Superior Court Judge Peter Busch on Friday tossed out a case brought against Citibank by two former Howrey partners who allege that the bank deceived them about their firm’s financial instability.
Plaintiffs Stephen O’Neal and David Buoncristiani filed suit against Citibank several months after Howrey dissolved in 2011, seeking a declaration relieving them of the obligation to repay the money the bank loaned them for their capital contributions. O’Neal and Buoncristiani, who are now at Jones Day, allege in O’Neal v. Citibank, CGC-11-514106, that Citibank assured them of Howrey’s financial health to persuade them to take out the loans, though the bank had reason to believe the firm was in jeopardy. The case preceded one filed against Citibank by a former Dewey & LeBoeuf partner who countersued the bank when it sought to recover the money he borrowed to join the firm.
Citibank must still fight that case, but its battle with the former Howrey partners is over for now. Ruling from the bench, Busch confirmed his tentative grant of summary judgment, ruling that Citibank is entitled to collect on its notes because the bank owed the plaintiffs no duty of disclosure by virtue of their borrower-lender relationship.
Robert Goodin, a lawyer for the plaintiffs, argued that Howrey’s bond with Citibank was much more than that, noting the bank was a longtime business partner of the firm. Busch seemed swayed by that point, though not enough to change his mind.
"This bank was not a simple lending office into which the firm entered one day and then the plaintiffs followed another day and said, ‘Please lend us money. Thank you. Goodbye," Busch said.
O’Neal met with Citibank around the time in late 2008 that he moved to Howrey from Thelen, where he was chairman. Coming from an unraveling firm, O’Neal and Buoncristiani were determined to join a shop that was stable, said Goodin, a partner at Goodin, Macbride, Squeri, Day & Lamprey.
"They didn’t want to go through two firm failures in two years, and they had other options," Goodin said.
O’Neal was influenced by Citibank executive Cassie Khuu, who assured him that "Howrey was a great firm, a strong firm, great financial relationship, great relationship with Citibank," according to court papers. During that conversation, she failed to mention that Howrey had defaulted on loan covenants in 2007 and 2008 and was likely to breach another, Goodin said.
"By law, she owed a duty to disclose the breaches and other facts that ‘materially qualified’ those representations" of Howrey’s strengths, the plaintiffs allege in court papers.
But the defendants’ lawyers insisted that Khuu’s statements were subjective and not meant to deceive.
"I don’t think the case law allows you to get into the myriad factors that determine what is ‘good,’" said Drew Davis, a partner at Folger Levin. "Is it good because they have 20-year relationship with the firm? Is the firm good because it has a good culture? Because the last year they did really well?"
Subjective statements like that would not trigger a duty to disclose the covenants, Davis added.
Busch wrote in his tentative ruling that "the plaintiffs, as partners in the law firm, are charged with knowledge of the allegedly undisclosed, material information concerning the partnership’s financial condition," a point echoed by Davis.
"There’s no dispute that they had the right to that information, and they are just trying to shift that duty to a third party," he said.
Knowledge of Howrey’s true financial condition was confined to a few partners in leadership roles, Goodin said. The firm’s internal communications, however, present a separate issue, Busch said.
"Your clients might well have had a great case against the firm, but that’s not the case we’re dealing with," he said.
But Busch noted that the expectation that partners be informed of their firms’ financial condition may need to be revisited as the legal industry consolidates. Both Dewey and Howrey were international firms.
"As firms get bigger and bigger and more international … do you get to the point where a partner in Shanghai is going to be charged with knowing everything that the management in New York knows?" he asked.