Subprime a Triple-A Opportunity for Lawyers

The subprime crisis is likely to gin up a lot of work for litigators for a long time to come, according to a report released today by Navigant Consulting,

There were 170 federal lawsuits filed in the first quarter of 2008 that related to subprime mortgages, almost as many as the 181 cases filed in the second half of 2007, when the crisis began. All told, 448 federal complaints have been filed over the last 15 months, and Navigant predicts subprime litigation "will soon surpass" the 559 cases filed by the Resolution Trust Corp. in the early 1990s relating to the savings and loan crisis -- which Navigant views as the "historical high water mark."

"It has really hit with tsunami force," says Jeff Nielsen, a Navigant managing director who wrote the report. In retrospect, the second half of last year could be called "a mild breaking wave," he says.

Navigant also tracked the types of cases filed, and found borrower cases and securities class actions continue to dominate: There were 79 borrower cases and 44 investor class actions. But the cases include contract disputes between financial institutions and claims by employees of failed mortgage companies who claim they were not paid overtime or given adequate notice of
their terminations under the federal labor laws.

"The breadth of the litigation was striking," Nielsen says.

Commercial contract disputes -- squabbles between the big financial players themselves, actually went down, from 22 percent of cases filed in 2007, to 10 percent in the first quarter. Even so, the raw number -- 17 cases -- was the second highest of the five quarters tracked. And Navigant expects more on the horizon. "Intra-industry disputes appear likely to expand as financial institutions shun traditional mores and pursue remedies from one another in litigation," according to the report. That means the Skaddens of the world will be facing off against their counterparts at corporate law firms, rather than the tribe of lawyers in the plaintiffs' bar.

Last month, Skadden filed suit on behalf of Merrill Lynch against XL Capital Assurance, a financial guarantee company that terminated seven credit default swaps. XL Capital, in turn, counter-sued. Expect more lawsuits ahead, says Skadden's Scott D. Musoff, who, along with Skadden's Jay B. Kasner, is representing Merrill Lynch,.

"The dislocation of the credit markets in the U.S. has clearly created an environment of increased litigation," Musoff says. "Although it is impossible to predict how long and how deep this will go, as long as the volatility continues, the litigation will continue as well."

When the crisis hit last August, a wave of lawsuits over alleged obligations to repurchase poorly performing loans dominated. At the outset of this year, Navigant found a wave of lawsuits fighting over the terms of collateralized debt obligations and credit default swaps like the one filed by Skadden.

The cases are piling up. "Across the board, the cases continue to be in their infancy," Nielsen says. Of the 448 lawsuits, 86 remain active, according to Navigant. Only 15 percent of the 278 cases begun in 2007 have received rulings on a motion to dismiss, the first big event in any lawsuit. And of the 191 class actions, only four have been "certified" by a judge who has ruled that the lawsuit should go forward to represent a class. "And so there is a long road ahead as far as the litigation goes," he says.

The uptick in litigation could put a rosy gloss on an otherwise dim forecast for Big Law. As it happens, the "managing partner confidence index" for the first quarter -- a survey conducted by the Citi Private Bank -- also came out today. Six out of ten managing partners "anticipate a rough road ahead," the first time that managing partners have waxed more negative than positive since Citi began polling them since February 2007.

Karen Donovan