Dispute arises over attorney conflict in PG&E case

SAN FRANCISCO -- An attorney not admitted to practice in California and representing more than a fifth of all wildfire victims might have had a conflict of interest when he helped negotiate a $13.5 billion settlement with the Pacific Gas & Electric Co., threatening to derail the utility's plan to emerge from bankruptcy.

As fire victims continue to cast their votes until the end of this week on whether to approve the settlement, a dispute over Texas-based attorney Mikal Watts' connection with two major investors in PG&E that are also backing a hefty loan to his firm has split lawyers.

One group is questioning whether Watts acted in the best interest of claimants. The group asked U.S. Bankruptcy Judge Dennis Montali on Tuesday to require Watts to confirm that his clients knew about the financial ties and possibly invalidate their votes.

The other, which wants to keep the settlement in place, has maintained there was no conflict of interest. The accusations are part of an effort to "prevent the plan from being confirmed," Watts said in an interview.

Montali took the matter under submission.

The allegations concern a $100 million loan from Missouri-based investment bank Stifel Financial Corp. to Watts Guerra LLP. Apollo Global Management Inc. and Centerbridge Partner LP, private equity firms holding PG&E equity and debt, bought portions of that loan.

Objectors are arguing Watts might be compromised because he and his financial backers stand to benefit from approving PG&E's settlement with wildfire victims and plan to emerge from bankruptcy. Meanwhile, some attorneys and victims have moved to renegotiate the $13.5 billion settlement because PG&E would pay half of it in equity.

During the Tuesday telephonic hearing, Watts said the loan was to fund all of his firm's litigation. He said he was careful not to negotiate with Apollo and Centerbridge once he learned of there participation in the proceedings. He instead chose to deal with key investors they introduced him to, which then foisted him to become among the leaders in crafting the settlement.

While the terms of the loan cannot be revealed, according to Watts, he continued they did not influence his settlement discussions with PG&E.

San Diego-based attorney Steven Kane, representing roughly 350 wildfire victims, said Watts played a major role in negotiations without making the appropriate disclosures and being appointed by the court. He continued the financial ties clearly affected him because he chose not to deal with Apollo and Centerbridge, which could have actually harmed his clients' interests.

"Is it just coincidence that Apollo acquired Watts' litigation financing?" he quipped.

Further doubt was cast on Watts when it was revealed he is not licensed to practice in California and neglected to obtain temporary standing to do so, which he said was a mix-up by his paralegal.

Kane urged Montali to require Watts to obtain waivers from all his clients that he appropriately disclosed his possible conflict of interest. He raised the possibility of invalidating votes from those who do not respond.

Montali was skeptical the proposal would remedy the situation. He cited time constraints because of the June 30 deadline for PG&E to emerge from bankruptcy. In re: PG&E Corp. bankruptcy, 19-30088.

A six week period ends this Friday for roughly 70,000 wildfire victims to vote on whether to approve PG&E's reorganization plan. Two-thirds of creditors must accept it for it to pass.

Watts said 98% of his clients have voted in favor of PG&E's plan.

In interviews after the hearing, each side accused the other of playing dirty.

Watts said objectors are trying to disenfranchise his clients' votes because they do not want the settlement to be approved.

"The motion is strategic rather than legal," he said. "They know it's succeeding at the ballot box."

Responding to calls for him to disclose the terms of his loan, Watts replied that it's confidential.

Kane claimed Watts is a "master of diversion" and simply "doesn't like to follow the rules."

"To say I can't disclose, it leave an implication that there's some problems here," he said.

An Apollo spokesperson stated "We have no ability to influence what Watts decides is best for his clients and no incentive to produce a result that is less than full payment" in an e-mailed statement. It noted that the firm owns less than $20 million in loans to Watts Guerra.

San Diego-based attorney Gerald Singleton, representing roughly 7,000 claimants, agreed with Watts that some lawyers are employing underhanded tactics to impede the vote. "To hear them piously talk about their concern about process when they want to prevent the people who deserve to have their voices heard from having their voices be heard, it's hard to stomach," he said.