If Riverstone paid K&E $14m a year, like they do V&E, that would be 0.2% of K&E’s revenue. Would that be allowed or would that also be too much of a conflict as to constitute the firm not disinterested?

We probably won’t find out; the chances of any of these big-law firms who have potential conflicts with creditors (spoiler alert: it’s all of them) filing in the EDVA ever again are slim to none. Therefore, let it be heard here first: Rosencrantz and Guildenstern (read: EDVA’s days of mega-cases) are dead.

A little history lesson for those who may not remember: EDVA’s exciting days of mega-cases started with Gymboree Corporation and Toys “R” Us in 2017, and lasted until 2021, when in an appeal related to third-party releases in Ascena Retail Group, a US district judge in dicta questioned whether fees should be billed at the national or local rate, and went as far as to remand the issue back to the bankruptcy court to review and recommend whether the fees in the bankruptcy were reasonable. Although the bankruptcy judge recommended the fees be approved, and this recommendation was adopted by the district court, the ordeal was enough to make the EDVA persona non grata among restructuring counsel until V&E decided to give it another shot with Enviva.

What’s going on here

To be clear, the issue here is not that a law firm’s retention application was denied, and it’s not even that this particular law firm’s application was denied in this situation, as there were some valid concerns cited by the US Trustee. What causes concern here is the reasoning Judge Kenney focused on in his denial of the application.

Let’s walk through the main reasons the court found V&E to be “not disinterested:”

1. Riverstone owns 43% of the common equity of Enviva
2. V&E does not have and cannot have ethical walls erected because certain attorneys represent both companies
3. Riverstone represented 1.4% of V&E’s earnings in 2023, making them a $14m-per-year client

Now, lets walk through the law:

11 U.S.C. § 327(a) provides that the court may approve retention of professionals “that do not hold or represent an interest adverse to the estate, and that are disinterested persons.”

According to 11 U.S.C. § 101(14), the term “disinterested person” means a person that:

1. is not a creditor, an equity security holder, or an insider
2. is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor, and
3. does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason (emphasis added)

Although Judge Kenney acknowledged in his opinion that the bankruptcy code does not define “interest adverse to the estate”, he concludes that “V&E cannot be expected to negotiate a Plan that contravenes the interests of its $14 million dollar-a-year client.”

The decision then compares Enviva to Invitae and says:

“In Invitae, the proposed law firm (K&E) billed the adverse party and client (Deerfield) a total of $2.4 million from the inception of the relationship, and $1.8 million in 2023, representing 0.03% of the applicant’s revenue for that year. The court described this as “relatively de minimus” in the scheme of things. In this case, V&E’s revenue from Riverstone amounts to 1.4% of its annual revenue for 2023, or 46 times more than the percentage of annual revenue in Invitae. The Court does not view V&E’s revenues from Riverstone to be de minimus in any sense of the term.”

While it is certainly fair to say that $1.8m a year is a de minimus amount to K&E, it still seems extreme to say that 1.4% of a firm’s revenue is not de minimus “in any sense of the term.”

Also, even if we accept that $14m is not de minimus to V&E, does that really rise to the level that would render the firm‘s position “materially adverse to the estate?” And more so than any other firm who has appeared in the EDVA?

Show me the precedent

Again, it is not uncommon for big-law firms to represent equity holders of a company in unrelated matters before they work on a company’s bankruptcy.

A simple search through EDVA’s “mega-cases” precedent shows:

In Intelsat’s bankruptcy, debtors’ counsel Kirkland & Ellis filed a retention application which stated “Kirkland currently represents, or in the past has represented, Appaloosa LP, Canyon Capital Advisors LLC, Citadel LLC, Cyrus Capital Partners, L.P., Discovery Capital Management, LLC, Goldman Sachs, PointState Capital LP, Solus Alternative Asset Management LP, UBS Investment Bank, York Capital Management, and/or certain of their affiliates (collectively, the “Equity Holders”) on a variety of matters.”

Granted, K&E does not specify how much of their gross revenue any of these clients make up, but wouldn’t logic follow that since all of these clients are in the same group of equity holders, it would make sense to aggregate that number? If a judge did that, it is unlikely that number would be de minimus. Yet no one objected to K&E’s retention here because this setup is, in fact, standard.

In Guitar Center’s bankruptcy, debtors’ counsel Milbank filed a retention application, which stated that three of the clients listed on the firms’ disclosure schedule, Ares, Bank of America, and JPMorgan Chase, accounted for more than 1% of Milbank’s gross revenue in the last two year, and specified that JPMorgan, a lender/noteholder in the case accounted for “less than 5%.” Additionally, Milbank disclosed that it previously represented Ares — an equity holder and plan sponsor in the bankruptcy — in its acquisition of Guitar Center, and later represented them in an exchange offer related to the debtors’ then-outstanding notes.

According to the 2021 Am Law 100, when Milbank represented Guitar Center in 2020, the firm’s gross revenue was $1.2bn, which means BoFA and Ares generated somewhere around $12m, and JPMorgan paid the firm somewhere between $48-60m, which is certainly not de minimus. Also, Milbank’s representation of Ares was related to Guitar Center before Milbank became debtors’ counsel, yet there was no objection or issue.

In Alpha Natural Resources’s bankruptcy, debtors’ counsel Jones Day filed a retention application that included multiple pages outside of the schedules disclosing funds, banks, and other clients that were involved as creditors and “major equity holders” in the case. Looking at the “major equity holders” section of the schedule lists over 20 clients of Jones Day. 20 plus clients that include billion-dollar funds such as Anchorage Capital Group, Blackrock Fund Advisors, Contrarian Capital Management, among others. Even for a large firm like Jones Day, the amount in aggregate is unlikely to be de minimus, and yet, once again, no objection.

The takeaway

Two wrongs don’t make a right; just because judges have allowed this setup in the past does not mean they should continue to allow it if it’s wrong. But is it wrong?

Does having clients that are creditors and equity holders in unrelated matters really incentivize a material adverse interest to a debtors estate? Would a client who makes up roughly 1% of a firm’s revenue really cloud counsel’s judgment and fiduciary duty to advocate for another client? Wouldn’t the risk of reputational harm for not properly advocating for a restructuring client, which could result in not receiving more debtor work, be enough of a stick — especially considering the multimillion-dollar revenue typically associated with debtor work.

Importantly, what is the lesson here?

Had the judge’s decision focused on V&E’s conflict waiver with Riverstone, which according to the US Trustee prevents V&E from litigating or threatening litigation against Riverstone, that would have been valid and educational. Judge Kenney came close to making this point when he compared V&E’s position to Project Orange, where the judge expressed concern that the debtors could not litigate against their largest unsecured creditor.

However, instead of focusing on the conflict waiver, Judge Kenney wrote “the Court cannot see how V&E could possibly negotiate a plan adversely to Riverstone’s position.” Similarly, when Judge Kenney compared this case to Invitae, he could have focused on the difference in K&E’s conflicts waiver which specifically allows K&E to take “Allowed Adverse Representations” including litigation, but instead he focused on the difference in percentage of total revenue writing, “V&E cannot be expected to negotiate a Plan that contravenes the interests of its $14 million dollar-a-year client.”

If the judge centered his opinion on V&E’s conflict waiver, firms could in turn update their conflicts waivers to make sure the waivers truly allow full and rigorous representation without impediment, but Judge Kenney’s decision hinged on this 1.4% of total gross revenue number. In fairness, there surely is a number that would render a firm conflicted out. It is unclear what that number is, but 1.4% seems like too low of a threshold.

The only takeaway, then, seems to be: generate more revenue.

As previously reported on here, V&E filed a motion for reconsideration where the firm says it will implement an ethical wall and a modification to its profit sharing where certain partners will not share in the net profits generated from Riverstone.

A hearing will take place on 14 June, 2024 at 2pm ET.

Our customers receive this news ahead of the crowd. To learn more about news on the 9fin platform, request a free trial below.