The Appellate Division, First Department, has dismissed the last claim in a $55 million legal malpractice suit against Paul Hastings that alleged the law firm gave faulty advice on a loan tied to the bankruptcy of retailer Steve & Barry's.

Ableco Finance, an arm of private equity firm Cerberus Capital Management, retained Paul Hastings partners John Hilson and Mario Ippolito in 2008 to advise it on providing a $125 million secured loan to a company established by Bay Harbour Management called BH S&B Holdings. The loan was made to finance Bay Harbour's purchase of assets from the bankruptcy estate of Steve & Barry's.

Ableco said it told Paul Hastings it would need a perfected first priority lien on Steve & Barry's entire inventory in case the Bay Harbor affiliate defaulted. But the purchase agreement the affiliate entered into instead provided that Steve & Barry's would retain inventory in many stores, according to Ableco. Without repaying the loan in full, the Bay Harbor affiliate filed for bankruptcy in 2008. Ableco claimed in Ableco Finance v. Hilson, 650618/09, it did not realize it did not have a perfected priority lien on all of Steve & Barry's inventory until the bankruptcy.

First Department Justices Angela Mazzarelli (See Profile), David Saxe (See Profile), Leland DeGrasse (See Profile), Sallie Manzanet-Daniels (See Profile) and Darcel Clark (See Profile) on Tuesday cited documentary evidence that "refutes plaintiff's pivotal claim that it made the loan on August 26, 2008, without knowing that it was not getting a first priority lien on the entire Steve & Barry's inventory."

Paul Hastings' malpractice attorney, Paul Spagnoletti of Davis Polk & Wardwell, said the suit is emblematic of malpractice litigation spawned by the financial crisis when lenders lost money on investments and then filed a "failure to advise" malpractice suit to mitigate the loss. "It's typically unhappy clients…looking to foist the blame for their own bad business decisions on their lawyers," he said. Ableco's malpractice attorney, Stuart Shapiro of Shapiro Forman Allen & Sava, did not return a message for comment.