It is now two years since the collapse of mammoth firm Dewey & LeBoeuf. But the next chapter in the story of its dramatic spiral into crisis is about to emerge in lurid technicolour following a High Court trial last week.
Monday 28 May 2012 might have marked the end of Dewey (29 May 2012) but it was just the beginning of a flood of litigation, as fights in the boardroom turned into brawls in the courts in the US and UK over liability for debts.
Now the firm’s bank has been drawn to the front of the fight. Partners of the former firm have accused Barclays of misleading them about the financial health of the firm in order to induce them to take out individual capital loans. The bank argues the loans were for individual capital contributions to the firm but the partners say they were misled and the real purpose was to induce partners to shoulder debt for the failing firm.
Last Friday (28 February 2014) Barclays’ attempt to avoid a full trial at High Court was foiled, when Mr Justice Popplewell said its claim against former partner Lester Charles Landgraf for repayment of a $486,000 loan needed to be heard in full (4 March 2014).
The bank’s relationship with the former firm will now be in the spotlight in order to assess whether the two colluded to bail out the sinking firm by channelling debt to individuals.
Popplewell J said in his judgment: “The evidence adduced on behalf of Mr Landgraf of the closeness of the relationship between the bank and the firm, and the bank’s actual or probable knowledge of the firm’s financial position, raises a real issue as to whether the bank knew that the true purpose of this particular loan was not for a capital contribution required […] but simply to finance the firm’s general indebtedness, including indebtedness to the bank.”
The partners, including Landgraf, allege that the capital loans were presented to them as firm debts, not personal liabilities, but the bank disagrees and wants the money back. The bank and former partners have been tussling over repayments of the loan ever since April 2012 when banks started putting pressure on partners to recoup the money in the wake of the firm’s collapse (25 June 2012).
After winning the summary judgment, former partner Landgraf will go head to head with Barclays in a December trial. Landgraf was represented by Candey partner Andrew Dunn for the February hearing. Dunn instructed 4 Stone Buildings’ John Brisby QC and Alexander Cook for the trial.
Barclays had been hoping to have the case solved quickly but will now have to reveal hoards of up-to-now private documents about the nature of its loan agreements and extent of knowledge about the health of the firm.
Fountain Court’s Guy Philipps QC and Adam Zellick represented the bank for the summary judgment, instructed by TLT partner Richard Clayton, and battled to resolve the issue without the mammoth disclosure exercise.
However their application was thrown out by Popplewell J, who said: “It is not fanciful to suppose that with the benefit of disclosure and cross-examination at trial, the impression which arsis on first reading of the contractual documents would appear in a very different light.”
Landgraf is just one of Dewey’s 226 equity partners who took out loans, but say they were not aware of the dire financial state of the firm. The bank is suing 50 former partners over $15m of claims based on the same contract.
The partners took out the loans in 2010 following a rocky three years for Dewey (16 April 2012), which had struggled since the ill-fated merger between debt-laden Dewey Ballantine and LeBoeuf Lamb Greene & MacRae was sealed in 2007 (28 August 2007).
By 2008, profit was 40 per cent off target and junior partners were not entitled to the full drawings they thought they were. Any junior partners who had taken drawings of more than £170,000, which was 60 per cent of their target compensation, would have to pay back the rest out of their following year’s distributions. If this did not happen, the firm said it would be in breach of covenants with its bankers.
Two years later, Landgraf alleges he was approached by the firm’s management – then chairman Steve Davis, executive director Steve DiCarmine (a non-lawyer once among the firm’s most powerful), chief executive officerr Joel Sanders and finance chief Frank Canellas.
The firm had been failing to meet its target income between 2008 and 2011 but Landgraf alleges he had always maintained the requisite amount of capital in the firm.
Despite that, the four managers encouraged him to take out a capital loan to inject more cash. He claims he was assured that “the burden of repaying the capital and interest of any loans extended pursuant to the BCLP [Barclays Capital Loan Programme] was that of the firm (or at any, primarily the firm), and not of its individual partners”.
According to Popplewell J “the evidence put forward on behalf of Mr Landgraf raises a serious issue that by 2008, and continuing into 2010, the firm was in serious financial difficulty and had significant levels of indebtedness to its bankers and other creditors, although this was not apparent to him at the time”.
The former partner has launched a counter claim against the bank alleging that Barclays breached its duty of care in advising him about the financial health of the firm. He also alleges that the bank made implied misrepresentations that the contemplated borrowing was prudent, although it knew the firm was in dire financial straits.
Landgraf is not the only former partner fighting back against Barclays. Candey partner Dunn is also represting high-profile former partner Londell McMillan, who is being pursued by the bank in the UK and has filed a fraud claim against it in the US (20 February 2013).
Barclays is suing McMillan for $550,000 in damages in the UK but the partner has filed a fraud claim against Barclays in the Manhattan federal district court, claiming that Barclays “intentionally failed to disclose” Dewey’s indebtedness to him to “induce” him to enter into a loan agreement, “assuming it [the agreement] is not a fabrication”.
“By fraudulently inducing plaintiff [McMillan] to enter into the letter agreement, upon the immediately present event of default, Barclays could pursue [McMillan] for hundreds of thousands of dollars while having no obligation to fund [McMillan’s] capital contribution,” the claim alleges.
McMillan’s allegation is similar to Landgraf’s counter claim for breach of a duty of care owed to him by the bank “of various specific matters which affected the financial health of the firm”.
The raft of allegations will be exposed in the upcoming trial this year when both sides will battle over whether or not Barclays and the defunct firm were in collusion to mislead partners and saddle them with debts for the benefit of the firm.
With a disclosure deadline of April looming for Barclays, the case looks set to be explosive. It is the latest legal furore to hit the bank, which is also at the centre of the Guardian Care homes Libor mis-selling case (6 December 2013).
A negative outcome in both cases could leave Barclays with a severe financial headache.