The Justice Department asked a federal court yesterday to appoint a trustee to run A. H. Robins Co., which it said improperly spent money after filing for voluntary bankruptcy last August.
Sources said that the spending included $1.2 million in deferred compensation for Robins officers and executives and another $6.5 million for other purposes after the Richmond-based pharmaceutical company filed for bankruptcy Aug. 21 in the face of mounting lawsuits over its Dalkon Shield contraceptive device.
U.S. Attorney Justin W. Williams alleged in a motion filed in U.S. District Court in Richmond that Robins committed civil contempt by disobeying a court order prohibiting payment of debts incurred before the company petitioned for reorganization under the bankruptcy code.
Williams was acting on behalf of the Internal Revenue Service, which the sources said has a large claim on Robins' assets. Under the bankruptcy law, Robins was forbidden to pay debts incurred before its bankruptcy petition without court permission because the final sum available for creditors -- including the IRS -- is reduced when payments to other creditors are made.
A hearing on the contempt motion was set for April 21 before Judge Robert R. Merhige Jr., who issued the order and presides over the bankruptcy case.
Robins spokesman Roscoe E. Puckett Jr. said that the pre-petition payments were made "in the belief that they were proper in the ordinary course of the company's business." He said Robins "regrets any violations of the court's order" and that there had been no intent to violate it.
"The suggestion that such actions amount to contempt is unwarranted, as is the suggestion that a company with the performance record of Robins needs a trustee to oversee its operations," Puckett said.
The request for appointment of a trustee was highly unusual, because the normal procedure is to retain the existing management to operate a company attempting to reorganize its affairs under Chapter 11 of the bankruptcy law. The bankruptcy law provides, however, for appointment of a trustee in event of misconduct, which judges have interpreted to include disobedience of a court order.
Recently, the sources said, Robins was discovered to have paid the $7.7 million with neither court permission nor notice to other creditors. In addition to the $1.2 million in deferred compensation, they said, the payments included:
*More than $5 million to discharge debts incurred under certain contracts entered into before the bankruptcy. The contracts included one for computer services and others for royalties on drug patents.
These creditors did not include women among the 5,100 Dalkon Shield litigants who had settled with Robins before the bankruptcy but had not received their settlement checks by Aug. 21.
*Approximately $600,000 in "miscellaneous" expenses.
*About $800,000 in pre-petition taxes.
The Associated Press in Richmond last night quoted the contempt motion as saying that "the court must firmly penalize the utter arrogance evidence by these payments in violation of a clear, unambiguous order of the court. . . Those directors, officers, employes and counsel who participated in the offense should be directed to show cause why they should not be found in civil or criminal contempt and appropriately sanctioned."
The company was further said to be "out of control, and only the appointment of a trustee can set it back on course."
In a related filing, which was made for Williams by Assistant U.S. Attorney S. David Schiller, the government denounced a motion for Merhige to disqualify himself from the bankruptcy case. The petition was filed March 4 by 10 lawyers for women victims of the Dalkon Shield, the intrauterine contraceptive device Robins sold for 3 1/2 years in the early 1970s.
Schiller called the recusal motion "knee-jerk" and "absurd," saying it was "based on on a patchwork of the court's comments often taken out of context, and heavily loaded with unsupported innuendo." Merhige himself has yet to respond.
The motion filed by the 10 lawyers charged that Merhige "has a personal bias or prejudice" in favor of the company and its chairman. They asked Merhige to stay all proceedings until their petition is ruled upon and to issue an order of disqualification "so that the case may be assigned to another judge, who should come from outside" Richmond.
Merhige has set Friday for a hearing on other matters in the bankruptcy but may rule on the recusal motion at that time.
The 10 lawyers filed the motion after a hearing at which Merhige dissolved the 38-member Committee of Representatives of Dalkon Shield Claimants, which he had appointed after the Chapter 11 filing, and announced that he would appoint a small new committee.
When Robins filed for bankruptcy, it said the move was necessary because of thousands of Dalkon Shield lawsuits could result in a "serious cash-flow problem."
As of June 30, the company said, it and its shield insurer, Aetna Casualty & Surety Co., had paid out $378.3 million to dispose of about 9,230 of nearly 15,000 shield cases, and had spent an additional $107.3 million in legal fees and other expenses.
Robins, a 119-year-old firm that markets such well-known merchandise as Chap Stick lip balm and Robitussin cough syrup, sold the Dalkon Shield from 1970 to 1974.
In 1984, the company reported record sales of $632 million and operating earnings of $128 million. But after setting up a reserve fund to pay shield claims, Robins reported a loss of $461 million.