Not Again! PG&E Bankruptcy FAQs

The PG&E chapter 11 is a major case and will take a while to sort out. Contractors should consult with their lawyers to make sure their claims and rights are protected.
For the second time in the 21st Century, the nation’s largest investor-owned utility has filed chapter 11.
By Mark Gorton – Shareholder, Boutin Jones Inc.

On January 29, 2019, PG&E Corporation and its primary operating subsidiary, Pacific Gas and Electric Company (together “PG&E” or the “Debtors”), filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Northern District of California in San Francisco. PG&E’s cases have been assigned to Judge Dennis Montali and are jointly administered under Case No. 19-30088 (DM). Judge Montali also presided over PG&E’s first chapter 11. 

Case information about the PG&E chapter 11 can be accessed without charge through Prime Clerk, the noticing agent hired by PG&E with the approval of the bankruptcy court, at https://restructuring.primeclerk.com/pge/. Documents filed in the case can be reviewed by clicking the “Docket” tab on the Prime Clerk PG&E webpage. The bankruptcy court maintains a docket in the PG&E case which can also be accessed electronically through the federal PACER program but you must sign up to review documents and the PACER program charges for accessing documents. Use the Prime Clerk site. PG&E has also provided a chapter 11 link on its webpage containing information about the reorganization process, including press releases and FAQs at www.pge.com/reorganization.

Immediately upon the chapter 11 filing, the bankruptcy automatic stay came into effect and put a stop on virtually all collection, lien creation, and private-party litigation against the Debtors. The filing also immediately created a bankruptcy estate that includes virtually all of the legal and equitable interests of the Debtors’ in property at the time of filing (the “petition date”). The bankruptcy estate is managed and represented by PG&E as the “debtor in possession” (or “DIP”).   

PG&E as DIP is prohibited from paying any claims of creditors for services rendered or goods delivered prior to the petition date. Those prepetition claims may only be paid under a confirmed plan of reorganization or a specific court order. Claims for service rendered or goods provided after January 29, 2019, the petition date (postpetition claims), may be paid by the DIP in the ordinary course of business. To pay for its chapter 11 administration and its postpetition obligations, PG&E has obtained a $5.5 billion loan commitment that should be finally approved by the bankruptcy court by the time of this article’s publication. The loan is projected by PG&E to cover postpetition expenses and claims for the first two years of the case.

With that background, let’s answer some basic questions.

1. Will I get paid?

That depends on whether your claim is prepetition or postpetition. Postpetition claims should be paid in the ordinary course of business.

Payment on prepetition claims will be delayed until a plan is confirmed or a specific court order authorizes payment. Payment on a prepetition claim will also occur only to the extent of the amount of the claim as stated in the bankruptcy schedules of liabilities and only if the claim is not identified as contingent, unliquidated or disputed (unless superseded by an allowed proof of claim timely filed by the creditor).

2. Will I get paid the full amount of what I’m owed?

Postpetition PG&E claims should be paid in full in the ordinary course of business. In general, postpetition claims are at risk in bankruptcy cases when (x) the case becomes “administratively insolvent” (i.e., the income of the postpetition estate and the estate assets together became insufficient to pay the expenses of the postpetition estate) or (y) the bankruptcy court determines the value to the estate of the postpetition service or goods was less than the amount paid. The risk of administrative insolvency in PG&E’s case appears to be very low in light of the $5.5 billion loan commitment and the bankruptcy court rarely intervenes in the value of postpetition goods and services because of the presumptive validity of the contract value agreed by the parties.

It is too early to tell whether PG&E’s prepetition claims will be paid in full. Prepetition claims will be paid to the extent allowed and as provided in a confirmed plan or a specific court order. The bankruptcy law requires a plan to satisfy the “best interests” test, which means creditors must be provided no less than the amount they would receive in a liquidation of the debtor under chapter 7. That is a minimum; the goal of creditors in plan negotiations is to do better. In PG&E’s first chapter 11, filed in 2001 during the height of the California energy crisis, the plan that was eventually confirmed in 2003 provided for payment in full of all allowed prepetition claims. 

3. When will I get paid?

A postpetition claim should be paid in the ordinary course of business.

Payment on prepetition claims will be delayed, and the delay may be long. A plan may take years to confirm. In the first PG&E chapter 11 case, it took nearly three years for the plan to be confirmed and become effective.  Even then, payment on many prepetition claims was delayed due to disputes over the extent of PG&E’s liability, the amount of the claim or other aspects of a particular claim. These disputes were resolved in claim objections decided in the bankruptcy court. Many of these claim objections lasted long after plan confirmation and the plan’s effective date.

4. Is it possible for my prepetition claim to be paid before a plan is confirmed?

As indicated earlier, prepetition claims can only be paid under a confirmed plan or a specific court order. 

There are limited circumstances when your prepetition claim may be paid under a specific court order such as either as part of PG&E’s assumption of an executory contract or as part of PG&E’s First Day Order authority.  See Question 6 below.

5. What is an executory contract and how does it affect my prepetition claim?

An executory contract in bankruptcy is generally held to be an agreement in existence on the petition date where material performance remains to be done by both the debtor and the nondebtor contract party. A partially performed construction contract between an owner and a contractor is a classic example – the owner has material performance to pay and the contractor has material performance to complete the services and provide the materials. Contracts between prime contractors and subcontractors and contractors and materialmen also qualify where one of the parties is a debtor. By contrast, a promissory note is not an executory contract because the only material performance required is by the borrower, not the lender.

PG&E as DIP has the right to assume or reject executory contracts in the chapter 11. If a contract is beneficial or profitable to the estate, the DIP can retain it by assumption. On the other hand, if a contract is burdensome or unprofitable, the DIP can reject it. In some cases, debtors and counterparties negotiate modifications to executory contracts that allow the contract as modified to be assumed. Essentially, the decision to assume means the contract will be performed and the estate will receive the benefits and assume the burdens of the contract. The rejection decision means the debtor will not perform and the estate’s only liability will be for breach of contract damages that will be treated as a prepetition nonpriority unsecured claim. The decision to assume or reject belongs to the DIP, subject to bankruptcy court approval. For most executory contracts, the court will not interfere with a rejection decision made within the scope of the DIP’s management authority under the business judgment rule. The DIP has until confirmation of the plan to make the decision and seek court approval, unless an earlier time is ordered.  Because the decision to assume or reject can have major financial impacts on the reorganization, any deadline set by the bankruptcy court will provide the DIP with a reasonable time to evaluate its options.

During the period between the petition date and the order approving assumption or rejection of an executory contract (sometimes referred to as the “limbo” period), the nondebtor counterparty is required to continue to perform the contract despite the debtor’s prepetition breach. The nondebtor may seek relief from the bankruptcy court by filing a motion asking for relief such as modification of the automatic stay to allow suspension of performance, immediate payment for postpetition services and goods as an administrative expense, and setting a deadline for PG&E to assume or reject the contract.

For a prepetition claim to be paid under an executory contract, PG&E’s assumption of the contract must be approved by the bankruptcy court. As one of the conditions for approval of assumption, the DIP must cure prepetition defaults under the executory contract. Thus, a prepetition claim arising out of the contract would have to be paid for the contract to be assumed. In this fashion, a prepetition claim may be paid by specific court order prior to confirmation of a plan. The cure must be “prompt” but some bankruptcy courts have found cures made in installments over time, sometimes as long as 12 months, to be prompt.

6. How might the First Day Orders help in getting my claim paid?

PG&E sought several “First Day Orders” when it filed chapter 11 that may provide relief to some contractors. The bankruptcy court has granted interim approval for orders authorizing PG&E to pay prepetition claims of vendors determined by PG&E to qualify as Operational Integrity Suppliers, Maintenance and Repairmen and Sellers.

  1. “Operational Integrity Suppliers” are described as vendors, suppliers, service providers and similar parties essential to protecting the public health and safety and maintaining the on-going value and integrity of the debtors’ businesses and operations. These Operational Integrity Suppliers, according to PG&E, fall into three primary categories: (1) those that provide necessary support for safe and reliable electric and natural gas service (“Safety and Reliability Vendors”), (2) those that provide goods and services related to planned and unplanned outages (“Outage Vendors”) and (3) those that provide goods and services for the operation and decommissioning of the nuclear reactor power units (“Nuclear Facility Vendors”).
  2. “Maintenance and Repairmen” are described as service providers that may be permitted to assert statutory or possessory liens against Debtor’s property and equipment if the Debtors’ fail to pay the prepetition amounts owed to those parties for their various goods and services (“Lien Claimants”) who provide maintenance and repair services on the Debtors’ network of production, transmission and distribution facilities, including the Debtors’ generation units and gas facilities. 
  3. “Sellers” are described as those that in the ordinary course of business sold and delivered a variety of raw materials, equipment, specially fabricated repair and replacement parts, supplies and other goods to the Debtors prior to the petition date but for which the Debtors have not yet been invoiced or made payment to the Seller in full and who have made a written demand for reclamation of those goods not later than 45-days after the receipt thereof by Debtors or 20-days after the petition date if the 45-day period expires after the petition date.

These orders do not require PG&E to pay any of these folks. The orders give authority to PG&E management to make the determination in their business judgment.

These First Day Orders are subject to final approval at a hearing on February 27, 2019. PG&E asks that you contact your normal sourcing contact at PG&E concerning whether you may qualify under one or more of these First Day Orders for payment of some or all of your prepetition claim. For more detailed advice, you should consult with your attorney.

7. What do I have to do to be sure I participate in any distribution and what is the process that will be involved in sorting out creditor payments?

PG&E has not yet filed bankruptcy schedules identifying its liabilities and the deadline for it to do so has been extended to March 14, 2019, subject to further extension.  A deadline for filing proofs of claim has not yet been set.  

In chapter 11, payment on a prepetition claim will be made only to the extent of the amount and priority of the claim as stated in the bankruptcy schedules of liabilities and provided the claim is not identified as contingent, unliquidated or disputed  unless superseded by a timely filed and allowed proof of claim timely filed by the creditor. Said another way, if PG&E has identified your claim in its Schedule of Liabilities, the Schedule does not say the claim is contingent, unliquidated or disputed, and you agree with the description of your claim as stated in the Schedule, you do not have to file a proof of claim and you will participate in any distribution based on the Schedule. If any of those elements are missing, you need to file a proof of claim.

The bankruptcy court has approved Prime Clerk as the Claims and Noticing Agent in this case. Instructions for filing proofs of claim are available by clicking on the “Submit a Claim” link on Prime Clerk’s website for the PG&E case:

https://restructuring.primeclerk.com/pge/

Consult your counsel before filing a proof of claim. The filing of a proof of claim does more than assert your place in the distribution line. It may waive any right you may have to a jury trial, may be deemed consent to resolution of the claim by the bankruptcy court and may subject you to the jurisdiction of the bankruptcy court for counterclaims, including “clawbacks” seeking monetary relief to undo preferences and avoidable transactions. In the rare case, you might elect not to file a proof of claim for these or other reasons.

The proof of claim, when adequately prepared, supported, signed and filed, is prima facie evidence of your claim and deemed allowed unless an objection is made. An allowed claim participates in any distribution in the amount and priority described in the proof of claim. 

An objection to a proof of claim can be filed at any time prior to distribution on the claim, unless a separate order or the plan sets a deadline. An objection starts a contested matter in the bankruptcy court where the bankruptcy judge, based on evidence presented and arguments made, determines the allowability, amount and priority of the claim. Based on that ruling, the claim is allowed or disallowed.

The plan of reorganization, when confirmed, will govern the distribution on claims. It will establish classes into which claims are categorized and provide that claims in each class get the same treatment. 

A plan of reorganization will take time to be negotiated, proposed and confirmed. PG&E has projected it will take two years. That does not seem an unreasonable projection. One can hope for greater speed, but don’t be surprised if it takes longer. There appear to be many more issues and moving parts this time than in PG&E’s last foray into chapter 11 in 2001.

8. Is there anything I can do to improve my situation?

If you have mechanics lien rights and have taken the steps required to preserve your lien rights before the petition date, you can file a notice in the bankruptcy case under Bankruptcy Code section 546(b) which operates to protect your lien rights. The automatic stay prohibits you from otherwise perfecting the lien against PG&E or its property but contains an exception that allows for the filing of this notice to preserve the lien rights. You should consult with counsel about this procedure and the issues related to mechanics liens concerning public utilities.

To the extent the mechanics lien reaches equity of PG&E in the liened improvement, your prepetition claim should be entitled to secured status and you will be entitled to payment in full of the secured portion of your claim in the plan distribution.

If you delivered materials to the project for which you have not been paid, you may assert reclamation rights under section 546(c) of the Bankruptcy Code. The problem here is the reclamation demand must be made within 45-days of the Debtors’ receipt of the goods but no later than 20-days after the petition date, which would be February 18, 2019. By the time this article hits publication, the time to assert your reclamation rights will have passed. 

Whether or not you made a timely reclamation demand, Section 503(b)(9) grants administrative priority for the value of any goods sold to the debtor in the ordinary course of the debtor’s business and physically received by the debtor within 20 days before the bankruptcy filing. The time for asserting this claim is not specified in the bankruptcy law and the court may set a specific deadline. If the 20-day goods are of substantial value, you may want to discuss with your counsel filing a motion for allowance of an administrative priority claim under Section 503(b)(9).

The bankruptcy automatic stay that prevents you from pursuing your prepetition claims and enforcing your mechanics lien rights in state court protects PG&E but not others who may be liable to you on the claim. To the extent your claim can be asserted against a surety, guarantor or bond, you are free to do so.

9. Am I at risk for clawback and, if so, what can I do to prepare for that?

 “Clawbacks” are claims by DIPs or Trustees against creditors seeking monetary recoveries based on preferences and avoidable transactions. Avoidable transactions generally involve transfers without consideration and, as such, are not applicable to contract parties. On the other hand, payments and transfers preferring one creditor to the detriment of others is said to be preferential and allowing for the avoidance of such transfers implements the bankruptcy policy favoring equality of treatment among similarly situated creditors. Payments received in the period 90-days before the petition date (i.e., in the period from October 31, 2018 to January 28, 2019; the “preference period”) are subject to review for preference avoidance. For this analysis, payment checks received before October 31, 2018 that cleared after October 31, 2018 may be included. Not all payments within the preference period are avoidable. Your defense might include (a) PG&E paid and you received the payment in the ordinary course of business just as you had with payments before the preference period; (b) you continued to work for PG&E after receipt of payment and did not get paid for that work; or (c) you had a valuable lien on PG&E’s property at the time of payment. Because you will not know for some time whether clawbacks will be prosecuted (such actions for affirmative relief must be filed by the second anniversary of the petition date; i.e., no later than January 29, 2020), for now you should maintain your records. In particular, preserve any history of billing and payment you have for periods before the bankruptcy so that you can prove the pattern of ordinary course of business dealing that existed before the preference period and that any payment you received during the preference period was consistent with past practice. Even after January 29, 2020, unless your claim has been paid by specific order or under a confirmed plan, you should continue to maintain your records because an unreturned preference can be alleged defensively as a basis to object to your claim, even after the two year limitation has passed.

10. What about selling my claim?

Claims traders are likely to offer to buy your claim. Speculation in bankruptcy claims, particularly in large cases, is common. The trader generally offers current payment in exchange for transfer of your claim to the trader, who will then receive any distribution from the Debtors under the plan or otherwise.

But seller beware. Traders, as a group, are savvy and sophisticated and they do not assume the risk of allowance. As a result, the contract to buy your claim routinely will include requirements that your claim be allowed in full, that you cooperate in the defense of any objection to the claim, that you pay for that defense and, to the extent the claim is reduced or disallowed, you pay back the trader. Consult your counsel before entering into any deal to sell your claim.

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The PG&E chapter 11 is a major case and will take a while to sort out. Contractors should consult with their lawyers to make sure their claims and rights are protected.

Legal disclaimer: The information in this article (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.

 Mark Gorton is a Shareholder in Boutin Jones Inc.’s Banking, Bankruptcy and Creditors’ Rights Group whose practice focuses mainly on representing creditors in bankruptcy cases. He represented creditors in the first PG&E chapter 11 and is doing so again in the current chapter 11. Mark can be reached at mgorton@boutinjones.com. https://boutinjones.com/attorney/mark-gorton/