With Dewey & LeBoeuf now mired in bankruptcy, Barclays and Citibank are clamping down on former partners who took out loans to fulfill their capital contribution obligations—worth 36 percent of their target compensation—and Citi has gone so far as to initiate legal action against at least one former partner in order to get its money back.

At the time they were hired, Dewey partners were given until the end of the calendar year in which they joined the firm to chip in 36 percent of their target compensation as a capital contribution. Through the years, Dewey worked first with Barclays, and later with Citibank, to establish loan programs that the firm stressed were the easiest way for partners to quickly fulfill their capital obligations.

Dewey acted as the middleman in the granting of the loans, according to several former partners who participated in the programs, and often agreed to pay the interest for a number of years to ease the burden on its partners. According to two former partners, the amount asked of Dewey partners increased as target compensation increased, even though, as is now widely reported, the firm failed for years to pay partners what was promised.

Now that Dewey is dead, former partners are personally obligated to pay back any loans they took out, with interest, and the banks have started taking action to get their money. Two former partners say they have received statements directly from Citi and Barclays, with both banks suggesting unfavorable terms for repayment; another partner says there has been no word yet from Citi and believes others are in the same situation.

Only Citi appears to have taken legal action so far, and in only one instance—against former Houston partner Steven Otillar, an oil and gas lawyer now with Akin Gump Strauss Hauer & Feld. The bank filed a summons in New York state court May 31 seeking repayment of roughly $209,670, which court papers say accounts for a $207,000 loan given September 2, 2011, plus interest (the amount equates to a target compensation of $575,000). According to Citi’s filing, the loan contained a clause that triggered the default of the note if Otillar ceased being a partner at Dewey. The loan note, included as an exhibit to the summons, also contains a clause that if the firm “dissolves, reorganizes, merges, consolidates, or otherwise ceases to exist in its present form” it would cause a default.

A representative for Citi declined to comment on the lawsuit or the loan program. A press representative for Barclays did not return a request for comment Tuesday afternoon. Citi Private Bank is known in the industry for its law firm lending program–according to the bank’s Web site, it counts 650 firms and 38,000 lawyers among its clients. Barclays also advertises a capital loan program on its site, saying it now holds $400 million in loans for 3,200 partners.

Otillar, who declined to comment through an Akin spokesman, joined Dewey in January 2011 as part of a team from Baker & McKenzie and stayed with the firm until mid-May. Court papers show that Otillar received a letter May 21 from a lawyer for Citi, Donald Pearce, declaring the loan immediately payable as of May 29 because of the default clause enacted by his departure. Pearce, who runs a law firm in New York, declined to comment.

When Otillar took out his loan in the fall of 2011, the firm was strongly encouraging any partners needing to fulfill capital contributions to do so through a program with Citi, according to two former partners. Partners were given a deadline in late August to sign up, even though capital wasn’t officially due until December.

The program wasn’t just open to lateral partners; any current partners being asked to increase their capital with the firm because of increased target compensation could also participate. One of those lawyers was Jeffrey Kessler, who would later join the firm’s five-man office of the chairman in the weeks before the firm’s demise. Kessler, now at Winston & Strawn, said Tuesday that he took part in the program at the encouragement of firm leaders. Though he declined to specify how much his target compensation and capital were increased, he characterized it as “a material amount.”

A spokesman for Dewey had no comment on the loan programs.

That 2011 push to get partners to participate in the Citi program also came to light in a lawsuit filed June 12 by Henry Bunsow, a former Dewey partner who joined in January 2011 from now-defunct Howrey. In the suit, which brings accusation of fraud against five former Dewey leaders, Bunsow describes how Dewey encouraged him to take out the loan from Citi as quickly as possible after his arrival, even though leaders “knew that Dewey was in trouble financially and that [Bunsow] would lose the money that they were inducing him to borrow.” In Bunsow’s case, that money amounted to $1.8 million based on a guaranteed compensation of $3.6 million.

By October, Dewey partners were told the full extent of the firm’s compensation guarantees—to nearly 100 partners—and by January former chairman Steven Davis conceded that the firm was far under budget and would not be able to pay everyone what they expected.

According to a former partner who borrowed from Citi, and another who borrowed from Barclays, both banks are now demanding much higher interest rates than originally promised, with Citi requesting 4.5 percent annually, and Barclays seeking up to 6 or 7 percent, according to the former partners. 

The demands come to light a week after Dewey’s wind-down team called a meeting to update former partners on what it hopes will be a quick settlement that will give an influx of cash to the estate and at the same time shed all former partners of ongoing liability related to the firm (with the exclusion of former chair Davis). So far, no dollar amounts have been given. Meetings with former partners and their counsel are expected to be called next week or the week after to present them with more detailed information.