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By 1998, the fabled bankruptcy department of New York-based Milbank, Tweed, Hadley & McCloy had fallen on hard times. Many of the practice area’s partners had left the firm during the 1990s, including one, John Gellene, to a federal prison, after being convicted of bankruptcy fraud for failing to disclose a conflict of interest. But since then, the firm has enjoyed a stunning turnaround. Led by Luc Despins, a partner hired away from Kirkland & Ellis in 1998, Milbank has become a bankruptcy player again. Last year alone, the firm took a leading role in several major cases, including the massive Pacific Gas and Electric Co. filing. In December, the firm began to vie for one of the biggest assignments of the year: counsel to the creditors committee in the bankruptcy of Enron Corp., the largest in the nation’s history. There was one major obstacle — for at least five years, Milbank had been one of many outside counsel of Enron and its affiliates, earning fees of more than $17 million. To switch sides and become Enron’s pursuer, Milbank would have to convince a U.S. bankruptcy judge that it was fit for the task. And that meant, among other things, finding and disclosing the details of its relationship with Enron as well as shedding any continuing assignments. This is the story of how the firm, over six weeks, cleared that hurdle. After Enron filed for Chapter 11 protection in December, naming New York-based Weil, Gotshal & Manges as its lead counsel, other major bankruptcy firms were quickly drawn into the case’s gravitational field. Milbank first appeared on behalf of Toyota Motor Manufacturing North America Inc., and Swiss Re Financial Products Corp., creditors of Enron. But Milbank had an agreement with those clients that permitted Milbank to withdraw from those representations if the creditors committee wanted to hire Milbank. As committee counsel, Milbank could take on a more prominent and far-reaching role, acting as the watchdog for all of Enron’s unsecured creditors. That is a cast of thousands, including ex-employees of Enron, some of whom may not have individual counsel to protect their interests. On Dec. 12, the U.S. trustee in the Enron matter appointed the 15-member creditors committee, which includes many of Enron’s biggest lenders, such as J.P. Morgan Chase & Co. and Citigroup Inc. The committee is charged with shining a bright light on Enron’s business practices, among them, off-balance-sheet financing transactions and alleged misconduct by Enron executives and directors. The committee must also investigate all sources of recovery, including, perhaps, the accountants and lawyers who signed off on any of the questionable deals. Following a two-hour organizational meeting at a midtown New York hotel, the committee retreated to the nearby offices of Paul, Weiss, Rifkind, Wharton & Garrison, which represents two committee members. There, the committee searched for a law firm. “We couldn’t waste any time,” says James A. Beldner, a partner with Kronish Lieb Weiner & Hellman who represents a committee member. “In a case like this, matters come up every hour which have to be dealt with.” By the evening, the committee had narrowed its choice to four New York firms: Milbank; White & Case; Kaye Scholer; and Kramer Levin Naftalis & Frankel. Despins, head of Milbank’s bankruptcy practice, and two of his partners made a 10-minute sales pitch to the committee. Milbank won, say those involved, because of its experience handling energy and derivatives deals, the core areas of Enron’s business. The Dec. 12 beauty contest was just a prelude. After a committee selects counsel, it must apply to the U.S. bankruptcy judge — in this case, Arthur Gonzalez — to approve its choice. Among other things, the judge looks for conflicts and questions whether a firm can represent its client in a “disinterested” fashion. In support of the Enron committee’s application, Milbank, by law, would have to file an affidavit, disclosing all potential conflicts. The job of preparing that disclosure fell to Stephen Blauner, a Milbank attorney who advises the firm on ethics. “It was a massive undertaking,” says Blauner, who also serves as chair of the New York state bar’s ethics committee. Using a computerized conflicts search, Blauner delved five years into the firm’s work history and found that Milbank had billed Enron and various affiliates more than $17.5 million from 1997 through 2001 (nearly $7 million of that amount was billed to Enron Wind Corp., a solvent subsidiary). During that stretch, Milbank handled more than 100 matters for Enron and its subsidiaries. In an interview Blauner said that “on or about” the time of the Enron bankruptcy filing — Dec. 2, 2001 — Milbank had been discharged by Enron and all of its subsidiaries from continuing legal representation. Blauner said that he had received “a separate discharge” from each client. Blauner said that the discharge had not been intended to be “a dead stop.” He said, “It’s not like an on-and-off switch.” Despite the discharge, he said, the firm had “an ethical obligation” not to withdraw precipitously from any matter that might harm the client. To discuss conflicts and other issues, Blauner met on several different occasions with Carolyn Schwartz, the U.S. bankruptcy trustee in Manhattan. Trustees are employees of the U.S. Department of Justice who assist in the administration of bankruptcy cases. They frequently work with counsel on both sides of a bankruptcy to address potential conflict problems. Given Milbank’s history with Enron, Blauner and Schwartz had a lot to talk about. On Dec. 30, Blauner sent a memorandum to about 20 of his partners, recounting a meeting with Schwartz on Dec. 28. A Milbank source sent The American Lawyer a copy of the memo in January. Asked to comment on the contents of the memo, Blauner refused. He contended that “Milbank will not comment on any matters referred to in or relating to a document improperly obtained by The American Lawyer.” He added that “the document of Dec. 30 is a privileged document that should have been promptly returned to Milbank Tweed under applicable legal and ethical rules.” According to the document, Schwartz and Blauner discussed Milbank’s representation of both the Enron creditors committee and the creditors committee in the Pacific Gas bankruptcy, the second-biggest Chapter 11 matter in 2001. Enron is a major creditor of Pacific Gas and vice versa. According to Blauner’s memo, Schwartz suggested that Milbank, as Enron committee counsel, shouldn’t get involved in Pacific Gas-Enron disputes. The committee would eventually hire a separate firm, Cleveland’s Squire, Sanders & Dempsey, to handle this and other matters in which Milbank might be conflicted. And Milbank would later set up an “information firewall” separating its attorneys on the Enron and Pacific Gas committees. Linda Stanley, the U.S. trustee in the Pacific Gas bankruptcy, was also concerned that Milbank might run into conflicts in representing both creditors committees. In an interview, Stanley said that she was not confident that firewalls offer sufficient protection. A better solution for all concerned, she said, would be for a firm other than Milbank to represent the Enron committee. “I don’t like walls,” Stanley said, “because walls depend on the integrity of firms. We’ve learned a lot in Enron about the self-regulation of professionals. It doesn’t seem to have worked.” At the Dec. 28 meeting, Schwartz and Blauner also discussed Milbank’s continuing connections to Enron Wind in four projects. Milbank was representing Enron Wind in the sale of its interest in a Texas wind-power facility, which closed on Dec. 29. According to the memo, Milbank was also representing Enron Wind in energy matters in Honduras, Ireland and Cefn Croes, Wales. Beyond these matters, Milbank was done with Enron. Schwartz wanted Milbank to sever its remaining links to Enron Wind, according to Blauner’s memo. “I think it’s largely a matter of optics rather than conflicts; no committee counsel in the history of bankruptcy has also simultaneously represented a debtor affiliate in matters that will come before the bankruptcy court,” wrote Blauner in the Dec. 30 memo. Milbank’s continuing ties to Enron Wind were, indeed, unusual, say bankruptcy lawyers, who specialize in representing creditors. They said that a firm usually disentangles itself from a debtor and its subsidiaries before being hired by the creditors committee. A section of the bankruptcy code states that a law firm cannot simultaneously represent a creditors committee and a client “adverse” to the committee. Enron, the debtor, is directly adverse to the committee. And Enron Wind, an indirect subsidiary, is just two steps removed. Enron’s creditors may try to claim that Enron Wind isn’t legally separate from Enron, and that Enron Wind’s assets could thus be used to satisfy Enron’s debt. Usually, in fact, a solvent affiliate of a debtor is at odds with the debtor’s creditors, says Nancy Rapoport, dean of the University of Houston Law Center and a former bankruptcy attorney with San Francisco’s Morrison & Foerster. “The healthy affiliate is running away, and the unhealthy debtor and its creditors are chasing,” says Rapoport. Blauner says that Milbank did not violate the bankruptcy code, as it had been “discharged” as counsel by all of Enron’s subsidiaries. After Blauner’s Dec. 28 meeting with Schwartz, Milbank worked to end its involvement in Enron Wind matters. It was out of the Honduras and Ireland projects by Jan. 15, according to a Milbank court filing. On Jan. 14, Milbank handed over its representation of Enron Wind in Cefn Croes to Andrew Welbourn, a former Milbank partner who now works for London’s Lovells. Welbourn notes, however, that, “given that the transactions were not subject to a particularly urgent timescale, it is possible that Milbank had ceased work on these matters on a date prior to [Jan. 14].” The next day, on Jan. 15, Milbank filed its disclosure with the bankruptcy court. Spanning 80 pages, it included exhibits. In interviews, several bankruptcy attorneys said that it was the most extensive disclosure they’d ever seen. Blauner said that it was the biggest he’d ever prepared; he couldn’t even recall the next largest. As part of the disclosure, Blauner filed an affidavit, offering a detailed narrative account of various Enron matters that the firm had worked on. The affidavit, for example, described Milbank’s representation of Enron Wind in the Texas matter, which wrapped up on Dec. 29. But Blauner didn’t note in the affidavit that Milbank still represented Enron Wind in Honduras and its sister company, Enron Wind Corp. Holdings B.V., in Ireland and Cefn Croes at the time it was hired by the committee. Along with the Blauner affidavit, Milbank filed an exhibit listing 125 Enron matters that it had handled prior to Enron’s Dec. 2 bankruptcy petition. In this exhibit, Milbank listed its work in Honduras. It stated its representation terminated in “11/01″, even though Blauner had described the Honduras matter as ongoing in his Dec. 30 memo. Milbank further disclosed that its representation of Enron Wind in Ireland had terminated in “12/01.” Again, there was no mention at all of the Cefn Croes project, which Milbank had transferred to Andrew Welbourn on Jan. 14. The disclosure had to be detailed. Bankruptcy rule 2014 requires firms to divulge every “connection” to the debtor, creditors and other parties in a case, along with those entities’ attorneys and accountants. Courts have held that all connections must be disclosed, no matter how trivial. For example, Milbank disclosed that one of its corporate partners was a brother-in-law of an attorney at Davis Polk & Wardwell, which represents a creditor. It also disclosed that a Milbank associate had owned 1,000 shares of Enron stock at the time the associate left the firm, more than a year ago. “The most important thing in bankruptcy is disclosure,” says Evan Flaschen, head of bankruptcy at Boston’s Bingham Dana. “It is a royal pain in the butt doing the kind of conflict check you need to do to show you are disinterested. But by doing that, you are informing all parties in the case of your [conflicts] situation, so if someone is uncomfortable they can raise it.” In a telephone interview, Schwartz says that she met with Milbank, as she did with other firms, to offer advice. “We just want to get all the disclosures out so that creditors and the public can see what connections there are, and then everyone can make an informed decision,” she says. “Disclosure is absolutely key.” Milbank filed its Jan. 15 disclosure on “presentment,” which meant that it could be signed by the judge without a hearing unless a party objected. Parties had until Jan. 25 to object. None did. On Jan. 28, Gonzalez signed off on the committee’s hiring of Milbank. Two days later, The American Lawyer interviewed Blauner and asked him about Milbank’s handling of the Wind matters in Honduras, Ireland and Cefn Croes. He stood by his disclosure of the Honduran and Irish matters, but he couldn’t explain why there was no mention of the Cefn Croes project. An explanation came one week later, when Blauner filed a supplemental affidavit. In Milbank’s initial disclosure, Blauner noted that he would supplement his affidavit biweekly. In the supplement, Blauner disclosed in narrative form that Milbank had represented Enron Wind in Honduras and Ireland at the time that it was hired by the committee on Dec. 12. And he disclosed that the firm represented Enron Wind Corp. Holdings in Cefn Croes until Jan. 9, 2002. He added that he had planned to describe the Cefn Croes project in his initial affidavit. But once the firm withdrew from the project, Blauner stated, he decided he didn’t need to disclose it in the affidavit. “When I deleted this paragraph providing details of the representation of Enron Wind [in Cefn Croes] from the narrative portion of my affidavit,” Blauner wrote in his supplement, “I inadvertently failed to prepare an appropriate entry to reflect the matter as a former representation on [an attached] exhibit.” Blauner also disclosed that Milbank had represented Robert Belfer, a member of Enron’s board, in trusts and estates matters after the committee hired Milbank. Belfer has been sued in derivative actions, which claim that Enron board members breached fiduciary duty in connection with Enron’s creation of certain off-balance-sheet partnerships. The firm terminated representation of Belfer before filing its Jan. 15 disclosure, and Belfer confirmed to The American Lawyer in January that Milbank no longer represents him. Gonzalez could reconsider his Jan. 28 approval. “If a judge finds that a law firm was not entirely forthcoming in its appointment [disclosure], the judge can revisit the appointment decision and require the firm to forfeit all of the fees it has earned,” says Elizabeth Warren, a bankruptcy professor at Harvard Law School. Courts have also disqualified firms for incomplete disclosures. But bankruptcy experts say that it is unlikely that Gonzalez would punish Milbank for not initially disclosing all of its Enron Wind work. It is difficult to dislodge an entrenched firm, says Lynn LoPucki, a bankruptcy professor at UCLA School of Law: “It is a big disruption in a case for a major party to change counsel.” Since Milbank made a correction soon after it learned of a mistake, it shouldn’t be penalized, says a creditor’s lawyer in the case: “If that were a criminal offense, few would escape hanging.” Milbank has gotten through the toughest part of the disclosure process. It has shed its Enron connections. Now, as Milbank goes forward, it must worry about sidestepping conflicts. The firm, for example, has represented banks in financial transactions involving various off-balance-sheet Enron partnerships. Off-balance-sheet deals will be a hot topic for the committee. If the committee investigates a matter that Milbank worked on, Squire Sanders, the committee’s conflicts firm, will have to handle the investigation. Milbank may also have to battle an issue of perception: Can a firm with such deep ties to Enron give the company the tough medicine it may need? “Milbank will have to try extremely hard to demonstrate to all the creditor body that they are serving appropriately in their fiduciary role, given their historical connections to Enron,” says H. Rey Stroube III, a partner with Dallas-based Akin, Gump, Strauss, Hauer & Feld, which represents Dynegy Inc. in the case. “It’s not that [Milbank] can’t do it, but it is a high hurdle.” Milbank’s Despins, the head lawyer for the committee, says that the firm will have no trouble vigorously pursuing its former client. “I have every reason to believe that we will be as aggressive with [Enron] as we are with any debtor when we represent a committee,” says Despins. “They won’t catch any breaks with us.”

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