In its effort to recover money from former Dewey & LeBoeuf lawyers to whom it extended loans meant to cover capital contributions, Citi Private Bank has so far initiated one legal action. Citi sued Steven Otillar in New York state court just three days after Dewey’s May 28 bankruptcy filing. At issue: $209,670 Citi loaned Otillar, a Houston-based energy and finance lawyer who joined Dewey as a junior partner from Baker & McKenzie in January 2011, so that he could meet the capital demands of his new firm.
A review of online court dockets indicates that Otillar—though not the only Dewey partner to take out such a loan—remains the only borrower Citi has sued so far. Even as he has begun to fight back aggressively, it remains unclear why Otillar has been singled out. But a little-noticed court filing submitted earlier this summer suggests he may not stand alone for long.
The document in question was filed by Luskin, Stern & Eisler, the law firm that took over as Citi’s lawyers in the Otillar action in late July from New York solo practitioner Donald Pearce. In asking the court to approve the switch, Luskin Stern lawyers wrote that the firm “is handling numerous other matters for Citibank that are related to the demise of Dewey & LeBoeuf including many related to loans taken out by other former Dewey & LeBoeuf partners. Citibank now wants one firm to coordinate these matters, and has selected LS&E to do this.”
Michael Luskin, who is acting as Citi’s lead lawyer, did not return several requests for comment as to what other actions he is handling for the bank; nor did Michael Stachura, a managing director at Citi who oversaw the bank’s lending to Dewey lawyers; or a Citibank spokeswoman. Pearce declined to comment on his earlier involvement for Citi in Dewey-related matters.
As Law Journal affiliate The Am Law Daily reported two months ago, many former Dewey partners have received demand letters and requests for repayment from both Citi and Barclays—the two banks that loaned money to Dewey partners to fulfill their capital contribution requirements—insisting the loans are immediately payable now that Dewey has dissolved. Otillar received such a letter from Citi on May 21, according to the bank’s action against him.
For his part, Otillar, who has declined to comment on the matter, defended himself in a batch of filings made in mid-August in New York federal court, where the case was moved in June. In those filings, he alleges that Citi and Dewey actively defrauded not just him and his wife, whom the bank has also sued, but also other recruits by hiding the full extent of Dewey’s financial situation. (Otillar’s response was first reported by Reuters).
Dewey and its management’s “scheme to defraud was intended to lure unsuspecting lateral hires to join the failing firm as equity partners, who would then be responsible for making significant capital contributions to [Dewey] when its revenue was insufficient to pay its obligations,” Otillar wrote in a 23-page filing in Citibank v. Ottilar, 12 cv 05092. The same document also implicates Citi in the alleged misrepresentations, ultimately concluding “Citibank actively participated in the fraud and breach of fiduciary duty” and “Citibank had a duty to disclose what it knew.”
Otillar joined Dewey in January 2011 along with Karl Hopkins, who left Dewey for SNR Denton in February.
In response to Otillar’s recent allegations, a Citi spokeswoman said in a statement: “These claims are without merit and we intend to defend ourselves against them vigorously.”
Citi began offering capital loans to Dewey partners around 2010, according to former partners. Its relationship with the firm, however, dates back to the 1970s. Citi was among four banks that extended a $100 million line of credit to the firm. In the weeks leading up to Dewey’s fall, Citi cashed out its portion of the debt, selling it to hedge funds and essentially removing itself as a Dewey creditor as the firm veered toward bankruptcy.
Dewey had a requirement—not uncommon among other law firms—that partners contribute 36 percent of their target compensation to the firm as capital by the end of the calendar year in which they joined the partnership. The money could be deducted from paychecks throughout the year or paid through a loan offered by a partner bank. Interviews with former Dewey partners, as well as papers filed by Otillar, indicate that Dewey applied pressure on partners to choose the latter option.
In one memo attached as an exhibit to Otillar’s response, the firm’s CFO Joel Sanders told a group of partners on Aug. 22, 2011, that if they signed on to a loan program with Citi by Aug. 30, they could take out an “attractive” six-year loan with a fixed interest rate of 2 percent, with Dewey covering that interest for the first three years. A second set of emails included in the filings and sent to Otillar Sept. 6 and 7 from a Citi representative with a marker of “high importance,” said he had to overnight the loan papers to the bank and noted that “It appears your firm has a tight deadline for the funding.”
Otillar says in his declaration that as a result of that pressure, he and his wife signed on for a $207,000 loan. The amount corresponds to the $575,000 annual salary he was told he would receive. However, according to his filings, from the time he joined Dewey in January 2011 until his departure in May for Akin Gump Strauss Hauer & Feld, he only received 55 percent of the promised compensation, despite bringing in $1.5 million in receivables.
Otillar accuses the bank of participating in a scheme under which Dewey was run as a Ponzi scheme—a term also used in former Dewey partner Henry Bunsow’s lawsuit against a handful of former Dewey leaders—that continually brought in new partners and new capital though it was clear the firm would not be able to cover compensation promises made to laterals and legacy partners.
Otillar also stresses that he didn’t blindly join the firm. To the contrary, Otillar says he probed the partners recruiting him about the firm’s financial state following the 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae. “I was told I was joining [Dewey] at the absolute perfect time as the firm’s profitability had grown and was continuing to grow substantially,” he wrote in the filing. Otillar says he also relied on assurances from an unnamed recruiter, as well as what appeared to be strong financial information on Dewey published in Law Journal affiliate The American Lawyer. The magazine later revised several years of financial data for Dewey.
Otillar, represented by Helen Chaitman of Becker & Poliakoff, is urging the court to allow him to file a counterclaim against Citi before determining if he and his wife must repay the loan. Chaitman had no additional comment beyond the filings, and said she is not aware of any other former Dewey partner who has been sued by Citi.
Dewey’s bankruptcy advisers acknowledged in a recent filing that former partners have had to cope with a variety of challenges since the firm went under, including “being asked to pay off personal loans they had to take to finance their capital contributions to [Dewey] that had to be repaid despite that their capital was lost in [Dewey]‘s collapse.”
Dewey’s wind-down team brought up the point in a motion asking Southern District Bankruptcy Court Judge Martin Glenn (See Profile) to approve a proposed settlement that would see more than $71 million paid into the Dewey estate from former partners in exchange for a waiver of some Dewey-related liability. For some of those partners, the amount they were asked to contribute includes unpaid capital Dewey claims they owe the firm.
@|Sara Randazzo, a reporter at The American Lawyer, an affiliate, can be contacted at firstname.lastname@example.org.