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Litigation

BY ADAM SETH TURK AND THOMAS J. McCORMACK
E lawyers can tell you about a moment in Many LIVE in turbulent financial times—a global recession, trillions of dollars of equity their law school career when, sitting in class, they market would gaping have in own law dreamed what it losses,be like to holestheirpension plans and personal retirement accounts, massive firm, with their name on the top of the stationary job layoffs, a worldwide credit the likes of Skadand as synonymous with the law asmarket collapse, unprecedented Proskauer. For some it was Constiden, Cravath andhome mortgage default rates and booming home for others it In this environment, tutional Law andforeclosures. was Legal Writing. it is not surprising that the litigationa train it is Typically when they picture starting firm has already left the station and is gathering clerking seven to 10 years into their legal career, aftersteam as it a judge and working at a large law firm, learning forproceeds down a multi-year track. Indeed, the bubble of their craft. and honingmortgage defaults is expected to rise dramatically over the next two years, as to new reWith law school admission soaring borrowers move off the New York legal job their repayment cords andthe interest-only phase ofmarket in shamobligations. We address below some of the more bles, law firms of all sizes are laying off attorneys and ripe areas There is an overflowing number of attorhiring less. for litigation. neys both new and old fighting for fewer positions Collateralized Debt Obligations in this new marketplace. While it is not as simple as The out a shingle, with the right planning the hanging last decade has seen an explosion of it is use and issuance of shiny diploma and obligations possible to take your collateralized debtto start a law (CDOs). Lenders law other firm directly out of and school.mortgage originators packaged mortgages (frequently viewed as a into Starting a firm should not be subprime) temmortgage-backed securities while waiting for a porary fix or something to dowhich were sold to third-party investors, thereby shifting the risk of different position to open up. Some skeptics will say non-payment from the business the third-party that a new lawyer has nolenders tostarting his own investors. may claim such a person is not qualified firm. They These mortgage-backed securities were themselves packaged into CDOs, which law rated to both run his own business and practiceweresimulby credit However, after were issued law school, taneously.agencies. CDOsthree years ofin tranches, with the tranche rated as the admitted receiving passing the Bar exam and beingleast riskyto practice the one is interest rate and simultaneously practice law, lowest fully equipped to the more risky tranches receiving higher interest law and open a law firm. rates. When home prices began evidencedthe the recent dissolutions of ThelAs to fall in by past couple of years, mortgage delinquencies rose causing increasing losses to the en, Thacher Proffitt & Wood and Heller Ehrman third-party few years, even the over the past CDO investors. most seasoned attorIn litigation to date, the investors have focused neys can have trouble properly running a business. This is not a problem limited to new attorneys. Other critics will say a new lawyer lacks the experience necessary to be a competent attorney, and
THOMAS J. HALL and THOMAS J. McCORMACK are litigation partners with Chadbourne & Parke and head Seth Turk is founding partner of group. They Adam its bankinga litigation practicethe Manhattan can be reached at PLLC. He co-founded the law firm law firm Turk & Davidoffthall@chadbourne.com and tmccormack@chadbourne.com. Firm associates upon graduating from law school. He can be contacted at JASON PARK , aturk@turkdavidoff.com . 212-265-4900 orJONATHAN NOBLE and FRANCESCA PERKINS assisted in the www.turkdavidoff.com preparation of this article.

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MONDAY, JANUARY5, 2010 MONDAY, APRIL 5, 2009

BY THOMAS J. HALL

W

Financial Meltdown So You Want to Triggers Start A Firm RightLitigation Out Of School Wave
You can do it, and succeed.
that a lawyer needs to work for a big firm for a few attention on the originators his own. However, as years before he can succeed onof the CDOs and the underlying mortgage-backed securities. Allegations many practicing lawyers can tell you, a large number have been made that the originators misrepresented of attorneys at big law firms or working in governthe risks associated with these financings complaint ment positions for years have never filed aor failed to warn them adequately of these risks. or taken a deposition on their own. For instance, in Teamsters Local 445 Freight Div. Pension Fund v. First Things to Focus On Bombardier Inc., 2005 WL 2148919 (SDNY Sept. 6, 2005), anaearly harbinger of the present wave Starting law firm is equivalent to starting of new business entity; of securities backed to anylitigation, purchaserscertain decisions need by pools of at the onset. One of the securities fraud be mademobile home loans broughtmost important claims against the structure underwriters (profesis which corporateissuers and to use, PLLCof those securities, alleging that the defendants (professional sional limited liability company), PLLP falsely stated in offering documents that “strict and prudent” limited liability partnership) or PC (professional corstandards poration). (such as credit score requirements) were used in originating theto work fromloans. and get Another is whether underlying home Plaintiffs alleged a Manhattan address, which a virtual office with that defendants disregarded those a few hundred dollars a a large volume of start atstandards by generatingmonth, or a permaunderlying that to applicants can “no assets, no nent office loansin Manhattan withrun thousands evidence a month. A newly formed law income, of dollars of employment, debt exceeding firm will and multiple scores.” Though business operating needpoor FICObank accounts; a the court refused to dismiss the claims against all account. Many court account, and an attorney trustdefendants, the banks found that scienter was not adequately pled as to offer the latter account for free. the While it is not mandatory to have malpractice corporate parent because those allegations were vague and conclusory recommended. When first insurance, it is stronglyand, unlike the allegations against a law practice the premiums on a policy starting other defendants, were not supported by should be relatively low. Premiums increase each the detailedcover you from the time sources. your year as they reports of confidential you start In addition, with the local bar brought against practice. Check claims have been association to see the rating any group that rated the risks.1 Whether if it offers agencies rates. ratingplanning towill bea exposed to liability be If agencies open firm with a partner, is unclear. Rating agencies sure all partners have careful from the onset. Make have traditionally defended such to divide both the revenues andare agreed on how claims by asserting that they eximmune from liability under §11 of the Securities penses and, most importantly, that they all share the Act of 1933, business ethics. published rating same goals and and that their opinions are protected freeaspeech under the First If you are going to start firm, research and find Amendment of the U.S. Constitution. out exactly what suits your particular needs. There areFunding Suspension Litigation as well as many informative books published online groups that can help you make an educated With decision. the tightening of (or, some would say, evaporation of) credit may not be a partner in a In New York State you markets, lenders are increasingly lookingalso a member in good standlaw firm until you are for ways to avoid lending obligations. Real estate developers are claiming with ing of the bar. From law school graduation in May, increasing frequency in litigation that their lenders to taking the bar exam in July, to waiting what seems have improperly refused to release construction like an eternity to find out your score sometime in funds, causing manybeing admitted to the bar can the fall, to ultimately to halt construction work and consider bankruptcy.over a year. take from seven months to Several have gone to court demanding that their lenders release funds While Waiting for Bar Admission so that development work can continue. Back thisthe 1990s real estate recession, lender Use in time wisely. Sit and write out a business liability suits were prevalent.goalsthat time, in an plan, outlining budgets and At for the foreseeeffort to improve networking: Establish a network of able future. Start the prospects of repayment, many
ISTOCK

MONDAY, JANUARY5, 2010 MONDAY, APRIL 5, 2009
programs tojudges to servecontact homeowners in lawyers and identify and as mentors and advisors. danger as many recent law school graduate events as Attend of delinquency. The settlement further provides for a loan you can find. modification for attorney positions aton the firms. Interview program. Depending other form of loan, modifications may includechance todown Going on interviews will give you a writing meet the principal balance to 95 percent of theask quesmore experienced lawyers face to face and current value about how their successful firm isfixed-rate tions of the property, converting to run. The mortgages, cutting variable interest ratescanas low information gathered on these interviews to prove as 2.5 percent, with limitsstages of your own firm. vital in the development on future rate increases, and extending interest-only or introductory-rate It will also keep your mind sharp as you engage in payment periods. Countrywide also agreed toon the legal debate, and will help you stay updated waive prepayment penalties and fees forgives you an oplatest legal trends. Additionally, it late payments, delinquencymake loan modifications. experienced portunity to and an impression on the While that the next time you see each other at lawyers so this settlement resolves the claims of the attorneys general, in early December 2008, a networking event, or need to place a phone call to the holder they are likely to remember you and take each other, of securities backed by Countrywide mortgages or a phone call. damages allegedly arising a meeting filed suit seeking out of the modification to the loan terms.8 The Join Bar Associations plaintiff contends that Countrywide’s settlement with the bar associations, such as the New York Most state attorneys general, in which it modified loan terms, will cause it damages. The City Bar, New York State Bar Association, New York plaintiff contends that Countrywide simply Bar County Lawyers Association and the American had no right to are free or heavily discounted for the Association modify the terms of the mortgages and that, under the applicable contracts, Countrywide first year after being admitted to practice. is obligated to purchase at face value any mortgage A newly admitted lawyer should become a memthat it modifies. ber of as many of these groups as possible and take advantage of all the benefits of membership. Most barClass Actions by Borrowers to network with associations offer the chance other lawyers, access to their extensive legal libraries, Another category of recent litigation has including subscriptions to Westlaw and LexisNexis, included a place to meet with who claim profesand even claims by borrowers clients in a either inadequate disclosure or misrepresentation as to sional setting. the terms of their mortgage financing. Federal Learning Those Skills law obligates that certain disclosures be made to homeowners engaging obstacle to overcome when The most difficult in mortgage financing, and with increasing frequency completing law school is starting a firm soon after borrowers are contending that the appropriate disclosures were not made. learning new practice skills. A significant issuefirmthese cases is whether such In a typical law in setting, senior associates and claims can be brought on a and action basis. While partners would train newer class junior associates on common law claims and be subject to class If you the proper methods may standard practices. action consideration, out of school, however, actions to start a firm rightthe availability of class you needfor statutory claims is be more proactive. less clear. In Andrews v. if you want to focus2008 U.S. For example, Chevy Chase Bank, your firm App. LEXIS 20153 spend a few 24, at the local around litigation, (7th Cir. Sept.days2008), Susan and Bryan Befriend the employees who work becourthouse.Andrews alleged they obtained a loan from Chevy Chase Bank, F.S.B. to refinance staff; hind the counters along with other courthouse their home. The bank offered them an unusual “cashflow they are usually glad to show a respectful young attorpayment option” loan, that enabled them to In a ney how to properly fill out and file paperwork. vary their payments may on their monthly cash flow. few minutes theybasedshow you more about how the This system works than you learned in your entire courtflexible mortgage option allowed them to pay a monthly minimum payment at a low interest rate law school career. for an initial term. While theirin court, rate was to Also observe other lawyers interest and watch adjust as they interact with their clients, remained closely monthly, the minimum paymentsjudges and fixed at the low rate until the initial a veteran lawyer opposing counsel. Try to accompany term expired or the outstanding balance exceeded 110 percent of the to court for an afternoon; there are many seasoned original loan (through negative amortization). After a time, the Andrews’ minimum monthly payment became insufficient to cover the accrued interest, attorneys who welcome the chance to help a young and the negative amortization feature (adding the motivated esquire. unpaid interest to theto focus your new practice on If you would like principal) commenced. In 2005, the couple filed a class action a local transactional work, consider volunteering atlawsuit against Chevy Chase Bank, train volunteer attorneys bar association, which may alleging violations of the Truth in Lending Act (TILA), 15 USC §1635, and on certain matters in exchange for taking on a cerseeking damages under §1640(a)(2) and rescission tain number of cases pro bono. under §1635. TILA is the federal more likely to be As a recent student you are law developed to protect consumers for help from a mentor. Contact comfortable asking engaging in credit transactions by assuring “meaningful disclosure of credit terms” your law school’s alumni department and local bar to the consumer. §1601(a). TILA’s most significant associations to inquire about mentorship programs. requirements concern information thatattorneys’ There is no reason for you to repeat other must be disclosed so seek out other lawyers who have also mistakes, to a borrower before extending credit, such astheir own firms and don’t be afraid to ask for started the term of the loan, annual percentage rate and total costs to the borrower. The plaintiffs their advice. Having an established attorney mentor claimed that several of Chevy Chase’s disclosures can be invaluable. were misleading, particularly regarding whether Do Not Be Intimidated the initial interest rate was fixed. Additionally, the Once you, a newthat the stampthe steps and couple claimed attorney, take used by the bank on its disclosure forms, whichmust not to the open the doors to a law firm, you referred let esnote as a “WS Cashflow 5-Year Fixed Note Interest tablished attorneys intimidate you. There are lawyers Rate over 20 years of experience who still get things with 1.950%,” was similarly deceptive because the documentacould bebasis. wrong on regular understood to identify the note as having aspeaking to opposing council, do not When fixed rate. The district court other Eastern District If feel intimidated by the in thelawyer’s experience.of Wisconsin feels out summaryand the opposing counsomething granted of place judgment in plaintiffs’ favor, authorizing rescission and awarding attorney’s sel may be wrong, you must double check and say fees.9 The district court granted class certification something. under Ruleadmitted attorneys are no longer just Newly 23(b)(2) of the Federal Rules of Civil Procedure, allowing all are members of the right to lowly law students; they class members the bar and rescind act like it. Clients Thenot seeheld that the need to their mortgages. will court your monthly certified class would include any person whodebt. bills piling up, nor do they care about school had obtained an adjustable-rate mortgage from Chevy By having your own law firm, a client will view you as Chase on a primary residence between April 2004 a successful professional and entrepreneur who has and January 2007, status. had received a Truth in achieved a certain and who Lendingyour name on the door; fromshould not feel It is Disclosure Statement you Chevy Chase bank lesser attorney. of the language the court like a containing any found deficient under TILA. Generating Business On appeal, the U.S. Court of Appeals for the Seventh Circuit noted to succeed in New York City For a new law firm that while this was a matter ofmust do more than just good legal work:First partit first impression in that circuit, the The and Fifthwill need to generate business. They must draw ners Circuits, in addition to California’s Court of Appeals, have held that rescission class actions attention to themselves and their name. are Become a member of youras a matter ofalumni unavailable under TILA law school’s law.10 The court ruled that announcement printed about association. Have an because the TILA rescission remedy firm in the most recent alumni newsletter. the new requires the return of borrowers to the position all available technologies loan was signed, Use they occupied before the to establish the it is a purely personal remedy to be fashioned by firm’s presence on the internet. Consider taking individual creditorsblog about an Moreover, the time and starting a and debtors. up-and-coming courtsubject, offer elementary advice while of the legal indicated that the personal nature giving rescission remedy makes it both procedurallyquesreaders contact information to follow up with and substantively unsuitable for class certification. tions. The courtall marketing optionsthe statutesocial Explore remarked that while through does not explicitly as LinkedIn, Facebook class Twitter. networks such prohibit the use of a and action for rescission effective ways to lack of anbrand. These are cost purposes, the establish a explicit instruction in this area is not dispositive. In fact, the court wrote that TILA’s rescission remedy “is written with the goal of making the rescission Older attorneys and more established law firms process a private one.”11 the newest trends and use tend to be slow to adopt Finally, the court pointed out that the TILA them to their benefit. While these tools may not damageFortune 500 company thealesser ofit’s a great land a provision has a cap of as client, $500,000 or 1 percent of the creditor’s net worth for the total place to start to build a client base. recovery in limit clients to In contrast, the court Do not class actions. one geographical area. ruled that becausefirms are slow to expand beyond Many established recoveries could possibly reach the hundreds ofBy traveling to meet a client similar their city limits. millions in this case and outside ones on a class basis, athe notable aabsence of a of the immediate area, firm shows commitment similar client. As ain the TILA rescission provision to that provision result, the client will be more likesuggests Congress did not intend to include class ly to recommend the firm to friends and colleagues. actions foravailable resources in order to achieve the Use all rescissions. goal. A young lawyer should not hesitate to call an Conclusion older family friend for a favor or press a friend for a referral. is no question that a tremendous wave There Many established attorneys and larger firms rouof litigation is flowing from the unprecedented tinely turn the subprime can not afford their fees collapse ofaway clients thatmortgage industry and or matters that to them are the outcomes call and related credit crunch. Whilesmall. You can to some befriend established practitioners to be predictable, of these cases may appear to some and see if they can refer the smaller claims and magnitude of the losses the nature of the cases and potential clients that cannot likely their fees to you. As a new law firm, you will afford lead courts and litigants into uncharted will territory. legalnot have the overhead costs of larger firms and as a result can handle the matter for a smaller fee and still make a••••••••••••• profit. • •••••••••••••• Opening a law firm • more than a job; it is a is 1. See, While you may not 282 Pension Trust at your e.g., Local always be lifestyle.Corp., TeamstersCiv. 8375 (SDNY)sitting Fund v. Moody’s No. 07 (alleging that desk or in court, you are always working. it assigned Moody’s misrepresented or failed to disclose that Every per“excessively high should be subprime MBSs and CDOs and son you meet ratings” to seen as a potential referral thereby misled investors about the quality and relative risk of or future client. those investments).

2. See Counterclaim, Wachovia Bank v. Promenade at Doral LLC Are You Delaying the Right Dream? also II, 08-13745CA02 (11th Cir. July 21, 2008); see Complaint, Urbana Holdings, LLLP v. Bank of America, No. If you are a recent law school graduate and cer08-47824CA27 (11th Cir. Aug. 20, 2008); Complaint, Regent Hotel,that you want toNo. 00009879own law firm right tain LLC v. First Bank, open your (Cal. Super. Ct. May 1, 2008); Cross-Complaint, J.P. Eliopulos Enter. law v. IndyMac now, then going to work for a different Inc. firm only Bank F.S.B., No. GC040588 (Cal. Super. Ct. May 20, 2008). postpones your dreams. 3. Michael Corkery, “Builders Sue Banks That Pull Financing as Construction Projects Lie Unfinished,”of openMost attorneys never achieve their goal Wall St. J., July 23, 2008, at C1. ing their own firm,Citigroup, theCiv. 9721 (SDNY 2008). and as 08 years go by their ca4. Relativity Media v. reersSee Tripp v. different path. When they are finally 5. take on a IndyMac Financial Inc., 2007 WL 4591930 (C.D. Cal.leave positions at larger firms and establish ready to Nov. 29, 2007) (court dismissed complaint for failure to plead scienter noting that while the restatement their bank’s financials families and mortgages and are of the own, they havewas some indication that defendants unable to take the risk. were aware of inaccuracies in those records, “an even stronger inference is that the Defendants were simply unable to shield When considering whether this is the right themselves as effectively as they anticipated from the drastic choice for you, remember the markets and, once legchange in the housing and mortgage words of hockey that inability became evident, “You miss 100 percentchanged end Wayne Gretzky: IndyMac’s financials were of the accordingly”). shots you don’t take.” v. Alex Brown & Sons Inc., 132 6. See Banca Cremi, S.A. If you, Cir. 1997), (court upheld dismissal of claims F.3d 1017 (4thas a newly minted law school graduate, againstthe rightwho sold collateralized mortgageskills, and have a broker attitude, confidence and obligations to the plaintiff, a foreign bank, finding that the plaintiff bank put in the amount of work necessary to in assets, had was a sophisticated investor, held $5 billion succeed, you can achieve your goal of opening law firm directly “extraordinary” investment experience, aand had employees with business expertise and background in the industry); In from law school. re Apple Computer Securities Litig., 886 F.2d 1109, 1115 (9th Cir. 1989) (“We conclude that in a fraud on the market case, the defendant’s failure to disclose material information may

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