Citibank N.A. is forcefully denying allegations by a former lawyer with the now-defunct Dewey & LeBoeuf that the bank conspired with leaders of the firm to woo lateral partners with a Ponzi-like scheme aimed at paying off Dewey’s debts to the bank through a steady flow of capital contribution payments.
In a 25-page filing made Wednesday in New York federal court, Citi asserts that partners should have done their own research into the firm’s financial condition and that it was not the bank’s responsibility to warn them. Citi also lays out why it believes it deserves repayment of a loan it extended to former Dewey partner Steven Otillar, who borrowed $207,000 from the bank in 2011.
Citi’s filing comes in response to Otillar’s allegations that the bank conspired with former Dewey leaders to fraudulently induce partners to join the firm and his claims that Citi should have cautioned him of Dewey’s financial troubles when he took out the loan.
The back-and-forth between the two sides originated with a lawsuit Citi filed against Otillar, as well as his wife, just days after Dewey’s May 28 bankruptcy seeking the immediate recovery of the money it loaned Otillar. Otillar responded in a series of mid-August filings, arguing that he should be allowed to bring counterclaims against Citi and conduct discovery before being forced to repay the loan, now worth $209,670 once accrued interest is added.
What still hasn’t been explained, by any of the parties involved, is why Otillar, a relatively junior partner from Dewey’s Houston office, appears to be the only former Dewey partner the bank has sued so far. Citi launched a capital contribution program with Dewey in 2010, according to former partners, through which it offered six-year loans—with Dewey paying the interest for the first three years—to help partners fulfill capital obligations that committed them to contribute 36 percent of their targeted yearly compensation to the Dewey partnership by the end of the calendar year in which they joined. Dewey promised to repay any remaining portion of the loan and return the rest of the money to partners who left within three years of their departure.
In its Wednesday filing, Citi lays out why it believes it deserves repayment from Otillar and his wife, and why the couple should not be allowed to prolong the case with discovery. In disputing Otillar’s accusations, Citi argues that he had ample opportunity to assess Dewey’s financial condition on his own and that the bank was under no obligation to provide such information.
Citing a clause in Dewey’s partnership agreement that any partner “shall have the right to inspect books and records of the Partnership,” Citi contends, “It is apparent from Otillar’s motion papers that he never availed himself of this opportunity at any time before signing on as a partner or before taking out his Citibank loan, or, indeed, ever.”
The court filing at times seems to avoid the issue of whether or not some of Otillar’s assertions are true, arguing instead that they have no place in the current dispute.
“While Otillar claims that he was kept in the dark about the Firm’s finances, this is completely irrelevant under governing New York law,” Citi writes, further arguing that Citi cannot be held liable for failing to disclose confidential information about one of its customers to another.
Touching on Otillar’s point that Dewey lured a large number of lateral partners so it could pay off its bank debts via the capital loan program, Citi writes: “[E]ven if partners’ capital contributions were used to repay Dewey’s indebtedness—so what? No one has ever questioned the legitimacy of Dewey’s bank loans and repaying debt is certainly a proper use of partnership funds.”
Citi’s relationship with Dewey dates back to the 1970s, and it was one of the financial institutions that had extended a $100 million line of credit to the firm as of earlier this year (Citi cashed out its portion of Dewey’s debt before the firm filed for Chapter 11 protection). “Citibank had no control over how Dewey utilized that money,” the bank’s attorneys write, “and no obligation to police it.”
Citi’s lawyer, Michael Luskin of Luskin, Stern & Eisler, has not responded to repeated requests for comment. Reached Friday, a Citi spokewoman repeated an earlier statement that Otillar’s claims “are without merit and we will defend against them vigorously.”
Otillar, now with Akin Gump Strauss Hauer & Feld, declined to comment. His lawyer, Becker & Poliakoff partner Helen Davis Chaitman, said Friday: “We believe we’ll be able to prove our contentions in discovery.”
Citi appears to have little sympathy for Otillar, stating at the outset of its filing: “While Dewey’s collapse in May 2012 was unfortunate, it did not relieve Otillar of his obligations to make his capital contribution (which he had already done); nor did it relieve him of his obligation to repay the loan.”
In a somewhat confusing point made later in the filing, Citi seems to imply that Dewey bears at least some responsibility for the loan. In stressing a point that Citi could not have known that Dewey would fail to keep up interest payments on partners’ capital loans or repay them when partners departed, the bank’s lawyers write, “Dewey was not obligated to repay Otillar’s capital contribution until he withdrew or the Firm dissolved, and there is no allegation (or basis to allege) that in August 2011 either was likely.”
An addendum to the Wednesday filing also officially reveals for the first time that three of Dewey’s administrators—executive director Stephen DiCarmine, chief financial officer Joel Sanders, and director of finance Frank Canellas—had letters of credit issued by Citi. A declaration by Jeffrey Cole, identified as a senior credit officer in the Citi Private Bank Risk-Law Firm Group, says the three took out the letters in early 2010 for an unspecified dollar amount. All three of the letters expired in December 2011 without having been drawn upon. (The letters essentially held money aside at the bank for the three.)
In Otillar’s August motions, he argued that “the only reason someone would want a letter of credit is that he had reason to believe the firm would not survive.”
No hearings have been scheduled yet in the case.
In other Dewey developments, a hearing is scheduled for next week for a judge to weigh in on whether a proposed $71 million settlement with former partners should be approved. Groups of former partners as well as creditors took positions either for and against the settlement in a batch of court filings submitted Thursday.