September 22, 2014
Authored by: Mark Duedall and Leah Fiorenza McNeill
Attorneys with secured lenders for clients may one day find themselves in the following hypothetical scenario: An attorney represents a secured lender in the workout of a loan that is owed by a small distressed borrower. The borrower finds a buyer for its assets (either in a § 363 sale or out-of-court short sale), and the borrower and buyer agree upon the basic terms of the sale transaction. However, the borrower’s counsel does not have the experience, time or resources to draft the sale transaction documents, so the responsibility to “just get it done” falls on the secured lender’s attorney, whose client has the biggest economic stake because it will likely receive most of the sale proceeds.
After the deal closes, it turns out that the borrower is subject to tax claims that could have been avoided if the sale had been done another way, or the borrower is stuck with some pre-closing liabilities that it (mistakenly) thought the buyer was taking, or some other liability that counsel for the borrower should have addressed prior to or at the closing, but that the attorney did not care about or missed. The borrower sues — and the target of the suit