Court Tosses Claim of Malpractice Against Cadwalader

, New York Law Journal


Editors' Note: This article has been updated to reflect a Correction.

Cadwalader Wickersham & Taft has won dismissal of a claim that it committed malpractice by failing to give appropriate advice to a Japanese asset management firm about a mortgage securitization, though it must still face a claim that it failed to do due diligence.

The company, Nomura Asset Capital Corp., claimed that Cadwalader failed to advise it of rules that the mortgages had to satisfy to qualify for a federal tax benefit, ultimately causing Nomura to pay a $67.5 million settlement.

But a 3-1 Appellate Division, First Department, panel ruled Thursday in Nomura v. Cadwalader, 116147/06, that Cadwalader had shown that it did, in fact, advise Nomura about the rules, partially reversing Manhattan Supreme Court Justice Melvin Schweitzer (See Profile). The majority said that only one allegation, that Cadwalader failed to do due diligence before providing an opinion about the securitization, could go forward. Justice Rosalyn Richter (See Profile) wrote the majority opinion, joined by Justices John Sweeny (See Profile) and Dianne Renwick (See Profile).

Justice David Friedman (See Profile), dissenting in part, said that the entire suit should have been dismissed.

The case centers on a pool of 156 commercial mortgages, worth about $1.8 billion, that Nomura securitized in 1997.

Nomura was an "industry leader" in originating and securitizing commercial mortgage loans in the 1990s, according to the First Department's decision. Nomura typically securitized its mortgages through a type of trust called a "real estate mortgage investment conduit," or REMIC, which was eligible for federal tax benefits. To qualify for REMIC, a mortgage loan must be secured by real property worth at least 80 percent of the loan's value. The valuation, for REMIC purposes, counts only the land and buildings on it, not the value of any going concern occupying the property. It may include equipment belonging to a business if that equipment is a structural component of a building, but not if it is an accessory to business operations.

One of mortgages in the 1997 securitization, called the D5 Securitization, was a $50 million loan Nomura made to Doctors Hospital of Hyde Park, an acute care facility in Chicago. Nomura's appraiser valued the hospital at $68 million, more than satisfying the REMIC rules. However, the valuation incorrectly included the value of the hospital business. The appraised value of the land and hospital building alone was only about $31 million. Even assuming that all of the hospital's equipment was REMIC-eligible, the property would have barely cracked the 80 percent minimum.

Nomura hired Cadwalader as counsel to advise it in the D5 Securitization. On the closing date of the securitization, the firm issued an opinion letter saying, among other things, that the mortgages were REMIC compliant. The letter identified the documents the firm relied on, including Nomura's appraisal documents, in reaching its conclusion.

After the securitization was completed and sold to investors, the hospital went bankrupt and defaulted on its mortgage. LaSalle Bank National Association, acting as trustee for the investors, sued Nomura, alleging that Nomura had to repurchase the Doctor's Hospital loan because it breached a warranty saying that it was REMIC-eligible. Nomura settled that case for $67.5 million in 2006.

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