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TIMOTHY S. LAFFREDI (WI SBN 1055133) 

Assistant United States Trustee

JASON BLUMBERG (NY SBN 4055257)

Trial Attorney

United States Department of Justice

Office of the U.S. Trustee 

450 Golden Gate Avenue, Suite 05-0153

San Francisco, CA 94102

Telephone: (415) 705-3333

Facsimile: (415) 705-3379

Email: jason.blumberg@usdoj.gov

Attorneys for Andrew R. Vara, Acting United States Trustee for Region 31

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

In re:

PG&E CORPORATION,

- and -

Bankruptcy Case

No. 19-30088 (DM)

Chapter 11

(Lead Case)

(Jointly Administered)

Date: May 9, 2019

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

Place: United States Bankruptcy Court

 Courtroom 17, 16th Floor

 San Francisco, CA 94102

PACIFIC 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)

UNITED STATES TRUSTEE’S OBJECTION TO APPLICATION OF 

THE DEBTORS TO EMPLOY COMPASS LEXECON, LLC

Andrew R. Vara, Acting United States Trustee for Region 3 (the “United States 

Trustee”), by and through his undersigned counsel, hereby files this objection to the Application 

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

 

1 Andrew R. Vara, Acting United States Trustee for Region 3, is acting in this appointment for Tracy 

Hope Davis, United States Trustee for Region 17, who has recused herself.

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and Employ Compass Lexecon, LLC as Economic Consultants to the Debtors Nunc Pro Tunc to 

Petition Date (ECF No. 1756) (the “Application”). This Objection is supported by the following 

memorandum of points and authorities and any argument the Court may permit.2

PRELIMINARY STATEMENT

The Debtors are seeking to retain Compass Lexecon as their “economic consultant” in 

connection with the assessment and evaluation of damages resulting from the California 

wildfires. Meanwhile, the Official Committee of Unsecured Creditors is seeking to retain 

Compass Lexecon’s parent company - FTI Consulting - as its financial advisor. FTI will assist 

the Committee “in the review of the claims reconciliation and estimation process, including 

potential exposure from wildfire damage claims. . .”3

The roles of FTI and Compass Lexecon share core similarities. They both must review 

and determine wildfire claims, a central issue in this case. The Court will almost certainly 

require declarations or testimony from financial experts from the Debtors and the Committee in 

assessing claims or in making valuation determinations. 

Two possibilities exist regarding FTI and Compass Lexecon. First, FTI and Compass 

Lexecon will provide different analyses, in which case FTI and Compass Lexecon employees 

will have to be adverse to each other. Second, FTI and Compass Lexecon will have 

substantially similar analyses, in which case the Court, the United States Trustee and the public 

will have difficulty in determining whether there was in fact some behind-the-scenes 

 

2 The United States Trustee requests that the Court take judicial notice of the pleadings and

documents filed in these cases pursuant to Federal Rule of Bankruptcy Procedure 9017 and Federal

Rule of Evidence 201.

3 FTI Employment Application at ¶ 6(h).

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coordination by corporate affiliates to avoid embarrassment or for other reasons. The integrity 

of the process requires conflict free analyses. 

Also, while Compass states that it maintains complete separation from FTI on an 

operational level, there is no statement whether FTI executives will (directly or indirectly) 

receive a portion of the compensation from the Compass engagement. This connection 

undermines confidence in Compass Lexecon’s ability to provide “unbiased” advice “free from 

personal interest” when evaluating the wildfire claims. In view of the critical importance of that 

task, Compass Lexecon has an actual conflict of interest if FTI is retained by the Committee.

Simply put, FTI and one of its subsidiaries cannot be retained by competing entities in the 

same chapter 11 case. A debtor and an official committee of unsecured creditors carry fiduciary 

duties to opposing bodies. In a case as complex and prominent as PG&E with tens of thousands 

of creditors, victims and stakeholders, both the Debtors and the Official Committee merit 

untainted advice on the financial impact of the wildfires. FTI and Compass Lexecon, a parent 

and affiliate, cannot offer conflict-free analysis. 

I. BACKGROUND

1. On January 29, 2019 (the “Petition Date”), the Debtors commenced the abovecaptioned cases by filing voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. 

See ECF No. 1. No trustee has been appointed in the Debtors’ cases. See generally Case 

Dockets.

2. On January 29, 2019, the Debtors filed the Declaration of Jason P. Wells in 

connection with the bankruptcy filings (the “Wells Declaration”). See ECF No. 28. As stated 

by Mr. Wells, “[t]he chapter 11 filings were necessitated by a confluence of factors resulting 

from the catastrophic and tragic wildfires that occurred in Northern California in 2017 and 2018, 

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and PG&E’s potential liabilities arising therefrom.” See Wells Declaration, at Preliminary

Statement.

3. On February 12, 2019, the United States Trustee appointed an Official Committee 

of Unsecured Creditors (the “Committee”). See ECF No. 409. On February 15, 2019, the 

United States Trustee appointed an Official Committee of Tort Claimants. See ECF No. 453.

4. The section 341(a) meeting of creditors in these cases was called on March 4, 

2019 and concluded on April 29, 2019. See ECF Nos. 396, 736.

5. On March 14, 2019, the Debtors filed an application to retain Lazard Freres & 

Company LLC (“Lazard”) as their investment bankers (the “Lazard Application”). See ECF No. 

891. The Lazard Application has been continued to May 22, 2019. See ECF No. 1782.

The Debtors’ Application to Employ Compass Lexecon

6. On April 29, 2019, the Debtors filed the Application to employ and retain 

Compass Lexecon, LLC (“Compass Lexecon”), through the Debtors’ litigation counsel, Cravath, 

Swaine & Moore LLP (“Cravath”), as economic consultants for the Debtors. See Application 

generally.

7. As disclosed in the Application, Cravath initially retained Compass Lexecon on 

February 24, 2018 as its economic consultant with respect to the Northern California Wildfires. 

See Application, at p.4.

8. If the Application is approved, the Debtors and Cravath contemplate that 

Compass Lexecon will continue to provide and/or may be requested to provide the following 

services:

• analyzing the losses and potential damages associated with the Northern 

California Wildfires;

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• assisting the Debtors in any claims estimation process in the Chapter 11 Cases, 

including performing economic analysis and data review pertaining to the 

estimation of potential liability in connection with the Northern California 

Wildfires;

• supporting the Debtors with related empirical analyses; and

• providing expert testimony in connection with any of the foregoing services.

See Application, at p. 5.

9. In addition, as set forth in a supplement to the Application filed on May 3, 2019, 

the Debtors disclosed that Compass Lexecon has also been engaged to provide consulting 

services “related to a proceeding initiated by the California Public Utilities Commission ... to 

implement the requirement of Senate Bill 901 concerning utility requests for wildfire cost 

recovery.” See ECF No. 1842, at p.3.

The Committee’s Application to Employ FTI Consulting

10. Compass Lexecon is a wholly-owned subsidiary of FTI Consulting, Inc. (“FTI”). 

See Application, at p.7.

11. On April 3, 2019, the Committee filed an application to employ and retain FTI 

Consulting, Inc. (“FTI”) as its financial advisor. See ECF No. 1212 (the “FTI Employment 

Application”). 

12. If that application is granted, FTI will, among other things, assist the Committee 

in “the review of the claims reconciliation and estimation process, including potential exposure 

from wildfire damage claims.” See FTI Employment Application, at ¶ 6(h) (emphasis added).

13. As described in the declaration of Samuel E. Star (ECF No. 1212) (the “Star 

Declaration”), FTI has established an ethical wall procedure to protect confidential information 

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in connection with the concurrent engagements of FTI and Compass Lexecon. See Star 

Declaration, at ¶ 23.4

14. The Debtor filed a statement of “no objection” to the FTI Employment 

Application “subject to the condition that the Committee’s retention of FTI would in no way 

prejudice or preclude, in any way, the Debtors’ ongoing ability to utilize Compass’s services, in 

any capacity, in these Chapter 11 Cases or any other context and would not present any conflicts 

for Compass or for the Debtors’ continuing retention and use of the services of Compass.” See

ECF No. 1560. 

15. The United States Trustee has objected to the FTI Employment Application on the 

basis of the actual conflict resulting from the Committee’s engagement of FTI and the Debtor’s 

engagement of Compass Lexecon. See ECF No. 1505.

5

 

II. MEMORANDUM OF POINTS AND AUTHORITIES

A. Statutory Framework

Section 327(a) of the Bankruptcy Code governs the employment of professionals 

by a debtor in possession. Under Section 327(a), a professional representing a debtor in 

possession may not hold or represent “an interest adverse to the estate” and must be a 

“disinterested person.” See 11 U.S.C. § 327(a).

Moreover, Section 328(c) of the Bankruptcy Code provides that “disinterestedness” is a 

prerequisite to allowance of compensation for a professional person who is employed under 

section 327(a) of the Bankruptcy Code. Section 328(c) states, in relevant part:

 

4 Compass Lexecon has represented that it will employ similar procedures to protect confidential 

information relating to its engagement. See Application at p.9.

5 The hearing on the FTI Employment Application has been continued to May 9, 2019, so that it 

can be considered in conjunction with the Debtors’ Application to employ Compass Lexecon.

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...the court may deny compensation for services and reimbursement of 

expenses of a professional person employed under section 327 or 1103 of 

this title if, at any time during such professional person’s employment 

under section 327 or 1103 of this title, such professional person is not a 

disinterested person, or represents or holds an interest adverse to the 

estate with respect to the matter on which such professional person is 

employed.

See 11 U.S.C. § 328(c) (emphasis added). Section 328(c) is a “penalty” for a professional's 

failure to avoid a disqualifying conflict of interest. See In Sundance Self Storage-El Dorado LP, 

482 B.R. 613, 625 (Bankr. E.D. Cal. 2012).

A “disinterested person” is a person who, among other things, “does not have an interest 

materially adverse to the interest of the estate or any class of creditors or equity security 

holders, by reason of any direct or indirect relationship to, connection with, or interest in, the 

debtor, or for any other reason.” See 11 U.S.C. § 101(14)(C) (emphasis added). Stated 

differently, a disinterested person is “one that can make unbiased decisions, free from personal 

interest, in any matter pertaining to the debtor’s estate.” See In re Shat, 2009 WL 7809004, at 

*6 (B.A.P. 9th Cir. Nov. 25, 2009). 

To have an adverse interest means, “the (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.” See In re AFI Holding, Inc., 355 B.R. 139, 148-49 (B.A.P. 9th

Cir. 2006) (affirming the removal of a Chapter 7 trustee, where the trustee had a materially 

adverse interest due either to an appearance of impropriety or potential conflict of interest 

arising from the trustee’s prior representation of the debtor’s insider, among other grounds), 

aff’d by 530 F.3d 832, 838 (9th Cir. 2008) (adopting the B.A.P.’s analysis). 

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To represent an adverse interest “means to serve as agent or attorney for any individual 

or entity holding such adverse interest.” See In re Envirodyne Indus., Inc., 150 B.R. 1008, 1017 

(Bankr. N.D. Ill. 1993); see also In re Shat, 2009 WL 7809004, at *5.

The “adverse interest” language found in sections 101(14)(C), 327(a), and 328(c) 

“‘telescope into what amounts to a single hallmark [that is] designed to filter out conflicts that 

may jeopardize a fair and equitable administration of the bankruptcy case.’” See In re Sundance 

Self Storage-El Dorado LP, 482 B.R. at 626 (emphasis added).

B. The Role of the United States Trustee

Under 28 U.S.C. § 586(a)(3)(I), the United States Trustee is charged with monitoring 

applications filed under 11 U.S.C. § 327 "and, whenever the United States trustee deems it to be 

appropriate, filing with the court comments with respect to the approval of such applications." 

This duty is part of the United States Trustee’s responsibility to enforce the laws as written by 

Congress and interpreted by the courts. See In re Columbia Gas Sys., Inc., 33 F.3d 294, 295-96 

(3d Cir. 1994) (noting that the United States Trustee has "public interest standing" under 11 

U.S.C. § 307 which goes beyond mere pecuniary interest); In re Revco D.S., Inc., 898 F.2d 498, 

500 (6th Cir. 1990) (describing the U.S. Trustee as a "watchdog"). 

III. ARGUMENT

A. The Application Should be Denied Because Compass Lexecon Has an Actual 

Conflict of Interest.

An actual conflict “mandates” disqualification of a professional from serving in a 

bankruptcy case. A potential conflict is also grounds to deny a professional’s employment. 

See In re Shat, 2009 WL 7809004, at *6; see also In re Marvel Entm’t Group, 140 F.3d 463, 

477 (3d Cir. 1998) (“Section 327(a) presents a per se bar to the appointment of a law firm with 

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an actual conflict, and gives the district court wide discretion in deciding whether to approve 

the appointment of a law firm with a potential conflict.”).6

Here, the Committee is seeking to retain FTI as its financial advisor, while the Debtors 

are seeking to retain Compass Lexecon as its economic consultant in connection with the 

Northern California Wildfires. Compass Lexecon is FTI’s wholly-owned subsidiary.

The Debtors contend that there is no per se rule that prohibits the retention of a 

professional and a professional’s wholly-owned subsidiary in the same case. See Application, 

at p.7. 

Even so, “where inappropriate safeguards exist to alleviate the conflict, or if there is 

any material concern, the retention will not be allowed.” See In re Greystone Holdings, 

L.L.C., 305 B.R. 456, 462 (Bankr. N.D. Oh. 2003) (wholly-owned subsidiary of law firm 

previously retained by committee was not disinterested and, thus, could not be retained as 

committee’s financial advisor). 

There is a material concern in this case. Compass Lexecon’s engagement relates to the

assessment and evaluation of damages from the California wildfires. Resolution of these 

claims is questionably a “principal objective[ ]” of these cases. See ECF No. 263 (amended 

declaration of Jason P. Wells), at p.4. It is difficult to conceive that the interests of the Debtors 

and the Committee are fully aligned on this issue.

Compass Lexecon’s affiliation with FTI undermines confidence in its ability to provide 

“unbiased” advice “free from personal interest” when evaluating the wildfire claims. In light 

 

6 “An actual conflict exists if there is ‘an active competition between two interests, in which one 

interest can only be served at the expense of the other.’” In re Git-N-Go, Inc., 321 B.R. 54, 58 (Bankr. 

N.D. Okla. 2004) (citing In re BH&P, Inc., 103 B.R. 556, 563 (Bankr. D.N.J. 1989), aff'd in pertinent 

part. 119 B.R. 35 (D.N.J. 1990)).

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of the critical importance of resolving the claims, Compass Lexecon has an actual conflict of 

interest. See, e.g., In re Hammer, 2007 WL 7540944, at *7 (B.A.P. 9th Cir. Oct. 11, 2007) (law 

firm retained by the Chapter 7 Trustee was not disinterested, where it also represented a major 

creditor in the case); In re Shat, 2009 WL 7809004, at *8 (counsel had an “irreconcilable 

conflict,” where he represented debtors whose estates had competing interests in the same 

property); In re Woodworkers Warehouse, Inc., 303 B.R. 740, 742-43 (Bankr. D. Del. 2004) 

(denying retention of debtor’s proposed counsel where counsel had represented the committee 

in the Chapter 11 case of the debtor’s predecessor); In re Quality Beverage Co., Inc., 216 B.R. 

592, 595 (Bankr. S.D. Tex. 1995) (“Coopers has performed services for the Committee, and 

now seeks to perform services for the Trustee who has potential preference actions against 

members of the Committee, resulting in a potential dual representation. Where there is a dual 

representation, an “actual conflict” exists.”) (emphasis added).

B. An Ethical Wall Cannot Cure Compass Lexecon’s Conflict.

The purpose of an ethical wall is to protect confidentiality. See, e.g., Concat LP 

v. Unilever, PLC, 350 F. Supp. 2d 796, 822 (N.D. Cal. 2004) (“Although an ethical wall 

may, in certain limited circumstances, prevent a breach of confidentiality, it cannot, in the 

absence of an informed waiver, cure a law firm's breach of its duty of loyalty to its 

client.”); see also In re Ampal-American Israel Corp., 534 B.R. 569, 583 (Bankr. 

S.D.N.Y. 2015) (“Although associated attorneys are presumed to share client confidences 

... that presumption is rebutted through evidence that an ethical wall prevents 

information sharing.”).

By shielding client confidences, an ethical wall may ameliorate the sometimes 

harsh effects of vicarious or imputed disqualification due to the personal disqualification

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of one member of a firm. See, e.g., In re Cty. of Los Angeles, 223 F.3d 990, 997 (9th Cir. 

2000) (“Screening mechanisms that are both timely and effective ... will rebut the 

presumption that the former judge disclosed confidences to other members of the 

firm.”).7

An ethical wall does not, however, eliminate a “conflict arising from concurrent 

adverse client relationships.” See, e.g., Concat LP v. Unilever, PLC, 350 F. Supp. 2d at 

822 (“Screening measures ... do nothing to mitigate conflict arising from concurrent 

adverse client relationships, since the purpose of the prohibition against such 

relationships is to preserve the attorney's duty of loyalty, not confidentiality, to his 

client.”); In re Chicago S. Shore & S. Bend R.R., 101 B.R. 10, 13 (Bankr. N.D. Ill. 1989)

(“The duty of loyalty encompasses more than confidentiality.”).

Here, the issue is not limited to the protection of client confidences. Compass

Lexecon has an actual conflict of interest due to the Committee’s proposed engagement 

of FTI.

C. Compass Lexecon’s Services May Overlap with Lazard’s Services.

The United States Trustee also objects to this retention, because the Debtors have 

not adequately explained the role of Compass Lexecon, as compared to Lazard. It 

appears that Lazard is in fact undertaking some of same functions as Compass Lexecon. 

 

7 A professional’s knowledge and duty of loyalty are imputed to the professional’s firm. See In 

Hammer, 2007 WL 7540944, at *7 n.11.

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WHEREFORE, the United States Trustee respectfully requests that the Court (i) deny 

the Application and (ii) grant such other relief as the Court deems appropriate and just.

Dated: May 6, 2019 Andrew R. Vara

Acting United States Trustee, Region 3 

By:/s/ Jason Blumberg 

Jason Blumberg

Trial Attorney for Acting United States Trustee

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