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The imprudence of Prudential

18/05/2012

In 1978 Prudential, then the largest insurance company in the USA, lent $160 million to United States Lines (USL), the shipping firm. General Electric Capital Corporation (GECC) also lent to USL but, as part of the deal, Prudential took the primary lien on eight USL vessels. GECC was only entitled to the leavings after Prudential had recouped its loan.

The deal was restructured in early 1986, at which point USL owed Prudential $92,885,000 (to be tediously precise). But when a secretary at GECC’s attorneys typed up the revised mortgage document she turned that into just $92,885.

The original cock-up was ultimately replicated on almost 100 subsequent documents, but neither GECC’s drafting team nor Prudential’s in-house counsel spotted it. Nor did the insurance company’s outside counsel, or the lawyers for United States Lines. In masterly understatement, Prudential’s general counsel eventually called the oversight “astonishing.”

In 1986 USL entered bankruptcy protection, and started selling off assets. Prudential maintained that it was owed nearly $93 million, the value of the lien, from the ships’ sale. Or so the insurance company thought, but close scrutiny of the lien documents disclosed that those three little zeros had gone AWOL.

While USL’s problems were thus temporarily placed on hold, Prudential’s had just begun. First, the shipping company argued that under the clear terms of the mortgage, Prudential’s interest in its ships was a matter of thousands, not millions of dollars. It was a powerful claim, particularly because under a quirk in the bankruptcy law, whatever USL actually knew about the parties’ intent was irrelevant.

Nowhere in the court records is it disclosed who discovered the missing zeros, but you can just picture the forehead-smacking moment of disbelief. Rather than put its entire entitlement at risk, Prudential gave USL $11.4 million of the $65.4 million it raised from the sale of the ships to drop the claim.

In March 1988, GECC tried to cash in on the mistake. In what even Manhattan Lawyer magazine called “the kind of claim that only a lawyer could love,” GECC insisted with a straight face that Prudential should get just 93 grand, leaving GECC with the rest. The lawyer for GECC made the argument, assuring the Federal District Judge that he could still “look himself in the mirror” after doing so. Lawyers, eh; doncha just love ’em!

Prudential eventually prevailed in two Federal courts, but not before it had forked over hefty fees to yet another set of lawyers. What with the pay-off to USL, its own legal fees and also the costs of holding onto and maintaining ships it would otherwise have sold, Prudential reckoned that the typo had cost it at least $31 million.

Ooo.

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