C.M. Meiers Legal Battle Goes On, Allegations Heat Up

With a quote from former president Ronald Reagan, an emergency motion from a sex toy business and increasingly acerbic accusations, the legal battle between the new and old owners of bankrupt agency C.M. Meiers continues to wage as each side piles on allegations.

Opposing sides squared off again this week over a temporary restraining order filed with U.S. Bankruptcy Court in the Central District of California to decide whether the former owners of C.M. Meiers – a Chapter 11 insurance agency believed by its trustee and new owners to be out of trust by over $1 million – absconded with clientele and information that were to be sold off during an auction last month.

In an application filed with the court, Woodland Hills, Calif.-based Liberty Company Insurance Brokers Inc. charges the former agency owners and Affinity Global Insurance, a Woodland Hills agency with which the former C.M. Meiers owners are now under contract, with unfair competition, misappropriation of trade secrets and interference with contractual relations. During its finanical spiral into bankrputcy, Affinity stepped in for a brief period and managed the agency.

Liberty, whose $1.375 million bid for the 76-year-old firm beat out two other bidders, also filed a for temporary restraining order against the former owners alleging “wrongful activity,” seeking injunctive relief involving customer lists under the Uniform Trade Secrets Act.

The restraining order seeks to bar the former owners from using or disclosing any confidential or proprietary information, or trade secrets formerly owned by C.M. Meiers. It would also require the defendants to hand over all copied information considered confidential, as well as pricing and quote information, and any information pertaining to clients. Lastly, the order being sought would require the defendants to place in constructive trust all money received on or after Feb. 8 that pertains to policies placed with customers who were former C.M. Meiers customers as of Jan. 9, when the agency filed its Chapter 11 bankruptcy petition.

Liberty is seeking a minimum of $1.75 million in damages in its application.

The application also states that on March 2, Liberty received 21 letters from Glendale, Calif.-based CIBA Insurance Services Inc. stating that many former C.M. Meiers customers were changing their insurance broker of record to Affinity. All but one of the letters were dated Feb. 13, and they related to policies up for renewal on March 31, for which a written notice of broker change was due CIBA by Feb. 15, according to the application.

Since mid-February Liberty has continued to receive several change of broker letters, affecting its “customers wrongfully transferred to Affinity, and insurance policies up for annual renewal within the next few months,” the application states.

The court document places the potential loss to the C.M. Meiers estate in excess of $112,500, and as high as $650,000.

For their part, attorneys for Affinity and the former C.M. Meiers owners say a letter sent out by Liberty to C.M. Meiers carriers contained false allegations defaming their clients and has cost them business.

Lost in Transition

Much of the time so far in the long-running legal squabble, which has now spanned over a month to decide on the restraining order application and four-months-and-counting to weed through details and ramifications of the C.M. Meiers bankruptcy, has been spent discussing allegedly missing information and emails, as well as changes made to the broker of record on accounts in the firm’s software management system sometime around the bankruptcy process.

Taking the witness stand so far has been an information technology specialist who worked at C.M. Meiers and is now with Liberty, a former C.M. Meiers broker now at Affinity, an assistant to C.M. Meiers’ bankruptcy trustee, the president of Liberty and Affinity owner Jason Adelman.

The hearing begins again on for a partial day on Tuesday, and continues for a full day on Friday. Set to take the stand next week are Adelman, and former C.M. Meiers owners Herb and Eric Rothman. Adelman is related though marriage to the Rothmans, who along with several former C.M. Meiers employees went to Affinity following the sale. Several C.M. Meiers employees also went to other Southern California firms, markedly reducing the agency’s ranks.

During a daylong hearing on Tuesday Adelman proved to be a somewhat contentious witness for plaintiffs’ attorneys, responding at length and with accusations against Liberty to that agency’s attorney Gary Torrell, whose questions were directed toward discovering whether Affinity has pilfered C.M. Meiers’ accounts.

Torrell, with Valensi Rose PLC in Los Angeles, and Adelman also debated over the broker of record letters, and C.M. house accounts being switched into the name of Herb Rothman around the time of the bankruptcy.

Adelman maintained that no client information or proprietary information was taken from C.M. Meiers, and that he hired Herb and Eric Rothman as contractors because they are senior producers, not to get their existing books of business they built at C.M. Meiers. Herb and Eric Rothman are each being paid $10,000 per month at Affinity, according to Adelman.

According to an old C.M. Meiers webpage, Herb Rothman joined C.M. Meiers in 1963 as a sales associate and 30 years later he was named president. Eric Rothman, who joined C.M. Meiers in 1996, is also a board member of the IBA San Fernando Valley insurance association.

Torrell continued to grill Adelman about Affinity and how much it has made in the past and what it has made following the bankruptcy of C.M. Meiers.

“We’re at a huge net loss because of your clients and the lies they sent out in these letters,” he said.

Several times Adelman answered beyond Torrell’s line of questioning, and Torrell on several occasions requested Adelman’s comments be stricken from the record. Adelman was instructed by Federal Bankruptcy Court Judge Maureen Tighe, who presided over the auction in February, to keep his answers simple.

He did not, so Tighe ended up admonishing Torrell to stop asking open-ended questions, as Adelman had indicated repeatedly through his answers “he wants to give a speech,” Tighe said.

Torrell also drilled down on Adelman on the subject of whether any information – from his files, from former and now Affinity employees, or the Rothmans – made it into Affinity’s possession.

“Affinity has not had trade secrets or confidential information since the day we destroyed it,” Adelman said, noting that all information from Affinity’s brief period managing C.M. Meiers, was disposed of, and that he instructed the Rothmans to bring no C.M. Meiers confidential information over with them.

“Ronald Reagan said trust but verify, and I’m verifying,” Adelman said.

He later added: “I instructed (Herb and Eric Rothman) not to take trade secrets.”

Torrell attempted to establish the notion that Affinity, a fledgling agency with no reportable revenues for the past two years, was benefiting from information he alleged was obtained from C.M. Meiers so the firm’s former owners could start anew by bringing over their C.M. Meiers clients.

Asked by Torrell for Affinity’s gross revenue for 2010, and then 2011, Adelman responded, “Zero dollars.” And again, “Zero dollars.”

Adelman said Affinity has sought to purchase other firms in the past two years, but the C.M. Meiers deal would have been the “first go around with Affinity.”

As for the Rothmans and the other former C.M. Meiers employees, Adelman said he hired them because they are producers.

Adelman said he projects that Eric Rothman can generate at least a $250,000 book of business, and Herb Rothman could generate $600,000 to $700,000.

Much of that business is going to be new business, or business from friends, family and long-time associates of the Rothmans, Adelman said.

Adult Entertainment Program

“Eric is developing a very substantial adult entertainment program right now,” he added.

One such client is Health Devices Corp., doing business as Doc Johnson. The North Hollywood based company sells sex toys and other novelties.

During Tuesday’s hearing the company appeared in court with an emergency motion asking the judge to instruct the new owners of C.M. Meiers to pay their premiums.

Doc Johnson attorney Richard W. Labowe, with Labowe, Labowe & Hoffman LLP in Los Angeles, filed a motion for an order compelling the payment of insurance premiums held in trust by Liberty, which Labowe alleged is withholding payments as a punitive act against Doc Johnson for dropping C.M. Meiers as its agency.

The motion states Doc Johnson’s policies with Lloyd’s of London were set to lapse on May 1, and at the hearing Labowe urged the judge to require Liberty to make the premium payments.

The motion states that in December Doc Johnson utilized C.M. Meiers to acquire property insurance through Lloyd’s of London, and submitted two partial payments to cover policy premiums in the amounts of $32,283 and $9,244.

Following the Chapter 11 filing by C.M. Meiers, Doc Johnson submitted three more premium payments for a total of $111,560 before and after the filing, according to the motion.

Labowe said that Liberty is making premium payments of other C.M. Meiers’ customers, but is purposely stalling making payments on behalf of Doc Johnson because the firm signed a letter of intent with Affinity.

“They are willfully refusing to pay the premiums,” Labowe told the judge.

But Liberty attorney David Ruben, with Ruben & Sjolaner in Los Angeles, argued that not all premiums can be paid until a thorough audit of C.M. Meiers trust can be conducted.

“There’s simply not enough in the trust accounts to pay all the premiums,” Ruben said.

He noted that Liberty in purchasing C.M. Meiers agreed to make up the trust account under the terms of the sale, but the firm has no obligation to do so for 180 days from the purchase and won’t do so until a the audit has been conducted.

Despite Labowe’s argument that more than $77,000 was paid by Doc Johnson after the bankruptcy filing, when the trustee was running C.M. Meiers, Tighe ruled that a judgement can’t be made until it’s finally decided what was purchased in the bankruptcy. The matter of individual books of business of brokers, and just what C.M. Meiers owned is still in part being decided.

“I don’t have enough evidence,” she said, adding that the emergency petition was filed April 30 and that’s not enough time to review the matter and grant the request.

She advised Labowe to advise his clients pay the premiums and then go after Liberty in due course.

“Go forth and litigate,” she said. “I know you will.”

Allegations

During Tighe’s comments to Labowe and Ruben she expressed her frustration over the preponderance of allegations back and forth between plaintiffs and defendants.

“There’s been a lot of allegations in this case,” she said.

Early on in the hearing Sonia Lee, an attorney for Affinity owner Adelman, spent a great deal of time challenging a letter sent from Liberty to C.M. Meiers’ carriers with several allegations of misconduct by former owners of the agency from Liberty.

The letter to several carriers calls attention to the C.M. Meiers bankruptcy, that the firm was out of trust and it contains statements from trustee Bradley D. Sharp that he did not sign off on.

Lee, with Raines Feldman LLP in Beverly Hills, Calif., in an extensive examination of Liberty President Tom Leach, the first witness in the temporary restraining order hearings, hammered him over the letter that he approved and had sent to carriers.

The letter was sent out to about 75 carriers. In the letter from Liberty it states C.M. Meiers were out of trust by at least $1 million. It also contains other allegations, which Lee argued are not backed by evidence.

Lee asked Leach what investigation had been done to determine that C.M. Meiers was out of trust.

“None,” replied Leach, who said Liberty is are waiting to choose an auditor via a bidding process.

Pressed on how he knew Liberty was out of trust, Leach said it was because Liberty was forced to take money out of its own pocket to pay premiums.

The trustee, Sharp, is also mentioned in the letter. Lee in trying to assert that Sharp was added to the letter to give it added authority, asked Leach if the letter had been with vetted with Sharp. Leach said it hadn’t been.

During the hearing Leach also testified that more than 2,000 house accounts had been recoded into the name of former C.M. Meiers owner Herb Rothman.

“You’re accusing the defendants here of a number of things,” she said, questioning why Leach didn’t investigate these allegations before making them public.

She asked Leach if he had evidence that anything had been “absconded” from C.M. Meiers, or if any clients had been stolen.

Leach said he talked to two or three clients who told him that Herb Rothman had called them, but offered little more solid evidence of wrongdoing in his testimony.

“Did you conduct any investigation to determine the truth or veracity of the allegations?” she asked.

Lee argued that simply because the accounts were recoded doesn’t mean they were taken. In truth only a handful of businesses may have switched to Affinity, and most of those 2,000 accounts remain with C.M. Meiers, according to Lee.

“Just because they took a handful of businesses you made damaging allegations,” Lee told Leach.

Esoteric discussion followed regarding just who can take C.M. Meiers accounts now that they’ve been sold.

Leach maintained that while other firms could try and take the accounts, the Rothmans and Affinity cannot. But Lee wanted to know whether fair market competition could ever play into who could take these accounts, and how long those accounts are protected by the sale.

“They’re not their accounts,” Leach maintained.

Lee retorted: “Just because you bought them doesn’t mean you own them forever.”

IT Guy

The allegation that’s grabbed a spotlight, and taken up the brunt of time, at the hearing is whether accounts that were considered C.M. Meiers house accounts were improperly recoded into the name of Herb Rothman.

Much of the testimony on that subject was given by Russell Hugenberger Jr., who was in charge of the information technology department at C.M. Meiers for eight years. He was also in place in IT for the transition, working for the Sharp the trustee while the agency was being sold. He’s now in IT for Liberty.

Hugenberger, who was asked about the AMS (agency management) system. C.M. Meiers uses AMS 360, a popular agency management software system made by Bothell, Wash.-based Vertafore Inc.

During the hearing attorneys for Liberty and the trustee worked to make a connection between a possibility that the Rothmans or their employees, or both, took information from the AMS that was supposed to have been sold in the sale and could use it on Affinity’s system.

According to Hugenberger, Affinity uses an online version of the AMS system, but the information could be converted with some technical effort.

Hugenberger testified that several accounts were changed from a producer’s account to house accounts, and that he was asked by Eric Rothman to change several house accounts into Herb Rothman’s name.

Hugenberger, whose testimony ran over two days, talked about recoding, or changing the executive fields in AMS, namely changing the name of who is the executive on the accounts around the time of the bankruptcy.

He testified he’d been asked to recode accounts from time to time during his tenure at the agency, but he had never been asked to convert a large number of house accounts into any one person’s name.

“The timing of everything seemed a bit sketchy I guess,” he said.

However, when Lee asked Hugenberger whether he had knowledge that any data that left C.M. Meiers and went to Affinity, he replied “No.”

Hugenberger’s testimony was also key as to the allegation that four months of emails were missing from Herb Rothman’s email account that were supposedly in the deleted file folder of his C.M. Meiers account.

During an examination of Hugenberger Torrell introduced into evidence several screenshots taken off a computer with the Microsoft Outlook email software system open showing a period between Aug. 29, 2011 and Dec. 29, 2011 of missing emails from Herb Rothman’s deleted email file.

Torrell questioned Hugenberger about the roughly four months’ worth of missing emails from Herb Rothman’s account. “From this document it is your testimony that it appears that Herb Rothman’s emails (from the deleted file) for the last four month of 2011 were deleted from the system?” Torrell asked.

“Yes,” Hugenberger replied.

Torrell asked him if it was unusual for a block of emails to be deleted from Herb Rothman’s emails like that.

“For that to be missing, yes it is,” Hugeberger replied.

Based on Herb Rothman’s previously mentioned lack of computer skills during Hugeberger’s earlier testimony, Torrell asked him “do you think Herb had the skill to do that?”

“No,” Hugenberger replied.

“Did Eric?” Torrell asked.

“Yes,” Hugenberger replied.

Torrell also asked Hugenberger if Adleman had been seen around the office prior to the bankruptcy auction when Affinity stepped in to manage the firm for a week, inquiring whether Adleman had an email account and if that account had any restrictions.

Hugenberger replied that Adleman had an account and it had no restrictions, and noted that during that time some Affinity personnel were at C.M. Meiers’ offices often, including both Affinity executives Carol James and Melodee Schwartz.

Both executives also work at HCF Insurance, a nearly 10-year-old agency that focuses on insuring healthcare facilities that shares its offices with Affinity. Adelman also owns HCF.

“Melody was there a lot,” Hugenberger testified, noting she was there more than 15 days in December prior to the bankruptcy filing.

“As for James?” Torrell asked.

“She was in a lot as well,” Hugenberger replied.

Adleman has maintained that James, Schwartz and he were at the agency to help keep it afloat, and as well to do due diligence research under Affinity’s effort to purchase C.M. Meiers.

Also examining Hugenberger was Larry Gabriel with Jenkins Mulligan & Gabriel LLP in Woodland Hills, the attorney for Bradley Sharp. Sharp has been unable to attend any of the restraining order hearings so far due to a scheduling conflict. However, he’s set to be present at next week’s hearings and may offer testimony.

Gabriel asked Hugenberger how many house accounts were changed to Herb Rothman’s name at the direction of Eric Rothman.

“About a thousand,” he replied.

Hugenberger testified that roughly 900 accounts had been changed from the name of Cathy Kerhulas, former vice president at C.M. Meiers, to house accounts under the direction of Eric Rothman.

He said Rothman offered no explanation about the changes, which he said happened less than 10 days before the bankruptcy was filed.

Held Over

More damage to the defendants may have been done by Eric Held, with Development Specialist Inc. in Los Angeles. He worked with Sharp, the trustee, and testified that as of Jan. 25 C.M. Meiers’ books and records disclose the agency had a “net payable” to various insurance companies in the amount of $1,085,659.

“The trust account was underfunded,” he said. “It was out of trust at that date.”

In a declaration submitted to the court Held also claimed the Rothmans engaged in a fraudulent transfer of an $80,000 life insurance policy under Herb Rothman’s name and made fraudulent transfers to pay the mortgage on their Newport Beach, Calif. home.

In cross-examination of Held, Lee established that no official audit of C.M. Meiers has been made, and defense attorneys have argued that audits of C.M. Meiers accounts were conducted by various carriers that showed the carriers owed the firm money.

The issue of the firm’s trust and accounting have been oft repeated topics during the bankruptcy and restraining order hearings, but attorneys on both sides have so far seemed to favor even more the topic of whose clients are whose, returning to the topic time and again.

Throughout the hearing attorneys for the plaintiffs have argued that C.M. Meiers clients cannot be pilfered by the Rothmans or Affinity because they have a prior relationship with those clients and the attorneys believe those clients were taken using information that was sold at auction to Liberty.

And attorneys for the defendants have argued those clients are fair game if their contact information was not obtained through records and information that was sold during the auction, but through public knowledge.

Testifying for C.M. Meiers was Charlene Hill, listed as a former vice president of the firm, who was hired by Affinity in February.

Hill, who was at C.M. Meiers from 2003 until she was terminated by the trustee following the bankruptcy, was cross-examined by Torrell who accused her of taking C.M. Meiers information with her to Affinity.

She denied taking any electronic or hard copy files or information from C.M. Meiers, including emails.

Torrell also grilled Hill about how she got clients to move with her to Affinity, to which Hill responded that she sent out a tombstone letter via email informing former clients she was with a new firm.

Asked how she got their email addresses, she replied she recalled them or searched for them on company websites.

Hill acknowledged her main source of customers was through C.M. Meiers, as well as cold calling. Hill testified that at C.M. Meiers she dealt with primarily three business managers who generated most of her business. One of the managers came over to Affinity with her and the other two stayed, she said.

Hill, who specializes in high net worth, entertainment and business management clients, testified she had a $3.2 million book of business as of the end of 2011.

Challenging the notion that Hill could remember the emails and names of so many of her clients, Torrell asked Hill to recall one of the emails, which she did. He asked her the name of another client, then asked her to recall the email. Again she recalled the email.

When asked by Lee why the other two business managers didn’t leave with her Hill testified that they were told of the troubles being experienced by C.M. Meiers and they were advised to leave the firm altogether.

In fact, Lee said, the letter sent out by Liberty to C.M. Meiers has been hurting her efforts to generate business at Liberty.

“Because of this Liberty letter it’s been difficult for us to get appointments,” she said.

See previously related stories:

C.M. Meiers Brokerage in Southern California on Trustee’s Auction Block

Out-of-Trust C.M. Meiers Brokerage in California Fetches $1.375 Million at Auction

C.M. Meiers Legal Battle Continues With New Allegations

Topics California Carriers Agencies