An independent trustee must be appointed to oversee the bankruptcy of a Massachusetts pharmacy linked to a meningitis outbreak because of the firm's "gross mismanagement," among other reasons, a Justice Department official argued Tuesday.
U.S. Trustee William Harrington also argued in his motion that an accountant the New England Compounding Center hired to lead it through the Chapter 11 process had a hopeless conflict of interest because the NECC's board can fire him at any time.
Harrington accused the NECC of hiring Keith Lowey and appointing him to its board just before it filed for bankruptcy "in an apparent attempt to forestall the appointment of a trustee."
"Creditors and victims of the (NECC's) conduct should have an independent, conflict free party developing a reorganization or liquidation strategy," Harrington wrote in the motion filed in the U.S. Bankruptcy Court in Massachusetts.
Daniel Cohn, the NECC bankruptcy attorney, said the company would oppose the motion for appointment of a trustee because it would hinder progress toward the purpose of its bankruptcy filing, which the company has said was to set up a fund to fairly compensate victims.
"Our primary concern is that appointment of a trustee would be a setback to our efforts, working cooperatively with the claimants' lawyers, to establish a compensation fund for the claimants at the earliest possible date and with the least expense," he said. "Appointment of a trustee would result in significant delay and expense, with no offsetting benefit."
A tainted steroid made by the NECC has been linked to a fungal meningitis outbreak that has killed 40 and sickened more than 600 since this summer.
The Trustee Program is a part of the U.S. Justice Department that is responsible for overseeing bankruptcy cases and private trustees. The program has 21 regional offices, and Harrington is trustee for Region One.
The Framingham-based New England Compounding Center has been shut down since the outbreak was discovered in Tennessee in September. It said in its bankruptcy filing last month that it was facing at least 130 lawsuits by people claiming injury from the contaminated steroid.
On Tuesday, Harrington filed a motion for the appointment of an independent Chapter 11 trustee and an objection to the NECC's application to hire Lowey and his firm, Foxborough-based Verdolino & Lowey, P.C.
In the motion, Harrington noted that "gross mismanagement" by a debtor is among the factors that, if shown, require the court to appoint an independent trustee.
To show gross mismanagement, Harrington cited a Massachusetts state report that detailed results of an inspection conducted after the outbreak, which found a failure to meet cleanliness standards and said the company shipped out drugs before tests results confirmed they were sterile. He also cited the fatal outbreak.
"This gross mismanagement appears to have been long standing, culminating in the voluntary suspension of the Debtor's right to operate, the recall of all of its products and cessation of its operations," he wrote.
Harrington also argued it is wrong for Lowey, in his role as the NECC's "chief restructuring officer," to be expected to lead an investigation of members of the board that appointed him, and which still could fire him "with or without cause."
Besides Lowey, the five-member NECC board is made up of founders and brothers-in-law Greg Conigliaro and Barry Cadden, and two of their relatives.