Latham Defends Steward Bankruptcy Effort Despite TRACO Concerns

Latham & Watkins LLP said the Justice Department’s bankruptcy watchdog has “no valid basis” to oppose its retention in Steward Health Care System LLC’s bankruptcy.

The firm’s filing comes after the US Trustee challenged the bankrupt hospital system’s request to bring Latham on as co-counsel to Weil Gotshal & Manges LLP in the Chapter 11 case.

“L&W is not challenging the adequacy of its proposed co-counsel’s representation of the Debtors but challenging the U.S. Trustee’s contention that L&W’s retention is unnecessary and unduly burdensome,” the firm said in a response filed Monday in the US Bankruptcy Court for the Southern District of Texas.

In a separate filing, one of the Latham attorneys who would represent Steward, Ray C. Schrock, disclosed that he and his colleague Candace M. Arthur can’t work with Steward on matters related to TRACO International Group, an insurer and non-bankrupt affiliate, because TRACO has refused to grant a requested waiver.

The two attorneys recently joined Latham from Weil, which has been the private health network’s lead bankruptcy counsel since last spring. Steward’s retention application described them as “essential” for its Chapter 11 bankruptcy.

Schrock and Arthur were previously part of the Weil team that advised Steward and its subsidiaries, including Tailored Risk Assurance Company and TRACO, on the Chapter 11 cases. As of August 2024, the insurer is no longer a client of Weil and has retained Steptoe LLP as counsel.

TRACO filed a complaint last year in bankruptcy court against Steward for allegedly withholding payments, including insurance premiums of $3.5 million per month.

“It apparently does not wish for Ms. Arthur and myself to represent the Debtors in matters against TRACO,” Schrock wrote in the supplemental declaration.

Despite TRACO’s refusal to grant the waiver, he said, he doesn’t believe the retention of Latham represents “any interest adverse” to Steward’s estate or precludes the firm from being a disinterested party.

Schrock said Weil would handle those matters. As a precaution, Latham established an “internal ethical wall” to prevent attorneys and staff who previously worked on TRACO-related matters while at Weil, including Arthur and himself, from accessing TRACO-related files or participating in any matters specific to the insurer.

The US Trustee opposed Latham’s retention last month, saying Steward “cannot afford the fees of another large multinational law firm,” as Weil has already billed nearly $70 million in legal fees.

Latham argued that the US Trustee overlooked that Schrock and Arthur logged 2,000 hours of Weil’s legal services during the bankruptcy, saying their continued involvement would benefit the company.

The case is Steward Health Care System LLC, Bankr. S.D. Tex., No. 24-90213, response to objection 2/3/25.