Mortgage mess becomes prime territory for law firms

The collapse of the subprime-mortgage market has turned into a legal free-for-all not seen in the financial-services industry since the savings-and-loan crisis.

Last year, 278 subprime-related civil cases were filed in federal court, equaling half of the 559 S&L cases handled by the Resolution Trust Corp. from 1989 to 1995, according to Navigant Consulting Inc. The study does not include suits filed in state courts.

"The S&L crisis has been a high water mark in terms of the litigation fallout of a major financial crisis," said Jeff Nielsen, managing director of Navigant Consulting. "The subprime-related cases appear on their way to eclipsing that benchmark."

Virtually every participant in the meltdown is being sued: Brokers, lenders, appraisers, home builders, bond underwriters, bond insurers and money managers, among others.
And the suits keep coming in 2008, according to anecdotal evidence, as the number of foreclosures escalates and financial institutions suffer more losses. Estimated losses from the subprime mess could amount to close to $400 billion, not including litigation costs.

With that kind of fallout, it could take years to unclog the courts.

Borrower class-action suits made up the biggest chunk of cases last year (43 percent), with claims that they were the victims of illegal or abusive lending practices.

Within this category of borrower suits, however, are some atypical defendants. For instance, two California couples have accused home builder KB Home of conspiring to inflate prices by generating fraudulent appraisals.

Even cities with high foreclosure rates want someone to blame. The City of Cleveland has sued 21 investment banks, including Goldman Sachs, Merrill Lynch and HSBC, alleging they created a public nuisance by investing in subprime loans.

Similarly, Buffalo is suing 28 lenders in hopes of getting them to take responsibility for abandoned properties in the city.

"There are some creative lawsuits out there, some would say frivolous," said Richard Gottlieb, a Chicago lawyer who represents lenders in litigation.

Gottlieb leads a practice of 41 lawyers at the Dykema law firm that is busier than usual despite the loss of some big clients, such as mortgage lender New Century Financial Corp., to bankruptcy.

The surge in litigation has left other firms scrambling to decipher the complexities of subprime lending and the related securities issued by investment banks that bundled the mortgages into bonds. Securities cases accounted for 22 percent of the filings. Firms are looking to capitalize on new opportunities, as other areas of commercial litigation cool off.

Besides litigation, firms are being called on to advise clients involved in regulatory investigations. Federal and state authorities, including the Illinois attorney general, have launched probes into predatory lending practices.

On the move: Tim Callahan joined Paul, Hastings, Janofsky & Walker from Mayer Brown. Callahan works on transactions in the alternative and renewable energy industries. At Mayer, he was head of its global wind-energy practice. ... Edwin Brooks joined McGuire Woods from Drinker Biddle & Reath. A trial lawyer, Brooks represents health-care companies and other businesses in disputes and litigations related to bankruptcy.

Briefly: Three partners at Cooney & Conway have donated $1.5 million to establish a new faculty position, an endowed chair in advocacy, at Loyola University Chicago's law school. John Cooney, Robert Cooney Jr., and Kevin Conway all graduated from Loyola's law school in the 1970s. Their personal-injury firm concentrates on asbestos cases. The school plans to fill the position by the fall of 2009.

----------  (Chicago Tribune)