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SAN FRANCISCO

 

Robert A. Julian (SBN 99469) 

Cecily A. Dumas (SBN 111449) 

BAKER & HOSTETLER LLP 

1160 Battery Street, Suite 100 

San Francisco, CA 94111 

Telephone: 628.208.6434 

Facsimile: 310.820.8859 

Email: rjulian@bakerlaw.com 

Email: cdumas@bakerlaw.com 

Eric E. Sagerman (SBN 155496) 

Lauren T. Attard (SBN 320898) 

BAKER & HOSTETLER LLP 

11601 Wilshire Blvd., Suite 1400 

Los Angeles, CA 90025-0509 

Telephone: 310.442.8875 

Facsimile: 310.820.8859 

Email: esagerman@bakerlaw.com 

Email: lattard@bakerlaw.com 

Counsel for Official 

Committee of Tort Claimants 

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

In re:

PG&E CORPORATION 

-andPACIFIC GAS AND ELECTRIC 

COMPANY, 

 Debtors. 

□ Affects PG& E Corporation 

□ Affects Pacific Gas and Electric Company 

■ Affects both Debtors 

*All papers shall be filed in the Lead Case, 

No. 19-30088 (DM) 

Bankruptcy Case 

No. 19-30088 (DM) 

Chapter 11 

(Lead Case) 

(Jointly Administered) 

STATEMENT OF THE OFFICIAL 

COMMITTEE OF TORT CLAIMANTS 

REGARDING THE DEBTORS’ 

APPLICATION PURSUANT TO 11 

U.S.C. § 327(A) AND FED. R. BANKR. P. 

2014 (a) AND 2016 FOR AUTHORITY 

TO RETAIN AND EMPLOY COMPASS 

LEXECON, LLC AS ECONOMIC 

CONSULTANTS TO THE DEBTORS 

NUNC PRO TUNC TO PETITION DATE 

[Dkt. No. 1756] 

Date: May 9, 2019 

Time: 9:30 a.m. (Pacific Time) 

Place: United States Bankruptcy Court 

 Courtroom 17, 16th Floor 

 San Francisco, CA 94102 

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The Official Committee of Tort Claimants (hereafter, the “TCC”), in the above-captioned 

chapter 11 cases (“Chapter 11 Cases”) of PG&E Corporation and Pacific Gas and Electric 

Company (collectively, the “Debtors”), by and through its undersigned counsel, hereby submits 

this statement in response to the Application Pursuant to 11 U.S.C. § 327(a) and Fed. R. Bankr. P. 

2014 and 2016 for Authority to Retain and Employ Compass Lexecon, LLC as Economic 

Consultants to the Debtors Nunc Pro Tunc to Petition Date [Doc. No. 1756] (the “Initial Compass 

Application”), as supplemented by the Supplement to Debtors’ Application Pursuant to 11 U.S.C. 

§ 327(a) and Fed. R. Bankr. P. 2014 and 2016 for Authority to Retain and Employ Compass 

Lexecon, LLC as Economic Consultants to the Debtors Nunc Pro Tunc to Petition Date [Doc. No. 

1842] (the “Supplemental Compass Application” and together with the Initial Compass 

Application, the “Compass Application”). In support of this statement, the TCC respectfully states 

as follows: 

BACKGROUND 

1. On January 29, 2019 (the “Petition Date”), the Debtors commenced these Chapter 

11 Cases by filing voluntary petitions for relief under chapter 11 of title 11 of the United States 

Code (the “Bankruptcy Code”). 

2. On February 15, 2019, the Office of the United States Trustee (“U.S. Trustee”) filed 

an Appointment of the Official Committee of Tort Claimants [Doc. No. 453]. Following the 

resignation of Richard Heffern from the original committee and the addition of Tommy Wehe, on 

February 21, 2019, the U.S. Trustee filed the Amended Appointment of the Official Committee of 

Tort Claimants [Doc. No. 530]. The members of the TCC are: (i) GER Hospitality, LLC, in its 

capacity as an individual claimant; (ii) Kirk Trostle; (iii) Tommy Wehe; (iv) Angelo Loo; (v) Karen 

K. Gowins; (vi) Agajanian, Inc.; (vii) Susan Slocum; (viii) Samuel Maxwell; (ix) Karen M. 

Lockhart; (x) Wagner Family Wines-Caymus Vineyards; and (xi) Gregory Wilson. The TCC 

conducted a meeting on February 15, 2019, at which all members were present, and appointed 

Karen M. Lockhart as Chairperson. 

3. On April 3, 2019, the Official Committee of Unsecured Creditors (the “UCC”) filed 

the Application of the Official Committee of Unsecured Creditors for Entry of an Order Pursuant 

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to 11 U.S.C. §§ 328(a) and 1103 and Fed. R. Bankr. P. 2014(a) for Authorization to Retain and 

Employ FTI Consulting, Inc. as Financial Advisor Nunc Pro Tunc to February 12, 2019 [Doc. No. 

1212] (the “FTI Application”). 

4. Relevant here, in the FTI Application, the UCC disclosed that Compass Lexecon, 

LLC (“Compass”), a wholly owned subsidiary of FTI Consulting, Inc. (“FTI”) and the subject of 

the Compass Application, had provided economic consulting services regarding the assessment of, 

and methodology for evaluating potential damages relating to the California wildfires to the 

Debtors before the Petition Date. Based on information provided to FTI, the UCC further disclosed 

that the Debtors would continue to utilize Compass’s services for the same purpose during the 

Chapter 11 Cases. Among other proposed financial advisory services outlined in the FTI 

Application, the UCC alleged that FTI will be assisting the UCC with its review of the claims’ 

reconciliation and estimation process, including potential exposure from wildfire damage claims.1

5. On April 17, 2019, the U.S. Trustee filed the United States Trustee’s Objection

to Application of the Official Committee of Unsecured Creditors to Employ FTI Consulting, Inc. 

[Doc. No. 1505]. Based on FTI’s relationship to Compass and the respective services they propose 

to provide, the U.S. Trustee argued that FTI has an actual conflict of interest and therefore the Court 

should not approve its retention.

6. On April 24, 2019, the Court conducted a hearing on several matters, including the 

FTI Application. For the reasons more fully stated on the record, the Court adjourned the FTI 

Application to May 9, 2019, and stated that it would also consider any application of the Debtors 

to retain Compass at that time. 

7. On April 29, 2019, the Debtors filed the Initial Compass Application, together with 

the Ex Parte Motion of Debtors Pursuant to B.L.R. 9006-1 Requesting Order Shortening Time for 

Hearing on Application Pursuant to 11 U.S.C. § 327(a) and Fed. R. Bankr. P. 2014 and 2016 for 

Authority to Retain and Employ Compass Lexecon, LLC as Economic Consultants to the Debtors 

Nunc Pro Tunc to Petition Date [Doc. No. 1759] (the “Motion to Shorten”). 

 

1 See FTI Application at 4. 

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8. On April 30, 2019, the Court entered an order grating the Motion to Shorten and 

scheduled a hearing on the Compass Application for May 9, 2019 [Doc. No. 1769]. 

9. On May 3, 2019, the Debtors filed the Supplemental Compass Application. 

ARGUMENT 

A. The Debtors and UCC Should Be Required to Share the Services of Either FTI or 

Compass With Respect to Their Mutual Challenge to Tort Claims 

10. These Chapter 11 Cases present the rare situation where the interests of the UCC 

and the Debtors are so aligned that they should be ordered to conserve estate assets by sharing the 

services of one financial advisor on tort claims estimation. This complete alignment is presented 

by the following facts: The Debtors filed their cases as solvent cases. The unsecured creditors hope 

for and expect to receive full recovery on their claims, as was the result in the first PG&E 

bankruptcy cases. The only materially different characteristic between these cases and the last 

bankruptcy cases is the existence of many billions of dollars of contingent claims for damages 

PG&E caused when its electrical system ignited numerous wildfires in 2015, 2017 and 2018. 

11. The Debtors and the UCC are aligned for the following reasons: First, the Debtors 

wish to reorganize. They cannot reorganize unless the aggregate tort claims are determined to be 

in an amount that is low enough for the Debtors’ enterprise value to support the financing necessary 

to pay all unsecured claims. The wildfire-related claims are general unsecured claims, payable at 

the same priority as the bonds issued by the utility ($17 billion), bank debt owed by the utility ($5 

billion) and trade debt of the utility (estimated to be $2.1 billion). This means that in order to be 

able to reorganize, the Debtors must raise through operations or refinancing $24.1 billion plus the 

amount necessary to fund payment of tort claims. The Debtors disclosed a reserve of $14 billion 

in their SEC filings, but Jason Wells, CFO, noted in his testimony at the 341 meeting that the 

amount may be much higher. (The TCC believes that the evidence will show that valid tort claims 

exceed $30 billion as reported in the Debtors’ filings with the SEC; subrogation claims may be $10 

billion; and public entity claims may be $2 billion.)

12. And this is only the debt at the utility level. The holding company has bank debt in 

excess of $700 million. Only with payment in full of both the utility company debt (and preferred 

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stock of $300 million) and holding company debt will the equity security holders receive any 

recovery at all on their investments. 

13. So, it is abundantly clear that all the major constituents in these Chapter 11 Cases—

Debtors, UCC, Ad Hoc Committee of Bondholders, banks and equity security holders all are 

diametrically opposed to tort claimants. It is in this context that the UCC wishes to employ FTI, in 

part, to estimate (challenge) tort claims, and for the Debtors to employ Compass, FTI’s subsidiary, 

to estimate (challenge) tort claims. 

14. The Court should order the UCC and the Debtors to pick one—FTI or Compass—

and share a financial advisor on the subject of tort claims estimation. To state the TCC’s position 

differently, the TCC should not be required to fight against two different advisory firms, both of 

whom are attacking the value of tort claims. 

B. In the Alternative, the Court Should Determine that Compass is Ineligible to be 

Employed by the Debtors Due to its Relationship to FTI 

15. To retain Compass, the Debtors bear the burden of showing that Compass does not 

“hold or represent an interest adverse to the estate” and is a “disinterested person.” 11 U.S.C. § 

327(a); Official Comm. of Unsecured Creditors v. ABC Captial Mkts. Grp. (In re Capitol Metals 

Co.), 228 B.R. 724, 727 (B.A.P. 9th Cir. 1998) (“The applicant bears the burden of proving that the 

standards for appointment have been met.”). For Compass to be “disinterested,” it may not “have 

an interest that is materially adverse to the interest of the estate or any class of creditors by reasons 

of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other 

reason.” 11 U.S.C. § 101(14)(C). 

16. Although the phrase “hold or represent an interest adverse to the estate” is not 

defined under the Bankruptcy Code, courts have interpreted it to mean: (1) possession or assertion 

of an economic interest that would tend to lessen the value of the bankruptcy estate; or (2) 

possession or assertion of an economic interest that would create either an actual or potential dispute 

in which the estate is a rival claimant; or (3) possession of a predisposition under circumstances 

that create a bias against the estate. In re AFI Holding, Inc., 355 B.R. 139, 148-49 (B.A.P. 9th Cir. 

2006). 

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17. “A disinterested professional is one that can make unbiased decisions, free from 

personal interest, in any matter pertaining to the debtor’s estate.” First Interstate Bank, N.A. v. CIC 

Inv. Corp. (In re CIC Inv. Corp.), 192 B.R. 549, 553 (B.A.P. 9th Cir. 1996). Importantly, courts 

have interpreted the Bankruptcy Code’s requirement of disinterestedness to “cover[] not only actual 

impropriety, but the appearance of impropriety as well” and have disqualified professionals from 

employment whose relationship “would even faintly color the independence and impartial attitude 

required by the Code.” AFI Holding, Inc., 355 B.R. at 149, 153 (internal citations and quotations 

omitted). Any doubt with respect to the existence of a conflict, should weigh in favor of 

disqualification. See In re Lee, 94 B.R. 172, 177 (Bankr. C.D. Cal. 1988). 

18. These requirements further the statute’s purpose of assuring that professionals 

employed by the estate devote undivided loyalty to their clients. See First Interstate Bank, N.A. v. 

CIC Inv. Corp. (In re CIC Inv. Corp.), 192 B.R. 549, 554 (B.A.P. 9th Cir. 1996); see also In re 

Sundance Self Storage-El Dorado LP, 482 B.R. 613, 626 (Bankr. E.D. Cal. 2012) (stating that the 

“adverse interest” component of § 327(a) and the “material adverse interest” element of the 

“disinterested person” definition under § 101(14)(C) are “designed to filter out conflicts that may 

jeopardize a fair and equitable administration of the bankruptcy estate.”). 

19. The Debtors have not met their burden in demonstrating that Compass’s relationship 

to FTI does not compromise its ability to act as disinterested professional free from conflicting 

loyalties in these Chapter 11 Cases. Compass is an “affiliate” of FTI under the Bankruptcy Code 

because FTI is its 100% owner. See 11 U.S.C. § 101(2). In addition, the UCC and the Debtors have 

hired FTI and Compass, respectively, to provide the same services: to analyze the potential liability 

and damages of tort claimants. Notwithstanding the independence of Compass’s and FTI’s 

employees and information technology systems, it seems apparent that FTI can set Compass’s 

corporate policy and oversee its operations. Based on this potential for control and the 

predisposition for Compass to act in the economic interest of its parent, it is unclear how Compass 

can demonstrate it does not represent an interest adverse to the Debtors, regardless of FTI’s separate 

corporate existence. 

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20. Without support, the Debtors argue that in evaluating Compass’s compliance with 

the requirements of section 327 of the Bankruptcy Code, the Court should consider that the Debtors 

hired Compass long before the UCC had hired FTI.2 Whether the Debtors hired Compass first is 

irrelevant to determining Compass’s connections at the time of its proposed employment and the 

Court should not read such a requirement into the statute. See In re Plaza Hotel Corp., 111 B.R. 

882, 891 (Bankr. E.D. Cal. 1990), aff’d 123 B.R. 466 (B.A.P. 9th Cir. 1990) (Section 327’s 

requirements apply not only at the time of retention but also throughout the case).

21. Moreover, the UCC’s proposed retention of FTI and the Debtors’ proposed retention 

of Compass are subject to different requirements. Under section 1103 of the Bankruptcy Code, a 

committee’s professionals are not prohibited from simultaneously representing the committee and 

creditors of the same constituency. See 11 U.S.C. § 1103(b); Adorno & Yoss LLP v. United States 

Tr. (In re 3DFX Interactive, Inc.), No. 07-1240, 2008 Bankr. LEXIS 4702, at *13 (B.A.P. 9th Cir. 

Feb. 6, 2008) (Section 1103(b) prohibits a professional’s dual representation if it “would interfere 

with counsel’s vigorous advocacy for either client, jeopardize counsel’s undivided loyalty to either 

client, or endanger the confidences and secrets of either client.”). Section 327 does not permit dual 

representation by a debtor’s professionals. In addition, section 1103 of the Bankruptcy Code, unlike 

section 327 of the Bankruptcy Code, does not expressly require a committee’s professionals to be 

“disinterested.” Compare 11 U.S.C. § 327(a) with 11 U.S.C. § 1103(b).3 

22. Compass, as the Debtors’ professional, must satisfy the requirements of section 327 

of the Bankruptcy Code, not section 1103. Due to this distinction and the post-petition overlap of 

work that has already existed to date, the TCC does not believe that the denial of the UCC’s 

employment of FTI would allow the Debtors to employ Compass. As stated in the U.S. Trustee’s 

objection to the FTI Application, these concurrent representations appear to create an actual 

conflict, or at least create the appearance of a conflict, which should disqualify Compass from 

representing the Debtor. 

 

2 See Initial Compass Application at 14. 

3

 However, courts may deny allowance of compensation for a committee’s professional who is not disinterested. See

11 U.S.C. § 328(c). 

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C. The Debtors’ Failure to Seek the Court’s Approval For Compass’ Retention 

Sooner Should Not Be Sanctioned 

23. According to the Compass Application, Compass has provided professional services 

to the Debtors after the Petition Date.4 The Debtors suggest that because Compass was hired 

through their litigation counsel, section 327 was not invoked, and that the Debtors have only sought 

to retain Compass now “out of an abundance of caution.”5 However, the timing of the Compass 

Application shows that the Debtors made a conscious decision not to seek the Court’s approval. 

Notwithstanding the unequivocal requirements of the Bankruptcy Code, the Debtors waited until 

the Court raised questions concerning the UCC’s retention of FTI and its connections to Compass 

to file the Compass Application. The Court should deny the Compass Application on this ground 

alone. 

24. The TCC understands that Compass’s retention was structured through the Debtors’ 

litigation counsel to protect applicable privileges between Compass and the Debtors. However, it 

was incumbent upon the Debtors to seek the Court’s approval for Compass’s retention as soon as 

Compass agreed to provide post-petition services to the Debtors. See In re Mahoney, Trocki & 

Assocs., Inc., 54 B.R. 823, 825 (Bankr. S.D. Cal. 1985) (professionals must ordinarily receive court 

approval of employment before providing services to the estate.). 

25. A professional person within the meaning of section 327 of the Bankruptcy Code 

“is one who takes a central role in the administration of the bankruptcy estate and in the bankruptcy 

proceedings.” Blair v. Stratton (In re Blair), No. 04-1461, 2005 Bankr. LEXIS 3385, at *11 (B.A.P. 

9th Cir. June 20, 2005) (internal citations omitted); In re Napoleon, 233 B.R. 910, 913 (Bankr. 

D.N.J. 1999) (holding that expert witness for the debtor’s special counsel was not a professional 

person under the statute because the expert’s services were not essential to the administration of 

the estate or case). Individuals or entities that provide services without the ability to exercise 

discretion or of a mechanical nature do not qualify as professionals whose retention must be preapproved by the bankruptcy court. Blair, 2005 Bankr. LEXIS 3385, at *11-12 (holding that an 

escrow agent was not a professional under section 327 of the Bankruptcy Code because, as a limited 

 

4 See Initial Compass Application at 14, n.2; Supplemental Compass Application at 5, n.3. 

5

Id.

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agent that must strictly comply with the instructions given by the parties, it could not exercise 

discretion); see also In re ACandS, Inc., 297 B.R. 395, 403 (Bankr. D. Del. 2003) (holding that an 

entity that had provided claims-processing services for the debtor was a professional whose courtapproved retention was required). Importantly, even when payment is to be made from third parties, 

a professional must obtain the court’s approval for the retention. See In re Boh! Ristorante, Inc., 99 

B.R. 971, 972-73 (B.A.P. 9th Cir. 1989). 

26. Courts possess the power to retroactively authorize a professional’s employment 

when the applicant can show both a satisfactory explanation for failing to seek judicial approval of 

the employment sooner and that the applicant had benefitted the bankruptcy estate in some 

significant way. See Atkins v. Wain, 69 F.3d 970, 974 (9th Cir. 1995). The circumstances justifying 

nunc pro tunc retention must be “exceptional.” Id. The applicant bears the burden in demonstrating 

satisfaction of both requirements. See In re B.E.S. Concrete Prods., Inc., 93 B.R. 228, 231 (Bankr. 

E.D. Cal. 1988). 

27. Compass is undoubtedly a “professional person” whose retention must be approved 

by the Court under the Bankruptcy Code. It is unclear to the TCC why the Debtors only sought to 

retain Compass once this Court suggested it do so in order to resolve the question of whether the 

UCC could hire FTI due to its relationship to Compass. In addition, the Debtors have not 

demonstrated, let alone alleged, exceptional circumstances that would warrant nunc pro tunc

retention ninety days after the commencement of the Chapter 11 Cases for a professional whose 

services were known to be needed long before the decision was made to formally seek its retention. 

D. Compass’s Retention cannot be Approved Absent Full Disclosure of the Scope 

of Services it is to Provide 

28. The Debtors allege that the attorney-client and attorney work product privileges 

limit the extent to which the Debtors may disclose the scope of work Compass will provide during 

the Chapter 11 Cases. In applying for professional employment, the Debtors may not selectively 

disclose information they deem relevant to their proposed retention of Compass. It is for the Court 

and parties in interest to make that assessment. 

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29. The disclosure rules imposed by the Bankruptcy Code and Rules are strictly 

construed. The applicant may not exercise any discretion to withhold information but must let the 

court and parties in interest determine whether further inquiry should be made before deciding to 

approve the professional’s employment. See In re Thomas, 476 B.R. 579, 586 (N.D. Cal. 2012) 

(stating that an attorney’s duty to disclose under the Bankruptcy Code and Rules extends to all facts 

that may be pertinent to a court’s determination of whether it is disinterested or holds an adverse 

interest to the estate); In re Condor Sys., 302 B.R. 55, 70-71 (Bankr. N.D. Cal. 2003) (requiring 

same comprehensive disclosure of information from the debtor’s proposed financial advisor); see 

also In re Sonicblue Inc., No. 03-51775, 2007 Bankr. LEXIS 1057, at *34 (Bankr. N.D. Cal. Mar. 

26, 2007) (“Estate professionals must make full, candid and complete disclosures of all facts 

affecting their eligibility for employment.”). 

30. In the Compass Application, the Debtors alleged that prior to the Petition Date their 

litigation counsel, Cravath, Swaine & Moore LLP (“Cravath”), had retained Compass as its 

economic consultant to perform consulting work related to the evaluation and analysis of potential 

damages and losses associated with the Northern California Wildfires. Without any further 

explanation, the Debtors alleged that the specific services Compass had provided are subject to the 

attorney-client privilege and the attorney work product doctrine and that subject to Court approval, 

Compass would be providing the same services to the Debtors, through Cravath, during the Chapter 

11 Cases. The TCC respectfully submits that this disclosure is inadequate for the Court and TCC 

to assess, among other things, whether Compass’s services would be duplicative of those already 

being provided by other estate-retained professionals. 

31. With respect to the applicability of the attorney-client privilege, the Debtors have 

not shown why the privilege trumps their disclosure obligations. See Raj Kamal Corp. v. Fukushima 

(In re Raj Kamal Corp.), No. 12-1648, 2013 Bankr. LEXIS 5305, at *10 (B.A.P. 9th Cir. Dec. 17, 

2013) (holding that the attorney-client privilege does not excuse the disclosures required under 

section 327 of the Bankruptcy Code and Rule 2014 of the Federal Rules of Bankruptcy Procedure).

Nor have the Debtors identified the basis of the privilege, the identity of the parties to whom the 

alleged privilege applies, or the purpose of the alleged communications. Similarly, the Debtors have 

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not attached a privilege log that identifies these foundational elements. Although the Debtors’ 

information may be protected by the work product doctrine, the doctrine’s protection is limited and 

may not be available in these Chapter 11 Cases under all circumstances. If the work product 

privilege applies, the Debtors have not identified the foundational elements for its application. 

NOTICE 

Notice of this statement will be provided to (i) the Debtors and their counsel; (ii) the Office 

of the United States Trustee for Region 17 (Attn: James L. Snyder, Esq. and Timothy Laffredi, 

Esq.); (iii) the UCC’s counsel; (iv) those persons who have formally appeared in these Chapter 11 

Cases and requested service pursuant to Bankruptcy Rule 2002; and (v) all the Standard Parties, as 

defined in the Court’s Amended Order Implementing Certain Notice and Case Management 

Procedures entered on March 27, 2019 [Doc. No. 1093]. The TCC respectfully submits that no 

further notice is required. 

WHEREFORE the TCC respectfully requests that the Court: (a) require the Debtors and the 

UCC to share the services of either FTI or Compass with respect to their mutual challenge to tort 

claims; (b) in the alternative, deny the Compass Application; and (b) grant such other and further 

relief as the Court may deem just and appropriate. 

Dated: May 6, 2019 

BAKER & HOSTETLER LLP 

By: /s/ Cecily A. Dumas 

Cecily A. Dumas 

Attorneys for The Official Committee of Tort 

Claimants 

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