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A U.S. bankruptcy judge delayed ruling on a proposed settlement between Brobeck, Phleger & Harrison’s estate and Citibank FSB after objections were raised by former Brobeck partners. Under the deal, Citibank would take $2.85 million in cash as full payment for the $8.2 million still owed by Brobeck’s estate. Brobeck’s bankruptcy trustee, Ronald Greenspan, would take over Brobeck’s Citibank debt, paying it by using money from a prior settlement with Morgan, Lewis & Bockius. At a hearing Friday before Judge Dennis Montali, attorneys for a group of former partners said the deal would breach their loan agreement with Citibank, saying it could only be assigned to another financial institution. They specifically took issue with a clause in the proposed settlement that would free Citibank of any liability — from Brobeck partners and other parties — for assigning away its rights as a lender. “There is the essence of a good deal,” said Thomas Patterson, a partner at Los Angeles’ Klee, Tuchin, Bogdanoff & Stern who is representing a group of former Brobeck partners. But, he added, Citibank “is using alchemy” by having the trustee stand in its shoes to collect additional money from Brobeck partners and other third parties. Specifically, Patterson said after the hearing, “the concern former partners have is that the trustee is going to use the debt Citibank doesn’t want to collect anymore and sue the former partners to collect it.” Cecily Dumas, a partner at Friedman Dumas & Springwater who is representing a second group of former Brobeck partners, also spoke against the transfer of Citibank’s loan agreement to the trustee. Montali asked the attorneys for the trustee and Citibank to revise the wording of the settlement to address the concerns raised by the former partners. “It makes sense for the bank and the trustee to reach a settlement,” Montali said, but added that “I don’t want to run roughshod over the rights of the objectors.” Citibank’s attorney, Kathryn Coleman, a partner at Gibson, Dunn & Crutcher, cautioned that the bank would not accept a settlement that left it open to liability. “We must not have the possibility of getting additional liability from the settlement,” Coleman said. Citibank is Brobeck’s largest creditor. Prior to the firm’s collapse in February 2003, Brobeck partners had reduced some of the firm’s debt to the bank — which at one point reached $86 million — by agreeing to withhold their distributions. While Citibank would take a multimillion-dollar loss under the agreement, it would also be freed of any actions the trustee may have pursued against it. Greenspan had investigated whether the bank might face liability for its lending practices before and after Brobeck’s collapse. He outlined the bank’s potential “lender liability” in a motion last month requesting approval of the Citibank agreement. (That issue is separate from the liability issues raised by former Brobeck partners during Friday’s hearing.) “Brobeck’s debt level reached unusual levels — up to $500,000 on a per-partner basis — in the final years of operation,” the court filing says. “Citibank might have exposure to the estate for the manner in which it conducted itself as lender at the time Brobeck’s debt levels reached such heights.” Greenspan had also questioned whether Citibank could be held liable for funding half the $1 million that a group of Brobeck lawyers paid to the Lanier Law Firm for litigation against Clifford Chance. The suit, over Clifford Chance’s hiring of former Brobeck partners, has not been resolved. Citibank will be paid with part of a $10.2 million settlement the trustee reached with Morgan Lewis. Montali approved that settlement earlier this month. Montali has yet to rule on a third proposed settlement, also between Greenspan and Clifford Chance. Under that agreement, Clifford Chance would pay $3.75 million to settle claims that its hiring of Brobeck partners contributed to the collapse of the firm. Many former Brobeck partners oppose the settlement.

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