Sovereign Bank has responded to an attempt in federal court by Stradley Ronon Stevens & Young to avoid a malpractice finding by filing its own malpractice lawsuit in a Philadelphia trial court and asking the federal judge to toss the law firm’s declaratory judgment action.
Stradley Ronon had filed the declaratory judgment action last month in the Eastern District of Pennsylvania looking to put an “end to ongoing and baseless assertions and threats of malpractice” by Sovereign. The law firm sought a ruling that it did not commit legal malpractice when it advised Sovereign on a loan agreement with a mortgage financing company that ultimately went bankrupt. During the bankruptcy proceedings for Taylor Bean & Whitaker Mortgage Co., Sovereign found out it was not a secured creditor and ultimately settled with the mortgage company for less than the $200 million it lent the company.
The day before a response was due in the federal action — Stradley Ronon Stevens & Young v. Sovereign Bank — Sovereign filed a malpractice action in the Philadelphia Court of Common Pleas in Sovereign Bank v. Stradley Ronon Stevens & Young .
In its Wednesday response in the federal action, Sovereign said Stradley Ronon’s declaratory judgment action “has no purpose other than to attempt to pre-empt Sovereign’s choice of forum for its malpractice action against Stradley.”
It went on to cite a string of case law that barred companies and, in some cases specifically law firms, from seeking a declaratory judgment action that they were not liable for past actions.
According to a footnote in Sovereign’s response in the federal action, the parties had entered into a series of standstill agreements beginning in March 2010 to toll the statute of limitations for Sovereign’s malpractice claim. Sovereign said the parties were in the process of scheduling further meetings to try to resolve the dispute when Stradley Ronon “abruptly” terminated the tolling agreement May 4, 2012, and filed its declaratory judgment action the next day.
“Stradley seeks to pre-empt its client’s choice of forum and to force Sovereign to litigate its malpractice claim in a forum Stradley apparently believes will be more receptive to its position,” Sovereign said in the response. “Stradley’s action is not a proper use of the Declaratory Judgment Act. The matter in dispute concerns solely the past actions and omissions of Stradley in its representations of Sovereign and damages that Sovereign has already suffered. No declaration of their respective rights is required to guide the future conduct of either party.”
Now in its malpractice suit in the Philadelphia Court of Common Pleas, Sovereign has alleged that Stradley Ronon failed when drafting amendments to the loan agreement to include private investors such as Wells Fargo and Bayview Loan Servicing on a list of approved investors whose payments to Taylor Bean would be considered collateral against Sovereign’s loan to Taylor Bean.
Stradley Ronon has argued that it was Sovereign’s responsibility to decide whether Wells Fargo and Bayview should have been added to the approved investors list in the agreement and the bank’s responsibility to identify the investors whose loan portfolios met its qualifications for advances of loans under the agreements. The law firm has further argued that it was Sovereign’s choice to settle with the Taylor Bean bankruptcy trustee rather than fight its claims for secured status as Stradley Ronon was prepared to do.
Stradley Ronon filed pleadings on Sovereign’s behalf in the Taylor Bean bankruptcy proceedings to argue that the amended agreement did perfect a security interest for Sovereign. It is that same argument, the firm said, that it is now advancing in its declaratory judgment action — that the sixth amended agreement creates a clear security interest for Sovereign.
In an Oct. 3, 2011, letter, Ballard Spahr attorney William A. Slaughter, as outside counsel for Sovereign, outlined the terms of a proposed settlement between Sovereign and Taylor Bean’s trustee. As part of the agreement, Sovereign guaranteed a recovery of $15.75 million, retained allegedly preferential payments of $24.3 million and preserved the right for future opportunities to collect millions more, according to Stradley Ronon’s complaint.
In that letter, however, Sovereign said it was its view that “‘had its security arrangement with TBW been properly documented by Stradley, the bank would have been entitled to … recoveries that TBW has received from Wells Fargo and Bayview, private investors who should have been listed as ‘approved investors’ on schedule 3 [of the sixth amended agreement] which Stradley prepared on the bank’s behalf,’” according to Stradley Ronon’s complaint.
Stradley Ronon’s general counsel, Lee A. Rosengard, sent a response Oct. 11, 2011. He said the firm laid out a valid defense in February 2010 to the claims asserted by the trustee as to the scope of Sovereign’s security interest. Rosengard urged Sovereign to reconsider the settlement, the terms of which he said would be at the bank’s own risk. Rosengard further pointed out that Stradley Ronon would not be accountable to the bank for losses it sustained by settling without giving due regard to all available defenses, according to the complaint.
Sovereign went ahead with the settlement.
“Stradley Ronon is not responsible for the consequences of Sovereign Bank’s decision to settle,” the firm said in its complaint.
Taylor Bean was in the business of originating mortgages that it would sell to entities like Ginnie Mae and Freddie Mac. Taylor Bean would then enter into contracts with the new owners to service those mortgages. Sovereign Bank, as well as co-agent Colonial Bank, provided several loan facilities to Taylor Bean, according to the complaint.
It was Taylor Bean’s responsibility to cover any deficiencies with respect to the borrowers’ monthly payments, the complaint said. While Taylor Bean paid the “servicer advances,” the owners of the mortgages had a contractual obligation to repay those expenditures when recovered from the homeowners. It was the loans from Colonial and Sovereign that provided Taylor Bean with enough funds to cover those advances, according to the complaint.
The creditors’ committee in Taylor Bean’s bankruptcy determined that Sovereign did not have a right to recover advances Taylor Bean made to Wells Fargo and Bayview Loan Servicing under the sixth amended agreement.
Stradley Ronon argued in its complaint that one of its associates asked Sovereign in May 2009 to confirm the accuracy and completeness of the list of approved investors and Sovereign never raised an issue with the list. Stradley Ronon said it never could have known which banks Taylor Bean was seeking Sovereign loans to pay because the agent at the time, Colonial Bank, handled those requests.
Stradley Ronon said its involvement was limited to revisions of the documentation for the Taylor Bean loan, principally the sixth amended agreement. At that point, all lending had been terminated and the parties were operating in “workout mode.” Any loans to Wells Fargo and Bayview pre-dated Stradley Ronon’s involvement, the firm said in the complaint.
Sovereign has now raised claims for breach of contract and legal malpractice against Stradley Ronon. Ballard Spahr’s Slaughter is representing Sovereign in the suit. Robert C. Heim of Dechert is representing Stradley Ronon. Slaughter declined to comment.
Heim said he is surprised Sovereign doesn’t want to litigate this in federal court. He said that after ongoing discussions with Sovereign that were underlined by threats of litigation, Stradley Ronon got to the point where it wanted a resolution “because it feels very strongly that it did nothing wrong here.”