This article was updated February 2, 2019.
PG&E commenced its chapter 11 bankruptcy case on January 29, 2019 to deal with the litigation and claims resulting from the recent wildfires, and perhaps other business disputes. PG&E will eventually propose a plan of reorganization. That plan could include a myriad of options. It could spin off different units, liquidate some of its assets as it did in its previous bankruptcy, and could seek to raise its rates after obtaining approval from the California Public Utility Commission (“CPUC”). The plan will propose a distribution to creditors, and creditors will have an opportunity to vote for or against the plan. At the end of the day, the PG&E plan will have to be approved by both the bankruptcy court and the CPUC. However, there can be a long road between the date that the case is filed, and the confirmation of the plan of reorganization. Creditors who provide services to PG&E are wondering what they can do to protect themselves? Will they be paid for services that they provided before the commencement of the case or during the case, and will their services be paid after the filing? Cities and others who buy power may find PG&E trying to renegotiate some of the terms.
The Automatic Stay
When a bankruptcy is commenced there is an automatic stay that applies to any action against the Debtor. After the commencement of a case, a creditor cannot terminate a contract, demand payment for a pre-petition debt or continue litigation against a debtor without obtaining permission from the court (see below). Violations of the automatic stay can be punished by substantial fines. Creditors that want to terminate certain existing contracts known as executory contracts, may file a motion requesting permission from the court to do so.
Treatment of General Unsecured Creditors and Parties to Contracts
While the case is pending, a creditor should do what it can to determine that it will be paid in full for supplies or services rendered post-bankruptcy. In general, creditors who are owed money at the time the bankruptcy case is commenced that do not have liens are general unsecured creditors. This may include cities, banks, unions, contractors, landlords, and suppliers. Chapter 11 debtors, such as PG&E, that wants to continue in business must pay suppliers and other creditors for services provided after the filing. There are several ways that a vendor, contractor, or supplier, can continue to be paid for pre-filing services or goods. PG&E may obtain permission to pay some creditors in full on the grounds that they are critical vendors or employees, and ask the court for permission to continue to pay them for pre-filing debts and timely for post-petition services. Generally, creditors that offer unique services fall into this category. Some creditors will be parties to an executory contract, such as a lease, ongoing construction contract, or other contract which requires both sides to do something. Those contracts may be assumed or rejected. Parties who sell (suppliers) or buy power (cities and other entities) have contracts that will also be assumed or rejected, also for the purpose of renegotiating the terms or eliminating unfavorable contracts.
If PG&E assumes the contract, the creditor will have to be paid in full for the pre-petition debt at the time of assumption, or receive proof that there is a mechanism to pay the creditor in full for pre-petition debt. Such a decision will be delayed as long as possible until the debtor knows where it is going with the bankruptcy case. Contracts can be assumed at any time during the case. However, commercial landlord leases have to be assumed or rejected within the time period set forth in the United States Bankruptcy Code. Parties to an executory contract that do not want to continue to provide services without knowing whether their contract will be assumed, can file a motion asking the court to require the debtor to make a decision. In considering such a motion, the court will take into consideration the facts unique to that contract. Once a contract is assumed, a subsequent breach elevates the contract to an administrative claim, which is paid before general unsecured creditors. Therefore, courts usually give debtors a reasonable amount of time to determine whether a contract should be assumed. Also, creditors may find information about payment in the debtor’s pleadings that are filed that request permission to use post-petition financing. Those pleadings will provide some information about post-petition payments, although not every creditor may be listed by name. A creditor can consider asking to be paid at the time of or in advance of the work to be provided, or asking for assurances that it will be paid.
Is the Creditor Secured or Unsecured
At the time the bankruptcy case is commenced, creditors’ are determined to be secured or unsecured, and creditors cannot take action to secure their debt after the commencement of the case. Creditors who are secured have a right to payment from their collateral before general creditors are entitled to payment. Secured creditors have a valid pre-petition lien against personal property or real property. Liens are perfected by the filing of a U.C.C. Financing Statement, deed of trust, judgment or mechanics lien depending on the facts related to that creditor. Creditors who don’t have a lien are general unsecured creditors. Creditors that obtain a lien within 90 days of the commencement of the bankruptcy case, may find their liens avoided as preferences if creditors are not paid in full, thus turning them back into unsecured creditors. General unsecured creditors will have to wait until a plan is proposed to find out what distribution they will receive. Secured creditors have the right to be paid at least as much as the value of their collateral and under some circumstances can file a motion to ask the court to allow them to foreclose on their collateral. The court will only consider granting such relief if there is value in the collateral that attaches to that creditor’s lien, and the collateral is not necessary to the reorganization.
Right of Reclamation
A seller of goods has the right to make a demand for the return of goods delivered within 45 days before the bankruptcy case was filed if the debtor was insolvent at the time of delivery, if the seller makes a demand for the return of the goods within 45 days of delivery, or not later than 20 days after the commencement of the bankruptcy case if the 45 day period expires after the commencement of the bankruptcy case. In some cases, the creditor will not obtain the goods back, but all similarly situated reclamation creditors may be granted a lien on certain proceeds.
Pending Litigation is Stayed
Immediately upon the commencement of the bankruptcy case, an automatic stay comes into effect, staying (stopping) all litigation in which a debtor is a defendant. Creditors can file a motion for relief from stay asking the court to allow a pending lawsuit against the debtor to go forward under some circumstances, and sometimes such a motion is granted. Note, if the debtor is the plaintiff, there is no stay, and those matters will continue to go forward. If the debtor is one of multiple defendants in litigation, the litigation may go forward against the other defendants since the automatic stay would not apply to those third parties, absent court intervention. If there are cross actions in a case brought by the debtor as plaintiff, the defendants would need relief from stay to proceed on their cross actions, even though the debtor’s case as a plaintiff is not stayed. Creditors may want to wait until they know how much will be distributed to unsecured creditors before asking to continue to litigate a matter in state court. There may be no point in paying to litigate a claim if the cost of the litigation will exceed the amount the creditor will receive on its claim, even if it is allowed in full.
Preferences and Fraudulent Conveyances
Creditors may not be able to keep all of the payments that it has received prior to the commencement of the bankruptcy case. Some payments to creditors made on past due debts or liens perfected on amounts already owed within 90 days before the commencement of the bankruptcy may be avoided as preferences, if certain statutory requirements are met, and there are no valid defenses. The look back period for insiders is one year. Fraudulent conveyances may also be avoided. Transfers made for less than reasonable equivalent value, may be avoidable as fraudulent conveyance. Transfers such as certain sales or insider bonuses may be the target of avoidance actions, in addition to other transfers. If a debtor agrees to pay creditors in full, there may not be any avoidance actions.
What Should A Creditor Do if PG&E Files a Bankruptcy Case
The steps that each creditor should take are unique to that creditor and its specific circumstances. If you are a creditor that is owed money, or could be owed money, pay attention to the filings, and seek counsel to assist you in determining whether you should file a proof of claim or take additional steps to protect your rights. Pay particular attention to deadlines.
Debtors have to balance the needs of all stakeholders, and must obtain the approval of the bankruptcy to confirm a plan of reorganization and for actions outside the ordinary course of business. Creditors are entitled to notice, and an opportunity to respond for such actions. In the case of PG&E, it will also need the approval of the CPUC.