SAN FRANCISCO (CN) – In a move that will save Pacific Gas and Electric at least $500 million, a federal bankruptcy judge ruled Monday night that a lower federal interest rate applies to all debts in the embattled utility's bankruptcy case.
U.S. Bankruptcy Judge Dennis Montali sided with PG&E's position that the federal judgment interest rate must apply to debts in Chapter 11 cases where the debtor is financially solvent. For PG&E, that rate is 2.59%, calculated as the federal judgment rate on the day it filed for bankruptcy – Jan. 29, 2019.
An alliance of creditors, bondholders and those who sold PG&E goods and services argued 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%.
"While unsecured creditors are entitled to postpetition interest in a solvent estate, the Bankruptcy Code requires application of the federal interest rate to those claims and that such an application does not impair these claims," Montali wrote in a 17-page ruling.
Montali hinted he would likely apply the lower-interest rate at a bankruptcy hearing this month. The judge said he was bound by the 2002 Ninth Circuit decision In re Cardelucci, which states that using the federal rate for all debts “ensures equitable treatment of all creditors” and “promotes fairness among creditors.”
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.
Montali also rejected claims that applying the lower interest rate would render PG&E's creditors "impaired," or not fully paid the money owed to them. Under bankruptcy law, impaired creditors have the right to vote on a debtor's plan for exiting bankruptcy. That would give creditors the power to potentially block confirmation of PG&E’s preferred restructuring plan.
However, the judge found creditors can only be impaired by a debtor's plan for paying off its debts, not by the interest rate required under federal law.
"No plan compels the payment of the federal interest rate," Montali wrote. "Rather, the Bankruptcy Code does."
If the creditors have gripes about accepting a lower interest rate, Montali suggested they take the matter up with lawmakers.
"The unsecured creditors’ complaint is with Congress and the Bankruptcy Code, not the drafters of a plan," Montali wrote.
The judge further noted that even if he were not bound by Cardelucci, he would still apply the federal judgment interest rate because he believes that's what the Bankruptcy Code requires.
PG&E said in a statement that Montali made the right call on this dispute.
“We are pleased with the court’s decision, which confirms that the interest rate terms outlined in our plan of reorganization comply with existing law," PG&E spokeswoman Kristi Jourdan said in a statement. "We are on track to achieve confirmation of our plan in advance of the June 30, 2020, statutory deadline imposed by AB 1054. Throughout this process, we remain focused on compensating wildfire victims, protecting customer rates, and making the necessary changes to emerge as a safe, financially stable utility positioned to lead California’s energy future.”
Ben Springer, a spokesman for the Official Creditors Committee in PG&E's bankruptcy case, did not immediately return an email requesting comment Tuesday morning.
Also this month, Montali approved two settlements worth $24.5 billion, including an $11 billion deal with insurers who covered wildfire losses and a $13.5 billion settlement for all other wildfire claims.
The approval of those deals has given rise to new disputes over the limited trust fund for non-insurance wildfire claims, including whether the Federal Emergency Management Agency (FEMA) is entitled to a $4 billion slice of the $13.5 billion trust for wildfire victims.
The committee that represents wildfire victims filed an objection to FEMA's claim for reimbursement of emergency response and debris removal costs on Dec. 2. A hearing on that dispute is scheduled for Feb. 11 in San Francisco.
Also on Tuesday, a group of bondholders vying to take control of PG&E asked Montali to reconsider his Dec. 17 approval of both settlements. The bondholders, led by the $38 billion hedge fund Elliot Management, argued in a court brief that their recent offer to pay fire victims $13.5 billion in cash, instead of partially funding a trust with PG&E stock under PG&E's proposed plan, is a "new factual development" that justifies revisiting the decision.
The bondholders called provisions in both deals that require fire victims and insurers to support PG&E's preferred restructuring plan "anticompetitive" and asked Montali to consider removing those provisions.
PG&E declared bankruptcy on Jan. 29, 2019, as its finances buckled under the weight of a potential $30 billion or more in wildfire-related liabilities amid claims that its negligent maintenance of power equipment and vegetation caused 19 wildfires in 2017 and 2018 that killed more than 100 people.
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