Apollo, Centerbridge Backed PG&E, Funded Loan to Firm Suing It

By Mark Chediak and Peter Blumberg | April 30, 2020

Two major investors in PG&E Corp. are also backing a loan to one of the law firms suing the bankrupt California utility on behalf of thousands of wildfire victims.

Centerbridge Partners LP is the among the 20 biggest shareholders in PG&E and has committed to buying as much as $325 million in the utility’s shares when it emerges from Chapter 11. Apollo Global Management Inc. last year held as much as $506 million in PG&E bonds and tried unsuccessfully with other creditors to take control of the company.

The two firms bought stakes in a line of credit provided in September to the law firm of Mikal Watts, who worked with a group of lawyers that later negotiated a $13.5 billion settlement with PG&E for almost 80,000 people who lost homes, businesses or loved ones in blazes blamed on the utility’s equipment. Victims are now in the middle of voting whether to approve the bankruptcy plan.

It’s not unusual for big investment companies to loan money to law firms. But Centerbridge and Apollo’s positions in the loan — coupled with their having bought insurance claims against PG&E — underscores how Wall Street titans were on multiple sides in the largest utility bankruptcy in U.S. history.

Watts, who represents about one-fifth of the fire victims, disclosed the financing during town-hall style meetings with clients in December and April and told them he got the best settlement possible. Watts said in an interview that the credit line was for general support of his firm — not specifically for the wildfire litigation — and that the lenders have no right to a share of his firm’s legal fees in the PG&E case.

That hasn’t stopped some victims who aren’t Watts’s clients from complaining to the judge overseeing the bankruptcy that the loan raised a potential conflict of interest. The judge quickly dismissed one complaint that was filed by a persistent critic of the bankruptcy plan; another is pending. It was filed by a fire survivor who recently resigned from the bankruptcy committee for victims, saying the settlement is flawed.

Loan Money

Apollo said in a statement it has no ability under the financing arrangement to influence Watts’s decision-making for his clients. The New York-based investment manager held $100 million in insurance claims against PG&E as of April 13, according to court papers. Centerbridge, also based in New York, declined to comment. It held $209 million of insurance claims as of December.

Watts told some of his clients at a meeting in December in Santa Rosa, California, that representatives from Stifel Financial Corp. approached him in September and offered his San Antonio-based firm, Watts Guerra LLP, a “huge” line of credit, saying they heard he had a “bunch of fire cases,” according to a video recording viewed by Bloomberg News. At another town hall on April 18, Watts disclosed that the loan was for $100 million, according to a recording of that meeting.

Watts told his clients that Stifel didn’t need his consent to assign stakes in his loan to other investors and that he didn’t find out until after he accepted the credit that Centerbridge and Apollo were backing it.

“I was like holy moly, OK, I know what’s going on here, these guys are trying to play me,” Watts said on the video recording of the December town hall. The lawyer then assured his clients that he wasn’t going to let the money influence him.

St. Louis-based Stifel didn’t respond to multiple requests for comment.

‘No Less Green’

“I say, ‘Look, let me be blunt, your money is no less green than the other guy’s money,'” Watts said he told an Apollo representative. “I don’t care who loaned me what.”

Apollo said in its statement that it “owns less than $20 million of exposure in a syndicated loan structure to a law firm with a vast amount of other unrelated cases.”

“The implication from Mikal Watts is not only incredibly disappointing, but utterly false,” according to the statement. “In our position as bond holders in PG&E, we have always been aligned with the claimants with the goal of paying all creditors in full as timely as possible.”

In an interview Wednesday, Watts said he didn’t mean to suggest Apollo and Centerbridge had done anything wrong when he said they were “trying to play” him.

Credit Line

In an April 18 email to Bloomberg News, Watts said the loan conforms with an American Bar Association rule requiring lawyers to maintain professional independence. In a court filing, he said he’s made sufficient disclosures both orally and in writing to his clients. Watts also told Bloomberg there are more than a “handful” of investors in the loan beyond Apollo and Centerbridge. “It’s pretty diversified,” he said.

W. Bradley Wendel, a law professor at Cornell University who specializes in legal ethics, said Watts’s financing as he’s described it poses no conflict of interest because the investment firms have no control over his decision-making.

In other instances, Wall Street financing for personal-injury firms has generated controversy — especially if there’s a perception that a high interest rate was charged for a loan and a lawyer had incentive to settle a case quickly rather than keep fighting for a better payout for their clients.

‘Best Interest’

“If I were one of Watts’s clients, this financing arrangement would make me extremely nervous,” said Elizabeth Burch, a law professor at University of Georgia who teaches about mass torts. “How do I know whether he’s acting on behalf of my best interest or his investors’ best interest?”

Watts declined in an interview to disclose the interest rate for his loan.

He told his clients at the April town hall that Stifel offered him “‘substantially lower interest rates” than his firm had on previous loans with commercial banks. He described the line of credit in a bankruptcy court filing Tuesday as a typical bank loan with “flat, non-usurious” interest while arguing that it isn’t “litigation financing” and creates no risk of a conflict.

“I would never give a lender any say in what I would do as a lawyer and would never sign a credit facility that gave that control to a third party,” Watts said in an interview.

Watts was part of a team that negotiated with PG&E on behalf of fire victims. He said he was among 13 lawyers who decided to support the utility’s settlement with victims along with a committee designated to represent fire victims. The vote was unanimous, he said.

The lawyer said in an interview that representatives from Centerbridge and Apollo introduced him to the principal negotiators for the bondholders and shareholders, but that the two firms didn’t participate in the negotiations.

The lawyer said he’s encouraging fire victims to vote for PG&E’s bankruptcy plan because it has solid financing and would allow the utility to exit bankruptcy by a state deadline of June 30. Otherwise, victims could have to wait years to get paid. Watts and other attorneys who together represent more than 31,000 fire victims said in a court filing Tuesday that of those who have voted so far on the bankruptcy plan, 98.7% support it.

–With assistance from Crystal Tse and Jef Feeley.

About the photo: Firefighters survey a home burning along Highway 128 during during the Kincade fire in Healdsburg, California, U.S., on Sunday, Oct. 27, 2019. The wildfire that erupted in California’s wine country minutes after a PG&E Corp. power line went down has prompted an expanded evacuation order, as officials warn high winds could drive the blaze toward one of the region’s largest towns. Photographer: Phil Pacheco/Bloomberg

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