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PG&E’s Chapter 11 deal with shareholders challenged on appeal

Some PG&E shareholders say a bankruptcy court's relief plan will not lead to full payment of their claims, but their arguments may come at the expense of wildfire victims.

SAN FRANCISCO (CN) — PG&E’s bankruptcy agreement with shareholders is being challenged in the Ninth Circuit, in a dispute over whether investors’ claims are being paid in full under a bankruptcy court’s approved payment plan.

Lawyers for Public Employees Retirement Association of New Mexico faced an appeals court panel Friday to challenge a federal judge’s order affirming a bankruptcy court’s approving PG&E’s Chapter 11 plan. PG&E would pay out investors’ claims by converting their claims into stocks under the deal.

In February 2020, the utility company fought back investors who claimed it misled them about its wildfire safety practices. The investors lost a bid to file a massive class action claim seeking billions in damages, filing individual claims instead. 

PG&E shareholders who bought stock from April 2015 to November 2018 and noteholders who purchased bonds between March 2016 and April 2018 claimed the company artificially inflated its stock price. PG&E made fraudulent statements about its safety record and compliance with state regulations, and failed to notify shareholders before filing for bankruptcy in 2019, they claimed. 

The company has been accused of neglecting maintenance and failing to clear vegetation around power lines in the years leading up to destructive California wildfires in 2017 and 2018 that killed 129 people and destroyed nearly 28,000 buildings. Approximately 80,000 fire victims filed claims for recovery in PG&E’s bankruptcy case by the Dec. 31, 2019, deadline.

Public Employees Retirement Association of New Mexico was appointed lead plaintiff in one of four securities class actions filed in 2018 and 2019 against PG&E. In a nine-page order issued in August 2021, U.S. District Judge Haywood Gilliam Jr. affirmed the bankruptcy court’s order, saying it did not err by finding the payment plan’s definition of “insurance deduction” is fair and equitable.

In court Friday, U.S. Circuit Judges Kim McLane Wardlaw, Jacqueline Nguyen and Lucy Koh — appointed by Bill Clinton, Barack Obama and Joe Biden, respectively — waded into the dispute. 

Representing the pension fund, Michael Etkin argued that the bankruptcy court, by creating a formula to convert individual claims’ value into shares, did not ensure full payment of those claims.

He said that for example, a shareholder’s individual claim might be valued at $130,000, but under the bankruptcy court’s formula, converting that claim to stock under PG&E's current trading price would leave them receiving only $35,000.

“We don't believe, and the numbers don't bear it out, that creditors in this class are being paid in full,” he said. “There was absolutely no support for that on the record. The treatment is different — they’re an impaired, subordinated class of creditors.”

Nguyen said, “There’s a fundamental difference between your view and the bankruptcy court’s."

PG&E attorney Richard Slack said the company supports the bankruptcy court’s plan, and claimants will get an insurance payment on top of the shares they receive for relief. 

“Once that’s done, that’s finality, and that’s the key to the plan,” Slack said. 

Nguyen disagreed since the appellants say they are not getting full satisfaction of their claims. But she also added: "I find this case very surprising, because you went out and mediated the case, but you can't agree on the import of the value that was agreed upon.”

Slack replied, “The fact is, once there was this agreement on the conversion, a plan saying how many dollars you have when you convert into shares, that answers the question of 'what do you get?'"

Wardlaw weighed in. “How could these sophisticated lawyers come to an agreement without nailing down how the insurance proceeds would play in?”

Slack said the bankruptcy court can fashion a plan to eliminate the risk of “double recovery” — a legal offense where an insuree makes several claims from different insurers for the same loss. 

David Richardson, representing more than 85,000 fire victims, said they will be affected by the outcome of this appeal. The Fire Victim trust, which pays out fire victims with distributed proceeds, is the largest shareholder of debtor stock — and the price of that stock could be affected by this case. 

“We believe the paid in full issue is primarily an issue of law,” Richardson said. 

In rebuttal, Etkin said that the fire victims originally had about 477 million shares in their settlement with PG&E, and have sold off nearly 75% of them. 

“Until double recovery is reached and we have all the facts you can’t assume double recovery, and that’s the problem with what the bankruptcy court did,” he said. 

The appeals panel did not indicate when it will issue a ruling. 

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