Kathleen Smith Jim Ramsey side by side

From left, former University of Louisville chief of staff Kathleen Smith and former U of L President James Ramsey. They left the university amid a leadership overhaul in 2016.

LOUISVILLE, Ky. (WDRB) – Nearly three years after the University of Louisville sued its former president for an alleged financial “fraud,” a deal to settle the case for a fraction of the university’s alleged $80 million in damages has broken down in recent weeks, according to court documents and sources familiar with the private negotiations.   

U of L and its affiliated foundation reached an unwritten agreement in January to settle the 2018 lawsuit against former President Jim Ramsey, his former chief of staff Kathleen Smith and three other former U of L officials.

But the deal broke down, according to documents filed this week in Jefferson Circuit Court, over the U of L Foundation’s refusal to tell the U.S. Internal Revenue Service that it did not, in fact, pay “excessive” compensation to Ramsey and Smith from 2010 to 2016, as the foundation alleged in 2018.

For now, the three-year-old litigation continues, though it is still a long way from a trial. None of the defendants, including Ramsey, has been deposed.

U of L and its foundation brought the lawsuit in 2018, alleging that Ramsey, Smith and other defendants “depleted” the university’s endowment, a pool of donations invested in financial markets. Ramsey, Smith and others “disguised” their “excessive and unauthorized” endowment spending and “paid themselves (and others) excessive compensation out of the Foundation,” according to the lawsuit.

Attorneys for Ramsey, Smith and the other defendants have said the previous university and foundation boards approved the spending and compensation – yet their members were not sued – and that the money was not misappropriated, but spent for the benefit of U of L. For example, the lawsuit complains about a $10 million transfer from the endowment to U of L’s own James Graham Brown Cancer Center.

Private settlement talks began last November and culminated in a tentative agreement after a mediation on Jan. 29, according to court documents. The agreement involved Navigators Insurance Co., which insured the foundation against misdeeds by its directors and officers.

Details of the proposed settlement have not been made public, and the university asked a judge this week to keep the deal out of public court filings.

Two sources with knowledge of the case said U of L’s recovery in the proposed deal wouldn’t come close to equaling what the university and foundation have spent pursuing the claims.

Counting a $2.2 million third-party “forensic investigation” in 2017, which forms the basis of the lawsuit, U of L and the foundation have spent at least $5.7 million on the case.

The settlement agreement has not been approved by the university’s board of trustees, nor by the board of the directors of the U of L Foundation, which are necessary steps to finalizing it.

In a court filing Wednesday, Smith’s attorney Ann Oldfather said it was unclear whether the boards would go for the settlement because “they would have to justify” the “in excess of $6 million dollars of public monies” spent on the case.

Barbara Edelman, the Lexington lawyer handling the case for U of L, declined to be interviewed. In a statement, U of L spokesman John Karman acknowledged that “agreement terms were reviewed” by special litigation committees of the two boards following the Jan. 29 mediation session.

While the boards are public entities, all their discussions about the case have been held in private under the Kentucky Open Meetings Act. Neither board has publicly discussed the case since it was filed in 2018.

Breakdown over IRS claims

The Jan. 29 deal eventually broke down over U of L’s refusal to have the foundation withdraw its claims to the IRS in 2018 about Ramsey and Smith having been paid excessively, Ramsey and Smith’s lawyers said in court filings this week.

The foundation in 2018 commissioned a study that found Ramsey was overpaid by about $3 million, Smith by $344,253 and former U of L Provost Shirley Willihnganz (who was not sued) by $539,392. It then amended tax returns from 2010 to 2016 to disclose the “excess compensation” to the IRS.

In a court filing Thursday, Ramsey attorney Steve Pence said the U of L side’s refusal to withdraw “the administrative matter” – a reference to the IRS claims – “may expose Dr. Ramsey and Ms. Smith to millions of dollars in liability.”

“Dr. Ramsey could not, would not, and did not agree to a ‘global’ settlement that would still leave him exposed to that liability,” Pence wrote in the filing.

U of L said in a court filing this week that it was Ramsey and Smith who sought to add “new terms” to the settlement. Pence declined to comment, as did Smith’s attorney, Ann Oldfather.

In a court filing Wednesday, Oldfather wrote that Smith “retracted her offer” to accept the settlement in March after the U of L side failed to follow through with the agreement.

“Plaintiffs’ counsel refused to honor the stated term that all claims made by Plaintiffs’ (including the unfounded claim made to the IRS that Plaintiffs’ prior boards had provided excess compensation to Dr. Ramsey and members of his management team) would be released,” Oldfather said in the court filing.

Details about the potential resolution of the case are coming to light now because the other defendants want the proposed deal finalized. They have no interest in Ramsey and Smith’s fight with U of L over the IRS matter.

Those defendants are Michael Curtin and Jason Tomlinson, the former chief financial officers of U of L and the foundation, respectively, and former foundation vice chairman and paid consultant Burt Deutsch. (The foundation in 2018 said Tomlinson was also overpaid, but later withdrew the claim, saying it was based on an error).

“My clients, all they want is out, and every issue having to do with my clients has been resolved,” said Don Cox, the attorney for Curtin, Deutsch and Tomlinson.

Jefferson Circuit Court Judge Judith McDonald Burkman must now decide whether the settlement details should be disclosed in public court filings.

The U of L side wants to keep the details under wraps. Smith wants them to be made public. Ramsey has not yet expressed a position in court records, while Curtin, Deutsch and Tomlinson are indifferent.

Reach reporter Chris Otts at 502-585-0822, cotts@wdrb.com, on Twitter or on Facebook. Copyright 2021 WDRB Media. All rights reserved.