‘Legally correct’ PG&E bankruptcy debt ruling criticized

A bankruptcy court's decision to allow the Pacific Gas & Electric Corp. to pay the federal interest rate opposed to the higher contractual rate on debt may have been legally correct but is lousy bankruptcy policy, argued some legal experts. They predicted appeals.

U.S. Bankruptcy Judge Dennis Montali's recent ruling forces creditors to accept a lower interest rate that will save PG&E at least $500 million.

UC Hastings School of Law professor Jared Ellias said, "It's not a rule that makes a lot of sense. It makes more sense to pay people what they deserve."

The federal interest rate of 2.49% must apply in cases in which the bankrupt company is financially solvent, according to Montali's Dec. 30 order.

"While unsecured creditors are entitled to post-petition interest in a solvent estate, the Bankruptcy Code requires application of the federal interest rate to those claims," wrote the judge, who is based in San Francisco.

Creditors and bondholders argued interest should accrue at contractual rates or the much higher California rate of 10%.

The court is restrained by a 2002 9th U.S. Circuit Court of Appeals decision emphasizing "a single, easily determined rate for all post-petition interest ensures equitable treatment of creditors" and "promotes fairness among creditors," Montali wrote in his order. In re Cardelucci (9th Cir. 2002).

"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," said a PG&E statement. "We are on track to achieve confirmation of our plan in advance of the June 30, 2020 statutory deadline imposed by AB 1054."

In another blow to the creditors, Montali also found his ruling doesn't leave them impaired, or not fully paid the money owed to them.

Impaired creditors get to vote in favor or against plans of reorganization for the company to emerge from bankruptcy. They could potentially block confirmation of PG&E's proposal.

Montali's ruling leaves the creditors unimpaired despite getting a lower rate of return on PG&E's debt than they would expect if the utility had not filed for bankruptcy.

Pepperdine School of Law professor Mark S. Scarberry agreed with Montali that the lower federal interest rate should apply but said he should have instead found the ruling impairs the class.

"The correct way to come out would have been to say the class is impaired -- that the plan fundamentally changes their rights," he said.

The appellate decision Montali referenced doesn't speak to whether the creditors remain unimpaired, according to Scarberry.

"Montali's misapplying it by saying it has any relevance to impairment or lack of impairment," he said. "It doesn't deal with that at all."

Ellias argued Montali is bound by the Bankruptcy Code and that his ruling is "clearly written to indicate he doesn't agree with this rule."

"The unsecured creditors' complaint is with Congress and the Bankruptcy Code, not the drafters of a plan," Montali wrote.

Creditors will most likely appeal the decision, according to Ellias. He predicted higher courts will reinterpret existing precedent to "provide judges with a more obvious route to getting around the statute."

"One can imagine they have arguments they are impaired and get to vote," he said.

The impairment decision is especially significant for the committee representing bondholders because it is competing against PG&E to pass its plan of reorganization. In December, the group fighting to wrest control of PG&E from existing ownership argued Montali should reconsider his decision to approve two settlements worth $24.5 billion, including a $13.5 billion deal with wildfire victims and a $11 billion deal with insurers.

The bondholders, led by Elliott Management, revised their deal to offer wildfire victims $13.5 billion in cash, instead of a mix of cash and equity PG&E provides in its plan. They want Montali to eliminate a provision in the utility's settlements with both groups forcing insurers and wildfire victims to vote in favor of its plan of reorganization.

Montali will consider the issue at a Jan. 21 hearing.