Petters and Hecker cases: Who will pay their lawyers?

With two separate ongoing divorce proceedings, a $767 million bankruptcy case, a mushrooming criminal case and a tragicomic inability to stay out of judicial crosshairs, you'd think onetime auto mogul Denny Hecker would constitute a one-man stimulus plan for Twin Cities lawyers.

But last week both of the attorneys working on Hecker's month-old criminal case asked U.S. District Court Magistrate Judge Susan Nelson to allow them to withdraw from his case. The attorney handling Hecker's civil cases has asked to be excused from one of the family court matters and says he doesn't know whether he will continue to represent Hecker in the other two cases.

The popular perception of a complex white-collar criminal case is of a bottomless font of billable hours for the attorneys involved. But the reality is often far different: The massive swindles and Ponzi schemes that have dominated local and national headlines for the last year have revealed just how hard it can be for the lawyers handling them to get paid.

This time last year, the highly regarded attorneys defending Tom Petters asked to withdraw from that case, complaining that prosecutors were objecting to payment of their fees. U.S. District Court Judge Richard Kyle denied their request, noting that the law gave him the power to order them to stay on the case for free if he deemed it prudent. Ultimately Petters' lawyers were paid by a corporate insurance policy.

And paid handsomely: With Petters' sentencing a month away, to date their fees have added up to more than $3 million.

At the national level, last fall after the U.S. Securities and Exchange Commission froze the assets of R. Allen Stanford, accused of masterminding a $7 billion Ponzi scheme, a frustrated federal judge in Texas threw up his hands and appointed a public defender, making his defense the taxpayers' liability.

Now Hecker, who is accused of defrauding lenders out of millions of dollars, wants a federal judge to appoint a public defender to represent him. Hecker pleaded not guilty Feb. 11 to fraud, conspiracy and money laundering charges. Nelson is scheduled to preside over a hearing on the matters Monday.

Right to effective counsel
So when can a lawyer withdraw from a case? "The main issue is whether it prejudices the defendant," said Richard W. Painter, who teaches ethics at the University of Minnesota Law School. "You have the right to effective counsel. If you don't have effective counsel, any conviction is going to be thrown out. And that's the judge's job — to ensure effective representation."

In some circumstances a lawyer is required to withdraw when representation would force the attorney to violate rules of professional conduct; when he or she is too ill to do the job; or when the defendant fires them. 

Generally speaking, an attorney may ask to withdraw if the lawyer believes their client is using their services improperly, insists upon an imprudent strategy or can't fulfill their obligations to the attorney, including payment for services rendered.

It's this last point that becomes particularly sticky in cases involving financial fraud. Ordinarily attorneys simply ask for a sizable retainer up front, but things get more complicated when the defendant is both claiming bankruptcy and charged with stealing large sums of money.

Earlier this week, several counts of bankruptcy fraud were added to the list of charges Hecker faces. In June, Hecker filed for bankruptcy, seeking to rid himself of $767 million in debt. Since then, he has repeatedly been called to court to explain how he has continued to spend lavishly on travel, country club memberships and gifts. The trustee in that case has accused Hecker of hiding assets and the judge has refused to allow him to discharge $83 million he owes Chrysler Financial.

In his motion to withdraw, one of Hecker's two defense attorneys, Bill Mauzy, said the terms imposed by the bankruptcy court have made it impossible for him to get paid. "Defendant has had several months to secure payment as required under the fee agreements, but has been unable to due in large part to the unexpected, and indeed cataclysmic, impact of an $83 million non-discharageable judgment against him in bankruptcy court," Mauzy argued.

Hecker's other criminal attorney, Marsh Halberg, told the judge he had yet to file a formal notice of appearance, the court document in which an attorney commits to representing a defendant. In a letter delivered to Nelson last week, Halberg said Hecker's case had "not yet reached a critical stage, as charges have just been filed."

Last week, the Hennepin County District Court judge presiding over Hecker's divorce from his fourth wife, Tamitha Hecker, refused to allow Hecker to tap a retirement account for $100,000 to use as a retainer for the attorneys in his criminal case. Hecker had argued that he had no other assets to use to finance his defense.

In his order denying Hecker's request, Jay Quam noted that he had "heard the same refrain several times before," only to learn that Hecker continued to spend large sums of money on posh vacations and other luxuries "that would be out of the question if his claim of poverty were true."

'Indigent as a matter of law'
Jon May is chair of the white collar crimes section of the National Association of Criminal Defense Lawyers. He's not familiar with either of the Minnesota cases, but said that any number of circumstances can leave an affluent defendant "indigent as a matter of law." When someone is a party to both criminal and bankruptcy cases, as many alleged fraudsters are, the bankruptcy court may have issued injunctions to keep them from spending money that could be used to pay creditors. The government may be seeking to forfeit a defendant's assets as ill-gotten gains.

There are occasions where a federal district court can compel a bankruptcy court to free up funds for lawyers in other proceedings, May said. "Certainly the bankruptcy court has the discretion to make money available to [criminal] lawyers," he explained. "They regularly make money available to lawyers to litigate bankruptcies. If they didn't, that would cause bankruptcy proceedings to grind to a halt."

When faced with a lawyer's request to withdraw, judges in criminal cases also try to balance the reason for the request with the need to keep cases moving, said the U of M's Painter. "A judge is going to want to hear reasons why the lawyer wants to get out if the defendant doesn't want a substitution of counsel," he said.

In pleadings filed last year, Petters' lead attorney, Jon Hopeman, said he signed onto the case because he had assurances from prosecutors that they would not oppose payment of his fees. Several months into the case, however, the U.S. Attorney's Office began objecting, arguing that the legal fees would deplete assets that should be forfeited and used to compensate victims. Prosecutors also hinted they might seek to "claw back" any attorneys fees Hopeman and Petters' other attorneys could not prove Petters paid using money not obtained via a criminal enterprise.

Hopeman and his co-counsel, Paul Engh, argued that Petters' defense would require a year of hard work on their part, as well as paying a staff of lawyers and paralegals to comb through millions of pages of evidence in the case.

In his order rejecting Hopeman's argument, Judge Kyle concluded that the attorneys' withdrawal would both delay the case and require more of Petters' dwindling assets to be used to pay new lawyers to duplicate legal work already done.

"From the outset, defense counsel — experienced criminal attorneys — had to know that the prospect of forfeiture and claw back could rear its head," Kyle wrote. "Indeed, the potential for forfeiture exists in nearly all criminal cases involving financial frauds, where the taint of funds paid to an attorney cannot be fully known."

Kyle assured the attorneys he would sign off on "reasonable" fees — in this case topping $450 an hour — but pointed out that he had the authority to order the lawyers to continue pro bono if he thought is necessary.

"Part of being a lawyer is you are required sometimes to represent people for free," said Ted Sampsell-Jones, a professor at William Mitchell College of Law in St. Paul. "One of your ethical obligations is to accept a certain number of court-appointed cases."

Sampsell-Jones is curious to see how Nelson handles Hecker's request for a public defender. Last summer, the trustee in Hecker's bankruptcy case filed a complaint against his girlfriend, Christi Rowan, alleging she helped the former car dealer hide assets. Last week, Hecker told the Star Tribune that Rowan has a public defender.

The federal court docket does not list Rowan as a defendant in any pending criminal cases. If she were, and she was represented by a lawyer in federal defender Katherian Roe's office, Hecker's representation might eventually be assigned to one of the private attorneys who take cases that pose conflicts for the federal defender's office.

"You have a constitutional right to an attorney," said Sampsell-Jones. "Denny Hecker is not going to go unrepresented."

Beth Hawkins writes about education and other topics.