As we mentioned in the Labor Day edition of Morning Docket, there’s some interesting news on the Dewey & LeBoeuf front. The one former Dewey partner being sued by Citibank for allegedly defaulting on a capital loan — energy lawyer Steven Otillar, now a partner in the Houston office of Akin Gump — is opposing Citi’s attempt to collect on the debt, by arguing that he was “fraudulently induced” to borrow the money in question.
How much are we talking about? How does the debt compare to Otillar’s compensation while at Dewey? And what are Otillar’s specific allegations about “fraudulent inducement”?
Here’s a report from Thomson Reuters News & Insight, which first covered the filing:
In a 23-page motion filed in New York federal court, former Dewey partner Steven Otillar argues that he and other partners were “fraudulently induced” into signing up for a Citibank loan program that financed their capital contributions to the firm. The motion was filed in response to a request by Citibank for summary judgment that argued Otillar has no legal grounds to claim he doesn’t owe payment on the loan.
Otillar is the only former Dewey partner believed to have been sued for allegedly defaulting on his loan, though it could not be determined why he may have been singled out.
The amount in question is not huge, in the grand scheme of things:
One of approximately 300 Dewey partners at the time of its collapse, Otillar joined the firm in early 2011 from Baker & McKenzie. In September, he took out a six-year capital loan of $207,000 that stipulated Dewey would cover the interest payments for the first three years and Otillar would pay the second three, with his rate capped at 2 percent, Otillar’s motion said.
A provision in the loan triggered default of the $207,000 note if Otillar left the firm or the firm collapsed, according to Citi’s complaint, and the bank sued Otillar in May.
But $207,000 (or a shade over it, with interest) is far from negligible either — especially compared to what Otillar earned while at Dewey. According to the Dewey & LeBoeuf partner payments spreadsheet, Otillar received total 2011 and 2012 payments of $458,051. According to Otillar’s summary judgment opposition (reprinted in full on the next page), even though he negotiated for minimum annual compensation of $575,000 for 2011 and 2012, he ultimately received “just over 55% of his minimum guaranteed compensation set forth in his offer letter.”
So you can see why Otillar must be bitter about this situation. He alleges that he was pressured to take out this loan to cover his capital contribution to Dewey in early September 2011. In October 2011, he learned that the firm was in deep trouble financially. A few months after that, the firm imploded. And then Otillar got sued on his capital loan by Citi — one of Dewey’s lenders, and presumably well-informed about the firm’s financial predicament.
Here is the gist of Otillar’s theory, according to Reuters:
In his motion, Otillar says the loan program was designed by Citi and Dewey management to shift a pre-existing debt owed by Dewey to individual partners. He claims that the bank knew when it structured the arrangement that the firm’s finances were precarious and should have notified him that he was assuming a huge risk.
Otillar’s allegations against Citi are based on a novel legal argument that the bank had a fiduciary duty to alert him to Dewey’s precarious financial situation, but it is not the first time such claims have been made. In September 2011, two partners from the bankrupt Washington law firm Howrey sued Citibank in San Francisco Superior Court, accusing the bank of fraud for granting capital loans when it knew Howrey was foundering. A jury trial is scheduled for December.
Otillar, however, has not sued, and his motion also could be a negotiating tactic in an effort to settle Citibank’s lawsuit, said one lawyer who specializes in financial services litigation and is not involved in the Citi suit.
It is interesting that this matter hasn’t been settled quietly, which would seem to benefit both the Otillars — note that Steve Otillar’s wife, Laura Otillar, has been dragged in as a defendant — and Citi. As one ATL source observed, in situations where a partner moves from one firm to another while still owing money on a capital loan for the first firm, “lenders will [often] assist the borrower to term out the obligation, and when the new firm is banked by the same lender, accommodate the partner with a new loan and even a ‘roll up’ of the two loans together, possibly with a more aggressive principal paydown until the ‘old’ loan principal is paid off.”
Will Otillar’s theory fly? The experts consulted by Reuters have divergent views.
This loan program appears to be a classic “honey trap.”
Think about it. You offer a lateral candidate more compensation than they are worth to get them in the door. It is a competitive market for talent, and by definition the “winner” of the competition for talent has to be the firm that offers the most. It doesn’t have to be a lot more, but it has to be more…..and it has to be attractively packaged to distinguish the deal from other offer opportunities.
The new lateral partner funds the infusion the firm really needs and wants: the capital contribution. Tax free cash. If the firm offers $5 million guaranteed, as Dewey did for [IP litigator Henry] Bunsow, for example, then you get 36% or $1.8 million up front. But the lateral partner has received not much more, and possibly even less than that amount, in the first year. Meanwhile the firm collects all of the new lateral partner generated receivables for a year… or two or three years, with the use of “deferrals” of guaranteed compensation. Deferrals that the partner who withdraws will probably forfeit….
As we now know, at the time that Dewey went down, numerous partners were owed a total of millions in “guaranteed” but “deferred” compensation — compensation that is now “deferred” into eternity.
We’ll keep an eye on the litigation between the Otillars and Citi, as well as the lawsuit previously filed against former Dewey leaders by ex-partner Henry Bunsow, which makes similar claims. If you’re interested, flip ahead to the next page for a full copy of the Otillars’ motion, along with links to additional coverage.