Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Tuesday, November 8. In todays' newsletter, we examine the mea-culpa statements filed by several of the largest claims agents as they face a bankruptcy-court probe into side deals they signed with a claims-trading startup.

Elsewhere in bankruptcy court, Kirkland & Ellis denied having a disqualifying conflict in the bankruptcy case of 3M's military earplug unit, and digital manufacturing company Fast Radius filed chapter 11 after it went public through a SPAC merger this year.

Bankruptcy claims agents apologize for undisclosed data-sharing. Legal-service firms that administer major corporate bankruptcies are apologizing for undisclosed data-sharing deals, asking a New York court to spare them from punishment for collecting unauthorized fees in large chapter 11 cases.

The apologies followed a monthslong investigation by bankruptcy judges in New York into side deals between the service firms and Xclaim Inc., which used claims data to facilitate trades between bankruptcy creditors and debt buyers on its platform. The probe is exploring the firms' dealings with Xclaim during past cases in which they served as court-approved claims agents.

Four of the firms—Epiq, Stretto, Donlin and Omni—have said they terminated agreements with Xclaim earlier this year and only provided it with information that was also available to the public.

Justice Department lawyers want the scope of the inquiry expanded further, saying Friday that claims agents failed to disclose the agreements with Xclaim when they received court approval to work on numerous chapter 11 cases.
 

Lawyers from Kirkland & Ellis LLP denied on Monday it has a disqualifying conflict that should stop it from serving both as defense counsel to 3M and bankruptcy counsel to the company's combat-earplug division, Aearo Technologies LLC.

3M pushed Aearo into bankruptcy earlier this year, hoping to use the chapter 11 case to resolve mass product-liability lawsuits alleging its military earplugs exposed U.S. service veterans exposed to harmful noise on the battlefield. Minneapolis-based 3M, valued at close to $69 billion and not in chapter 11 itself, has agreed to bankroll a chapter 11 plan for Aearo that settles all valid injury claims, present and future.

Government lawyers and personal-injury claimants petitioned the bankruptcy court in recent weeks to disqualify Kirkland as Aearo's counsel. They argue that Kirkland can't show "undivided loyalty" to Aearo as a client given the firm's simultaneous representation of 3M as it tries to minimize its earplug-related liability. Kirkland said in response filed in bankruptcy court on Monday that the goals of its co-clients are aligned in both the chapter 11 case and the underlying tort lawsuits.

"This unified goal is to negotiate, obtain approval of, and ultimately consummate a plan of reorganizationthat resolves their respective liability," the firm said.

Kirkland said it properly disclosed its joint representation of Aearo and 3M in bankruptcy court, and that if the interests of its clients diverge in the chapter 11 case, any conflict of interest can be mitigated by calling in separate law firms to render independent legal advice.

Kirkland, widely considered the top firm in bankruptcy, said it collected 1.7% of its overall fee receipts from 3M in the year before Aearo's chapter 11 case. The firm also said it is incentivized to "produce the best possible outcome" for Aearo and that its disqualification would impair Aearo's ability to reorganize and pay all valid claims. — Andrew Scurria

Fast Radius SPAC merger ends in bankruptcy. Fast Radius Inc., a digital manufacturing company that went public via a SPAC merger in February this year, filed chapter 11 to sell itself.

The Nasdaq-listed company said it is “launching an in-court process to effectuate one or more strategic transactions,” and that it is in discussions with potential partners while exploring various alternatives. Fast Radius's shares have plummeted 96% since the Chicago-based business combined with a blank-check company in a deal valued at $1.4 billion, backed by investors including United Parcel Service Inc.

The company said Tuesday that pursuing a sale as a going concern through chapter 11 is the best option available to continue its mission of building a first-of-its-kind cloud manufacturing platform.

“Recent headwinds in the capital markets have inhibited our ability to adequately put in place the capital structure needed,” said Lou Rassey, Fast Radius’s co-founder and chief executive. The company said it intends to keep operating and paying its employees, suppliers and vendors normally.

Fast Radius this past summer said its business had been affected by rising inflation and global supply-chain shortages, which led it to cut its revenue forecast for 2022. — Dave Sebastian

New York City nonprofit's creditors says many sex-abuse claims are uninsured. The Madison Square Boys & Girls Club's official committee of unsecured creditors said the nonprofit can't locate insurance coverage for abuse claims that arose before 1968, which represent about 40% of the total abuse claims the organization faces.

The creditors committee is opposing Madison’s request to tap an $11 million chapter 11 loan, saying the new debt would encumber the youth organization’s valuable real estate and other assets that could be contributed to a settlement trust.

Only a few hundred thousand dollars from the loan are projected to be available for abuse claimants after legal bills, interest and fees are paid, according to the committee's objection, filed Sunday in the U.S. Bankruptcy Court in New York.

The committee said that given the lack of available insurance, pledging Madison Square's assets to borrow money is premature "without any semblance of a consensual plan structure or exit strategy for this case."

Madison filed for chapter 11 in June, following several other youth organizations that have turned to bankruptcy to settle allegations of childhood sexual abuse. The organization said 140 abuse claims were pending against it at the time it filed bankruptcy. — Jonathan Randles

PhaseBio taps Chiesi as lead bidder for drug assets. Chiesi Farmaceutici SpA has been named as the lead bidder for the key assets of PhaseBio Pharmaceuticals Inc., a publicly traded drug developer in chapter 11.

PhaseBio, focused mostly on a drug that helps prevent major bleeding for patients on blood thinners, said last month when it sought protection from creditors that it had lined up an unnamed strategic buyer to acquire its major program, Bentracimab. In a filing Friday in the U.S. Bankruptcy Court in Wilmington, Del., the Malvern, Pa.-based company identified its lead bidder as Chiesi.

The proposed bid, which is subject to court approval and higher offers, includes an upfront payment of $40 million in cash to PhaseBio and up to a total of $60 million for the achievement of certain milestones.

PhaseBio's chapter 11 filing follows the breakdown in a three-year partnership with SFJ Pharmaceuticals X Ltd., which has spent about $100 million on Bentracimab and is looking to claim the assets associated with the program. — Becky Yerak

Blue Apron withdraws revenue target as it awaits funds from major shareholder. The New York City-based company said the delayed payment from entrepreneur Joseph Sanberg led to an at-the-market offering that generated about $14.1 million of net proceeds to help Blue Apron manage its cash shortfall.

Shares are down 73% year to date at the online meal kit company, while sales are flat as the pandemic-inspired boom in at-home cooking cools off.

Inflation strains voters across income levels ahead of midterm elections. The economic pain from the highest inflation in four decades is reaching across all income groups and casting a broad shadow over Democrats’ prospects for keeping control of Congress in Tuesday’s midterm elections, the latest Wall Street Journal poll shows.

• Energy sticker shock grabs spotlight. Elevated fuel prices and shortages remain a concern for U.S. consumers ahead of the midterms, in which energy costs have become a crucial campaign issue.

Share your tips, suggestions and feedback with the WSJ Pro Bankruptcy team: Soma Biswas; Alexander Gladstone; Jodi Xu Klein; Akiko Matsuda; Jonathan Randles; Alexander Saeedy; Andrew Scurria; Becky Yerak. 

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