Some folks don’t know how to take “no” for an answer.

Denying a motion for reconsideration, Bankruptcy Judge Brian F. Kenney of Alexandria, Va., stood by his guns, refused for a second time to allow a large law firm to be the debtor’s general counsel, and concluded that a “partial ethical wall” would not confer disinterestedness on a firm that was concurrently representing a company that controlled 43% of the debtor’s common stock and two of the 13 seats on the debtor’s board.

The Partial Ethical Wall

A major manufacturing concern, the debtor tapped one of the country’s largest firms to be co-counsel in its chapter 11 case. The U.S. Trustee objected, and Bankruptcy Judge Kenney denied the retention application on May 30, finding that the firm was not disinterested. In re Enviva Inc., 24-10453, 2024 BL 185223 (Bankr. E.D. Va. May 30, 2024). To read ABI’s report, click here.

Denying the retention application in May, Judge Kenney focused on the firm’s concurrent representation of an entity that controlled 43% of the common stock and two of the 13 seats on the board. When initially applying for retention, the firm took the position that erecting an “ethical wall” was impossible because lawyers at the firm were representing both the debtor and the controlling shareholder.

Before the time elapsed for appealing denial of retention, the debtor filed a motion for reconsideration under Bankruptcy Rules 9023 and 9024.

As grounds for reconsideration, the firm described what the U.S. Trustee characterized as a “partial ethical wall.” In summary, the partial wall worked like this: Lawyers who billed time to the debtor but not the shareholder after the petition date would be prohibited from working for the shareholder. Conversely, lawyers who billed time to the shareholder after the petition date but not to the debtor would be prohibited from working for the debtor.

For lawyers who had billed time after filing to both the shareholder and the debtor, the firm proposed the following: Lawyers who billed fewer than 12.5 hours for the shareholder could work for the debtor, but lawyers who billed more than 12.5 hours to the shareholder could not work for the debtor.

For partners who worked more than 10 hours for the debtor after filing, the firm said that those partners would not participate in any of the partners’ income flowing from representation of the shareholder in 2024 and 2025.

Finally, the debtor and the committee agreed to the formation of a plan evaluation committee composed of six board members to review any chapter 11 plan independently. The evaluation committee would have its own counsel but could not retain financial advisors. The board, though, would remain responsible for negotiating the plan. The evaluation committee could be disbanded.

Rule 9023 Analysis

Judge Kenney first evaluated the reconsideration motion under Rule 9023, which incorporates Federal Rule 59. Under the rule, amending a judgment requires a change in law, newly discovered evidence or manifest injustice.

Judge Kenney said there was no change in the law and that the partial ethical wall was not newly discovered facts. The wall was “newly created,” he said.

To amend the retention-denial order under Rule 59, Judge Kenney searched for clear error of law or manifest injustice. He said that lack of an ethical wall was “only one factor” in denying retention in May. In 2024, he estimated that billings to the shareholder would exceed $9 million.

Furthermore, 13 timekeepers worked for both the debtor and the shareholder after filing, but only two would be walled off. He said that the “post-petition time-keeping . . . does not inform the Court as to how extensive the overlap might have been during the run-up to the bankruptcy filing.”

Judge Kenney found that the “proposed ethical wall is insufficient.” Next, he turned to the compensation arrangement and said that it did not render the firm disinterested, because partners had shared income from the shareholder in 2023 and early 2024.

Judge Kenney gave three reasons why the plan evaluation committee did not solve the “disinterestedness problem.” For reasons one and two, he said that the committee is not irrevocable and will not have its own financial advisors.

“[M]ost importantly,” Judge Kenney said, the committee will not have primary responsibility for negotiating the plan. He concluded that the committee “is only so much window dressing, an attempt to make it appear that [the firm] is disinterested,” given that it can be disbanded “at any time.”

Judge Kenney found no grounds for reconsideration under Rule 9023.

Rules 9024 and 60(b)

The debtor proposed that reconsideration was proper under Rule 60(b)(5) and (6) because enforcement of the prior order was “no longer equitable.”

Judge Kenney said that his prior decision was “not inequitable” and that the motion for reconsideration “does not present circumstances that justify relief.”

Judge Kenney Throws a Lifeline

Finding no grounds for retention under Section 327(a) as general counsel, Judge Kenney looked at Section 327(e) and retention for a “specified special purpose.”

The debtor told Judge Kenney about the expenses it “inevitably will encounter” by loss of the firm’s “deep institutional knowledge” and “specific expertise” regarding the debtor’s tax matters, securities laws disclosures, and contract renegotiations. Judge Kenney accepted the arguments as “true” but said they “elide the disinterestedness standard . . . in favor of expediency in the employment of counsel.”

“As long as the matters do not involve [the firm’s] other clients,” Judge Kenney said the firm could be retained as special counsel under Section 327(e). But he warned that “Section 327(e) is not to be employed as an end-run around Section 327(a)’s more general requirement of disinterestedness.”

Judge Kenney denied the motion for reconsideration.