In re Pacific Gas & Elec. Co.

• Decision Date: 07 February 2002
• Docket Number: No. 01-30923DM.,01-30923DM.
• Citation: 273 B.R. 795
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re PACIFIC GAS & ELECTRIC COMPANY, Debtor.

Page 795

273 B.R. 795

In re PACIFIC GAS & ELECTRIC COMPANY, Debtor.

No. 01-30923DM.

United States Bankruptcy Court, N.D. California.

February 7, 2002.

James L. Lopes, Janet A. Nexon, Howard, Rice, Nemerovski, Canady, et al., San Francisco, CA, Robert A. Can Nest, Law Offices of Keker and Van Nest, San Francisco, CA, Richard Levin, Skadden, Arps, Slate, Meagher and Flom, Los Angeles, CA, Dianne Coffino, Michael C. Hefter, Robert C. Myers, Benjamin Hoch, Marc Hirschfield, Law Offices of Dewey Ballantine, New York City, David Agay, Law Offices of Winston and Strawn, Chicago, IL, for Debtor.

Paul S. Aronzon, Robert Jay Moore, Milbank, Tweed, Hadley and McCloy, Los Angeles, CA, for E and Y Capital Advisors.

Stpehen L. Johnson, Office of U.S. Trustee, San Francisco, CA, for Linda Ekstrom Stanley, U.S. Trustee.

MEMORANDUM DECISION REGARDING PREEMPTION AND SOVEREIGN IMMUNITY

DENNIS MONTALI, Bankruptcy Judge.

I. Introduction

On September 20, 2001, Debtor, Pacific Gas and Electric Company ("PG & E") and its corporate parent, PG & E Corporation ("Corporation", and together with PG & E, "Proponents") filed their first plan of reorganization for PG & E and a disclosure statement.

On December 4, 2001, this court conducted a status conference regarding objections to the September 20th disclosure statement, and by Order Rescheduling Hearings On Approval Of Disclosure Statement ("Rescheduling Order") filed December 5, 2001, the court fixed December 19, 2001, as the date for Proponents to file a revised plan of reorganization and a revised disclosure statement. On December 19, 2001, Proponents filed their First Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code For Pacific Gas and Electric Company (the "Plan") and their First Amended Disclosure Statement For First Amended Plan of Reorganization Under Chapter 11 of the Bankruptcy Code For Pacific Gas and Electric Company Proposed By Pacific Gas and Electric Company and PG & E Corporation (the "Disclosure Statement").

The Rescheduling Order directed Proponents to include in the Disclosure Statement a description specifically of

... (1) the laws and regulations [Proponents] seek[ ] to preempt through confirmation of [Proponents' Plan]; (2) the governmental units affected by any such preemption; and (3) how the various transactions contemplated by the [Plan] will affect certain executory contracts and [PG & E's] obligations under those contracts.

That order set forth a schedule for consideration of various objections to the adequacy of the Disclosure Statement, including any objections to be filed by the California Public Utilities Commission ("Commission" or "CPUC"), the Attorney General of the State of California ("State"), and any other governmental unit contending that the Plan is facially invalid based upon sovereign immunity or impermissible federal preemption.

Thereafter the State, the Commission, and various other parties filed their objections, memoranda and supporting papers and Proponents and the Official Committee of Unsecured Creditors ("Committee") filed their memoranda and supporting papers in defense of the Plan and Disclosure Statement. The court conducted a hearing on the sovereign immunity and preemption challenges on January 25, 2002.

During oral argument counsel for Corporation stated "Your honor makes the law." This court doubts that with the stroke of a pen upon an order confirming the Plan it could make federal law and sweep aside a substantial body of nonbankruptcy law. Rather, the court believes its job is to interpret and apply the law, searching where in the Bankruptcy Code nonbankruptcy law is specifically preempted and where, under controlling case law, the purposes of federal bankruptcy law are frustrated such that federal law must prevail over specific conflicting state law.

For the reasons explained below, the court concludes that there is no express preemption of nonbankruptcy law that permits a wholesale unconditional preemption of numerous state laws, some of which are identified in the Disclosure Statement and some of which are obscured by the phrase "including but not limited to." Thus, if Proponents adhere to their contention that express preemption is available to them, the Disclosure Statement must be disapproved since the Plan could not be confirmed in the face of the vigorous objections made by the State and the Commission.

Nonetheless, the court believes that the Plan could be confirmed if Proponents are able to establish with particularity the requisite elements of implied preemption. If the Disclosure Statement is amended consistent with this Memorandum Decision, the court will approve it and let the Proponents test preemption at confirmation.

The court also believes the Plan as drafted offends sovereign immunity because it seeks affirmative relief against the State and the Commission. If the Plan and Disclosure Statement are amended as Corporation's counsel intimated they would be, then the Plan will overcome the sovereign immunity defense. If, however, Proponents leave unchanged the provisions of the Plan that seek injunctive and declaratory relief against the Commission and the State, they will have to prove that there has been a waiver of sovereign immunity. In that case the Disclosure Statement must be amended to describe why Proponents believe sovereign immunity has been waived.

II. Preliminary Observations

A. In theory, if no one objected to the Plan and Disclosure Statement, Proponents are probably correct that the Plan could be confirmed. The court would not independently block an unchallenged march to confirmation. But Proponents' request that the court not "kill" the Plan now is not persuasive given the serious clash between state and federal law presented by the Plan and the Commission's and the State's strenuous opposition to it. From the commencement of this case the antagonism between PG & E and the Commission has been palpable. The sweep of preemption in the Plan and Disclosure Statement will not go unchallenged. The situation here is not unlike what the court was presented with in the celebrated public utility bankruptcy of Public Service Company of New Hampshire. There the court chose to decide the preemption issue in an adversary proceeding, before confirmation. See Public Service of New Hampshire v. State of New Hampshire (In re Public Service Company of New Hampshire), 99 B.R. 506, 509 (Bankr.N.H.1989) ("Public Service") ("In the present case there is no uncertainty or contingency about the dispute arising in concrete form between the [debtor] and the [state].") The magnitude and complexity of this case weigh heavily in favor of addressing the central issues as early as possible. Once Proponents file a revised plan and set forth in a revised disclosure statement how the various state laws and regulations frustrate Congressional purposes and objectives, the stage will be set for Proponents to attempt to establish that the Plan should preempt conflicting state law at confirmation.

B. As the development of the reorganization plan for PG & E has progressed throughout this case, Proponents have submitted mark-ups of the Plan and the Disclosure Statement as recently as February 4, 2002. Thus, for reasons wholly apart from the preemption and sovereign immunity issues, the plan of reorganization and its accompanying disclosure statement are very much works in progress. For simplicity, however, the court will refer to the Plan and the Disclosure Statement (filed December 19, 2001) for purposes of the analysis that follows. The February 4th submission has not been reviewed.

Also for convenience in this Memorandum Decision, the court's reference to nonbankruptcy "law(s)" will include statutes, regulations, Commission decisions, Commission rules, Commission resolutions and all other state law authorities that Proponents seek to preempt through confirmation of the Plan.

C. The following discussion deals with arguments made by the State and the Commission. To the extent other objectors joined the State and the Commission their positions are addressed below. The court will only make the following brief comments about other objections.

The California Hydropower Reform Coalition argues, in part, that the rate making authority of the Commission which is not challenged under the Plan will be implicated because its traditional jurisdiction over some of PG & E's properties will cease. It also contends that the Proponents cannot be selective, preempting some state laws but not other state and federal laws. The court is not persuaded by those arguments. Similarly, the City and County of San Francisco maintains that the deference bankruptcy law pays to state law for the definition of property rights somehow supports its opposition to Proponents' attempted preemption of state laws in the Plan. The court also rejects those arguments. Any other remaining objections by other parties are largely rendered moot in view of the obvious fact that, unless this court's decision is reversed on appeal, the Plan and Disclosure Statement will have to be modified consistent with this Memorandum Decision.

III. Provisions of Plan Calling For Preemption

Proponents' full-scale attack on any state law that interferes with the Plan is anything but subtle:

Section 1123(a) of the Bankruptcy Code preempts any otherwise applicable non-bankruptcy law that may be contrary to its provisions. Accordingly, a plan may contain certain provisions that would not normally be permitted under non-bankruptcy law. For example, section 1123(a)(5) of the Bankruptcy Code authorizes, among other things, the sale or transfer of assets by [PG & E] without the consent of the State or the [Commission].

Disclosure Statement, 4:18-23.

Then they continue:

The preemptive effect of the Confirmation Order extends to all statutes, rules, orders and decisions of the [Commission] otherwise applicable to the Restructuring Transactions and...