An angered U.S. district judge twice reprimanded an officer of the bankrupt A. H. Robins Co. for refusing to admit that Robins used "a subterfuge" to make large payments prohibited by the Bankruptcy Code and court orders.
Robins, facing massive lawsuits from women who claim they were hurt using the company's intrauterine device, the Dalkon Shield, filed for bankruptcy protection last August.
Judge Robert R. Merhige Jr. rebuked Robins Vice President and Treasurer H. Carlton Townes during questioning by Assistant U.S. Attorney Robert W. Jaspen.
"Some smart guy violated the spirit of the law, and that's settled in my mind," Merhige told Townes.
Merhige delivered that reprimand at the close of the second day of a hearing on a government motion asking for a trustee to run Robins and requesting that the company be held in contempt for violating orders Merhige issued when the company filed for voluntary reorganization under Chapter 11 of the bankruptcy laws last Aug. 21.
The issue underlying the reprimands was Robins' use of its wholly owned subsidiaries, which are not part of the Chapter 11 proceeding, to make more than $1.9 million in payments that Robins would have made were it not bankrupt. Under the law and an Aug. 23 consent order, Robins was forbidden from dipping into the bankrupt estate -- which it is obligated to preserve for its creditors -- to pay any prebankruptcy debts without court permission.
Townes testified that four months after filing the Chapter 11 petition, Robins directed Elkins-Sinn Inc. (ESI), a subsidiary in Cherry Hill, N.J., to pay $78,895 to the United Way of Greater Richmond to fulfill Robins' prepetition pledge.
Townes said he understood Robins could not fulfill the pledge, but claimed the subsidiaries were free to act as they chose.
"For some reason, unsolicited, Vice President and then general counsel William A. Forrest Jr. came to me and said the payment could be made by Elkins-Sinn," Townes testified.
But, he said in an exchange with Merhige, the United Way refunded the $78,195 to ESI last month after company Chairman E. Claiborne Robins Sr. "personally gave" $80,000 to the charity.
Jaspen raised the subject again several hours later after Townes denied that any payment for Robins by subsidiaries was an improper subterfuge to evade the law.
Visibly upset by Townes' denials, the judge said: "Didn't we agree that the ESI United Way payment was a subterfuge and you knew it was?" Merhige then remarked about "some smart guy."
Jaspen asked if it were true that "you can't admit all of the subsidiaries' payments for their corporate parent were subterfuges?"
Townes avoided a direct reply, but conceded under renewed questioning by the judge that it "is true" the expenses of Robins were paid by its subsidiaries.
On cross-examination, Robins' bankruptcy counsel, Dennis J. Drebsky, asked the treasurer if at any time he had knowingly violated the law. "I have not, so help me God," Townes replied. He told Robert M. Miller, counsel for the stockholders committee, that "not one soul" in Robins' management has knowingly violated the bankruptcy code or the consent order.
Under questioning by Murray Drabkin, counsel for women claiming to have been harmed by the Dalkon Shield, Townes admitted that he had known of questioned payments, but had not disclosed them at a hearing called by a Justice Department official to enable creditors to learn about all major outlays that might affect them.
One payment of about $71,000 was for steel for a new distribution center and was made for Robins by ESI. Townes spoke of "a mental lapse" and of being "afraid I'd answer the question incorrectly" if he were to list the payment in a report.
Earlier, Robins in-house lawyer Oliver L. Norrell III testified that Executive Vice President Robert G. Watts had said the steel payment would be made "one way or the other."
The other payments consisted of nearly $1 million in deferred executive bonuses that were paid out to a few executives in a six-week period preceding the bankuptcy. By then, Townes testified, Robins' reserve of available cash had plummeted to about $5 million, and he was scrutinizing every check for $5,000 or more to see if it could be held.
Townes told Jaspen that the deferred payments were approved by a board of directors committee, although he said he had never told the committee or senior officers that the payments could be held back if the company came into hard times.
By the time of the Chapter 11 filing, Jaspen pointed out, Robins was insolvent, according to its own balance sheet. In these circumstances, he indicated, Robins was obligated to seek to recover the payments. Townes said this was a legal issue that hadn't been resolved.
Townes said that he knew that just before the bankruptcy petition, payments had been made to working executives despite a hitherto unbroken rule that they had to await retirement or departure from the company.
He insisted that there was no secret about the payments and that he had no desire to conceal them.
But, Townes -- a lawyer -- conceded to Drabkin that he did not disclose the payments to the creditors meeting, which Drabkin said had been called "so that the creditors could find out everything."