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January 28, 2010 5:31 PM

Former Clients File Malpractice Suit Against Milbank

Posted by Ross Todd

Two former clients have sued Milbank, Tweed, Hadley and McCloy, charging the firm with malpractice, breach of fiduciary duty, and breach of contract over the firm's work on the financing of a failed Nebraska ethanol project.

In a complaint filed Tuesday in state court in San Francisco, Medley Capital LLC and Fourth Third LLC allege that Milbank lawyers failed to secure a first, secured interest in the ethanol project for the former clients. The firm's work on the matter occurred from March 2007 to March 2009. The ethanol project subsequently went into bankruptcy in August 2009.

The lawsuit stems from a $22.5 million loan made to Altra Nebraska, LLC, a biofuels company developing an ethanol plant in Thayer County, Nebraska. According to the complaint, in the spring of 2007, Medley Capital explored the possibility of making the loan to Altra for the Nebraska project through an affiliated company called Fourth Third LLC.

Milbank was hired, the complaint says, "to act to protect the interests of Fourth Third as well as those of Medley" in making the loan to the Nebraska project.

The plaintiffs claim that in March 2007 Milbank partner Edwin Feo verbally assured them that Fourth Third would have the first, secured lien on the project's real estate and property in return for making the loan. According to the complaint, the plaintiffs allege that Milbank did not draft or record a "Notice of Commencement” needed to maintain a first lien on the real estate under Nebraska law and did not retain Nebraska counsel.

Contractors working on the project began recording liens for unpaid work in September 2007, according to the complaint, and in November 2007, Milbank informed the plaintiffs that a contractor was likely to have a lien that would be senior to Fourth Third's. Construction came to a halt on the project in March 2008. In December of that year, three contractors filed suit in Nebraska state court seeking to foreclose on the construction liens and asking for a determination that their liens were senior to other named defendants, including Fourth Third. Last August, Altra filed for bankruptcy in Nebraska and the court oversaw the sale of the project's assets in October 2009.

Medley and Fourth Third now claim that Milbank failed to draft and record the necessary documents to maintain a primary secure lien on the project assets. They terminated their relationship with the firm in March 2009. As detailed in the complaint, they are seeking repayment of any fees paid to Milbank and attorneys fees, as well as costs associated with the Nebraska lawsuit and bankruptcy proceedings and costs incurred providing maintenance and security to the partially contsructed project, plus punitive damages.

A Milbank spokesperson reached for comment on the lawsuit says, "The allegations in the case are without merit and the firm will vigorously defend the action." The firm is being represented in the case by Lawrence Barth of Munger, Tolles & Olson.

Robert Moore and Michael Betz of Allen Matkins Leck Gamble & Mallory and Jeffrey Nussbaum of Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor represent the plaintiffs.

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