A judge has rejected a request for a preliminary injunction in the case of a bankrupt Southern California insurance agency following a long, accusation-fueled legal battle between the former and current owners of the firm.
United States Bankruptcy Court Judge Maureen Tighe on Wednesday denied the request for a preliminary injunction against the older owners of Woodland Hills, Calif.-based C.M. Meiers, a 76-year-old agency believed by its buyers and a bankruptcy trustee to be out-of-trust by up to $1 million.
Woodland Hills-based Liberty Insurance Brokers Inc. outbid two others to acquire C.M. Meiers for $1.75 million in February, and they say they soon discovered afterward that former father and son owners Eric and Herb Rothman and an in law relation Jason Adleman had taken company information and clientele with them to fledgling agency Adleman’s Affinity Global Insurance.
Tighe handed down her decision nearly a month after the close of several days of what at some stages turned into caustic testimony over whether the old owners had absconded with clients, and information that was to have been sold during the auction in February.
“This motion for preliminary injunction raises the difficult intersection of a sale of a bankruptcy estate’s interest in all assets, tangible and intangible, and the rights of former officers of the debtor corporation to continue pursuing their trade after their employment with the debtor ceases,” Tighe wrote. “Here, Liberty Company Insurance Brokers, Inc. purchased the ongoing business of the debtor on an ‘as is, where is’ basis, only to discover that some of the accounts it thought it had purchased were leaving to join the departed principals of the debtor at a new brokerage business.”
She continued: “While legitimate concerns have been raised, the evidence does not warrant a preliminary injunction against those former officers and their new employer.”
It’s not immediately cleared whether the matter will be pursued further, and a countersuit was filed last week, assuring the battle between the new and old owners of C.M. Meiers will wage on.
Liberty attorney Gary Torrell, with Valensi Rose PLC in Los Angeles, declined to comment via email. He referred questions to his co-council Tom Ledbetter, with Ruben & Sjolander in Los Angeles.
“As a general policy, our firm and our client do not comment on pending litigation,” Ledbetter wrote in a reply to an email seeking comment for this article.
Liberty executives also were not available for comment, and bankruptcy trustee Bradley D. Sharp did not return a call or email seeking comment.
Adelman’s attorney, Sonia Lee, with Rains Feldman LLP in Beverly Hills, said the judge’s decision was in line with arguments she made from the start of the hearings.
“I think she did absolutely did slap them down,” Lee said referring to the plaintiff’s request for a preliminary injunction. “Not only did she find there was no misappropriation, but that there was nothing to misappropriate. That’s been our position all along.”
She added, “We’ve never taken any information, we’ve never used any information, and everyone has the right to solicit clients.”
The attorney for the Rothmans, Marcy Railsback, with Bovino & Associates in Aspen, Colo., said Tighe’s decision was definitive proof her clients were in the clear.
“There was no misappropriation of trade secrets,” she said. “They’ve never unfairly solicited anybody, they didn’t even solicit anybody.”
According to Robert Rasmussen, a dean and professor of law and political science at USC Gould School of Law, Tighe’s decision is in keeping with a “fine line” that’s often drawn following a bankruptcy sale.
“The challenge here is that there is a very fine line,” he said, noting that the “fine line” in question is drawn “between what you can’t do, solicit the old clients, and what you can do, just tell them where you are and let them find you.”
And that’s where the plaintiff’s case may have fallen apart. After days of testimony from several witnesses – an IT person testifying about missing emails and information, testimony about broker of records being changed, allegations that a life insurance policy was inappropriately switched – in the end the burden of proof of proof that fell on the plaintiffs to show the Rothmans or Adelman actually took information may have been too great, Rasmussen said.
“The plaintiff didn’t offer any evidence that the Rothmans actually went out and actually solicited the customers of the old insurance companies,” he said.
Gary Nye, an attorney with Roxborough, Pomerance, Nye and Adreani in Woodland Hills, is familiar with such cases, and he often represents insurance agencies in protecting their trade secrets.
“It becomes very difficult to protect, particularly in the insurance context,” he said.
In the insurance business customers are often farmed through personal relationships, and the only definitive confidential information remaining often is renewal dates, premiums, amounts of coverage and carriers, he said, adding that there was no evidence that the Rothmans or Adelman used any of that information to solicit new business.
“The judge focused on the incontrovertible evidence: customers will stay with producers,” he said.
In the future those purchasing agencies may want to take a closer look at producer agreements before agreeing to make a buy, Nye said.
“I think what it will cause people to do is look a lot closer at the agreements to make certain they have a clear understanding with producers that they wills stay with the business,” he said.
Several producers left C.M. Meiers while it was struggling financially, and then going through the bankruptcy process. While a few went to Affinity, many went to other Southern California agencies.
While the judge found no evidence information was taken, she did however seemingly indicate she at times had some reservations about the credibility of the defendants testimony.
She referred to testimony on May 8 where Eric Rothman did not return Microsoft Outlook files located on his personal computer at C.M. Meiers. When asked what he did with that information Eric Rothman testified that he deleted it.
“Plaintiff did not present any evidence contradicting Eric’s testimony about deleting the Outlook files upon his termination,” Tighe wrote. “Eric’s testimony, however, was not persuasive in all respects as it is a rare professional who would purposefully delete a contact list that may also contain many personal contacts. The Court finds only that the Outlook files were not used to solicit clients.”
Tighe has during the hearings said through a court clerk that she would not be commenting on the case. A call placed requesting comment from Tighe on Thursday was not immediately returned.
Tighe also seemed a times in her opinion to question the credibility of Eric Rothman’s testimony in refuting testimony from Russell Hugenberger Jr., a former head of C.M. Meiers’ IT department. Hugenberger testified that Eric Rothman had asked him to recode roughly 1,000 of the agency’s house accounts into Herb Rothman’s name and recode roughly 900 accounts of former C.M. Meiers producer Cathy Kerhulas into house accounts.
The coding, which is used to determine whether a producer is entitled to commissions, was a “housekeeping matter,” Eric Rothman testified. He also noted that the accounts had never left C.M. Meiers.
“Eric was adamant, while testifying, that re-coding did not establish or change ownership,” Tighe wrote. “Eric was credible in his testimony, but was evasive when addressing whether coding established or somehow helped determine ownership. Although Eric was vague about the effect re-coding had on ownership, no evidence was presented showing that Debtor lost ownership of these accounts or customers in late 2011 or early 2012. Although certain customers left post-sale, no evidence was presented showing that the re-coding had anything to do with the change in brokers.”
Addressing more testimony from Hugenberger regarding missing emails from Herb Rothman’s computer in his sent files from Aug. 29, 2011 through Dec. 29, 2011, Tighe wrote:
“The deletion of this huge swath of emails all at once was not adequately explained, but the sent folder was shown to still be available and none of that information was presented to the Court. There was no evidence illustrating that these deleted Outlook files indicate anything in particular.”
Another matter was the transfer of an $80,000 life insurance policy that C.M. Meiers held under Herb Rothman’s name on the day of the bankruptcy filing. Herb Rothman testified it had not been cashed in, and Eric Rothman testified was the Rothman Revocable Trust, not C.M. Meiers. The life insurance policy had a total gross accumulation value of $78,540.61.
“This issue may indicate a plan to salvage assets of CMM for personal gain, but the nature of the transfer and the value to CMM was not clear enough from the evidence to draw any firm conclusions at this time,” Tighe wrote. “This evidence, combined with the re-coding of accounts, deletion of emails and Outlook Files copied could indicate planning for an eventual transfer of CMM assets to the Defendants personally. Had there actually been evidence of improper transfers post-petition or post-sale, the probative value of these actions would be greater; without such evidence, the Court cannot, at this point, determine what these actions show.”
Railsback believes the judge was merely being fair in her opinion, and she was not questioning the credibility of her clients.
“Judge Tighe is very fair,” Railsback said. “She had days of testimony and a mountain of evidence and the burden was on Liberty.”
Instead what Tighe was writing was to note that Liberty was merely speculating about her clients’ intentions, but that they couldn’t prove anything.
“I think she was essentially saying there’s no ‘there’ there,” she said. “They did not do it. They did not do anything wrong.”
The Rothmans issued a joint statement following the judge’s decision:
“This is a major victory. We can now continue our careers in the insurance business without the blemish on our reputations that Liberty sought to depict. Neither we nor Affinity are in a position to benefit from improperly disclosed trade secrets because we never had any. The judge’s ruling indicates that she understands that.”
In fact the credibility of the Rothmans and Adelman seemed to be a constant target of examination and cross examination by attorneys for the plaintiffs and the trustee.
Adelman’s credibility came under attack when attorneys issued a subpoena on the Custodian of Records for California State University Northridge seeking his admission records and proof of commencement.
It had been stated on Adelman’s company website under his bio that he had earned two bachelor’s degrees from the university.
That attack ended with Adelman’s attorneys stipulating that he attended the university, but did not graduate or receive a degree from the institution in exchange for the subpoena being withdrawn.
The bottom line on Tighe’s decision was that the plaintiff’s failed to meet the requirements to obtain a preliminary injunction – that it’s likely to succeed, they are likely to suffer irreparable harm without the relief, the balance of equities tips in its favor, that an injunction is in the public interest.
Aside from not meeting those standards, the plaintiffs failed to prove the customer lists they believe left was not information that could have been pulled together from public sources, such as the internet, from a wedding list, as Eric Rothman testified, or from Herb Rothman’s fraternity list as he testified.
“There was credible testimony and evidence showing that Defendants compiled a new customer list from sources not attributed to ‘expended time or efforts’ on the part of CMM,” Tighe wrote.
In fact, not only did the judge rule there was no evidence the Rothmans had not stolen trade secrets from C.M. Meiers, but she stated it wasn’t clear they were trade secrets in the first place.
“Even assuming the information utilized by Defendants to pursue their future venture constituted a trade secret, there still would need to be misappropriation of this information,” she wrote. “The evidence failed to demonstrate that Defendants misappropriated trade secrets.”
Liberty President Tom Leach may have set the stage for the Rothmans’ defense and ultimately Tighe’s decision.
“Leach testified at the outset of the hearing that the norm in the insurance industry is for the clients to follow the producer,” she wrote. “He appears to have fully realized the risk Liberty took when it bid on CMM’s assets, especially with the little due diligence it conducted. Liberty does not appear to have anticipated the amount of business that would follow former CMM producers as has actually left. Leach seems to have captured Plaintiff’s buyer’s remorse when he insisted on cross-examination that the Rothmans simply should not be speaking to any CMM clients, because Plaintiff ‘purchased those clients.'”
As for whether the plaintiffs will pursue the matter further and try to uncover more evidence of wrong doing it’s not immediately clear.
Lee said she wasn’t sure whether the plaintiffs would pursue the matter further.
“I have no idea what they expect to do, but I certainly think they have taken their best shot and the court has found their best shot was woefully short,” she said.
However, this matter may be far from over. Tighe’s decision comes a week after defendants in the case filed countersuits against Liberty claiming libel, slander and unfair competition, among other things.
That suit seeks damages, though neither an attorney for the Rothmans nor Adelman detailed a monetary amount. However, both stated they expect it to be well over $1 million.
Lee believes the judge’s decision will lend credence to their countersuit.
“I would certainly say so, yes,” she said when asked if Tighe’s decision will help her client’s countersuit. “I would say all the allegations they have made without any basis … every defamatory statement they have made are equally egregious and equally damaging.”
The suit names a letter Liberty executives sent to clients and carriers following the bankruptcy that calls attention to the agency being out-of-trust by an estimated $1 million, and states that an investigation by the California Department of Insurance has been launched into the matter.
CDI does not comment on investigations and there has so far been no evidence presented of an investigation taking place.
Railsback in the countersuit referred to Liberty’s letter, and what she says are evience of emails, as a “scorched earth” attack.
Tighe’s decision she said, “goes to the false accusations and the unsupported accusations they’ve been making without any evidence of the misappropriation. They’ve been on a campaign.”
Rasmussen said that Liberty will now have to prove those allegations.
“I think we all agree they were out of trust,” he said. “But the letter also said they are currently under investigation. And the Judge said she found no proof of that. I think it is problematic.”
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