Law firms sued by a bankruptcy trustee for more than half a million dollars in fees paid to them by debtor Birdsall Services Group will go to mediation next month in an effort to resolve the dispute.
New Jersey’s largest law firm, McCarter & English, and a dozen others were paid by Birdsall for their representation of company officers and employees in the course of an investigation by the state Attorney General’s Office.
The probe culminated in indictments of Birdsall, former CEO Howard Birdsall and other executives and employees for conspiring to violate N.J. pay-to-play laws — which prohibit awarding public contracts to those who donate more than $300 to a political candidate or campaign — by having employees make the contributions. The employees wrote checks that were bundled and sent in together and the company later reimbursed them through bonuses or other means, the state charges. The scheme allegedly continued for more than six year and involved hundreds of thousands of dollars.
The crimes charged include a range of first-, second-, third- and fourth-degree charges, such as conspiracy, money-laundering and making false representations for public contracts.
After Birdsall filed for bankruptcy on March 29, the state tried to get the case dismissed on the ground that the company was trying to hide behind the automatic stay to circumvent a court order allowing seizure of its assets, but U.S. Bankruptcy Judge Michael Kaplan in Trenton denied the motion on April 8.
Edwin Stier, a Skillman solo appointed trustee on April 16, filed the complaint against McCarter and such prominent criminal defense firms as Arseneault Whipple Fasset & Azzarello in Chatham, Benedict & Altman in New Brunswick, Critchley Kinum & Vasquez in Livingston, Lomurro, Davison, Eastman & Munoz in Freehold and McDonald & Rogers in Somerville.
Stier alleges that following the service of grand jury subpoenas on Birdsall management on May 2 and 3 of 2012, and after the May 2 execution of a search warrant of its premises, the board, at a specially called telephonic meeting on May 4, approved indemnifying those subpoenaed for their legal fees and expenses.
Stier claims that $526,239 in fees paid by the company between May 15, 2012, and March 12, 2013, should have been borne instead by U.S. Specialty Insurance Co. of Houston, under a Directors & Officers liability policy that provides $5 million in coverage plus another $1 million for defense costs.
U.S. Specialty allegedly denied pre-indictment coverage on the ground that the policy did not cover criminal investigations.
Stier, however, alleges that the exception for “deliberately criminal acts” applies only when such criminal guilt has been “finally determined.”
In addition, an endorsement to the D&O policy expanded the definition of a covered claim to encompass receipt of a subpoena in connection with a criminal investigation.
U.S. Specialty acknowledged coverage of the officers once they were indicted and ceased coverage of those who pleaded guilty.
The complaint asks for recovery of the legal fees as fraudulent conveyances under the Bankruptcy Code because the payments were made for the benefit of insiders when the company was insolvent in exchange for “less than reasonably equivalent value.”
The lion’s share, 40 percent or $212,672, went to McCarter in Newark for Robert Mintz’s services on behalf of former Birdsall marketing director Phil Angarone. He was the first one to plead guilty, admitting to third- and fourth-degree crimes on Nov. 30, 2012.
The next largest portion, $108,176, went to another Newark firm, Krovatin Klingeman. Henry Klingeman represents former executive vice-president Thomas Rospos.
The other 11 firms, which were paid sums ranging from $6,150 to $59,696, account for the remaining $205,391.
The complaint also names the officers and employees whose fees were paid.
Stier’s attorney, Daniel Stolz, of Wasserman Stolz & Jurista in Millburn, says mediation sessions are scheduled for Nov. 18 and 21, to be conducted by a retired federal judge whom he declines to name at this point. He calls “the issue of a company paying criminal defense costs of indicted officers an interesting and unresolved issue in bankruptcy court.”
Klingeman says the operative question is whether the payments were made in the best interests of the company. He says they were, because he and the other counsel were brought in under a joint defense agreement.
Birdsall itself pleaded guilty in August and was ordered to pay a $1 million penalty. And in April, it agreed to pay $2.6 million to resolve a civil forfeiture action brought by the state.