Cauley's debt to centennial at $41 million: contingency fee issue a 'white mule case'.

MORE DETAILS OF GENE Cauley's tangled financial affairs were revealed when Centennial Bank of Conway sued his former law partners on Oct. 16. In pressing the bank's claim on collateral securing $13.9 million in loans, the complaint disclosed that Cauley's overall borrowings with Centennial total more than $41 million.

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The bank is trying to collect money from class-action securities cases with settlements that Cauley claimed would be worth more than $30 million in contingency fees.

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However, Cauley's former partners believe that claim is overvalued and could be further devalued because Cauley lost his right to collect contingency fees when he forfeited his law license on May 28.

"It is a compelling argument that after he surrenders his license he is not entitled to receive legal fees because he is no longer a lawyer," said Gordon Rather Jr., partner at the Little Rock law firm of Wright Lindsey & Jennings. "And doesn't a contingency fee constitute a legal fee?"

According to the lawsuit, Cauley is entitled to the lion's share of those potential class-action payouts that secure two Centennial loans totaling $13.9 million.

Buried within the 80-plus pages of exhibits accompanying the 21-page complaint are references to 12 additional loans totaling more than $27 million that Centennial and its predecessor banks made to Cauley, a former director of Centennial's holding company, and his various enterprises.

These debts are secured by real estate holdings in central and northwest Arkansas, properties that also help secure a $1.5 million line of credit established on May 29 with Cauley, his professional association and Cauley Bowman PLLC.

The line of credit, which Cauley fully tapped, and $12.4 million owed on a $12.5 million secured line of credit account for the $13.9 million loan total tied to the contingency fee collateral dispute.

Confusing? Welcome to Cauley's chaotic balance sheet that trumpeted his personal net worth at more than $100 million earlier this year.

These days, the former Little Rock lawyer is scurrying to liquidate assets to come up with $8.8 million in remaining restitution for a client's trust fund account he looted.

That repayment effort, which has yielded only $500,000 since his theft of $9.3 million was discovered in April, is in advance of a Nov. 23 criminal sentencing hearing on charges of wire fraud and contempt of court.

While Cauley strives to sell assets and generate cash, his lenders are scrambling to solidify their collateral positions.

Securing Security

Centennial's lawsuit follows efforts to bolster its collateral on the original $12.5 million agreement dated Aug. 29, 2008. That debt is secured by properties that include real estate in central Arkansas and billboards in northeast and central Arkansas and Mississippi.

The bank also is pressing its security claim on Cauley's interest in more than 30 class-action lawsuits overseen by the Little Rock law firm of Carney Williams Bates Bozeman & Pull/am PLLC.

Centennial is acting on Cauley's behalf under a power-of-attorney agreement after his former partners rebuffed his earlier lawsuit to collect money on the caseload he helped build. If successful, the lawsuit would help the bank recoup money credited toward its loans as well as aiding Cauley in generating cash for restitution.

According to the Centennial complaint, Cauley's former partners are withholding information on the disposition and payouts of the cases.

The bank and Cauley particularly are interested in $6 million allegedly collected from two class-action settlements: Sterling Financial Corp. of Spokane, Wash., and Wal-Mart Stores Inc. of Bentonville.

Centennial's participation in the fray started with an Aug. 31 letter penned on its behalf by Daniel Goodwin of the Little Rock law firm of Gill Elrod Ragon Owen & Sherman.

"[You] are required to pay 100 percent of all proceeds of the contracts and contract receivables to the bank immediately. You are hereby instructed to pay such proceeds to the bank directly."

Not satisfied with the cool response from Cauley's former partners, the bank followed through with its not-so-veiled threat to sue with the recent Pulaski County Circuit Court complaint filed by Little Rock's Williams & Anderson law firm.

But Skip Henry, who is representing Cauley's former partners, said Cauley forfeited his right to collect contingency fees when he surrendered his law license in advance of his June 1 guilty plea in federal court in New York.

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"We have told Cauley this and Centennial this," said Henry, a partner at Little Rock's Barber McCaskill Jones & Hale law firm. "Because he is no longer a lawyer, we cannot pay him any contingency fees."

Centennial "took the power of attorney from Cauley in an effort to step into his shoes. Ethically and legally, my clients are prohibited from paying Cauley or Centennial a contingency fee."

John DiPippa, dean of the UALR William H. Bowen School of Law, concedes his Billy Martin stance of feeling strongly both ways regarding arguments in the case.

"My first take is that [Cauley] is collecting for prior work," DiPippa said. "As long as this is for work he performed before his suspension, then he is not practicing law. He is collecting on a contract.

"The only fact that complicates it is if he is collecting for work that he isn't performing. His suspension means he can't benefit from his agents or quasi-agents practicing law on his behalf. By analogy, he can't benefit from someone else's work on a contingency contract post suspension.

"I think it's a close case because both sides have strong arguments."

Bud Whetstone, partner in the Little Rock law firm of Whetstone & Spears, said the unusual circumstances surrounding the case provide an interesting backdrop for a ruling.

"The reason no one is going to be able to give you a concrete answer is that this is a white mule case," he said. "There's not many of them around."

Whetstone, who has worked with contingency fees for more than 30 years and teaches ethics at Arkansas Bar Association workshops, can't recall a situation even close to Cauley's predicament.

His decision to take millions from a client trust fund account to shore up personal cash-flow problems put at risk millions of dollars in contingency fees and his law license.

"That is probably the No. 1 no-no that will cost you your license," he said. "There's been people do a lot of things--have sex with clients, not return client calls and file court documents late.

"The one thing that is a kiss of death is converting client funds. You're pretty much going to lose your license. The laws are real strict on taking money from a client.

"You do it behind closed doors, and there's no one to see you do it. That's why the penalty is so severe. This is such an extreme case. It takes your breath away. Taking client funds is like playing Russian roulette with an automatic."

By George Waldon

[e-mail]

Centennial Bank Loans to
Gene Cauley and His Entities

Borrower                                    Owed *

S. Gene Cauley P.A.                    $12,500,000
Coco Mountain Ranch LLC                $11,941,815
Coco Mountain Ranch LLC                 $2,568,509
Trammel Estates LLC                     $2,550;071
SEC WLR Holdings II LLC                 $2,311,847
SEC Consultants LLC                     $1,799,073
Coco Bryant Holdings LLC                $1,591,745
S. Gene Cauley P.A.,
  Cauley Bowman PLLC and Cauley         $1,500,000
Cauley                                  $1,249,412
Coco Mountain Ranch LLC                   $967,603
Cauley                                    $953,739
Conway Splash LLC                         $872,727
Kanis & Kirk LLC                          $287,071
SEC Holdings LLC                           $99,270

Total                                  $41,192,882

Source: Centennial Bank documents flied in Pulaski
Courtly Circuit Court

* All balances as of April 1,2009