SAN FRANCISCO (CN) – A federal bankruptcy judge hinted Wednesday he will likely let Pacific Gas and Electric keep at least $500 million in potential interest owed on billions of dollars in debt, despite arguments that such an outcome would be patently unfair.
U.S. Bankruptcy Judge Dennis Montali listened to lawyers squabble for two hours in his courtroom over what interest rate should apply to PG&E's debts, but the judge seemed fairly convinced that a 2002 Ninth Circuit ruling requires him to apply a lower interest rate.
According to PG&E, bankruptcy law mandates the federal judgment interest rate apply to debts in Chapter 11 cases where the debtor is financially solvent. For PG&E, that rate would be 2.59%, calculated as the federal judgment rate on the day PG&E filed for bankruptcy – Jan. 29, 2019.
An alliance of creditors, bondholders and trade claimants, or those who sold PG&E goods and services, say the proper interest rate should be based on the terms of PG&E's contracts with individual creditors, or tied to the much higher California state judgment interest rate of 10%.
According to PG&E, the difference between the federal judgment rate and various contract rates on just its unsecured debt alone equals about $500 million.
"The debtors are trying to take hundreds of millions of dollars and give it to equity," bondholders' attorney Abid Qureshi argued, insisting the interest money would go to PG&E shareholders instead of creditors.
Montali repeatedly asked PG&E's opponents how he can rule in their favor when a 2002 Ninth Circuit ruling, In re Cardelucci, says the law "mandates application of the federal judgment interest rate."
In a 14-page brief, PG&E cited the Ninth Circuit's holding in Cardelucci, which stated that applying the federal judgment interest rate uniformly "ensures equitable treatment of all creditors" and "promotes fairness among creditors."
Despite that finding from a higher court, creditors insisted the ruling does not apply to circumstances in PG&E's bankruptcy case.
Representing a group of unsecured creditors, attorney Dennis Dunne argued his clients can only be considered "unimpaired," or fully paid the money owed to them, if all their "legal, equitable and contractual rights" remain unaltered.
Paying creditors less interest than what they are owed under contracts and state law would essentially render them "impaired" and give them the right to a vote on PG&E's plan for exiting bankruptcy, Dunne said. That would give creditors the power to potentially block the confirmation of PG&E's preferred restructuring plan. But PG&E maintains the creditors are only "impaired" by the law, not by the utility.
"The idea that it's equitable to have one rate apply to everyone, it's mismatching," Dunne argued.
Despite the impassioned advocacy of PG&E's opponents, Montali appeared unwilling to accept arguments in favor of applying higher interest rates.
"You make a very persuasive argument except I am bound by a case," Montali said, referring to the Ninth Circuit's 2002 Cardelucci ruling.
Montali took the arguments under submission and did not say when he would issue a ruling.
Last week, PG&E announced a $13.5 billion settlement with wildfire claimants. The settlement package includes $5.4 billion in immediate cash, $650 million released in January 2021, and $700 million released in January 2022. The remaining $6.75 billion will come in the form of stock in the reorganized PG&E corporation, with a guarantee that a trust fund for fire victims will own no less than 20.9% of the restructured company.
Also on Wednesday, Montali said he would postpone a Dec. 17 hearing on whether billions of dollars in state and federal government wildfire claims are liquidated and therefore not subject to estimation like other wildfire claims.
If the $13.5 billion settlement is approved, the process of estimating wildfire claims and a related state jury trial on PG&E's liability for the 2017 Tubbs Fire will become unnecessary. Approval of the settlement would also moot the dispute over liquidated versus unliquidated government claims.
A hearing on a motion for approval of the $13.5 billion settlement is scheduled for Dec. 17 in San Francisco. Objections to the settlement must be filed with the bankruptcy court by noon on Dec. 16.
Amid accusations that it underinvested in safety and maintenance before allegedly sparking 22 wildfires in 2017 and 2018, an audit recently made public found PG&E diverted $123 million from a program designed to help bury power lines underground. The Oct. 15 audit by the California Public Utilities Commission found PG&E "consistently and significantly" redirected ratepayer money allocated for the program and that it could not account for how the money was spent.
Though the audit stopped short of accusing PG&E of fraud, it said circumstances surrounding the shifting of funds were indicative of "fraud risk factors." The review also concluded the diversion of money caused delays and higher costs for the program.
"PG&E ratepayers not only paid more in rates than PG&E spent on the Rule 20A program, the project activity that was performed was done so in a manner that was inefficient and costlier than necessary," the 250-page audit states.
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