Chief U.S. District Judge David Ezra yesterday tossed out the controversial plea agreement between federal prosecutors and former Hawai'i labor leader Anthony Rutledge Sr., saying it was only the second time in 18 years as a judge that he even considered making such a ruling.

Ezra said he could not "countenance" a section of the plea bargain that would have allowed Rutledge and his son, Aaron, who is also charged in the case, to return to jobs at Unity House Inc., a nonprofit labor benefits organization previously headed by Tony Rutledge.

After Ezra's ruling, the Rutledges withdrew guilty pleas entered in August to reduced charges in the case. The defendants declined comment after the hearing and their lawyers said they did not know if the case would now go to trial or if they would try to negotiate another agreement with prosecutors.

"We're disappointed," said William McCorriston, attorney for Tony Rutledge. "We're going to think about what's next. It may involve going to trial."

Edmund Power, lead prosecutor in the case, declined comment on Ezra's decision or what the government may do next.

A federal grand jury returned a 13-count fraud and conspiracy indictment against the Rutledges in December. Tony Rutledge faced a maximum punishment of 93 years in prison, but under the plea deal he admitted guilt to a single charge of filing a false income tax return and was to have served a five-year term of probation. Aaron Rutledge was facing up to 53 years in prison but agreed to plead guilty to a misdemeanor charge of witness intimidation during the course of an IRS criminal investigation. He was to serve a one-year term of probation.

Ezra said he was limited in what he could say about his reasons for rejecting the plea deal, but did say he could not approve the return of the Rutledges to Unity House after they pleaded guilty to financial crimes.

"This court cannot countenance a defendant pleading guilty to these crimes and then stepping back to a fiduciary responsibility with an organization like Unity House," Ezra said.

The federal government seized control of Unity House after the December grand jury indictment. A court-appointed receiver now running Unity House ousted the Rutledges from executive positions they held there and also removed the board of directors at the nonprofit.

The December indictment alleged that the Rutledges used Unity House's assets for their own benefit and otherwise mismanaged the organization's financial portfolio of some $30 million.

The plea agreement would have allowed Tony Rutledge to return to a consulting job at Unity House after he completed serving his probation. Aaron Rutledge would have been allowed to return to a Unity House consulting job immediately. The plea deal also called for the return of the former Unity House board of directors and would have permitted the board to approve payment of more than $1 million in Rutledge legal bills.

Brook Hart, an attorney representing the private company now running Unity House for the government, filed a motion last week protesting terms of the plea agreement, saying that prosecutors should have consulted with his client before entering into the plea bargain with the Rutledges.

Attorneys for Local Five of the Hotel Employees and Restaurant Employees union also protested the plea agreement in a "victim's impact statement" filed in the case. Unity House assets are managed for the benefit of members of Local Five and other Hawai'i unions. Some two dozen Local Five members attended yesterday's hearing.

McCorriston said in the hearing that Local Five had no legal standing in the case and Ezra said he did not consider the "victim's impact statement" in making his ruling on the plea agreement.

Edward "Ted" Groves, a former U.S. Justice Department attorney who obtained the December grand jury indictment of the Rutledges but moved to private practice this year, called the plea deal a "travesty of justice" in August.

Groves declined comment yesterday on Ezra's ruling.

When the plea deal was first presented to the judge, Ezra said he had "grave and serious reservations" about it and required the prosecutors to file paperwork justifying the agreement.

Those papers were filed under seal because prosecutors said making them public would unfairly expose the government's legal strategies if the case had to go to trial and might also cause "embarrassment" to witnesses in the case.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.