of a Best Western Old Hickory Inn, but dismissed a claim relating to a defaulted KMart loan. Cadwalader and its lawyers at Cravath declined to comment.

Judge Schweitzer did note that “Cadwalader ultimately may prevail” on the S&P reliance argument if it can show that it followed customary practices. In the meantime, his ruling could send some shivers down the spines of law firms that handled securitization deals that later cratered.