Guerrilla Warriors Against Large Banks – Lawyers Weekly USA

Excerpted from – Lawyers Weekly USA – Small Firm Profile

On a boulevard lined with palm trees in Santa Barbara is a small firm that strikes fear in the boardrooms of large banks. A trailblazer in the field of lender liability, A. Barry Cappello and his firm represent small businesses that have been wronged by lenders. It has taken on many of the largest banks in the U.S., including Citicorp, Bank of America, GE Capital Corp, Wells Fargo and Union Bank, enormous institutions that once seemed invincible to lender lawsuits.

In little more than a decade, the firm has landed more than $300 million in verdicts and settlements in lender liability cases, and begun a nationwide trend that the Wall Street Journal said had “bankers quaking in their pinstripes.”

Today, Cappello and his firm are nationally recognized experts in lender liability law. Cappello has co-authored a seminal book on the topic, Lender Liability (Juris Publishing), and he has written numerous articles on the subject.

Ironically, the firm’s practice niche was almost inadvertent, recalls Cappello.

In the late 1970s, Cappello, who had been legal counsel for the city of Santa Barbara, stepped into private practice where he was concentrating in business litigation. He began getting calls from local businessmen who were in trouble due to bad debt and loans called early.

When Cappello called around to locate lawyers who were experts in banking liability, he found none. Every lawyer in town was afraid to take on the big banks, he says. Cappello spied an opportunity.

Buoyed by his earlier success in suing major oil companies for the massive 1969 Santa Barbara Channel oil spill, he decided to tackle the big banks himself. And he began winning.

After all, he says, “In any trial, it’s one lawyer against another and one judge deciding. They’re human flesh, just like me.”

Cappello recommends that other lawyers look for legal needs that aren’t being met and step into that void. ‘Find a niche and fill it,” he advises.

Lender Bender Cappello built his firm by representing small businesses that were bankrupt, or near bankrupt, on a contingency basis. His reasoning was elementary: small businesses facing bankruptcy cant afford high-priced law firms. The firm continues to take many cases on a contingency or partial contingency basis.

About 55 percent of its cases involve lender liability. The rest are complex business cases including SEC matters and class action suits.

In the lender liability arena, bankers’ misdeeds include accelerating loan re-payments, prematurely initiating defaults and foreclosing loans that aren’t in default. A more serious charge is that banks interfere with a borrower’s operations and create economic problems that cause bankruptcy.

One such case involved a Los Angeles manufacturer, Contempo Metal Furniture Co., a once-profitable family business that employed 300 people before it went broke. The company hired the firm to sue Union Bank in 1989 for ruining its business.

According to Cappello, Union Bank forced the furniture company to hire a management consultant, who was a friend of a Union Bank vice president, to upgrade its antiquated operations. However, instead of controlling costs, the consultant ran the company into big debt. Union Bank then called the company’s loans.

Cappello sued Union Bank for fraud, breach of fiduciary duty and interference with corporate governance. The furniture company won $12.5 million in compensatory damages in a jury verdict, then settled for a confidential amount before the punitive damages phase got underway.

Mergers that have swept the banking industry are another culprit in lender liability cases, according to Cappello. When new corporate managers take over, they make decisions about which industries they want to lend to and invest in.

“Managers put the word out to aggressively monitor accounts. Then all of a sudden, a bunch of borrowers call me and say they’re in trouble,” says Cappello. “When times are tough, banks tighten up. There’s an old saying, ‘Lenders sell umbrellas when it’s a sunny day.'”

$70.8 Million Against GE The largest lender liability award Cappello’s firm has won is a $70.8 million jury verdict against GE Capital Corporation. The case began in the late 1980s when American Aviation Industries, a small airplane-retrofitting company based in Van Nuys, came to the firm for help in a venture that went sour with GE Capital, its lender.

American Aviation had planned to develop a low-cost, 12-passenger trans-Atlantic business jet by retrofitting older Lockheed JetStar corporate jets with GE military turbofan engines. However, the deal nose-dived when the development phase took longer than GE Capital wanted, according to Cappello.

“GE Capital pulled the plug and tried to grab the project,” explains Cappello, who sued for breach of fiduciary duty, fraud and breach of contract.

After a five-month trial, the jury awarded American Aviation $70.8 million. When the judge reduced the award to $10 million, the parties settled for an undisclosed figure.

Banking on Success The key to his early success, says Cappello, was realizing that the big banks and lending institutions with huge legal departments were not invincible. It was a lesson he learned in the Santa Barbara oil spill case, when as city attorney he faced off against powerful big-firm attorneys for Mobil, Gulf, Texaco and Union Oil. The case settled for $9.5 million.

How does a small firm in balmy Santa Barbara beat the Big Boys?

“By being well-organized,” says Cappello, who was raised in Brooklyn, N.Y. and graduated from UCLA Law School in 1965.

Although large firms have dozens of good attorneys, they specialize in many areas and handle hundreds of cases. By contrast, Cappello concentrates on a few cases in a narrow area, tackling them with precision.

Keeping Things Lively While lender liability raises the hackles of financial institutions, it can make a jury yawn. To prevent this, Cappello follows two principles:

  • Pick smart jurors, preferably in professional jobs, who are willing and able to analyze complex evidence.
  • Present evidence through victims who have compelling stories to tell about how their lives have been affected by the matter at hand.

Cappello adds that he chooses his clients very carefully, based on three criteria. The first is the plaintiff’s credibility. “When I take on a case I ask, ‘Is he going to be credible?… Does he have prior cases of fraud, felony convictions? What’s his motivation?'”

The second is the legitimacy of the claim. Cappello makes sure his client doesn’t just want to skip out of a bad debt. And the third is the degree of damages. “I’m looking for real damages…for loss of profits, loss of an investment, large economic losses.

“When I have all three things, then I decide whether to take a case. “Out of 30 cases, he may take one.

His advice to young firms hoping to make a mark in the legal field: Take a gamble, just as he did when he ventured into lender liability.

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