In Hurricane Katrina litigation, Dickie Scruggs at times has seemed like a legal superman, able to bring lawsuits left and right, achieve big settlements and manipulate public opinion and the media at will. Well, U.S. District Court Judge William Acker just may have dropped a 20-pound bar of Kryptonite down Superman’s red shorts.
Two days after Alice Martin, U.S. Attorney for the Northern District of Alabama, declined to prosecute Scruggs, Judge Acker appointed two Birmingham attorneys as special prosecutors to pursue a charge of criminal contempt. Here is a copy of Acker’s special prosecutor order. If you don’t remember what this is all about, here is a post I wrote that tells all. If you don’t have much time, here’s an AP story on developments.
If you do have much time, read on.
Kerri and Cori Rigsby, two sisters who worked for E.A. Renfroe, a business that assists State Farm in claims handling and adjustment, copied confidential State Farm claims documents and gave them to Scruggs. They claimed the documents showed State Farm was engaging in bad faith claims handling. They fed the docs to Scruggs over several months in 2006, and when they sensed Renfroe was on to them and they were about to be sacked, they copied one last big "data dump" before they could be fired. They then went to work for Scruggs with $150,000 consulting contracts and turned over this final set of documents shortly afterward. Scruggs says $150,000 is the amount each of the sisters earned from Renfroe the prior year (this is plausible because with the massive Katrina claims workload, some people undoubtedly worked very hard and did very well for themselves).
The sisters had confidentiality agreements with Renfroe, as would anyone who reviews private insurance information of numerous policyholders. So Renfroe sued for breach of those agreements in federal court in Alabama, and during the litigation, Judge Acker issued an injunction requiring Scruggs to give the documents back to Renfroe. Instead, after the injunction was issued, Scruggs that night called Mississippi Attorney General Jim Hood, who was suing and criminally investigating State Farm and other insurers. The result of their conversation was a plan where Scruggs would send the documents to Hood, according to Acker’s June order finding Scruggs in contempt, so he wouldn’t have to return them to Renfroe. Scruggs also later requested that Hood make copies of the documents and send them back to Scruggs.
To Acker, this looked like willful disobedience of the injunction. Why would Scruggs do it? Keep in mind that Acker had also issued a protective order keeping the returned documents from State Farm and Renfroe itself, so as not to interfere with Hood’s criminal investigation — only Renfroe’s counsel would have the returned documents, and they could not further disclose them without the court’s review and express permission. Acker had these thoughts about that issue in his June order:
[E]ven if the court had not issued a protective order with the preliminary injunction, and even if Renfroe’s counsel had promptly disclosed the documents to State Farm, the court does not understand how this would have jeopardized a criminal investigation of State Farm. Unless, as Renfroe has hinted at, Scruggs and Hood had teamed up to bully State Farm into civil and criminal settlements by telling State Farm that they had 15,000 inculpatory documents but not allowing State Farm to see them, the court does not see why it was worth it to Scruggs to risk contempt. (Emphasis added).
The reason why Scruggs did what he did is somewhat perplexing. Because a protective order was in place, neither State Farm nor Renfroe would know exactly what was in the documents, except what Scruggs had already disclosed. It is inconceivable that a lawyer as smart as Scruggs would be unaware that a protective order was part of the injunction. Although Scruggs was not representing the Rigsby sisters in the Renfroe litigation as attorney of record, he did have an attorney-client relationship with them about these documents dating back to when they were employed by Renfroe. So let’s test the possible motive Judge Acker listed above.
Scruggs’ actions would make the most sense if he did not know there was a protective order in place, but that possibility must be disregarded for two reasons: first, because Scruggs received a copy of the injunction the day it was entered and is charged with constructive knowledge of its contents, and second, because Scruggs received an e-mailed letter confirming his talk with Hood from one of Hood’s assistant AG’s, and the letter stated that Hood’s office was "not comfortable that the protective measures put in place by the Court will be effective in keeping these documents out of the grasp of State Farm." This would appear to mean they feared either that Renfroe’s counsel would violate the protective order and give the copies to State Farm and Renfroe, or that Renfroe’s attorneys would convince Judge Acker to review the documents and then release them. Scruggs then Fed Ex’d the documents to Hood later that day. Remember that Hood already had a copy of the documents, because Scruggs had advised the Rigsbies to give copies of the documents to both Hood and the FBI months earlier.
Cori Rigsby called Scruggs to get the documents, so she could comply with the injunction and give the documents to Renfroe’s counsel. Scruggs said he didn’t have them, because he had given them to Hood. Renfroe sought an order forcing Scruggs and the Rigsbies to give up the documents, and the court issued an order requiring them to show cause why they should not be held in contempt for failing to abide by the injunction. On February 1, Hood sent the documents directly to Renfroe’s counsel.
Now, relevant to our inquiry might be this question: what if anything happened in the meantime, between when Judge Acker’s injunction was entered in December 2006 and when Jim Hood sent the documents to Renfroe’s counsel in February 2007? Remember that we are testing Judge Acker’s "bullying" theory. One big thing happened, and that was that on January 23, State Farm and the Scruggs Katrina Group announced a massive settlement of 639 policyholder lawsuits that had been filed by Scruggs. This deal was worth $80 million, and the Scruggs Katrina Group reportedly took most or all of its cases on a 40 percent contingency. Also on January 23, State Farm and Hood announced that State Farm also agreed to pay at least $50 million — but possibly hundreds of millions more — to thousands of Mississippi policyholders whose claims were denied but didn’t sue the company. In return for that , Hood agreed to drop his civil lawsuit and criminal investigation. The second part of the deal involved a certification and immediate settlement of a class action, and federal Judge L.T. Senter Jr. rejected it as procedurally unfair and not in compliance with federal class action requirements. The settlements of the individual lawsuits worth $80 million, however, were not subject to a judge’s review under the federal rules and were valid.
Settlements of that size take a long time to negotiate. How long? This story quotes Hood as follows:
“It’s been like a death roll with an alligator for the last two months in these negotiations,” Hood said.
Hmmmmm. Two months? Isn’t that about the time frame between when Acker ordered the documents returned (and Scruggs instead sent them to Hood), and Hood’s return of the documents to the Renfroe lawyers? It may be significant that Hood gave them to the lawyers about a week after the settlements were announced.
Could there be something to Acker’s theory? Could be, although one would think State Farm had some idea of what the documents said, especially since Scruggs had previously used some of them as exhibits in the complaint in the McIntosh v. State Farm lawsuit. One would expect he would have already come out with the best stuff he had. Also, let us suppose that State Farm has been truthful when it says that it believes its claims practices have by and large been done honestly and in good faith. It is difficult to blackmail someone who does not believe they have done anything wrong. On the other hand, keeping the documents in some kind of suspended animation might be a useful strategy to increase the perception in the public of State Farm’s wrongdoing, and therefore threaten State Farm with damage to its brand name. As the public, from all evidence available to me, has an understanding of Katrina legal issues that ranges from fuzzy to completely wrong, adding some mystery to the document issue might be just the thing to make them seem nefarious. This possible answer also seems somewhat unsatisfactory, because it depends on the public being aware that the documents exist. For example, one could just as easily make up some story about 15,000 documents that contain incriminating evidence of bad faith, and numerous people would believe it despite the lack of any evidence. One could also make the same charge without mentioning documents at all, and numerous people would believe it.
However, throughout the Katrina litigation, Scruggs has had a pattern of pointing to specific documents as evidence of State Farm’s bad faith. He has acknowledged the Katrina cases were only part legal, but also involved public relations and political pressure. Even though a story about the contents of the 15,000 documents would be lost on the vast majority of the public, many of whom would believe any bad story about an insurance company, politicians and the media pay closer attention and would not be fooled by a story that was totally invented. Therefore, some plausible elements of the story would have to exist to make them believe in it. If Judge Acker was correct in his theory, could this be the reason — that Scruggs wanted to play keep-away with the documents to keep anyone from seeing there was nothing harmful in them while he negotiated the settlements? Perhaps. But let’s also remember that in mid-January, another set of lawyers won a $2.5 million bad faith verdict — later reduced to $1 million — against State Farm in the Broussard case, which likely contributed to State Farm’s willingness to settle. Still, clearly the negotiations had been going on for some time before the Broussard verdict.
Another possibility that must be considered is that Scruggs was right, and the documents do contain damaging information. If so, it would seem the smartest strategy to make sure State Farm got the documents so it could see just how incriminating they were, making it clear State Farm must settle. Looking at all these possibilities, I admit Scruggs’ actions don’t make complete sense to me, and I remain open to interpretations and theories.
UPDATE: I’ve also cross-posted on this issue at Point of Law.