Risk Update

Lawyer Disqualification — Firm DQ’d in Bankruptcy Matter Due to Shareholder Client Conflict + “Impossible” Ethical Walls Scenario

Posted Dan Bressler

“Wood-Pellet Maker’s Bankruptcy Lawyers Ousted Over Conflict of Interest” —

  • “Law firm Vinson & Elkins can’t represent Enviva because its largest shareholder is also a client, bankruptcy judge says”
  • “A bankruptcy judge rejected a law firm’s application to represent wood-pellet maker Enviva while it works for its largest shareholder Riverstone, saying the firm’s work for the private-equity backer amounts to a conflict of interest.”
  • “Vinson & Elkins can’t represent Enviva while negotiating against Riverstone, another client of the law firm that accounted for 1.4% of its revenue collections in the last fiscal year, said Judge Brian Kenney of the U.S. Bankruptcy Court in Alexandria, Va. He said the law firm’s relationship with Riverstone violates the core principle of bankruptcy law that companies only employ professionals who are “disinterested” parties.”

“MEMORANDUM OPINION AND ORDER DENYING DEBTORS’ APPLICATION TO EMPLOY VINSON & ELKINS L.L.P.” —

  • “On April 3, 2024, the Court entered an Order Continuing the Hearing on the V&E Application, noting that V&E had disclosed: (a) that it represents certain Officers and Directors of the Debtors in shareholder and derivative litigation; and (b) that it represents the Riverstone entities, which are equity security holders in the Debtors (discussed below). Docket No. 224. See also Docket No. 183, Meyer Decl. pp. 9-11. The Court further noted that V&E had not discussed any ethical walls in its Application. Docket No. 224.”
  • “Mr. Meyer disclosed in his first Supplemental Declaration that V&E represents certain members of the Ad Hoc Group in unrelated matters… Specifically, V&E represents Ares Management, LLC, Morgan Stanley & Co., LLC, Oaktree Capital Management, LP, and Monarch Alternative Capital LP.”
  • “The U.S. Trustee asserts that V&E failed to disclose its connection with Oaktree, and that the U.S. Trustee discovered this connection on its own.”
  • “The Monarch representation is notable because it began in April 2024, after V&E filed the Petitions in this case on behalf of the Debtors.”
  • “V&E represents several of the Debtors’ Officers and Directors in shareholder and derivative litigation.”
  • “The U.S. Trustee argues that V&E’s representation of the Officers and Directors represents a conflict because the Ad Hoc Group RSA provides that the Debtors’ management will receive 3.5% of the equity in the reorganized entities, and additional warrants to purchase equity in the reorganized entities.”
  • “The first Meyer Declaration disclosed that Riverstone Investment Group, LLC, and its affiliates (collectively ‘Riverstone’), are current clients of V&E.”
  • “Riverstone and its affiliates collectively own 43% of the common equity ofEnviva, Inc.”
  • “Two members of Enviva’s 13-member board are affiliated with Riverstone.”
  • “V&E currently represents Riverstone in matters unrelated to this case.”
  • “There are no ethical walls erected at V&E concerning its simultaneous representation of Enviva and Riverstone… In fact, there are attorneys at V&E who currently represent both Enviva and Riverstone, thereby making any ethical walls impossible.”