Wildfire Victims Lose Bid to Send PG&E Insurance Dispute to State Court

A bankruptcy court will decide if a trust for paying fire victims can intervene in an arbitration dispute between PG&E and its insurers.

Vines surround a burning building as the Kincade Fire burns through the Jimtown community of unincorporated Sonoma County, Calif., on Thursday, Oct. 24, 2019. (AP Photo/Noah Berger)

SAN FRANCISCO (CN) — A federal bankruptcy judge on Tuesday refused to relinquish jurisdiction over an insurance-related dispute that could net up to $400 million or more for victims of wildfires likely caused by Pacific Gas and Electric’s equipment.

Retired Justice John K. Trotter of California’s Fourth Appellate District runs a multibillion-dollar trust established as part of a plan to bring PG&E out of Chapter 11 bankruptcy last year. In February, Trotter sued 22 former PG&E board members and executives in state court on claims of breach of fiduciary duty. PG&E assigned its right to pursue those claims to the Fire Victim Trust as part of a settlement agreement reached last year.

But the maximum fire victims can receive through the lawsuit is limited to PG&E’s maximum insurance coverage for liability claims against its former officers and directors. The maximum recovery is estimated at $200 million to $400 million or more, according to Fire Victim Trust attorney Frank Pitre.

Last month, Trotter sued PG&E and 15 of its insurance companies in state court seeking to take part in a private arbitration proceeding that will determine the maximum payout. PG&E had the case removed to federal bankruptcy court, arguing the bankruptcy court has exclusive jurisdiction over disputes between PG&E and the Fire Victim Trust.

Trotter filed a motion to remand the case to state court, arguing the trust’s right to intervene in the insurance arbitration dispute is a purely a matter of state law that does not concern the bankruptcy court.

Following more than an hour of arguments via Zoom video conference Tuesday, U.S. Bankruptcy Judge Dennis Montali ruled in favor of PG&E.

“I’m going to deny the motion to remand,” Montali said.

Quoting lines from Trotter’s lawsuit , Montali noted the trust described the dispute as “an essential part of the reorganization plan” and a “foundational premise” of the bankruptcy plan.

“The underlying rights are governed not by state common law but by the actual charter that created the trust,” Montali said. “Justice Trotter wouldn’t be in existence if that trust wasn’t created as a product of the bankruptcy plan.”

Fire Victim Trust lawyer David Molton argued that no aspect of the dispute requires a judge to interpret part of PG&E’s Chapter 11 bankruptcy plan. He said the resolution of this legal action hinges on one issue alone — whether the trust has a right under state law to intervene in an insurance dispute to which it is the sole beneficiary.

“It has nothing to do with the plan. It has nothing to do with the bankruptcy,” Molton said. “It has to do with California law.”

Montali said he found Molton’s attempt to “reframe” the issue as purely a matter of state law unavailing.

“If we do the animal test and say if it quacks and it has webbed feet, we can’t call it a turkey,” Montali said. “It’s duck.”

In its motion to remand the case back to state court, Fire Victim Trust lawyers said PG&E’s decision to immediately remove the case to bankruptcy court last month “smacks of forum-shopping.”

On Tuesday, Montali said the same accusation could be hurled at Trotter for deciding to file the lawsuit in state court in the first place.

“Perhaps what the trustee has done smacks of forum-shopping also because he could have brought the action here,” Montali said.

Trotter acknowledged in a letter to fire victims in January that the trust is $1 billion short of its intended value due to PG&E’s lower than expected stock price. The trust was intended to make $13.5 billion available to fire victims through a mix of cash and liquidated shares of PG&E stock. More than 86,000 claims for compensation were filed with the trust.

Also on Tuesday, PG&E made its first appearance in Sonoma County Superior Court to face 33 criminal charges related to the 2019 Kincade Fire, which burned about 77,000 acres, razed 174 buildings and prompted the evacuation of 200,000 residents.

PG&E attorney Brad Brian told Sonoma County Judge Mark Urioste the company intends to file a motion to dismiss 25 charges accusing it of causing air pollution emissions. PG&E did not enter a plea and the next hearing in the case is scheduled for May 25.

The criminal charges filed in Sonoma County also prompted a federal probation officer to report PG&E for a potential probation violation.

U.S. District Judge William Alsup, who oversees PG&E’s probation for convictions related to the 2010 San Bruno gas pipeline explosion, ordered the company to appear in federal court on May 4 to discuss the suspected probation violation.

PG&E was ordered not to violate state or federal laws as a condition of its federal probation, which expires in January 2022.

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