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Once disinterested forever disinterested.

Once again Vinson & Elkins’ application to be employed as Enviva’s debtors’ counsel was denied. Although V&E offered a number of solutions to render the firm “disinterested,” Judge Brian Kenney of the US Bankruptcy Court for the Eastern District of Virginia found that the standard for amending judgment has not been met, and more importantly, even with the additional safeguards, V&E is not disinterested.

Under Bankruptcy Rule 9023, courts in the fourth circuit recognize three possible grounds to merit an amendment in judgment as discussed below.

(1) an intervening change in controlling law. No one argued this was present in Enviva and the judge agreed there is no change in Section 327(a) the law on disinterestedness.

(2) to account for new evidence not available at trial. V&E claimed the new ethical wall, decision to abstain from profits generated from Riverstone and the new plan evaluation committee are new evidence which merit reconsideration. In response to this argument, Judge Kenney wrote “These are not, however, newly discovered facts. They are newly created[.]” Citing precedent Judge Kenney explained that the evidence must have already existed at the time of the trial and now simply created in response to an adverse decision, as was the case here. At the outset of the opinion, he reveals his frustration that the ethical wall was not put in place before the first hearing on the matter, writing, “[a]pparently unwilling to take the hint, V&E did not address the issue of an ethical wall in its [original] Reply Memorandum.”

(3) to correct a clear error of law or prevent manifest injustice. V&E argues the same three new facts render the firm disinterested and therefore to deny its application would cause manifest injustice due to the hardship imposed on the debtors. The court addressed each factor. Regarding the ethical wall, Judge Kenney found that even with a proper ethical wall, V&E would still not be disinterested because Riverstone is a huge client for V&E and is still a 43% shareholder in Enviva. Additionally, the judge believes that the ethical wall uses an arbitrary number to decide who is walled off and is therefore only a “partial ethical wall.”

With respect to V&E’s offer to exclude partners working on Enviva from sharing in Riverstone profits, Judge Kenney still does not find V&E disinterested. He explains that these partners have already shared in profits from the last year and first half of this year, and even if not, it does not change the optics of the situation and “[t]he perception of fairness is important here.”

Finally, on the plan evaluation committee, Judge Kenney does not believe this committee solves the disinterested problem because (1) the committee can be revoked by the board which has Riverstone members on it, (2) the committee would not have its own financial advisor and therefore depend on the board’s financial advisor and (3) V&E would still hold the primary responsibility of negotiating the plan, and V&E is not disinterested. Therefore, denying the motion for reconsideration would not prevent manifest injustice.

The debtors alternatively sought relief under Rule 9024, which requests relief from final judgment which Judge Kenney explains is only granted in extraordinary cases, not just in response to a request for the court “to change its mind.” V&E argued that the judgment here is no longer equitable given the new facts in place and there is a provision under this rule that allows the court to apply “any other reason that justifies relief.” Given that the judge believes V&E to still be disinterested, he did not find the judgment inequitable and denied the motion on these grounds.

Even after denying the motion, the judge suggested that under section 327(e) of the bankruptcy code, V&E may still have an important role to play. 327(e) provides that “(e)The trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.” Judge Kenney believes under this section, even though V&E cannot remain debtors counsel and advice on the bankruptcy strategy, the firm can still provide services to Enviva related to tax matters or securities law compliance as well as other matters he did not specify.

Although Judge Kenney’s reasoning for denouncing V&E as “not disinterested” here may not seem patently unreasonable, it is unclear from this decision what fact or what change of circumstances and at what phase could have changed the outcome and left V&E disinterested.

If V&E had introduced the ethical walls before the first hearing, would that have changed this outcome? If V&E had made the ethical wall apply to any attorney who billed any hours to Riverstone matters, would that have changed the outcome? If V&E in previous years generated $9m in profits from Riverstone as it is on track to do this year according to Judge Kenney, would that have changed the outcome — the answer is no, as Judge Kenney characterizes $9m as similarly “not de minimis.”

Seemingly no new fact and or change in circumstances would have changed the outcome. The facts that Judge Kenney described in his first order and repeated in this decision that “(a) V&E represented the Debtors’ Officers and Directors in shareholder and derivative litigation; and (b) V&E also represented the Riverstone entities, which owned 43% of the Debtors’ common stock,” could not be undone. Perhaps that is enough to render debtors’ counsel permanently not disinterested.

If so, it is unclear why this is the first case where this was pointed out, given this is not an untypical arrangement. Perhaps there were simply too many factors here that were not resolved before the first hearing on the matter and that was the deadline. Still, the precedent set here seems murky.

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