Ed. note: This is a weekly column by Elie Mystal, Managing Editor of Above the Law Redline, wrapping up the week that was in law and finance. Elie is not a practicing attorney, and anything he says that you listen to can and will be used against you.
So we're all having fun today with J.P. Morgan, lawyers at Mayer Brown and Simpson Thacher, and their collective $1.5 billion error. The Second Circuit ruled that creditors to the old General Motors may be entitled to $1.5 billion based on a legal mistake in old JPM loan documents.
It might seem weird to use this story as an example in favor of gigantic legal fees, but as you look at how this error happened, you'll see my point.
JPM loaned GM money as part of a $300 million synthetic loan. Unrelated to that, JPM also financed part of $1.5 billion loan to GM. When GM paid off the first loan, it needed to release JPM’s interest in GM property used to secure the $300 million.
I'm bored already. Evidently, so were lawyers at Mayer Brown. A senior partner delegated part of the task to an associate, who delegated some of the research to a paralegal. The paralegal was unfamiliar with the transaction, probably because he was a paralegal and people spend more time housebreaking their dogs than they spend explaining to a paralegal why they are being asked to do any particular task. The paralegal put in the wrong term because, whatever, he made a mistake researching something no lawyer knows off the top of his head.
From there, the associate copied the mistake into the documents sent to the senior partner without checking the paralegal's research. The partner send the docs to JPM's outside counsel without checking the associate's research. Outside counsel Simpston Thacher didn't double check or catch the error. Nobody at Mayer Brown, Simpson Thacher, or in-house at GM or JPM caught the mistake. Richard Gere shoved a gerbil up his ass. I know because I read it somewhere.
If you don't understand what corporate lawyers do, let me explain: corporate lawyers create templates. They take your deal, which is so awesome and cool to you, and find somebody who has done that deal before, then reuse the legal documents from that after changing some nouns and dates and figures. The best corporate lawyers can even synthesize two (or really, 50) templates into one new doc that then becomes its own template for the next guy. It's terribly exciting. Like, way more exciting than slamming a hammer into your own face until brain comes out of your nose.
The senior lawyers are in charge of making sure the right templates are used for the right deal: "Do you want pizza, or a cheeseburger? A cheeseburger pizza? That's gonna take some time!" The junior lawyers are concerned with the nouns and dates and figures: "He asked for American cheese, not Venezuelan." The paralegals or "document specialists" are the ones who deal with the piddling legal terms. The terms are just garnish: "Do you want fries with that?"
You, the client, do not want to pay your senior advisor's ginormous fees to research terms. She'd gladly do it. But when you got your bill you'd throw one of your "these lawyers are trying to screw me" temper tantrums and threaten to take your business to Legal Zoom and nobody wants that. You don't really want to pay junior lawyers to research those terms, because they are also expensive. And when you massively change the deal based on something you saw on Shark Tank last night, you want those kids fresh. So it's more economically efficient for you when "basic research" gets delegated to document monkeys.
Most likely, this mistake would have been caught if any competent attorney at any of four different companies had spent 10 minutes on Google with this particular term. But, again, who wants to pay for that? Who wants to pay for four different sets of lawyers to look over not just this particular term, but all of them, over and over again? You think your legal bills are high now, you could end the softness in Biglaw hiring if you were willing to pay for that.
But that's not efficient and so... mistakes will happen from time to time. You hope it doesn't cost $1.5 billion, but sometimes that's just how that goes.
But when you do get a legal bill, and "lawyer error" hasn't cost you $1.5 billion recently, pay it. Pay it and don't bitch. Pay it and say "thank you that you spent the time on this necessary to make sure that there was enough institutional redundancy to minimize our risk of costly human error." Lawyers bill by the hour because spending a lot of time with your documents is actually quite useful.