The scores of law firms that have worked for Pacific Gas & Electric Co. may find payments they’ve already received subject to clawbacks — and could be among the last creditors paid for what they’re still owed.
PG&E’s $30 billion in liabilities related to deadly California wildfires will soon prompt its second bankruptcy filing, the utility announced Jan. 14.
Law firms that represented PG&E could find payments they received 90 days prior to the bankruptcy filing deemed re-coupable as an avoidable payment. Such a “preference issue” is common in bankruptcies and can include creditor law firms, Leslie D. Corwin, Eisner APC managing partner in New York, told Bloomberg Law.
“And they will claw it back. I’ve seen it happen time and time again,” said Corwin.
The key issues are how the retention agreement was drafted, when the client became insolvent, and when payments were made, he said.
PG&E is a large consumer of legal services. According to a Bloomberg Law analysis, numerous major law firms have represented the San Francisco-based utility in recent years.
Firms that performed work for PG&E prior to any bankruptcy filing and are seeking to protect their billings need to look to terms of the agreement signed before Chapter 11, attorneys told Bloomberg Law.
“You do it with a retainer and making sure you get paid regularly. The bankruptcy law says if you’re getting paid in the ordinary course of business, you’re not going to get that clawed back,” said University of California Hastings School of Law Professor Jared Ellias.
If a client doesn’t make regular payments and pays the firm within 90 days before bankruptcy, that compensation is “highly likely to be re-coupable as an avoidable payment” the estate instead could’ve used to pay someone else, Ellias said.
Lawyers expect firms to seek to do business with PG&E in bankruptcy because those agreements are court-supervised and they will get paid. “It’s the ones that represented the company before bankruptcy that may not get paid,” Jessica Gabel Cino, Georgia State University law professor, told Bloomberg Law.
“Those that agree to help the bankrupt company do get paid —so long as the court approves the fees. So that’s the incentive the bankruptcy system creates: Help the company that has already filed and you go to the front of the pay line,” she said.
How do law firms protect themselves? “You can’t really,” Cino said. “I suppose a firm could take a pre-bankruptcy interest in some collateral of the debtor so the debt is secure but some courts frown on that. Really, they are an unsecured creditor—just a few steps above shareholders.”
Deep Legal Bench
This is the second trip to the bankruptcy court for PG&E, which filed for Chapter 11 in 2001 amid the California energy crisis. It didn’t have problem finding counsel then, and paid its pre-petition debts with interest.
PG&E tapped Weil Gotshal & Manges for the Chapter 11, the company announced Jan. 14. Cravath Swaine & Moore will advise the utility, particularly in corporate matters and over debtor in possession, or DIP, financing the company will require to continue operating while in bankruptcy.
PG&E expects to have $5.5 billion in committed DIP financing at the time it files for Chapter 11 on or about Jan. 29, the utility said in a Jan. 14 statement.
California’s largest investor-owned utility has called on a large stable of outside attorneys in the past to help with matters from environment to land use to intellectual property and labor.
According to an analysis from Bloomberg Law, the firms that have represented PG&E in litigation in federal courts over the last 15 years include Sidley Austin, Sedgwick, Paul Hastings, Littler Mendelson, Lafayette & Kumagai, Covington & Burling, Latham & Watkins, Schiff Hardin, Jones Day, Orrick Herrington & Sutcliffe, and Bruner Law Firm.
Other firms that have stepped in for the utility on the federal level, the analysis showed, include Akin Gump Strauss Hauer & Feld and Farella Braun & Martell, which represented the firm in the appellate courts during its first trip in bankruptcy.
Numerous firms outside the scope of Bloomberg Law’s analysis have also represented PG&E in state courts and in transactional work outside of the court system.
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