NEW YORK (Reuters) - A former Dewey & LeBoeuf partner who has been accused by Citibank of defaulting on a loan is making a provocative countercharge: He claims the bank participated in a “fraudulent scheme” to help a few leaders of the now defunct law firm hide Dewey’s dire financial situation from him and the broader partnership.
In a 23-page motion filed in New York federal court this month, former Dewey partner Steven Otillar argues that he and other partners were “fraudulently induced” into signing up for a Citibank loan program that financed their capital contributions to the firm. The motion was filed in response to a request made by Citibank in May for summary judgment. In its lawsuit, Citibank argues that Otillar has no legal grounds to claim he doesn’t owe payment on the loan.
Otillar is believed to be the only former Dewey partner to have been sued for defaulting on his loan, though it could not be determined why he may have been singled out.
If the court denies Citibank’s motion for summary judgment, the case could move to discovery and then a trial. That would open a new, contentious chapter in Dewey’s wind-down, legal experts say. If the judge grants Citibank’s motion, Otillar could pay back the loan or appeal the ruling.
Otillar’s allegations against Citibank are based on an unusual legal argument that the bank had a fiduciary duty to alert him to Dewey’s shaky financial situation — but it is not the first time such claims have been made. In September 2011 two partners from the bankrupt Washington law firm Howrey sued Citibank in San Francisco Superior Court, accusing the bank of fraud for granting capital loans when it knew Howrey was foundering. A jury trial is scheduled for December.
Otillar has not sued, and his motion could be a negotiating tactic in an effort to settle Citibank’s lawsuit, said one lawyer who specializes in financial services litigation and is not involved in the Citi suit.
Citibank’s senior vice president for public affairs, Natalie Marin, declined to comment. Otillar, now an energy lawyer with Akin Gump Strauss Hauer & Feld in Houston, also declined to comment. Several former members of the Dewey management team declined to comment or did not respond to requests for comment.
In his motion, Otillar says the loan program was designed by Citi and Dewey management to shift a pre-existing debt owed by Dewey to individual partners. He claims the bank knew when it structured the arrangement that the firm’s finances were precarious and should have notified him that he was assuming a huge risk.
By not doing so, the bank misled “me, my wife and countless other unsuspecting lateral hires and their spouses,” Otillar says in his motion, filed in New York federal court on August 17.
If the Citibank case goes to trial, Otillar could argue that the contract with Citibank is void, since he wouldn’t have taken the loan had the bank disclosed Dewey’s financial situation, said Andrew McGaan, a securities and fraud specialist at Kirkland & Ellis who is not involved in the case.
“It’s an elementary principle of contract law,” McGaan said. “If has in fact been demonstrated, then are excused from performing under the agreement.”
It is rare for a bank to sue a law firm partner over a capital loan — the sum partners borrow to finance the investment they must make in a firm upon being named partners — law firm consultants said. Typically, the partner and banks work out a compromise.
Otillar said in his motion that Citibank must have known of Dewey’s troubles because the bank issued some of Dewey’s management team letters of credit securing management’s compensation in the event of the firm’s collapse. Such a move would have been taken only if managers had reason to believe the firm was in trouble, he said.
Otillar also said in the motion that he decided to participate in the loan program only after receiving several communications from Citibank, including emails and phone calls from Citibank Senior Vice President Rohit Malhotra, urging him to sign and submit the loan documents as soon as possible. Malhotra did not return a request for comment placed through a Citibank spokeswoman.
Once one of the largest firms in the United States, New York-based Dewey closed its doors in May. The firm’s estate is seeking to pay approximately $315 million in what creditors claimed they were owed at the time of the bankruptcy filing. In a settlement proposal submitted to the court on Wednesday, the estate has worked out an agreement with one group of former partners to return $71 million in compensation.
One of some 300 Dewey partners at the time of its collapse, Otillar joined the firm in early 2011 from Baker & McKenzie. In September he took out a six-year capital loan of $207,000, Otillar’s motion said. A provision in the loan triggered default of the note if Otillar left the firm or the firm collapsed, according to Citi’s complaint, and the bank sued Otillar in May.
One issue that could come into play is Citibank’s fiduciary duty to Otillar, if it had any.
Under contract law, lenders typically are not obliged to advise borrowers on the soundness of their investment. An exception could arise if “the lender is aware of information that it knows is material to the borrower,” said Steve Thel, a Fordham University of Law contracts professor, in an email.
That could be a difficult case for Otillar to make. Citibank had a separate loan with Dewey, and it is unclear whether the bank would be free to discuss the situation of one client — Dewey — with another, Otillar, said David Eisen, a Los Angeles lawyer who specializes in representing attorneys and law firms in financial disputes. Otillar has “an uphill battle to demonstrate that (Citibank) had an affirmative duty to warn him regarding confidential financial dealings with a separate borrower,” said Eisen.
Editing by Eileen Daspin, Eric Effron, Amy Stevens and Douglas Royalty