Dalkon Case: No Fast End in Sight : Plan for A. H. Robins to Reorganize Stalled as Fees Mount

By MORTON MINTZ

Jan. 7, 1987 12 AM PT

The Washington Post

WASHINGTON — Nine months ago, U.S. District Judge Robert R. Merhige Jr. predicted a quick end to the voluntary bankruptcy proceedings of A. H. Robins Co.

Robins would come up with a plan to reorganize “sooner than you might expect,” said the judge, who has presided over the case since the company filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code on Aug. 21, 1985.

“To use a trite phrase, we’re on a roll,” Merhige said on March 28. He predicted that “the money will start reaching victims in September.”

Despite that sunny spring forecast, no payments were made in September. And in the past 12 months, Merhige has extended the deadline four times for Robins to file a reorganization plan.

As the case has dragged on, participants have blamed the delays on the judge, the company, its creditors, the complexity of the reorganization, the lawyers and the way bankruptcy attorneys are paid.

‘Astronomical’ Fees

Merhige has railed against the “terrible, terrible, disgraceful syndrome of billable hours” for lawyers and the paralegals they employ, and against what he described as “astronomical” fees.

In a bankruptcy case, the lawyers are paid from the same pool of assets used to compensate creditors. Lawyers in the case have requested hourly fees ranging up to $350. In an initial order, Merhige said he would authorize paying no more than 85% of the requested amounts; on Oct. 2, he lowered the limit to 70%.

A Richmond (Va.) Times-Dispatch analysis of court records showed billings for expenses of $12 million as of October, including $6.1 million in requested attorneys’ fees.

Attorney Stanley K. Joynes III, whose firm represents future Dalkon Shield claimants, said that, overall, the fees in the Robins case “may possibly be viewed as low,” perhaps as a result of Merhige’s expressed concerns. Joynes said the fees are in the ballpark with those of other major bankruptcies.

He also said: “If you look at the results produced thus far and the work product that has been generated, you might easily conclude that these fees are unjustified.”

Incentive to Delay

Similarly, another lawyer in the case, who asked not to be identified, granted that “a whole lot of work is being done” and that hourly rates are high these days, but said there may be “overlawyering” and an incentive to drag things out.

“The bigger problem is the nature of fees in bankruptcy cases generally,” Joynes said. “When your client is not paying fees directly, there is little incentive for anyone to monitor fees, at least in the traditional sense, because the lawyer who has been employed does not feel the normal constraints that are imposed explicitly or implicitly by the client.

“And certainly the clients, who are the creditors’ committees themselves, are not worried about the fees, because they are not paying them directly,” Joynes continued.

The U.S. Bankruptcy Code gives a company reorganizing in Chapter 11 four months to file a plan, but empowers the judge to extend the deadline. In seeking its series of extensions, Robins has offered a series of arguments for taking more time:

The case is extraordinarily complex, mostly because of the vast unknown liability from injuries allegedly caused by the Dalkon Shield contraceptive device. The company is conducting behind-the-scenes negotiations to formulate a reorganization plan. Enforcing a deadline could be confusing, disruptive and counterproductive by allowing outsiders to clutter the case with their own alternatives for reorganizing the company.

New Territory

Lawyers participating in the case say the same arguments were made by Manville Corp., which delayed filing a reorganization plan in its asbestos-induced bankruptcy for about four years.

During this period, “the negotiations were not real negotiations,” said one participant. “It was only after the judge said, ‘No more!’ that the parties had to sit down and face reality.”

Another attorney said he believes that Merhige “has handled the case as well as it can be handled.”

“It’s new territory,” said William C. White, who served as a federal bankruptcy trustee until he recently entered private law practice in Alexandria, Va. “There has never been a case quite like this. I am not at all surprised where we are.”

Other lawyers involved in the case, who asked not to be identified, disputed White’s assessment.

One attorney said Merhige came to the case with “some preconceived ideas, which are wrong,” such as that the stock must be given up in full to pay the creditors. But he said Merhige has handled some issues “better than a bankruptcy judge would have handled them.”

“What’s different,” the lawyer said, is that Merhige “is very activist. He feels he’s got a tremendous amount of power, and he has his own ideas how to resolve” the case.

Attorneys Faulted

“I give Merhige a B+,” another lawyer said. “He has not been able to get his arms around this case and move it forward,” partly because the judge started off more familiar with civil and criminal law than with the bankruptcy code. The lawyer faulted attorneys for “not giving Merhige much help” and sometimes even resisting his efforts to step up the pace.

Lawyers involved in the case disagree about whether the delays have been caused by a series of surprising developments that sometimes overshadowed the production and implementation of a reorganization plan.

Merhige and the other players in the Robins bankruptcy have been tied up for weeks at a time by a federal government effort to appoint a trustee to run Robins and to hold the company in contempt of court for improper payments without court authorization.

Assistant U.S. Atty. S. David Schiller charged that the company made the payments in “willful and knowing” violation of the bankruptcy code. Robins displayed “utter arrogance” and was “out of control,” he said.

The company generally denied intentionally violating the rules, saying some payments slipped through cracks in the corporate bureaucracy and others resulted from bad advice from outside lawyers.

The proceedings have turned up about $9 million in payments that should not have been made by a company reorganizing in Chapter 11 and about $18 million that was paid out in transactions made without authorization. Included were $3 million in bonuses paid to present and former officers and directors in what Schiller called “insider sweetheart deals.”

Executives’ ‘Robinspeak’

Schiller filed the motion to cite Robins for contempt 16 days before Merhige proclaimed the case was “on a roll.”

During 35 working days, Schiller and Assistant U.S. Atty. Robert W. Jaspen took depositions from 40 Robins executives and employees, with as many as 12 other lawyers from the various bankruptcy committees participating.

The sworn statements of Robins executives were filled with what Schiller later called “Robinspeak,” which he defined as: “ ‘I don’t know,’ ‘I don’t recall,’ ‘I have no present recollection,’ ‘We had no definitive discussion,’ ‘I probably said,’ ‘I would have said.’ ”

In the end, none of the legal proceedings nailed down who has authorized the payments. On June 14, Merhige found Robins in contempt but refused to appoint a trustee, asserting over strong objections that removing the company’s officers was “not necessary or desirable.”

Less than a month later, on July 11, the improper payments issue surfaced again. President E. Claiborne Robins Jr. and three other senior officers acknowledged that, after the contempt finding, the company had made unallowed payments to a subsidiary of the same kind that Merhige had condemned as subterfuges designed to flout the law. The four claimed not to know who specifically authorized the payments.

Rejecting harsher alternatives for punishment as impractical, Merhige warned Robins’ president that he would be personally responsible, at risk of possible criminal penalties, for any future misconduct. Merhige also ordered repayment of the improper funds.

Whether the lengthy investigation of the improper payments delayed formulation of a reorganization plan remains in dispute.

Other developments in the case have also distracted the players from the job of coming up with a plan to pay Robins’ creditors.

- On March 4, 10 lawyers representing Dalkon Shield victims asked the judge to disqualify himself because of alleged “personal bias or prejudice in favor of A. H. Robins Co. Inc. and its chairman, E. C. Robins Sr.” U.S. Atty. Schiller opposes the effort, calling the recusal motion “knee-jerk” and “absurd.”

Ten days later, Merhige refused to withdraw and called the motion “meritless.” In a 59-page memo and 85 minutes of courtroom comment, he ridiculed “the suggestion that I could be biased” and scorned any imputation of impropriety. An appeal is pending in the U.S. 4th Circuit Court of Appeals.

- On March 21, Robins suddenly dismissed its first special bankruptcy counsel, Murphy, Weir & Butler of San Francisco. By then, the firm was reportedly well along in formulating a reorganization plan. A few weeks went by before Skadden, Arps, Slate, Meagher & Flom was chosen to represent Robins and to begin anew the job of drafting a reorganization plan.

- On Oct. 14, Murray Drabkin, counsel for the Dalkon Shield plaintiffs, raised the possibility that Skadden, Arps would be removed from the case, passing the reorganization work on to a third team of lawyers. Drabkin filed a motion to disqualify the firm for an alleged conflict of interest, pointing out that Skadden, Arps also represented Aetna Life & Casualty Co., which insured the Dalkon Shield. Skadden, Arps partner Michael L. Cook called the motion “utterly without merit.”

- On Oct. 29, U.S. Bankruptcy Judge Blackwell N. Shelley ordered Skadden, Arps out of the case because its simultaneous representation of Robins and Aetna “conflicts with its duty” to the manufacturer.

But Aetna agreed not to seek legal advice or representation from it so long as the Robins bankruptcy case is pending.