Opinion ID: 1238266
Heading Depth: 1
Heading Rank: 3

Heading: $3½ Million Down the Drain

Text: The waste of $3½ million of West Virginia taxpayers money is a sorry saga that ought to be examined closely. These fee arrangements (if one can be so charitable as to call them that) initially entered into by the previous administration [3] are shocking to the conscience. But the current administration, [4] which now uses the contract for these absurd and excessive legal fees and expenses and the $3½ million of state funds already spent thereunder as one of the primary bases for seeking the dismissal of the lawsuits, fails to point out that these contracts are cancellable by the State upon thirty days notice. Why didn't the Commissioner cancel the contracts and pursue these lawsuits either through the Attorney General's Office, through in-house counsel, or through contingency contracts with private lawyers, any of which would have cost the state only reasonable expenses unless there was recovery? Only when recovery was had would the contingency fees be taken from the sums recovered. In fact, it seems that the outcome for the State is rather like that of Alice's situation in Wonderland-less or nothing. Take some more tea,' the March Hare said to Alice, very earnestly. `I've had nothing yet,' Alice replied in an offended tone, `so I can't take more.' `You mean you can't take less, ` said the Hatter: `it's very easy to take more than nothing.' Here, the State got less or nothing while the lawyers got more. The old proverb that a lawyer's opinion is worth nothing unless paid for has been extended to the maximum of absurdity in this case. The State has paid legal fees of $1,891,500 [5] to the firms of Fredeking & Fredeking and Galloway & Associates for litigation recommendations. A brief recitation of how the State came to pay nearly $2 million for the thoughts of Fredeking and Galloway is instructive. The process of providing full employment status for several lawyers appears to have been initiated by a solicitation letter from R.R. Fredeking, II, to John H. Kozak, Director of Legal Services Division, Bureau of Employment Programs. Mr. Fredeking, in a letter dated April 7, 1995, announced that he would like to meet with Mr. Kozak and then Commissioner Richardson to discuss a plan to collect delinquent premiums owed the Fund by the coal industry. Mr. Fredeking pitched his access to a comprehensive coal ownership and control database available to identify links to entitles who may be legally responsible for payment in addition to a nominal employer. It appears that shortly thereafter, Mr. Fredeking and Mr. Kozak met and discussed contracts. On May 12, 1995, Mr. Fredeking submitted a proposed agreement to Commissioner Richardson for the collection of delinquent worker's compensation accounts due from the coal industry. By June of 1995, Commissioner Richardson must have contacted Attorney General Darrell V. McGraw, Jr., regarding the matter. In a letter dated June 8, 1995, to Commissioner Richardson, Managing Deputy Attorney General Deborah L. McHenry indicated that a meeting was scheduled regarding the collection of unpaid worker's compensation premiums. Ms. McHenry noted that the Attorney General requested written documentation outlining the extent of the problem with respect to unpaid premiums including the special legal theories involved and a proposal as to the functional structure, goals and objectives regarding collections work. Finally, Ms. McHenry requested that the Attorney General be advised as to who had been involved in the development of the Bureau proposal. On June 12, 1995, Commissioner Richardson wrote to Attorney General McGraw stating that he had concluded that there is a reasonable probability that several of the larger employers in the mineral extracting industry have engaged in a pattern and practice of behavior to circumvent the payment of justly due premium taxes to the Fund. In particular, we have reason to believe that these employers operated mines and other facilities through captive companies and through vastly under capitalized companies knowing such companies could not operate under the laws of this State, including the requirements to pay premium taxes due to Worker's Compensation Fund and remain viable entities. Other schemes also appear to have been used. Commissioner Richardson indicated that as part of his fiduciary capacity on behalf of the Fund, he wanted to pursue actions against these larger employers. Commissioner Richardson indicated that he had discussed litigation with Mr. L. Thomas Galloway, Esquire, of the law firm of Galloway & Associates of Washington, D.C. It was stated that Mr. Galloway had compiled an extensive proprietary database of information on the inner workings of the coal industry and that the database was not available anywhere else in the country. Commissioner Richardson sought the consideration and approval of the appointment of Mr. Galloway and other attorneys as special assistant attorney generals to work on these litigation matters by use of a contingency fee mechanism. On July 7, 1995, Mr. Fredeking forwarded a contingent fee proposal of Mr. Fredeking and Mr. Galloway to collect the Worker's Compensation Fund debt. On July 31, 1995, the Attorney General appointed several attorneys including Mr. Galloway as special assistant attorneys general to the litigation team for the prosecution of causes of action to recover unpaid worker's compensation premiums. Interestingly, the appointment letter provided that: it is contemplated that you will advance all expenses necessary to commence and maintain these actions. Your fee shall be subject to the approval of the court and shall not exceed the proper reasonable and customary fee rate which is equal to one-third (33-1/3%) of recovery for those cases which are filed in any circuit court and the fee not to exceed 20% of any premiums which are recovered due to any administrative action which is undertaken. Apparently, this appointment letter was not satisfactory. The documentation, as well as public newspaper accounts at the time, indicate a disagreement between the Attorney General and Commissioner Richardson regarding the lawyers to be appointed as well as the terms of appointment. Mr. Galloway declined appointment under the fee terms outlined by the Attorney General. During the month of August 1995, the Attorney General requested information so that the project of attempting to recover the delinquencies could proceed. On August 21, 1995, the Attorney General's Office informed Commissioner Richardson that none of the attorney's fees to be paid are to paid from the monies received for the Fund, or from any other State fund. Rather, said fees will be separately awarded by the Court against the delinquent employers to be paid from the delinquent employers' own fund, not from their delinquent premiums. All fees are required to be approved by the Court as customary, reasonable and proper. It appears that no agreement was reached between Attorney General McGraw and Commissioner Richardson. On December 29, 1995, the Attorney General's Office informed Mr. Kozak of the impropriety of the Bureau approving any contract for legal services on the basis that the Bureau had no authority to enter into a contract for legal services. Apparently, the administration promptly went to the legislature seeking statutory authority for bypassing the Attorney General and for hiring outside counsel on this matter. Pursuant to the enrolled committee substitute for House Bill 4862, effective March 7, 1996, W.Va.Code§ 21A-2-6 (17), was amended to authorize the Commissioner of the Bureau of Employment Programs, with the approval of the Compensation Programs Performance Council, to retain counsel outside the Attorney General's Office. The Compensation Programs Performance Council immediately published an attorney solicitation and on June 21, 1996, approved the hiring of attorneys (including Mr. Galloway and Mr. Fredeking) to represent the Bureau in the collections litigation. The representation agreement provided that the law firms of Fredeking & Fredeking and Galloway & Associates would receive a flat fee of $5,200 for computer use and attorney related work for each recommendation made, as to each employer, regarding whether administrative and/or judicial action should be taken against one or more entities. An addendum to the agreement provided for a reduced legal fee of $2,340 for each recommendation made in 1998. To date, the Fredeking and Galloway firms have been paid $1,891,500 for their recommendations. Attorney's fees of this sort represent an absolutely outrageous boondoggle. [6] Moreover, the agreement provided for a contingent fee to be approved by a court or an administrative law judge in an amount no less than 20% of the recovery. This was in addition to the $5200 for every litigation memorandum! Further, and unbelievably, the Bureau agreed to pay the cost for consultation for screening, coding, storage and retrieval of documents and transcripts; microfilm readers; reproduction costs; mailing costs; telephone costs; paralegals based outside West Virginia; consulting experts; Lexis and Westlaw Research; and, ownership and control tracking and other computer related expenses not to exceed $5,000 per month. Interestingly, it appears that the contract had a one-year term and has been annually renewed by virtue of a change order approved through the State of West Virginia Purchasing Division. It appears that by virtue of purchase order no. BEP979 the representation agreement was extended for an additional year beginning July 1, 1999, and ending June 30, 2000. The Bureau Division Head, Ed Burdette, and Commissioner Vieweg signed the justification for the continuation of the coal litigation project on April 27, 1999. Now, four years after inception, some $3.4 million lighter and less than two months after renewing the representation agreement, Commissioner Vieweg, in his capacity as the fiduciary of the Fund, abandons this project with respect to the major big coal companies. We are left to wonder what the State has achieved. The record does not reflect whether the payment of over $1.8 million for recommendations resulted in the collection, through an administrative process or otherwise, of one penny of worker's compensation premiums.