By Casey Sullivan
Jan 8(Reuters) - Two former partners of the defunct Howrey
law firm have accused Citibank of committing fraud in connection
with a loan program that financed partners' capital investments
in the firm, court documents show.
Former Howrey partners Stephen O'Neal and David
Buoncristiani said in court filings that Citibank hid Howrey's
financial woes while encouraging the partners to enroll in a
loan program financing their capital in the flailing firm.
In a string of depositions, emails and financial documents
filed in November in San Francisco Superior Court, O'Neal and
Buoncristiani claimed that Citibank executives convinced them to
sign up for the loan program, despite knowledge that Howrey's
financial situation was strained.
"I later found out that during this whole period of time ...
when I was being romanced by Citibank, that they had reason to
believe -- in fact, they knew -- that Howrey was in default of
material covenants, and they didn't tell me that," said O'Neal
in a deposition.
A Citibank spokeswoman declined to comment and the bank's
lawyers did not respond to requests for comment.
O'Neal and Buoncristiani's claims mirror allegations made
against Citibank by a former Dewey & LeBoeuf partner in a
lawsuit pending in federal court in New York. In that case, the
bank is suing a Dewey partner for repayment of a capital loan
and the partner has alleged Citibank committed fraud by not
informing him of the failed law firm's financial problems.
If the former Howrey and Dewey partners are successful in
their claims, other former partners in failed firms could be
empowered to challenge loan agreements, said David Eisen, a Los
Angeles lawyer who specializes in representing lawyers in
financial disputes.
"There is no question that (a victory) would embolden other
partners similarly situated across the country to make the same
claim," said Eisen. "When lawyers hear about a legal theory that
succeeds, they can't wait to try it out for themselves."
RECALLING THE LOAN
O'Neal and Buoncristiani's lawsuit has proceeded quietly
since it was filed in September 2011, shortly after the men left
Howrey for the law firm Jones Day. At the time, Citibank sought
to compel O'Neal and Buoncristiani to repay capital loans
totalling $735,000.
O'Neal and Buoncristiani sued, asking the court to void the
loans. They argued that they did not owe payment because
Citibank had not informed them of Howrey's financial problems.
Instead, the partners said, Citibank presented the firm as
financially strong.
The two former partners claimed that Citibank knew that
Howrey was in financial distress because the firm repeatedly had
breached a lending agreement on a $75 million line of credit,
according to the lawsuit. In three instances -- in 2007, 2008
and 2009 -- Howrey was unable to meet the terms of the loan,
O'Neal and Buoncristiani said in the filings.
In 2009, Citibank had to modify the loan to qualify Howrey
for additional borrowing, the documents said. The firm drew "an
incredible $23 million over its borrowing limit," which gave
Citibank the right to recall the loan altogether, according to
the former partners' lawsuit.
O'Neal and Buoncristiani, who joined Howrey in late 2008,
claimed the 2009 breach, which happened in April of that year,
ca me shortly before they signed their loans with Citibank to
finance their capital contribution to the firm.
They said they signed up for the loans after Citibank Vice
President Cassie Khuu told them that the bank had a great
relationship with Howrey and that the firm was financially
solid, according to the pair's lawsuit.
"What she didn't tell me was that that wasn't true," said
O'Neal in a deposition. "Bankers usually look very dimly on
borrowers who breach material covenants in their financing
agreements, and law firms get put out of business by banks for
breaching those covenants."
Khuu declined comment through a Citibank representative.
CITIBANK CLAIM
Citibank claimed in court papers that it did not know of the
April breach while encouraging the partners to enroll in the
loan program. The bank said it only learned of the breach in
May, after the partners had already signed up for the loans.
Citibank also claimed that it owed no duty to the Howrey
partners to inform them of the firm's financial condition and
that any damages the partners suffered from joining Howrey and
signing up for the loan program was a result of their own
negligence.
Howrey collapsed in early 2011 after a failed merger attempt
and a mass partner exodus. Allan Diamond, Howrey's bankruptcy
trustee, declined to comment.
O'Neal and Buoncristiani did not respond to requests for
comment. Keith Johnson, who is representing O'Neal and
Buoncristiani, did not respond to a request for comment.
It is not uncommon for former partners of bankrupt law firms
to fight with their banks about repayment of their capital
loans, said Jerome Kowalski, a law firm consultant. It's rare,
however, for such disputes to rise to the level of a public
lawsuit, he said, but instead the parties usually work out a
payment plan.
In May 2012, Citibank sued former Dewey & LeBoeuf partner
Steven Otillar for defaulting on a $207,000 capital loan after
he left Dewey for the Houston firm Akin Gump Strauss Hauer &
Feld.
Otillar has said in court filings that Citibank hid Dewey's
precarious financial status from partners so that they would
sign up for the loans and the bank could shift a pre-existing
debt owed by Dewey to individual credit-worthy partners.
Otillar has requested a jury trial instead of summary
judgment, and the case is pending before a federal judge in the
Southern District of New York.
Otillar did not respond to a request for comment and his
lawyer declined to comment.
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