Judge Charges Justice Dept. Drove Firm to Bankruptcy

A federal bankruptcy judge, in an unusually harsh finding, ruled Monday that Justice Department officials “up to the highest levels” engaged in “outrageous and indefensible” conduct that allegedly drove a computer software firm into bankruptcy.

At the center of the case is a Justice Department official who once worked for the software firm, Inslaw Inc., but was fired from it in 1976. The official, C. Madison Brewer, grew so “consumed by hatred,” Judge George Bason Jr. said, that he sought in a variety of ways to sabotage Inslaw’s $10-million contract with the department and to ruin its business elsewhere.

And when Inslaw--backed by such notable figures as former Atty. Gen. Elliot L. Richardson--protested the treatment as an obvious conflict of interest, their complaints were viewed as attempting to bring “political pressure,” which Bason said in a sarcastic tone would be “of course unthinkable for the Department of Justice.”

When asked about the ruling, Brewer said in a telephone interview: “I have a somewhat different perspective. Inslaw has succeeded through a scheme of ad hominem attacks and slander to divert attention away from and prevent analysis of their performance and the costs related thereto. The ultimate losers are the taxpayers.”

William Hamilton, Inslaw’s president, said that Bason’s ruling will be of “tremendous help” to the firm, which he said plans to submit a financial reorganization plan to the court within 90 days.

Patrick S. Korten, the Justice Department’s deputy director of public affairs, said that the department will appeal Bason’s decision, adding: “We are satisfied the department’s conduct was lawful and proper.”

In finding that Brewer believed Hamilton had “wrongfully discharged” him from Inslaw, Bason said it was “impossible for the court to accept Brewer’s testimony that he didn’t know he had been fired and thought he quit voluntarily. It’s not the type of thing you make a mistake about,” the judge said.

Bason found testimony and actions by several department officials in the case “incredible,” “blase” and “biased.” The judge’s criticism extended to former Deputy Atty. Gen. D. Lowell Jensen, now a federal judge in San Francisco.

Bason said that Jensen appeared to recognize the principle that it is “a bad idea” to hire someone to supervise a contract with his former employer. “But he (Jensen) didn’t give any hint that he recognized the application of the principle to Brewer and Inslaw,” Bason said.

‘Trick, Fraud, Deceit’

The judge also ruled that the department--by “trick, fraud and deceit”--stole a computer software program Inslaw developed to manage caseloads in U.S. attorneys’ offices across the nation, as well as in state and local prosecutors’ offices.

While finding that the department was liable for damages suffered by Inslaw, he left to a future trial the amount and the question of whether punitive damages should be awarded. But he did order the department to pay Inslaw’s attorney fees and court costs, estimated at $500,000, and for all use of the software program from 1985, when Inslaw filed for bankruptcy, and for as long as federal prosecutors continue to use it.

Bason also disqualified Brewer and two other department officials from negotiating or making any decisions about the software program. He said that Brewer’s “lust for revenge” manifested itself in several ways while he was the department’s director of the office of management information systems and services. When Inslaw’s department contract was only a month old, Brewer sought to terminate it--an action that government witnesses testified would have been “ludicrous and absurd.”

Brewer then tried to learn how many other contracts Inslaw had at the department with the “obvious intent to try to scuttle as many as he could,” the judge said. By not authorizing prompt payments to Inslaw, he sought to “starve” the Washington-based company of “working capital it needed to survive.”

After Inslaw filed for bankruptcy under Chapter 11, a move that allowed it to reorganize, Bason said Brewer took steps to convert the bankruptcy into a much harsher Chapter 7, or liquidation.

The judge’s ruling criticized these other Justice Department officials in the case:

--Janis A. Sposato, general counsel of the management division, who showed “willful blindness to the obvious” by treating “so casually serious allegations of outrageous conduct by Mr. Brewer.” Sposato previously has drawn criticism for her handling of Atty. Gen. Edwin Meese III’s financial disclosure statement.

--William P. Tyson, former director of the executive office of U.S. attorneys, for describing Brewer’s attitude toward Inslaw as “positive and constructive in every way.” Bason said of Tyson, who is now chief administrative hearing office in the executive office for immigration review: “There’s no way I can believe anything the man has to say.”

--Laurence McWhorter, Brewer’s superior as deputy director for the executive office of U.S. attorneys, whose testimony the judge characterized as “totally unbelievable.” He said that McWhorter had testified 147 times that he could not remember details of how the contract was handled.

--Jack S. Rugh, Brewer’s assistant, who the judge said was trying to take over Inslaw’s program inside the department to “build his empire” and who suffered “collective amnesia” during the trial of Inslaw’s suit against the department.

Staff Writer David Lauter contributed to this story.