Home -> Law Blog Directory -> Corporate Governance Blogs -> The Race to the Bottom

Corporate Governance

: The Race to the Bottom

US v. Stockman: What Happens When the D&O Insurance Is Gone?

By J. Robert Brown

From the indictment, Paul Barnaba appears to be a bit player in the criminal action against David Stockman. Yet he is in the middle of a criminal case involving at least two other defendants and some 12 million documents, with no trial date in sight. He has sought severance (along with dismissal) in order to get his criminal exposure resolved. The severance issue is still undecided.

The most recent development in the case shows the consequences to people like Barnaba. Unable to severe and get a trial date, he has stood by while the D&O policy for Collins & Aikman, the bankrupt auto parts company, has vanished. What is the latest? The insurance is gone. In his motion of appointment of counsel, counsel for Barnaba, Solomon Wisenberg, noted that the D&O policy had a cap of $50 million, with four layers. The fourth tier, as predicted, is now exhausted, having been exceeded by the last round of bills. As he notes:

• On August 7, 2008, Barnaba?s attorneys received word that all proceeds of the D&O Policy were exhausted as of July 31, 2008. Indeed, the final insurance carrier?s preliminary estimate is that open invoices submitted on or before that carrier?s July 31, 2008, deadline exceeded the final $10,000,000.00 layer of coverage by $1,600,000.00.

With no more funding coming, Barnaba has moved for appointment of counsel under the Criminal Justice Act,
18 USC §3600A, and has asked that his current lawyers, Solomon Wisenberg and Adrienne Wisenberg of Wisenberg & Wisenberg, PLLC be appointed. The Criminal Justice Act is no great substitute. According to the statute:

• Any attorney appointed pursuant to this section or a bar association or legal aid agency or community defender organization which has provided the appointed attorney shall, at the conclusion of the representation or any segment thereof, be compensated at a rate not exceeding $ 60 per hour for time expended in court or before a United States magistrate [United States magistrate judge] and $ 40 per hour for time reasonably expended out of court, unless the Judicial Conference determines that a higher rate of not in excess of $ 75 per hour is justified for a circuit or for particular districts within a circuit, for time expended in court or before a United States magistrate [judge] and for time expended out of court.

In other words, Barnaba's counsel will be paid a modest amount (despite the statute, the amount in New York is apparently $100 an hour), something that might be described as a pittance in an era when some lawyers bill at over $1000 an hour.

Barnaba is, of course, lucky.  He has counsel willing to stay with him for very little compensation.  David Stockman likely has the financial wherewithal to continue to pay his attorneys, although even his personal fortune may not be enough if the current billing levels remain constant.  The next defendant to need his circumstances resolved will be David Cosgrove.  Cosgrove is represented by Craig Stewart at Arnold & Porter.  Stewart noted this at the last status hearing.

• MR. STEWART: But maybe that we are back in front of you on his behalf asking that he receive appointed counsel because he simply would not have the money to retain private counsel, given the scope and scale of this case, to defend it. And so I think actually, your Honor's hesitation is understandable, but I think it's fortuitous that the issue has come up because, really, I think within a week, there won't be any more insurance money to cover the cost of defense.
  

It remains to be seen whether appointed counsel is Arnold & Porter.  When we know, we will report it here.

The motion of appointment of counsel, along with most of the other important primary documents in this case, can be found at the DU Corporate Governance web site.  

Full post as published by The Race to the Bottom on August 21, 2008 (boomark / email).