October 2010

FinalCut: Judge Rules Ableco Can Proceed With Paul Hastings Suit

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finalcut_abelco

According to The American Lawyer, a judge ruled in August that a $55 million lawsuit by Ableco Finance, a unit of Cerberus Capital Management, against Paul, Hastings, Janofsky & Walker can move forward.

The lawsuit alleged that Paul Hastings committed malpractice through its “negligent failure” to give Ableco legal advice concerning the legal risks associated with a loan Ableco extended to BH S&B Holdings. Ableco consulted with Paul Hastings’ attorneys with regard to a $125 million loan to BH S&B Holdings. At the time, BH S&B Holdings was angling to buy S&B Industries, which operated bankrupt clothing retailer Steve & Barry’s.

To ensure that the loan would be repaid if BH S&B Holdings failed, Ableco claimed that it required on a perfected first priority lien on Steve & Barry’s inventory, valued at $183.7 million, the NYLJ reported. Ableco provided the $125 million loan to BH S&B Holdings, which then acquired Steve & Barry’s assets from S&B Industries for $163 million.

But the purchase agreement provided that S&B Industries rather than BH S&B Holdings would retain inventory in more than half of the retailer’s stores and that its rights to the inventory and sales proceeds would take priority over the BH S&B Holding’s lien on the assets in those stores.

In November 2008, BH S&B Holdings filed for bankruptcy. Ableco claims that it only realized it didn’t have a first priority lien on all of Steve & Barry’s inventory when BH S&B Holdings filed for Chapter 11. Ableco then filed suit against Paul Hastings for legal malpractice. The firm failed to advise Ableco that the terms of BH S&B Holdings’ acquisition of Steve & Barry’s inventory made it impossible for Ableco to get a perfected first priority lien on Steve & Barry’s entire inventory, according to the complaint.

Ableco claimed it lost $55 million on the loan transaction.