Skepticism over whether a legal theory of liability known as inverse condemnation can be addressed through a Chapter 11 process has market experts warning that a bankruptcy petition by Pacific Gas & Electric may not be the right call after all.
Obtaining a change to inverse condemnation laws, California’s unusually strict legal doctrine that holds private utilities responsible for damage caused to private property by their equipment without regard to negligence or fault, is seen as a key rationale behind PG&E’s plan to file for bankruptcy.
But that result is by no means ensured, and Citi analyst Praful Mehta, who previously said that bankruptcy was probably the right decision for the company, has now changed his tune, arguing that if inverse condemnation cannot be addressed through bankruptcy, Chapter 11 might not be worth it for PG&E.
In a research note issued this morning, Mehta stated: “With serious doubts being expressed on this legal strategy, we think one of the foundations of … a Ch.11 filing comes into question.”
Chapter 11 carries numerous risks for the company, Mehta noted, including straining relations with California’s governor, legislators, and regulators; the potential for a Chapter 11 process lasting three-plus years; and the potential for exiting Chapter 11 without resolving the critical inverse condemnation issue.
“Our initial view was a bankruptcy may [be] the right call,” Mehta said. “However, if IC cannot be addressed, Ch. 11 likely [is] not the right call.”
Mehta pointed to a conference call held on the issue last week with attorneys from Holland & Knight. During that call, attorney Tara Kaushik explained that previous litigation in California state court has been unsuccessful in overturning the application of inverse condemnation to investor-owned utilities (although one case remains pending in California Supreme Court), but with its contemplated bankruptcy filing, PG&E is hoping to find a “better forum” for change in the federal court system.
But Kaushik noted that there could be numerous legal obstacles to such a strategy, not the least of which is the threshold matter of jurisdiction, or in other words, the legal authority of the federal bankruptcy court to rule on an issue of state law.
Holland & Knight partner Robert Labate explained that while bankruptcy courts can and do preempt state laws with respect to debtor/creditor issues, preemption of state law as a general matter is rare with regard to inverse condemnation. “It is not something the bankruptcy court is likely to take on,” Labate stated.
A second obstacle would be obtaining a regulatory ruling on cost recovery. In an inverse condemnation proceeding, the utility typically applies to regulators for a rate increase to cover the additional liability. Unless and until such increase is denied, however, the utility may not have a case to bring before a federal judge since it has not yet, as a legal matter, incurred an injury, a legal concept known as ripeness.
PG&E, which last week announced plans to file for Chapter 11 on or about Jan. 29 in the U.S. Bankruptcy Court for the Northern District of California, estimates that it could face $30 billion in liabilities from the 2017 and 2018 wildfires in California. PG&E’s DIP financing would suggest the plan is for a two-year stay in bankruptcy. For an additional cost, the company does have the option to extend the financing by one year from the proposed December 2020 maturity.
This story was written by Rachelle Kakouris and Alan Zimmerman
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