In re Pacific Gas & Elec. Co.

• Decision Date: 14 June 2002
• Docket Number: Adversary No. 02-3026DM.,Adversary No. 02-3042DM.,Adversary No. 02-3040DM.,Bankruptcy No. 01-30923DM.
• Citation: 281 B.R. 1
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re PACIFIC GAS & ELECTRIC COMPANY, Debtor. People of the State of California, et al., Plaintiffs, v. PG & E Corporation; et al., Defendants. City and County of San Francisco, et al., Plaintiffs, v. PG & E Corporation, et al., Defendants. Cynthia Behr, Plaintiff, v. PG & E Corporation, et al., Defendants.

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281 B.R. 1

In re PACIFIC GAS & ELECTRIC COMPANY, Debtor.

People of the State of California, et al., Plaintiffs, v. PG & E Corporation; et al., Defendants.

City and County of San Francisco, et al., Plaintiffs, v. PG & E Corporation, et al., Defendants.

Cynthia Behr, Plaintiff, v. PG & E Corporation, et al., Defendants.

Bankruptcy No. 01-30923DM.

Adversary No. 02-3026DM.

Adversary No. 02-3040DM.

Adversary No. 02-3042DM.

United States Bankruptcy Court, N.D. California.

June 14, 2002.

Robert Glynn, Jr., c/o Frederick Brown, Frederick Brown, Orrick, Herrington and Sutcliffe, San Francisco, CA, Oscar Cantu, Michael P. Kessler, Weil, Gotshal and Manges, New York City, Jennifer L. Scafe, Law Offices of Latham and Watkins, for defendants.

Danette E. Valdez, Office of Attorney General, Joseph P. Como, Dennis J. Herrera, Office of City Attorney, San Francisco, CA, Timothy K. Sprinkles, Law Offices of Collins and Schlothauer, San Jose, CA, for plaintiffs.

MEMORANDUM DECISION ON MOTIONS TO REMAND

DENNIS MONTALI, Bankruptcy Judge.

I. INTRODUCTION

On April 23, 2002, the court heard arguments on three motions to remand to the state court three complaints filed against PG & E Corporation ("Corporation")¹, and in two instances, against several individuals who are directors of Corporation or of debtor, Pacific Gas and Electric Company ("Debtor"). After considering the motions, the oppositions, including Debtor's Position Regarding Motions To Remand and The Automatic Stay, and the arguments of counsel, the court will remand portions of all three removed actions, for the reasons set forth below.

II. FACTS AND PROCEDURAL HISTORY²

On January 10, 2002, Bill Lockyer, Attorney General of the State of California (the "AG"), filed a Complaint For Restitution, Civil Penalties, Injunction, Appointment Of Receiver, And Other Equitable And Ancillary Relief (the "AG Complaint") in the Superior Court of the State of California for the County of San Francisco (People of the State of California, ex rel. Bill Lockyer, Attorney General of the State of California v. PG & E Corporation, et al.; Case No. CGC-02-403289; Adversary Proceeding No. 02-3026) (the "AG Action"). On February 2, 2002, Corporation removed the AG Action to this court by filing its Notice Of Removal Of Action.

On February 11, 2002, the City and County of San Francisco ("CCSF") and the People of the State of California, by and through San Francisco City Attorney Dennis J. Herrera, filed a Complaint For Restitution, Civil Penalties, Injunction, Appointment Of Receiver, And Other Ancillary Relief (Conversion; Unjust Enrichment; Cal. Bus. & Prof.Code § 17200 — Unlawful, Unfair & Fraudulent Business Practices) in the Superior Court of the State of California for the County of San Francisco (the "CCSF Complaint") (City and County of San Francisco; People of the State of California v. PG & E Corporation; Does 1-150; Case No. CGC-02-404453; Adversary Proceeding No. 02-3040) (the "CCSF Action"). On March 4, 2002, Corporation removed the CCSF Action to this court by filing its Notice Of Removal Of Action.

On February 14, 2002, Cynthia Behr ("Behr") filed a Complaint For Recovery Of Claim, Set Aside Fraudulent Transfer, Conspiracy, Attachment, And/Or Levy Executed Against Assets, Damages, Restitution, Injunction, Appointment Of Receiver, And Other And Equitable And Ancillary Relief (Cal. Bus. & Prof.Code § 17200 — Unlawful, Unfair & Fraudulent Business Practices; Cal. Civ.Code § 3439 — Uniform Fraudulent Transfer Act; Cal. Comm.Code § 6107 — Sales Act) (the "Behr Complaint") in the Superior Court of the State of California in and for the County of Santa Clara (Cynthia Behr v. PG & E Corporation, et al.; Case No. CV-805274; Adversary Proceeding No. 02-3042) (the "Behr Action"). On March 8, 2002, Corporation removed the Behr Action to this court by filing its Notice Of Removal Of Action.³

Despite its lengthy title, the AG Complaint purports to assert one cause of action, viz. violation of the Unfair Competition Act, section 17200 of the California Business and Professions Code ("Section"). For the most part the AG Complaint alleges numerous events that occurred prior to April 6, 2001 (the "Petition Date"), the date the Debtor commenced its present Chapter 11 case in this court. Reducing a complex history and dozens of allegations to the simplest, the thrust of the Section 17200 theory is that Corporation has engaged in a series of events amounting to unlawful, unfair and fraudulent business acts or practices including (1) agreeing to the so-called First Priority Condition⁴ while never intending to abide by it and other conditions; (2) subordinating the interests of Debtor and Debtor's ratepayers to Corporation's own interest; (3) failing to disclose to the California Public Utilities Commission (the "CPUC") its true intentions during the so-called Holding Company Proceedings;⁵ (4) transferring ratepayer-funded assets from Debtor to Corporation for the benefit of Corporation and its affiliates, even while Debtor was experiencing financial distress, and without intent to infuse capital into Debtor when it needed capital to operate, in violation of the First Priority Condition and other conditions; (5) appropriating over $4 billion from revenues that Debtor had received from high frozen rates paid by ratepayers; (6) implementing "ring-fencing" transactions to protect the assets of other affiliates of Corporation from bankruptcy or credit down-grading, insuring that it would be impossible for Debtor to access such excess and impairing Corporation's ability to provide cash to Debtor, again in violation of the First Priority Condition. While the allegations go beyond those summarized by the court, for convenience they will be referred to herein as the "First Priority Claims."

The AG Complaint also alleges some events that occurred after the Petition Date. It alleges that Corporation is co-proponent of a Plan of Reorganization (the "Plan") in this court whereby Debtor will transfer assets of its electricity transmission business, its gas transmission business and its electricity generation business to entities outside of the control of the CPUC. It charges Corporation with utilizing the Plan (1) to restructure Debtor's operations without CPUC approval; (2) to remove those current operations and activities from the CPUC's jurisdiction; (3) to transfer hydro-electric generation assets for an amount far below their fair market value, without any revenue sharing mechanism which would entitle ratepayers to any credit for profits realized in violation of California law; (4) to burden Debtor with many of the liabilities with which it entered bankruptcy; (5) to change the ownership structure of Debtor without CPUC approval; (6) to evade compliance with the CPUC's Affiliates Rules;⁶ (7) to prohibit CPUC and the State of California from taking action related to the allocation or other treatment of "gain on sale" related to assets transferred or disposed under the Plan, and (8) to prohibit Debtor from reassuming the "net open position" of its customers unless certain conditions are met. More specifically, the AG Complaint alleges that Corporation's use of Debtor's Chapter 11 bankruptcy to approve restructuring transactions and transfer assets is "unfair" (AG Complaint, ¶ 105); that through Debtor's Chapter 11 bankruptcy case, Corporation and the other individual defendants are "... continuing to engage in unlawful, unfair and fraudulent business practices ..." (AG Complaint, ¶ 113); and that "[Corporation's and the individual defendants'] continuing wrongful conduct ... will further cause great and irreparable harm to ratepayers." (AG Complaint, ¶ 115.) While the allegations go beyond those summarized by the court, for convenience they will be referred to herein as the "Plan Claims."

The CCSF Complaint sets forth three separate causes of action. The first alleges conversion, the second alleges unjust enrichment, and the third alleges violation of Section 17200. The factual allegations are similar to, but nowhere near as comprehensive as, those in the AG Complaint. For purposes of this Memorandum Decision, CCSF's Section 17200 claims are also identified as "First Priority Claims." They do not allege any events after the Petition Date.

The conversion claim is somewhat confusing. CCSF alleges that "Corporation took at least $5.2 billion from [Debtor] between 1997 and 2000" and that, as a result, Debtor requested and was granted rate increases to cover shortfalls. CCSF Complaint, ¶ 43 (emphasis added). The CCSF Complaint thus concedes that the purportedly converted funds were owned and possessed by Debtor at the time of the alleged conversions. The CCSF Complaint does not allege that CCSF, citizens of San Francisco or of California, or Debtor's ratepayers (as opposed to Debtor) owned or had an immediate right of possession to the money at the time of the alleged conversion.

The unjust enrichment claim of CCSF also alleges that Corporation unlawfully took money from Debtor, leaving it with insufficient money to provide safe and reliable electric service. This resulted in CCSF and ratepayers being forced to advance additional money to Debtor in the form of rate increases. In order to avoid Corporation's unjust enrichment, CCSF asks for the imposition of a constructive trust upon money wrongfully taken by Corporation. Regardless of the different drafting approach, this claim resembles the conversion claim. It does not allege anyone other than Debtor owned the allegedly wrongfully withdrawn money.

The Behr Complaint appears to be almost a verbatim duplication of the AG Complaint, although it states four causes of action: (1) a claim under Section 17200; (2) a claim under Cal. Civ.Code § 3439, the Uniform Fraudulent Transfer Act ("Fraudulent Transfer Claim"); (3) a claim of conspiracy; and (4) a claim under California Commercial Code § 6107, the California Bulk Sales Law ("Bulk Sales...