A former partner in a respected American law firm, who borrowed $540,000 to fund his capital contribution to the business, has failed to convince the High Court that the loan was a mere sham and that he had no personal liability to repay it after the firm went bust.
The firm’s partners were expected to contribute capital to its account and many of them did so by taking loans from a bank – which was owed $56 million by 220 partners when the firm filed for Chapter 11 bankruptcy and was found to be insolvent.
In resisting debt enforcement proceedings, the former partner pointed out that the loan was designed to provide working capital for the firm and that he had not received any of the money. The bank had negotiated with the firm, rather than individual partners, and it was submitted that the terms of the loan agreement were a ‘fig leaf’ which disguised its true purpose. He also argued that he did not want or need a loan to fund his contribution, that the firm was already in financial difficulties when the agreement was signed and that the bank negligently advised him.
In upholding the bank’s claim, however, the Court found that the terms of the agreement were unambiguous and that the former partner knew and understood its purpose. There was nothing unusual or unfair about the loan and, as a partner in a major international law firm, he could not be viewed as a naive or vulnerable borrower. The bank had negotiated with the firm’s financial officers and was entitled to assume that they were acting in the best interests of the partners.