A federal judge today found the bankrupt A. H. Robins Co. in civil contempt for "knowingly violating court orders" and for taking actions "prohibited by both the spirit and the letter of the law."
U.S. District Judge Robert R. Merhige Jr. added at the end of a 7 1/2-hour hearing that "the law has been flouted" and that at a later time he will impose sanctions on the company and possibly on unnamed "certain persons" -- penalties "of sufficient severity to impress all that the law is the law is the law."
But Merhige refused to appoint a trustee to run the family-controlled, century-old company despite arguments that the present management cannot be trusted because it made an estimated $9 million in improper payments and engaged in improper transactions totaling about $18 million more.
Instead, the judge said he will approve appointment of a guardian who will function as an investigator for the court.
A trustee is "not necessary or desirable" and "I cannot in good conscience" appoint one, Merhige said. Merhige said he feared that a trustee could jeopardize the opportunity of creditors ultimately to paid in full, although the government and others hotly disputed him on this point.
The rejection of a trustee -- or of an examiner with equivalent extraordinary management powers -- was a victory for the company and for committees representing trade creditors and stockholders.
The rejection was a defeat not only for the government, but also for the committee representing the huge number of women who claim to have been harmed by the Dalkon Shield -- the Robins intrauterine contraceptive device -- and who also are creditors.
Robins filed for protection under Chapter 11 of the federal bankruptcy code last Aug. 21, saying that it had to do so because its financial viability was threatened by soaring litigation costs involving the Dalkon Shield claims.
However, a company in bankruptcy must abide by specific rules designed to protect its assets for its creditors. Under the code, the company's officers and directors become trustees for the creditors rather than for the stockholders.
One of the most important rules of Chapter 11 forbids, without court approval, the payment of debts incurred before the filing. The government -- involved in the case because of a $62 million claim against Robins by the Internal Revenue Service -- and the Dalkon Shield committee contend the company violated this wholesale.
Assistant U.S. Attorney S. David Schiller said today that the evidence was "unequivocal" that Robins filed Chapter 11 for "one purpose and one purpose only: to stop the Dalkon Shield litigation."
After that, he said, the battle cry was "business as usual, pure and simple."
Merhige called today's session to hear oral argument on the evidence produced at a three-day hearing on a government motion for a trustee, for civil contempt, and for an order to compel unnamed Robins officials to show cause why they should not be held in contempt. Merhige praised the motion as "well-taken."
Today Schiller, who filed the motion in March, and Murray Drabkin, attorney for the committee representing the Dalkon Shield claimants, argued that federal bankruptcy law mandates a trustee in cases where misconduct has been shown, and that if the Robins case didn't establish the need for a trustee, no other case ever has or would.
Schiller, citing chapter and verse in an impassioned 1 1/2-hour argument, charged that senior Robins officers had lied to the court and the company's creditors in contending that they hadn't known of a prohibition on post-bankruptcy payment, without court approval, of debts incurred before the Chapter 11 filing.
He accused the management of "greed," of "the boldest display of corporate arrogance" he has ever seen, and of a "disgusting raid" on the corporate treasury in which $3 million in bonuses went to officers and directors in "insider sweetheart deals."
Robins "abused its trust in so many ways that it defies accounting," Schiller charged, citing evidence from 46 depositions that he and Assistant U.S. Attorney Robert W. Jaspen took over 35 days. The judge today praised their performance.
In similar vein, Drabkin said the evidence reveals "an epidemic of wrongdoing," and argued that to appoint neither a trustee nor an examiner with equivalent extraordinary management powers would be "a miscarriage of justice."
Today, as he has for months, Judge Merhige complained that he still can't find out who made the decisions to spend millions of dollars in violation of law, court orders, and the advice of outside bankruptcy counsel.
Schiller said the explanation lay in good part in "Robinspeak," which he defined for the judge as executive testimony consisting of "I don't know," "I don't recall," "I have no present recollection," "we had no definitive discussion," "I probably said," and "I would've said."
In the depositions, Schiller said, the use of "Robinspeak" and of what Drabkin termed "an obsession with evasion" led to laughter even by an attorney from Robins' special bankruptcy law firm, Skadden, Arps, Slate, Meagher & Flom.
Schiller and Drabkin said that Chairman E. Claiborne Robins Sr. and President E. Claiborne Robins Jr. knew of some of the improprieties. The younger Robins was seated in a front row throughout today's session but remained generally expressionless.
Harold S. Novikoff, counsel for the trade creditors' committee, charged that the evidence showed "self-dealing" and conflict of interest on the part of Director and former president William L. Zimmer III and Director and former executive vice president George E. Thomas.
Zimmer is chairman and Thomas a member of the board's executive compensation committee. They received post-bankruptcy executive bonuses. In Zimmer's case, the amount was either $250,000 or $336,000 -- company documents and testimony differ. Thomas got $18,556.
Novikoff said Zimmer and Thomas should be punished, possibly by removal. Drabkin offered similar advice as to Chief Financial Officer G. E. R. Stiles and Senior Vice President and Treasurer H. Carlton Townes. Stanley K. Joynes III, counsel for the committee of future Dalkon Shield claimants, proposed penalties for Zimmer and Vice President and former general counsel William A. Forrest Jr.
Schiller said he wants those responsible for abuses fired and ordered to pay out of their own pockets the costs the government incurred in taking the depositions and in other related legal proceedings.
Executive Vice President Robert G. Watts testified last Saturday that he had procured Forrest's resignation as the company's top lawyer on March 21 because he had failed for six months to advise senior management about the prohibition on post-bankruptcy payment of pre-bankruptcy debts.
Today Merhige said, "I have no problem with Mr. Watts' credibility." But Drabkin said it was "totally bizarre" to believe that Watts didn't know of the prohibition until Forrest showed him an Aug. 23 consent order on Feb. 27.
Skadden, Arps lawyer Michael L. Cook argued on behalf of Robins that there were "undisputed" mistakes and ignorance in the executive suites, enhanced by a "breakdown" of communications and legal services. But, he said, there was no "clear and convincing" evidence of contemptuous or other wrongful conduct. "You've seen contrition all over their faces," Cook argued.
Cook argued that management has seen the light and is working diligently to end the bankruptcy and pay off the creditors. For this purpose, said Robert Miller, counsel for the stockholders committee, Robins is earning "oodles and oodles of money."
Schiller and Drabkin flatly disputed that Robins has reformed, citing evidence of improper payments and concealment that had to be "pulled tooth and nail" out of the company as recently as two days ago at a monthly creditors meeting.
"They were caught with their hands in the cookie jar, and they're still playing the same game," Schiller said. "They're still taking care of their own at the expense of" the creditors, particularly Dalkon Shield victims, he said.
Forrest remains a vice president, although a key document he prepared about executive bonuses is "at least in part a fabrication," Schiller said. Executive salaries haven't been reduced, he added.
Moreover, he said, the company persists in refusing to so much as consider terminating a pension fund that has an excess of at least $9 million that could be available to the creditors without impairing the pensioners' rights.