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The sleek design and glistening motorcycles in the lobby of Gilbert Heintz & Randolph’s Washington, D.C., office are a testament to the insurance-recovery firm’s successes representing clients in asbestos bankruptcies and other matters. The office certainly doesn’t give the impression that the firm itself could be teetering toward the edge of bankruptcy. But that’s the situation Gilbert Heintz could be in if it is forced to immediately make good on an order from a New Jersey court to return approximately $9.7 million in legal fees it earned representing New Jersey flooring manufacturer Congoleum Corp. in asbestos bankruptcy proceedings, says the firm’s lawyer fighting the order. “Common sense would tell you that GHR can’t survive,” said Alan Kraus, a partner at Latham & Watkins’ Newark, N.J., office, at a May 15 hearing held in the U.S. District Court for the District of New Jersey on the firm’s motion to stay the disgorgement order pending its appeal. Kraus said the firm had $2.3 million in liquid assets as of the end of March and argued that if Congoleum were to execute on the judgment immediately, it could drive Gilbert Heintz out of business � “potentially into bankruptcy.” And that would mean Congoleum would get none or nearly none of the $9.7 million back, he added. But that’s exactly what Congoleum has done. The company asked the court last week to enter the order, which would allow it to execute the judgment, register it with the District of Columbia, and begin collecting the money. Judge Kathryn Ferguson of the U.S. Bankruptcy Court for the District of New Jersey will hold a hearing on Congoleum’s request this month. If she grants the order, the 50-person firm may have to pony up the funds soon or face a sheriff knocking on its door. The firm’s chairman, Scott Gilbert, doesn’t think it will come to that. “Negotiations are ongoing with interested parties as to a settlement of this matter,” he says. “I believe that it is in each of the parties’ best interest to come to a consensual resolution.” Gilbert declined to provide details as to the shape such a settlement could take. But it looks like having Gilbert Heintz partners pitch in to fund the order is not on the table. Lawyers for Congoleum and other parties in the case argue that although the firm itself may not have the money on its balance sheet, the firm’s partners could guarantee a loan allowing it to borrow the necessary funds. Gilbert rejects this option, saying the partners have no legal liability for the order as partners in a limited-liability partnership and would not bankroll it. “There’s not a firm in Washington, D.C., that is also an LLP that would do otherwise,” he says. Judge Ferguson gave Gilbert Heintz until the end of May to comply with the order she issued in late March after a federal appeals court found that the firm violated conflict-of-interest rules by simultaneously representing Congoleum and thousands of plaintiffs who had asbestos claims against the company in the bankruptcy proceedings. The U.S. Court of Appeals for the 3rd Circuit’s October 2005 ruling disqualifying Gilbert Heintz resulted from a challenge mounted by some of Congoleum’s insurers to its retention of the law firm. Gilbert says the insurers used the challenge as a delaying tactic and notes that they objected to the involvement of a number of other law firms in the case, including initially challenging Congoleum’s hiring of Covington & Burling to replace Gilbert Heintz after the disqualification. “It’s a tactic to do everything that they can do to avoid meeting their contractual obligations” and delay making payments on the insurance policies they have issued, he says. Both of the motions the firm made to stay the order were denied. Gilbert Heintz is appealing the disgorgement order to the New Jersey federal court. In its court filings, the firm argued that disgorgement is an extremely harsh penalty, considering it worked on the case for more than two years, relying on the fact that its retention by Congoleum had been approved by both the bankruptcy court and the district court on appeal. The firm also argued that it fully disclosed the scope of its asbestos representations to both Congoleum and the court at the time. Lawyers familiar with the case note that Gilbert Heintz has little chance of winning its appeal of the order, as it would eventually wend its way back to the 3rd Circuit � the same court that held that the firm should be disqualified for its conflicts of interest in the case. The bankruptcy court ruled that because the 3rd Circuit subsequently found that there was a conflict, the firm should be treated as if the retention were never approved to begin with, Gilbert says. But he points out that the 3rd Circuit’s opinion didn’t suggest or require disgorgement. “In a nutshell, our view is that the disgorgement opinion is incorrect as a matter of law, it is incorrect as a matter of fact, it is unprecedented, it is grossly unfair, and we were denied due process in the way that this was handled,” Gilbert says. Judge Ferguson held that Gilbert Heintz misled the court into thinking its work for Congoleum was far more circumscribed than it actually was, but Gilbert says the firm has been denied its due process by never having had an opportunity to address the facts underlying the judge’s decision at a hearing. Asbestos bankruptcies Facing thousands of asbestos-injury claims, Congoleum, which made some floor-covering materials containing asbestos until the early 1980s, filed a Chapter 11 reorganization plan designed to channel its current and future asbestos liabilities into a trust on Dec. 31, 2003. The trust was to be funded almost entirely by proceeds from insurance policies held by Congoleum, while the company would contribute only a $2.7 million promissory note payable in 10 years and retain its equity. Its parent company was to chip in a mere $250,000. Some of Congoleum’s insurers objected to the plan. They claimed in their court filings that Congoleum agreed to a “collusive, prepackaged plan” engineered by some of the asbestos claimants’ lawyers and Gilbert Heintz to maximize the payout to those claimants and lawyers, leaving the insurance companies on the hook to fund the payouts. Calling the plan “the most recent chapter in an unfortunately common story in the asbestos bankruptcy world,” they argued that Congoleum had no incentive to minimize claims against it, as it was largely negotiating with the insurance companies’ money rather than its own. (Congoleum declined to comment on the case.) “There is absolutely no factual support for such claims,” Gilbert says. “If the insurers would say outside the court what they have said in court in some of their briefs, the odds are high that they would be sued for libel.” The insurers also objected to Congoleum’s application to retain Gilbert Heintz, arguing that the firm was conflicted because of the duties it owed to the asbestos claimants it represented as co-counsel with Perry Weitz, a partner at New York-based Weitz & Luxenberg, which represented a large number of plaintiffs with asbestos claims against Congoleum. Although “cozy relationships” between claimants’ and debtors’ lawyers are nothing new in asbestos bankruptcies, a lawyer familiar with the case says, Gilbert Heintz took things one step further by actually acting as counsel for clients on both sides of the table, bringing into question whether the negotiations were really at arm’s length. Congoleum hired Gilbert Heintz at Weitz’s suggestion. In October 2002, during the course of negotiations with the company regarding the claims of two of its clients suing Congoleum for asbestos injuries, Weitz recommended to Howard Feist, Congoleum’s chief financial officer, that it hire the firm. Companies in asbestos bankruptcy are not able to emerge from it unless lawyers representing a substantial portion of the asbestos claimants approve the restructuring plan. The U.S. Bankruptcy Code requires that any reorganization plan in an asbestos bankruptcy be approved by 75 percent of the asbestos claimants in the case, which forces debtors’ counsel to work closely with attorneys who represent large numbers of claimants, says the lawyer familiar with the case. The rule is in place because asbestos claimants are, in effect, losing their chance to litigate their tort claims once the reorganization plan is approved by the bankruptcy court. Asbestos-claims litigation is dominated by a small number of firms, which represent hundreds of thousands of plaintiffs. In many asbestos bankruptcies, the claimants’ lawyers end up controlling the creation of the bankruptcy trusts and dictate their structures and procedures. The company’s initial reorganization plan was largely the result of negotiations among Weitz, Joseph Rice of South Carolina-based Motley Rice (which also represented a large number of plaintiffs with asbestos claims against Congoleum), and Gilbert. Bad faith pervaded these negotiations, the insurers claimed in court filings. All of the key players in the negotiations had an interest in increasing the number and value of the claims. Weitz and Rice stood to make millions of dollars through contingent fee arrangements with clients they represented and through fee-splitting arrangements with other firms. Gilbert Heintz would benefit both as the debtor’s counsel and as co-counsel for many of the plaintiffs. Congoleum hoped to keep all of its equity interest in the company and contribute as little of its own assets to the trust as possible, while getting insurers to foot the bill. Although Congoleum should have wanted the number of claims approved against it to be as low as possible, it really wanted to give a group of plaintiffs a good enough deal to induce the requisite 75 percent to vote in favor of the plan, says another lawyer familiar with the case. The insurers questioned whether Congoleum could have settled the asbestos-injury claims for much less had they remained in the tort system. They argued in court filings that although Congoleum had been able to settle approximately 98 percent of the claims against it for $102 or less and resolve all of its claims for an approximate average of $400 prior to the bankruptcy filing, the proposed plan would have required Congoleum to pay 10 to 30 times these values for claims. The insurers claimed Congoleum did nothing to protect the company from hundreds of millions of dollars of meritless or fraudulent claims that were approved, including claims that involved no exposure to asbestos from a Congoleum product, were barred by the statute of limitations, resulted in payments far in excess of historical averages, or were based on lax medical criteria or bogus medical evidence. To the extent that the claims were not valid, it was Gilbert Heintz’s responsibility in representing Congoleum to see that the claims were rejected, even though that would have been adverse to Gilbert’s interests as counsel to those claimants. The claims in the case were largely approved by the Kenesis Group, which Congoleum had hired to screen and approve potential asbestos claimants prior to filing for bankruptcy. At the time, Kenesis was 70 percent owned by Gilbert Heintz and also had significant connections to Rice’s South Carolina firm. Moreover, Kenesis already had been disqualified from being retained to review claims and ordered to disgorge its fee in a similarly structured asbestos bankruptcy in Delaware, a proceeding in which Gilbert Heintz also had been involved. After a challenge from insurers and the U.S. bankruptcy trustee to Congoleum’s hiring of Kenesis, Ferguson denied Congoleum’s application to retain Kenesis on the basis that it was not disinterested due to its relationship to Gilbert Heintz. All of these disqualification-related issues have derailed hopes that a prepackaged bankruptcy could be pushed through the courts quickly. Nearly two and a half years after filing for bankruptcy and eight plans of reorganization later, Congoleum has yet to emerge from bankruptcy. The parties agreed to submit to mediation last week. Meanwhile, Sens. Arlen Specter (R-Pa.) and Patrick Leahy (D-Vt.), the chairman and ranking member of the Senate Judiciary Committee respectively, renewed their efforts to deal with the asbestos mess through legislation. In an attempt to woo opponents who blocked the asbestos bill in February, Specter recently introduced a new version of the bill that would replace the asbestos litigation system with a $140 billion trust, funded by insurance companies and corporations with asbestos liabilities. But lawyers who work on asbestos-related matters gave the new version little chance of passing, calling it “dead on arrival.” Alexia Garamfalvi can be contacted at [email protected]

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