Mortgage Lender Sues Firms for Malpractice, Botching a Deal

ECC Capital Corp. has filed a malpractice lawsuit against both Latham & Watkins and Manatt Phelps & Phillips, claiming that due to the firms’ “incompetent draftsmanship,” ECC Capital suffered more than $50 million in damages in its deal to sell its mortgage-origination business and a subprime loan portfolio to Bear Stearns & Co.

The complaint claims that the two firms drafted an agreement with Bear Stearns that was flawed, incomplete, and contrary to the company’s directions. Among other things, the company says that the agreement should have contained provisions that shifted the risk of early mortgage defaults in the loan portfolio to Bear Stearns, but those provisions were not properly included. It is more typical in these types of agreements for the risk of default to remain with the seller, at least for a limited period of time after the sale, but ECC Capital claims that it negotiated special terms with Bear Stearns that shifted that risk to Bear Stearns… terms that were not properly incorporated into the agreement.

The deal between ECC Capital and Bear Stearns did end up closing in 2007, followed by a couple of years of court battling between the two companies over final terms. The ECC- Bear Stearns litigation was resolved last July with ECC ultimately getting far less out of the deal than it originally anticipated, a result it blames squarely on the two law firms. ECC Capital’s complaint against the law firms does not specify a damages claim, though it does refer to expert estimates that the company lost more than $48 million that it should have received from Bear Stearns had the documents been drafted properly. The company also has about $4 million in legal fees from its Bear Stearns litigation, which the company also attributes to the firms’ poor work. Both firms deny the claims in the lawsuit and call it meritless.