PG&E Bankruptcy Judge Weighs Potential Conflict of Interest of Fire Survivors' Lawyer

Firefighters work in the Coffee Park neighborhood of Santa Rosa, decimated by the Tubbs Fire in 2017. (Sheraz Sadiq/KQED)

Under scrutiny over a potential conflict of interest, a lawyer representing thousands of fire survivors sought to defend himself during a PG&E bankruptcy hearing Tuesday.

The debate centered on whether – and how – Texas-based attorney Mikal Watts should have told his clients when he learned that one of his own credit lines, via a broker, had been funded by Wall Street firms whose interests are at odds with those of fire survivors.

William Abrams, whose family home was destroyed in the 2017 Tubbs Fire, said Watts' potential conflict may have adversely influenced the multi-billion-dollar settlement between PG&E and fire victims, which Watts helped negotiate along with other attorneys.

Abrams called on U.S. Judge Dennis Montali, who is overseeing PG&E's bankruptcy case, to extend the deadline for an ongoing high-stakes vote by 70,000 fire survivors on that deal. Two-thirds of those who vote on the deal must approve it for PG&E's plan to exit bankruptcy to move forward.

The deadline for fire survivors to vote is Friday, even as key terms of the deal – such as the timing and final value of the compensation – are still being negotiated with PG&E.

“It’s troubling. It should be troubling to everyone in this case,” Abrams told Judge Montali, who is now tasked with deciding whether to require additional disclosures to Watts' 16,000 fire survivor clients, or all victims, given the attorney's key role in negotiating the deal.

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In response, Watts laid out the extent of his disclosures of his potential conflict of interest so far, which include a slide presentation on the financing arrangement at town halls with clients on December 8. After KQED first reported the conflict in late April, Watts brought it up at a virtual town hall meeting. Last week, he shared a written disclosure with clients.

Abrams and his allies said Watts should have provided written disclosure when he learned of the potential conflict of interest, and gotten written consent from clients. An ethics expert commissioned by Watts said in a court filing that Watts did not need to disclose the arrangement at all.

Watts downplayed the role in the PG&E case of the two Wall Street firms, Centerbridge Partners and Apollo Global Management, who helped fund his line of credit.

"The truth of the matter is they were bit players in the negotiations. All that happened was one person from Centerbridge and one person from Apollo introduced me to the principals," Watts told Judge Montali.

Centerbridge Partners is part of a group of PG&E shareholders whose plan is set to be adopted. The utility is racing to confirm its plan by June 30 in order to qualify for a state wildfire insurance fund. Centerbridge has owned as much as 1.6% of PG&E shares. Recent financial filings show Apollo Global Management holds more than half a billion dollars in PG&E debt.

Both Centerbridge and Apollo have also scooped up insurance claims against PG&E and are expected to reap a significant financial windfall once the utility emerges from bankruptcy. PG&E has agreed to pay claims holders $11 billion in cash upon leaving Chapter 11. On paper, PG&E’s settlement with fire victims is worth $13.5 billion, with the utility paying half in cash and half in PG&E stock, an arrangement that some fire survivors find unsatisfactory.

Still, Watts said the vast majority of his clients have voted to support the deal. With Watts emerging as one of its biggest boosters, Abrams and another attorney questioned whether the terms of Watts' financing include incentives to ensure the deal gets the required two-thirds approval.

Fire attorney Jerry Singleton, who spoke in support of Watts during Tuesday's hearing, tried to assure Montali that the terms prove Watts did nothing wrong.

“I think it’s clear there is no conflict there,” said Singleton. “We’re not talking about a loan that influenced the litigation in any way. We’re talking about a fixed bank loan that’s typical. Most large law firms have a line of credit.”

Montali responded by returning to the question of disclosure.

"But the question is, does Mr. Watts put himself in a position where he at least needs to tell his clients that there is this relationship?" Montali asked. "Who is his adversary?"

“It really depends on what the terms of the loan are,” Singleton responded. “That’s what determines whether there is a conflict. There is a fixed rate.”

Critics say the interest rate and other conditions on the 4-year loan ought to be disclosed.

"We've never seen [the terms]," attorney Steven Kane told Montali on Tuesday.

In an interview with KQED on Monday, Watts said he was not at liberty to reveal the interest rate on the loan.

“I would love to tell you what it is. But my counter-parties will not allow me to say it because I believe it to be more favorable than what they're willing to offer on the open market,” Watts said.

“So I have to honor my contractual agreement of confidentiality, although I would love to scream from the mountaintops what the interest rate is.”

Kane also surprised some parties to the case by noting that Watts – who is not licensed to practice law in California – never petitioned to participate in this case. Watts filed a request for that permission Tuesday afternoon.