BEHIND THE NEWS: $18M nightmare continues for law firm on east side

When a Marion County jury two years ago issued an $18 million malpractice judgment against an east-side Indianapolis law firm, the figure was almost too large to believe. Surely this was the kind of zany jury verdict that an appeals court would swiftly overturn.

No such luck. The Indiana Court of Appeals last month upheld the verdict against Fillenwarth Dennerline Groth & Towe. And now attorneys for the plaintiff, the Indiana Department of Insurance, are tightening the screws. They’re asking the appeals court to require Fillenwarth Dennerline and its insurer to pay up or post a $20.5 million appeal bond.

The circumstances could hardly be more bleak for Fillenwarth Dennerline, a 45-year-old firm specializing in labor law. And here’s the most excruciating part: Three years ago, the insurance department was willing to settle for $1 million-the maximum amount of the firm’s insurance coverage-but the insurer wouldn’t bite.

The lawsuit stems from the 2002 collapse of the Indiana Construction Industry Trust, which provided health coverage to non-union construction workers. The jury found that Fillenwarth Dennerline partner Frederick Dennerline III, who served as outside counsel for the trust, failed to notify trustees of its growing financial problems. The verdict equaled the amount of unpaid claims due more than 8,000 Hoosiers after the trust went bust.

No one is blaming Dennerline or his law firm for the illegal shenanigans that helped bring down the trust. Two executives of the plan ended up in prison for using plan assets for personal expenses as well as concealing shortfalls by listing a bogus asset of $2.9 million in “precious stones” on its balance sheet.

Still, the case doesn’t cast Dennerline, who has been practicing law since 1974, in a flattering light. The appeals court ruling notes that even though Dennerline lacked experience with health insurance trusts, he did not consult anyone or research applicable laws when he began representing the insurance plan in the late 1990s.

The ruling also says that Dennerline knew by March 2002 that the stones were leased, not owned, and thus not a legitimate asset. That meant that the trust was in the hole by more than $2.7 million. Yet he did not tell trustees or notify them that trust rules required shutting down the plan if it was insolvent. After that date, more than $12 million in unpaid claims piled up.

Neither Dennerline nor his attorneys returned calls to IBJ. Attorneys for the firm’s insurer, Alabama-based ProNational Insurance Co., also did not return calls. But court records make clear that Frederick Dennerline and his law firm are beside themselves that the insurer allowed the case to come to this. All the other defendants in the insurance department’s lawsuit reached settlements, agreeing to ante up a total of more than $7 million.

While others were settling, “ProNational did not authorize any offer of settlement … nor … give any reason for this course of action,” Fillenwarth Dennerline partner Fred Towe said in a court affidavit.

By 2005-a year before the $18 million jury verdict-Fillenwarth Dennerline attorneys had become so alarmed at their potential exposure that they sued ProNational, alleging it was acting in bad faith.

In court papers filed that year, Frederick Dennerline called the case a “sword of Damocles” for him, his partners, their law firm and their families. In a letter to ProNational, an attorney for the firm wrote, “My clients cannot bear the risk of a $10,000,000 judgment. It would end the firm, result in individual bankruptcy and adversely affect these lawyers and their families in the future.”

The issues raised in the lawsuit against ProNational have not been decided. A federal judge dismissed the case in early 2006, ruling it was premature to bring it before the jury issued its verdict. Because Fillenwarth Dennerline has the right to refile and press its claims, the possibility remains that the insurer will end up on the hook for far more than the $1 million policy limit.

That may explain why ProNational stepped up to provide the $3 million appeal bond that the Indiana Court of Appeals required in late 2006 when it stayed the jury verdict. But if attorneys for the insurance department succeed in getting a much higher appeal bond now, it’s unclear whether ProNational would put itself further on the line.

Then there’s the question of whether asking the Indiana Supreme Court to review the decision would be likely to yield a different outcome. If not, continuing to challenge the verdict could just rub salt on the wound, since interest costs continue to mount. The size of the judgment is growing by about $4,000 a day, said Irwin Levin, an attorney with Cohen & Malad representing the insurance department.