Baker & Hostetler lawyers, appointed to represent plaintiffs in PG&E bankruptcy, warn of dangers

SAN FRANCISCO -- A bankruptcy attorney appointed on Monday to represent thousands of people harmed by wildfires allegedly caused by the Pacific Gas & Electric Co. said the judge overseeing the bankruptcy risks having the matter removed from his court if he approves the utility's financing plan.

The banks that lent PG&E's parent company $5.5 billion can argue the utility defaulted on its loans and demand whole and immediate repayment if it is found potentially liable for another wildfire or if a trustee is appointed to replace current leadership, according to Baker & Hostetler LLP partner Cecily A. Dumas.

"Honestly, this kind of a provision was an oversight," Dumas said.

In January, PG&E arranged for four banks to provide $5.5 billion in debtor-in-possession financing to fund continuing operations during its bankruptcy, which it expects to take two years.

U.S. Bankruptcy Judge Dennis Montali of San Francisco continued the decision at a March 13 hearing to approve the financing to later in the month because of concerns over the utility being found potentially liable for another wildfire.

PG&E attorney Paul Zumbro argued the possibility was considered when the company structured its deal with the banks and that it would not default.

But Montali maintained reservations about PG&E's proposal, primarily because his oversight over future steps would be limited if the utility were to default, according to Dumas.

"PG&E lawyers were arguing it wouldn't rise to the level of contractual default, but any one of the fires that were created in 2017 would absolutely be large enough to ... trigger the covenant that allows lenders to declare default if there is an adverse effect," she said.

PG&E is facing roughly $40 billion in wildfire liability, according to Baker & Hostetler partner Eric E. Sagerman.

USC School of Law Professor Robert Rasmussen said such provisions in financing agreements are standard and to be expected during Chapter 11 proceedings. But Dumas said PG&E's bankruptcy should not be treated as "business as usual" because the utility is a convicted felon and continues to provide operations that could reasonably cause another wildfire.

"Whether it'll get out of the 2019 fire season is a big question here," she said. "That needs to be the primary question to any consideration of any long term financial performance. If you can't get out of bankruptcy, it doesn't matter what your stock price is."

The plaintiffs in any future wildfire caused by PG&E would have priority over those who have already filed claims against the utility before its bankruptcy, Dumas and Rasmussen agreed.

Dumas also did not discount the possibility Montali or U.S. District Judge William Alsup of San Francisco -- who is handling PG&E's criminal probation -- might appoint a trustee to lead the company, which would similarly trigger a default because PG&E has repeatedly been found in violation of its probation arising out of the 2010 San Bruno pipeline explosion.

"[The terms of the financing] just doesn't match the reality of situation," Dumas said. "They aren't connecting the standard things that happen in bankruptcy court with the actual situation of this debtor."

The condition that PG&E triggers a default on its loan if a trustee is appointed to head the company is not standard for financing agreements, she continued.

PG&E declined to comment.

An examiner being appointed to scrutinize past decisions and recommend improvements is more likely, according to Rasmussen, who added courts "often feel that they may not be in the best position to select the right person to lead the company."

Robert A. Julian, a Baker & Hostetler partner who will also represent tort claimants, objected to PG&E's motion to approve $350 million in bonuses for employees.

Julian, who has started taking depositions, said internal emails indicate employees knew the equipment that started the Camp Fire was going to fail.

"It doesn't appear to me as though the guys who put together the policy considered employees' culpability," he said. "They are prioritizing performance in profits over wildfire safety by a factor of four to one."