Fire Survivor Vote on Huge PG&E Settlement Can Stand, Says Judge — Despite Concern Over Lawyer’s Potential Conflict

The judge overseeing PG&E's ongoing bankruptcy case said Monday that an attorney representing thousands of Northern California fire survivors properly disclosed a potential conflict of interest to his clients.

The finding was laid out in an order by U.S. Bankruptcy Judge Dennis Montali, who had previously indicated he would deny efforts by critics of attorney Mikal Watts to use the potential conflict to disqualify votes by Watts' clients on a massive, multi-billion-dollar settlement with PG&E. The six-week vote by fire survivors with claims against PG&E — a group comprised of about 70,000 people – ended on Friday. Watts represents 16,000 of those fire survivors.

PG&E is racing to have its bankruptcy plan confirmed by June 30 so that it can tap a state-mandated wildfire insurance fund in time for the peak of the 2020 fire season. But for PG&E's bankruptcy plan to move forward, two-thirds of the fire survivors who vote on the settlement deal must must approve it.

Scrutiny into Watts and his firm, Watts Guerra, was spearheaded by Tubbs Fire survivor William Abrams and was joined by various other fire survivors and their lawyers. The group argued Watts failed to properly disclose that his line of credit had been partly funded by Apollo Global Management and Centerbridge Partners.

Those two private equity groups are among the groups of Wall Street heavyweights that have been negotiating against each other – and fire survivors – in the PG&E bankruptcy. Watts said the arrangement was made through a broker, and that he learned of it afterwards.

In his order, Montali rejected the suggestion that the relationship tainted negotiations over the controversial settlement, which would leave fire survivors as major shareholders in PG&E once it exits bankruptcy. Watts was among the lawyers who helped negotiate the deal.

"Disenfranchising the votes of individual wildfire survivors is not the appropriate remedy here," Montali wrote.

The judge also stated that Watts' disclosures of the arrangement took place before the start of voting. However, the only documented disclosure prior to voting took place during in-person town halls in Chico and Santa Rosa on Dec. 12. A video of a meeting from that day was then made available to clients.

After KQED first reported on Watts' financing ties in mid-April, Watts raised the issue at a subsequent virtual town hall meeting, and sent a written disclosure to his clients in a newsletter.

Part of the dispute had hinged on how Watts should have told clients about the potential conflict of interest. In a brief with the court, Watts supplied a declaration from a legal ethics expert who said he wasn't required to disclose the arrangement at all.

But other ethicists said he should have shared the details with clients in writing upon learning of it, and received consent from them in writing. Not doing so, they argued, could violate California State Bar rules.

In his order Monday, Montali wrote that any such violation could be dealt with outside of the bankruptcy court.

"If Watts Guerra did in fact violate the California Code of Professional Responsibility, any remedies for such violations are within the purview of the California State Bar," Montali said. "That purported violation does not implicate the Bankruptcy Code and Rules, and the clients of Watts Guerra should not be disenfranchised."

In a hearing on Tuesday, PG&E bankruptcy lawyer Stephen Karotkin told Judge Montali that preliminary results of the vote on the settlement deal indicate significant support from fire survivors.

PG&E is expected to certify results of the vote on Friday.