US Justice Department flags Kirkland & Ellis' potential conflict of interest in a bankruptcy case

The problem arose from the firm's relationship with the top lender in the case

US Justice Department flags Kirkland & Ellis' potential conflict of interest in a bankruptcy case

The U.S. Department of Justice’s bankruptcy watchdog, the Office of the U.S. Trustee, has raised concerns about a potential conflict of interest involving the law firm Kirkland & Ellis in the bankruptcy case of genetic testing company Invitae Corp, Reuters reported.

The issue stemmed from Kirkland & Ellis's existing relationship with Deerfield Partners, Invitae’s main lender and a key player in a debt restructuring that prioritized Deerfield’s repayment.

In a recent court filing, the U.S. Trustee objected to Invitae’s proposal to hire Kirkland & Ellis as its bankruptcy counsel. The filing highlighted that while Kirkland represents Deerfield in matters claimed to be "unrelated" to Invitae’s bankruptcy, the firm's dual role could pose a conflict of interest. This objection was lodged in a New Jersey bankruptcy court where the case is being considered.

Invitae filed for bankruptcy protection in February and seeks to reorganize its finances, including securing a buyer and addressing its $1.5 billion debt load. The company has stated that its equity shareholders are unlikely to receive any recovery from the bankruptcy proceedings.

U.S. bankruptcy judge Michael Kaplan will review Kirkland & Ellis's appointment at a hearing scheduled for April 29 in Trenton, New Jersey. The decision will come amid heightened scrutiny from Invitae’s junior creditors, who have also expressed concerns about the law firm’s involvement. These creditors are considering legal actions to reverse the 2023 debt transaction that significantly benefited Deerfield, potentially unlocking substantial funds for lower-priority debt repayments.

Deerfield Partners, which holds US$ 305 million in secured bonds from the disputed debt deal, would stand to be repaid before the holders of Invitae’s US$1.2 billion in junior bonds. Invitae and Deerfield have previously defended the restructuring in court filings, arguing that the arrangement provided immediate financial relief to Invitae and postponed certain debt obligations from 2024 to 2028.

Reuters further reported that the legal controversy unfolds as Invitae faces financial difficulties exacerbated by aggressive expansion strategies, including 13 acquisitions from 2019 to 2021, significantly increasing its debt. The company has also been impacted by rising interest rates, intensified competition, and reduced demand for elective genetic testing services.

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