Sunday, July 16, 2006

The Sad Case of John Gellene or What It Feels Like to Get Hit By Lightning

One of the interesting features of this year’s State Bar of Texas Bankruptcy Section Meeting was a lunch time presentation by Milton C. Regan, Jr., author of Eat What You Kill: The Fall of a Wall Street Lawyer (The University of Michigan Press 2006). This is the story of John Gellene, the only attorney ever to go to jail for submitting an incomplete Rule 2014 disclosure. Although the book is a bit of a difficult read (you can read more about that in my review on, it is an interesting case study in the dangers of cutting corners. (The book does a really good job of documenting the pressure to cut corners, so I won’t discuss that in any detail here).

A Lawyer Walks Into A Minefield

For those who don’t remember the story from the newspaper, here is what happened. Milbank, Tweed was hired to represent Bucyrus –Erie Corporation in its bankruptcy proceeding. The bankruptcy was very contentious because the largest unsecured creditor, Jackson National Life, had accused the company’s investment banker, Goldman Sachs, with manipulating the company’s financial affairs to their own benefit. Things got worse when a Goldman Sachs partner, Mikael Salovaara, started his own firm, South Street Fund, and that firm made a deal with Bucyrus-Erie which put them ahead of all the other creditors. In order to avoid limits on debt which the company could incur, South Street engineered a sale-leaseback of the company’s principal assets. The sale-leaseback left South Street in control of the company’s principal assets and subjected the company to outrageous payments.

All this happened before bankruptcy lawyer John Gellene entered the picture. However, it created an adversarial situation between the company and the different factions. The debtor’s attorney would be caught in the middle of this conflict and would have to navigate it in order to successfully reorganize the company. One example of these pressures was Jackson National Life’s demand that every major creditor but itself should have its debt written off or subordinated.

Connections vs. Conflicts

John Gellene began representing Bucyrus-Erie a year before its bankruptcy at a time when his law firm was not representing either Salovaara or South Street. However, before the case was filed, Milbank, Tweed began representing South Street in another bankruptcy and also represented Salovaara in a dispute with his partner. Both of these were “connections” with creditors. However, Gellene failed to disclose these relationships in either of two affidavits filed with the court.

Disclosing these “connections” should have been a no-brainer. However, there were probably a lot of reasons why he could rationalize not doing it (as brought out in his subsequent criminal trial). First, Salovaara was not a creditor himself. He was just a partner of a creditor. Therefore, his representation should not be disclosed. Second, Milbank, Tweed represented South Street as a small player in a completely unrelated matter. This was not a conflict.

If this was Gellene’s thought process, he made the mistake of focusing on the purpose of the Rule 2014 disclosure rather than its language. Rule 2014 requires disclosure of “connections” with the debtor, creditors, attorneys and accountants for the debtor and creditors and employees of the U.S. Trustee. This is a requirement honored more in the breach. The requirement to disclose connections could be taken to absurd levels. For example, in a case with IRS debt, the attorneys should disclose the “connection” that they pay taxes to the IRS. In a case with credit card debt, the attorneys should disclose which attorneys hold credit cards issued by creditors in the case. However, the connections in this case were a bit more obvious. They involved major players who were at odds with Jackson National Life, the company’s main antagonist. However, if Gellene focused on conflicts, then there was an argument that they did not have to be disclosed.

Gellene may have also reasoned that disclosing the connection to South Street and Salovaara would merely provide leverage to Jackson National Life. If the case was to be concluded successfully, it would need to be confirmed quickly. Having a lengthy delay over employment of counsel would endanger the case’s prospects. If that were Gellene’s thinking, he made the mistake of (to use Joe Martinec’s phrase) pledging his loyalty to the deal rather than any other obligation.

It is also possible that Gellene made a quick cost-benefit analysis. In the recent Leslie Fay case, Weil Gotshal had made a very big failure to disclose. They were allowed to continue to represent the debtor and had to forfeit a “mere” $1 million out of their fees. They certainly did not go to jail. If Gellene had weighed the likely consequence of being caught against the possibility of being disqualified on the front end, he likely would have chosen to take the risk.

It is also possible that the failure to disclose was inadvertent. Gellene began working on the Bucyrus-Erie case in February 1993. However, the case was not filed until February 2004. The representations of Salovaara and South Street did not come up until December 2003. Therefore, it is possible that disclosures were drafted before the connection arose and were never updated during the hustle and bustle to prepare the case for filing.

From Triumph to Tragedy

Gellene successfully guided Bucyrus-Erie through its reorganization and his firm was paid nearly $2 million in fees for doing so. Unfortunately, his successful plan put the company’s old adversary, Jackson National Life, in control of the company. Years later, Jackson found out about the failure to disclose and sued Milbank, Tweed to return its fees and for malpractice. This proved to be very costly for Milbank, Tweed but it was worse for John Gellene. The publicity spawned by the fee litigation prompted the U.S. Attorney to file criminal charges against Gellene. A deal to plead to a misdemeanor fell through and the case went to trial. The prosecution sought to portray the failure to disclose as black and white, the while the defense attempted to put the statement in context. The jury sided with the U.S. Attorney and Gellene was convicted and sentenced to 15 months in prison. Gellene went from being a highly respected bankruptcy attorney to a convicted felon in a relatively short period of time.

Why John Gellene?

So, what happened? In some respects, Gellene was the victim of extremely bad luck. The Asst. U.S. Trustee in the case had previously been the U.S. Attorney (not an Asst. U.S. Attorney, but the U.S. Attorney). Therefore, he was more likely to look at the case from a criminal viewpoint than with bankruptcy eyes. He was also likely to have the informal clout needed to get a criminal referral taken seriously. Additionally, the Bucyrus-Erie case was filed in Wisconsin rather than New York or Delaware. Here, a big firm came swooping into Wisconsin, took a respected company into bankruptcy and walked away with nearly $2 million in fees. There had to be a little bit of jealousy of and distrust toward the outsiders. (Let’s face it, no one likes it when big firms poach all the good cases). Finally, Gellene’s own work product was part of his undoing. The confirmed plan left Jackson National Life in control of the company and allowed it to prosecute claims on behalf of the estate. Jackson National Life was still plenty upset toward Goldman, Sachs, Salovaara, South Street and Milbank, Tweed. Being left in a position to investigate the claims while having control of the company’s attorney-client privilege, made it likely that they would discover the non-disclosure and would be unhappy. This case proves that just because lightning may only strike one in a million times, doesn’t mean that it won’t hurt the person who gets hit.

Lessons to Be Learned

The lessons to be learned may be fairly simple. As Jay Westbrook is quoted as saying in the book, “Disclosure should be like voting in Chicago—early and often. Disclose, disclose, disclose. It’s hard to get in trouble when you follow that rule.” Eat What You Kill, p. 228. Attorneys rarely have to make statements under penalty of perjury. Since Rule 2014 is one of the few cases, it should be treated seriously. However, there is a significant temptation not to. The Rule 2104 disclosure is filed toward the beginning of the case. As a result, there is a temptation to get it on file quickly and to copy the disclosure from the previous case with a few modifications. This would be a mistake. As I have read 2014 again recently, I was surprised to learn not only that it required disclosure of connections rather than conflicts, but that it required disclosure of connections to other attorneys and accountants in the case. Sometimes it is easy to get so familiar with something that you respect for it. That would be a mistake.

Another lesson would be that it is better to tattle on yourself than to get caught. John Gellene could have submitted an amended disclosure at any point during the case, but did not. Even if he had brought it up at the hearing on his own fees, he probably would have received little more than a slap on the wrist. Instead, the issue didn’t come up until Jackson National Life brought it up and by that time, they were plenty mad so that the time for a slap on the wrist was gone.

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