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For a short while in April, the embattled insurance recovery law firm Gilbert Randolph could breathe a little easier. It had bought more time — four years in fact — to repay the more than $9 million in fees a federal judge ordered the firm to return to its client Congoleum Corp. for having a conflict of interest in the company’s asbestos bankruptcy. That extra time was significant, as it prevented too much cash from leaving the firm at once and potentially bankrupting it. But Gilbert Randolph’s problems aren’t over. It now faces another claim for a similar conflict of interest. And it was dealt a blow by a New Jersey judge last month, who found that the firm had “colluded” with other lawyers to leave insurance companies on the hook for asbestos damages. Meanwhile, lawyers at the firm keep leaving, most notably former name partner John Heintz, who decamped along with three other partners to Kelley Drye & Warren earlier this year. The firm’s head count currently stands at 26, according to the firm’s Web site, down from about 50 a year ago. And even the deal that helped delay the firm’s payout to Congoleum, a New Jersey-based flooring manufacturer, has its drawbacks. It includes severe restrictions on how the firm does business, restrictions that threaten its long-term profitability and even require that the firm hold a $10 million life insurance policy on its “key man,” firm Chairman Scott Gilbert. The firm isn’t talking about the settlement deal with Congoleum — or anything else for that matter. It declined to comment for this story. Its next hurdle is later this month: a hearing before a bankruptcy judge in Delaware in a case brought by insurers to disqualify Gilbert Randolph from representing Federal Mogul Corp., a Southfield, Mich.-based auto-parts maker. And Gilbert Randolph’s troubles could mean some reshaping of an industry known for cozy relationships among plaintiffs, defendants, and law firms. Several lawyers in the asbestos-claim industry say that the New Jersey ruling was a wake-up call. “In the asbestos litigation, frivolous claims abound and pre-pack bankruptcies invite more than their share,” says John Gerstein, a D.C.-based partner with Ross, Dixon & Bell, who is lead counsel for a number of the insurance companies challenging Congoleum’s bankruptcy plans. “This decision should invite other courts to take a hard look at these, and it should give people who are thinking of colluding pause — they can’t engage in business as usual anymore.” BUCKLING DOWN Things started to go downhill for the then-named Gilbert Heintz & Randolph last year. In March 2006, Judge Kathryn Ferguson of the U.S. Bankruptcy Court for the District of New Jersey ordered the firm to immediately return $9.7 million in legal fees it earned representing Congoleum after a federal appeals court found the firm had violated conflict-of-interest rules by simultaneously representing the company and thousands of plaintiffs who had asbestos claims against it. In its appeal of the disgorgement order, the firm said it would go under if it had to pony up the funds immediately. Although firm Chairman Gilbert had said he was confident the firm would be able to resolve the debt to Congoleum consensually, a number of the firm’s lawyers voted with their feet amid the uncertainty about the firm’s future. Still, Gilbert secured a deal with Congoleum that gives his firm until December 2010 to pay. As part of the settlement, the firm agreed to a number of restrictions on how the partnership can operate, including these covenants: not to merge or transfer its assets to anyone; to require any new partner joining the firm to become bound by the settlement agreement; and not to pay partners more than $100,000 per quarter (plus amounts necessary to satisfy tax obligations). In addition, the settlement also made it an event of default if certain partners, including John Heintz, were to leave the firm. In a Feb. 20 letter, Gilbert Randolph partner Craig Litherland informed Congoleum’s counsel of the partners’ departures and noted that it wouldn’t make “payments of capital to departing partners that such partners might be entitled to receive, if any, until at least such time as the obligations to Congoleum have been paid.” Presumably, Heintz’s departure didn’t derail the deal since Ferguson approved it on April 5. The settlement — which doesn’t require Gilbert Randolph to make any payments until December 2010 unless it makes more than a certain amount of money, gives the firm a favorable interest rate, and doesn’t require any of the firm’s partners to guarantee the debt — appears to be a good deal for the firm. In fact, it appeared to be too good to the insurers who objected to it being approved by the court vociferously, calling it in a court filing “a sweetheart deal designed to push a major issue under the rug.” A SIMILAR SITUATION Although the threat from having to immediately make good on the Congoleum disgorgement order has passed, Gilbert Randolph’s work in a number of similarly structured asbestos bankruptcies means the firm’s asbestos-related troubles may not be over, especially if the insurance companies seeking to disqualify it from representing Federal Mogul make some headway. In a May 21 filing with the U.S. Bankruptcy Court for the District of Delaware, which is overseeing Federal Mogul’s bankruptcy, a few of Federal Mogul’s insurers, including Ace Property & Casualty Insurance Co., asked the court to rule on their motion to disqualify Gilbert Randolph. The initial motion the insurance companies filed last year asking for the firm’s disqualification stressed that Gilbert Randolph’s representation of Federal Mogul was marred by the same conflicts as those found with Congoleum. “GHR simultaneously represented the debtor and those suing the debtor. The same circumstances exist here, with the same conflicted relationship arising out of the same co-counsel relationships.” The judge in the Federal Mogul case should take up the motion at the next bankruptcy hearing, scheduled for June 25, says Mark Plevin, a partner with Crowell & Moring who is one of the lawyers who submitted the brief. Plevin declined to comment further on the case. The insurers could get a boost from yet another ruling decrying Gilbert Randolph’s conflicts in the Congoleum case. In a May 18 opinion, New Jersey state court Judge Nicholas Stroumtsos ruled Congoleum’s insurance carriers weren’t on the hook to fund the company’s settlement with asbestos claims plaintiffs because it was an unreasonable agreement and the product of bad-faith negotiations among Gilbert and Perry Weitz, a partner at New York-based Weitz & Luxenberg, and Joseph Rice of South Carolina-based Motley Rice, who represented a large number of plaintiffs with asbestos claims against Congoleum. The same trio of firms worked together on a number of other asbestos bankruptcies, including Federal Mogul’s. The amount of scrutiny the Congoleum deal has been subjected to may already have led to a slowdown in the number of pre-packaged asbestos bankruptcies being cobbled together, say lawyers who work on these cases. In fact, one lawyer familiar with the case says Scott Gilbert suggested that he had other so-called “pre-pack” asbestos bankruptcies lined up at the time Congoleum’s plan was being put together in 2003, but may have had second thoughts after Congoleum’s plan starting hitting some roadblocks. AN INCURABLE CONFLICT 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 on Dec. 31, 2003, designed to channel its current and future asbestos liabilities into a trust. The trust was to be funded almost entirely by proceeds from Congoleum’s insurance policies, 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. The money from the insurers was set to fund a $500 million settlement Congoleum struck with plaintiffs who had asbestos claims against it. The plan was supposed to be a quick way for the company to dispose of its asbestos liabilities. But the insurance companies, which were largely left out of the negotiations, objected to the plan. Although insurers had acquiesced to similar schemes before, some of the companies involved in the Congoleum bankruptcy decided not to settle this time, says another lawyer familiar with the case. “The insurers had had enough,” he adds. “They decided they were going to make a record.” Much of the firm’s conflicts were laid bare in the proceedings that resulted from the insurance companies’ objections to Gilbert Randolph’s representation of Congoleum. In October 2005, the U.S. Court of Appeals for the 3rd Circuit disqualified the firm for having an incurable conflict of interest. Last month, Judge Stroumtsos of New Jersey went even further, finding that the firm “colluded with Rice and Weitz to create a framework that would provide Congoleum with both the insurance money and also protect against the asbestos liability, while leaving the insurance companies to bear the costs.” The ruling also validated the insurance companies’ claims that they were excluded from the negotiations that led to the settlement with the asbestos claimants. “GHR, Rice, and Weitz invited the insurers to meetings on March 13, 2003, in South Carolina and March 20, 2003, in New York; however, no real negotiations took place at that meeting,” Stroumtsos wrote. “One meeting was delayed while Scott Gilbert and Joe Rice were enjoying the afternoon looking at custom-made motorcycles.” STUCK IN THE MUD Cozy relationships between claimants’ and debtors’ lawyers are nothing new in asbestos bankruptcies. Asbestos-claims litigation is dominated by a small number of firms that 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. Companies in asbestos bankruptcies are not able to emerge from Chapter 11 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. The rule is in place because asbestos claimants lose their chance to litigate their tort claims once the reorganization plan is approved by the bankruptcy court. 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 and allow it to escape further tort claims, a lawyer familiar with the case says. In fact, Stroumtsos in his ruling highlighted the fact that the settlement the lawyers came up with contained “no meaningful provisions to ferret out fraudulent claims.” The claims were largely approved by the Kenesis Group, a claims-processing firm, 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 Randolph and also had significant connections to Rice’s South Carolina firm. 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 Randolph also had been involved. Stroumtsos also highlighted the fact that the claimant agreement allows time-barred claims and doesn’t contain any provisions requiring claimants to show they had been exposed to Congoleum’s products. “The provision was so lax that any individual could file a claim and it would be virtually impossible to challenge the exposure to the product since no details of any kind were required.” All of these issues derailed hopes that Congoleum’s pre-packaged bankruptcy could be pushed through the courts quickly. Nearly three and a half years after its initial filing, Congoleum has yet to emerge from bankruptcy.
Alexia Garamfalvi can be contacted at [email protected].

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