By Casey Sullivan

NEW YORK, Aug 29 (Reuters) - A former Dewey & LeBoeuf partner who has been sued by Citibank for allegedly defaulting on a loan is making a provocative countercharge: He claims the bank participated in "a fraudulent scheme" to help a few leaders of the now defunct law firm hide its dire financial situation from him and the broader partnership.

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.

If the court denies Citibank's motion for summary judgment, the case would likely move to discovery and then a trial. Such a development would open a new, contentious chapter in Dewey's wind-down. If the judge grants Citibank's motion, Otillar could pay back the loan or could appeal the ruling.

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.

Citibank senior vice president for public affairs, Natalie Marin, declined to comment. Otillar, now an energy lawyer with Akin Gump Strauss Hauer & Feld in Houston, declined comment. Several former members of the Dewey management team declined to comment or did not respond to requests for comment.

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.

By not doing so, the bank misled "me, my wife and countless other unsuspecting lateral hires and their spouses," Otillar says in his motion, filed in New York federal court on Aug. 17.

If the Citibank case goes to trial, Otillar could argue that the contract with Citibank is void, since he wouldn't have taken the loan had the bank disclosed Dewey's financial situation, said Andrew McGaan, a securities and fraud specialist at Kirkland & Ellis who is not involved in the case.

"It's an elementary principle of contract law," McGaan said. "If [aiding and abetting fraud] has in fact been demonstrated, then are excused from performing under the agreement."

A RARE MOVE

It is rare for a bank to sue a law firm partner over a capital loan -- the sum partners borrow to finance the investment they must make in a firm upon being named partners -- law firm consultants said. Typically, the partner and banks work out a compromise. In the Dewey case, a number of former partners are negotiating the terms of their capital loans with lenders such as Citibank, former Dewey partners said.

Otillar said in his motion that Citi must have known of Dewey's troubles because the bank issued some of Dewey's management team letters of credit securing management's compensation in the event of the firm's collapse. Such a move would only have been taken if the managers had reason to believe the firm was in trouble, Otillar said.

Otillar claims he decided to participate in the loan program only after receiving several communications from Citibank, including emails and phone calls from Citibank Senior Vice President Rohit Malhotra, urging him to sign and submit the loan documents as soon as possible. Malhotra did not return a request for comment placed through a Citibank spokeswoman.

"If Citibank knew that Dewey was going under and solicited Otillar's loan in order to pay down the Dewey exposure, Citibank could be liable for aiding and abetting a fraud," Otillar's lawyer, Helen Davis Chaitman of Becker & Poliakoff, said in an email.

Once one of the largest firms in the United States, Dewey closed its doors in May. The firm's estate is seeking to pay approximately $315 million in what creditors claimed they were owed at the time of the bankruptcy filing. In a settlement proposal submitted to the court on Wednesday, the estate has worked out an agreement with one group of former partners to return $71 million in compensation.

A different partner group, meanwhile, has asked the federal judge overseeing the case to appoint an independent examiner to investigate the settlement before it gets court approval. It is unknown if Otillar is participating in the settlement.

THE $207,000 DEFAULT

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.

One issue that could come into play in the matter is Citibank's fiduciary duty to Otillar, if it had any at all.

Under contract law, lenders typically are not obliged to advise borrowers on the soundness of their investment. An exception could arise if "the lender is aware of information that it knows is material to the borrower," said Fordham University of Law contracts professor Steve Thel in an email. In such a circumstance, if the lender knows the borrower does not have the relevant information, "the lender may be obligated to inform the borrower before making the loan."

But that could be a difficult case for Otillar to make. Citibank had a separate loan with Dewey, and it is unclear if the bank would be free to discuss the situation of one client -- Dewey -- with another client, Otillar, said David Eisen, a Los Angeles lawyer who specializes in representing attorneys and law firms in financial disputes. Otillar has "an uphill battle to demonstrate that (Citibank) had an affirmative duty to warn him regarding confidential financial dealings with a separate borrower," said Eisen.

A spokesman for Akin Gump, the firm where Otillar is now employed, declined to comment about the matter, saying the firm doesn't speak about pending litigation.

The case is Citibank, N.A. v. Otillar et al, No. 12-cv-05092.

For Otillar: Helen Davis Chaitman, Peter W. Smith and Valerie Sirota of Becker & Poliakoff.

For Citibank: Michael Luskin of Luskin, Stern and Eisle.

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