When a former Dewey & LeBoeuf partner alleged in August that Citi Private Bank defrauded him by hiding the now-defunct firm’s true financial state when Citi loaned him money to cover his capital contribution obligations, it turns out he wasn’t the first person to publicly lodge such accusations at Citi.
In the months following the March 2011 demise of a different Am Law 100 firm, Washington, D.C.–based litigation shop Howrey, a pair of former partners of that firm sued Citibank and one of its executives in San Francisco state court claiming that the bank had duped them by concealing Howrey’s financial instability as it was arranging capital loan agreements with the two lawyers.
Unless a settlement is reached, that suit is scheduled to go to trial in March. If it does, filings made in the 16 months since the litigation began that depict a firm relying on partners’ money to stay afloat and a compliant bank keeping the scheme going—first reported Tuesday by Reuters—should provide the basis for some compelling courtroom drama.
The plaintiffs in the suit, Stephen O’Neal and David Buoncristiani, joined Howrey in late 2008 as part of a group of construction litigators fleeing Thelen, which itself dissolved in October 2008 and filed for bankruptcy a year later. Thelen’s failure—which cost the two men a “significant” amount of compensation as well as 20 years worth of capital contributions—gave the lawyers a heightened sensitivity to the potential stability of the firm they were considering joining, according to their September 2011 suit.
“Understandably, the financial condition of Plaintiffs’ new firm was of critical importance,” according to one filing in the case.
O’Neal was Thelen’s chairman at the time it collapsed, and knew that the end came when Thelen breached a loan obligation to Citi. Which is why, O’Neal says in court papers, he asked Citi representatives repeatedly once he joined Howrey how the firm was doing. According to the suit, he and Buoncristiani were told that Howrey was well positioned for the coming months and poised to prosper despite the recession. What the Citi executives didn’t say, O’Neal and Buoncristiani claim, is that Howrey had already defaulted on loan covenants in 2007 and 2008, and had borrowed $23 million more than its existing credit line entitled it to in 2009, again breaching a covenant.
Once they joined Howrey, O’Neal took out loans totaling $315,000, and Buoncristiani borrowed $420,000 to cover both an initial capital contribution and a second capital call required of all firm partners in spring 2009. The suit does not specify how much compensation the pair were promised.
The money went directly to Howrey, according to filings related to the suit, and was even used to back Howrey’s own loans to Citi. The pair argue bluntly: “The capital contribution loan program permitted Citibank to shift risk from Howrey to individual partners.”
For its part, Citi claims it did not know about Howrey’s 2009 loan default until May of that year, after the partners had signed their agreements, and that in any event the bank was under no obligation to tell them about the firm’s financial condition. In court papers, Citi also blames Howrey’s demise on a steady decline in billable hours over a number of years; a delay in carrying out cost-cutting measures, including layoffs; and an increase in contingency fee matters.
After losing dozens of partners in early 2011—including O’Neal and Buoncristiani, who left for Jones Day in February of that year—Howrey’s remaining partners voted to dissolve March 15. The firm was pushed into involuntary Chapter 7 bankruptcy in San Francisco a month later, with the proceedings converted to the ongoing Chapter 11 case in June 2011.
Neither O’Neal nor Buoncristiani, who switched from being partner to of counsel at Jones Day at the start of this year, responded to calls for comment Tuesday. The pair’s lawyer, Robert Goodin of Goodin, MacBride, Squeri, Day & Lamprey in San Francisco, also could not be reached. The lawyers initiated legal action against Citi a month after receiving a demand letter from the bank for the unpaid loans.
A Citi spokeswoman had no comment. The bank’s lawyer, Folger Levin partner Roger Mead, did not respond to a request for comment.
The former Dewey lawyer, Steven Otillar, leveled his allegations against Citi when he countersued Citi in response to a bank-initiated legal action seeking to reclaim $207,000 Otillar borrowed when he joined Dewey’s Houston office in 2011. Otillar, now with Akin Gump Hauer Strauss & Feld, declined to comment Tuesday on those suits, which are pending in New York federal court. Otillar remains the only known former Dewey partner to be targeted by Citi in a suit.