PG&E Needs a Plan to Corral Suits in $30 Billion Bankruptcy

(Bloomberg) -- As PG&E Corp.’s executives and lawyers decide how to shield the utility in bankruptcy from billions of dollars in liabilities from wildfires, the playbooks most likely to catch their eyes were written for other companies faced with massive litigation.

California’s largest investor-owned utility could set up a trust like those used by Halliburton Co. and W.R. Grace & Co. to settle lawsuits over cancerous asbestos. The other option is a regular Chapter 11 reorganization plan, like the one that American Suzuki Motor Corp. formulated in part to resolve car dealers’ suits when it pulled out of the U.S. market.

Either way, PG&E’s goal is to corral -- in bankruptcy court -- thousands of homeowner suits blaming the utility for wildfires that devastated California in 2017 and 2018, killing more than 100 people, destroying tens of thousands of homes and charring hundreds of thousands of acres. By law, a bankruptcy filing automatically puts the suits on hold until a judge can decide what to do, but any criminal, or regulatory actions can continue.

Institutions and companies swamped by litigation often wield bankruptcy filings as a club to force plaintiffs to take smaller settlements than they could get through the regular court process, according to Chuck Tatelbaum, a Florida-based bankruptcy lawyer who’s been involved in asbestos-trust cases in the past.

“In this situation, PG&E is like a duck in a 360-degree shooting gallery,’’ Tatelbaum said. “The filing stops all the shooting and gives them a chance to take a breath and figure out how to get a handle on these cases.’’

PG&E said Monday the company will file for protection from creditors around Jan. 29 to restore financial stability in the face of more than $30 billion in wildfire liabilities. Those claims dwarf the more the $1.5 billion in cash and equivalents on hand as of Jan. 11, the company said.

Investigators are probing whether PG&E’s equipment ignited the deadliest and most destructive blaze in California history, the November Camp Fire, which destroyed the town of Paradise, killed 86 people and razed almost 14,000 homes.

James Noonan, a PG&E spokesman, didn’t respond to a phone call seeking comment on whether the company would ask a judge to allow the company to process the cases through a trust or a conventional bankruptcy reorganization.

Under either setup, PG&E will have to set aside a portion of its assets to cover homeowners’ fire damages while satisfying lenders’ and other creditors’ claims. A bankruptcy judge makes the ultimate call on whether the utility devoted sufficient resources to the claims given its desperate financial state.

Under bankruptcy law, secured lenders -- typically banks, with specific claims on specified assets -- get paid ahead of other creditors. Lawyers’ fees and other administrative costs also get priority over most other claimants.

The filing could pit homeowners against other so-called unsecured creditors, such as bondholders, in a fracas over who gets what share of the recovery pot, said Lynn LoPucki, a law professor at University of California at Los Angeles who specializes in bankruptcy. Home-damage lawsuits “are no different than any other unsecured debt,” he said.

The trust, which would be created as a entity separate from the company, has the advantage of removing PG&E executives from the decision-making process on who should get the biggest slice of the recovery pie, Tatelbaum said.

Independent trustees are appointed to make allocation decisions, he said. That’s what happened in the 1985 bankruptcy case filed by medical device-maker A.H. Robins. That company sought creditor protection to deal with more than 5,000 suits over its Dalkon Shield contraceptive device. Women said the devices were defective and caused pelvic infections, sterility and involuntary abortions. At least 18 women using the shield died, according to federal regulators.

The company set aside $2.5 billion to fund a trust to resolve the cases. Individual payments in that settlement ranged from as low as $725 to more than $190,000 depending on the severity of the injury, according to court filings.

More than 20 building-materials companies whose products contained asbestos, a carcinogen, used trusts to resolve billions in liabilities in the late 1990s and early 2000s.

The Towers Perrin consulting firm estimated in 2002 that asbestos suits may cost U.S. companies $200 billion. Asbestos suits are still being filed against shipbuilders such as Huntington Ingalls Inc. and consumer product makers like Johnson & Johnson.

The downside to trusts is that they can take years to resolve mass-tort claims, leaving plaintiffs in the lurch and companies struggling to get a fresh start, Tatelbaum said. “This kind of bankruptcy process can be likened to long and costly surgery that leaves you praying the patient doesn’t die on the table,” he added.

Alternatively, PG&E could set aside or sell assets to fund a regular Chapter 11 plan, he said. This route would likely be quicker and easier than setting up the kind of trust used in asbestos cases. It also may allow the bankruptcy judge to appoint an arbitrator to help decide how to fairly divide up the recovery pot between homeowners and other creditors, Tatelbaum said.

Brea, California-based American Suzuki filed for Chapter 11 protection in 2012 to wind down its U.S. automotive business in the face of slumping sales. That prompted a wave of dealers to sue the company, arguing the pull-out violated Suzuki’s franchise agreements.

PG&E Shares and Notes Take a Dive as Bankruptcy Takes Shape

As part of its 2013 reorganization plan, Suzuki paid unhappy dealers from $25,000 to $1 million to resolve litigation over the agreements. The total buyouts were valued at about $40 million, according to the Automotive News.

PG&E is no stranger to the bankruptcy courts. The utility first sought protection from creditors in 2001 to deal with California’s energy crisis brought on by market manipulation through controversial electricity trades by now-defunct Enron Corp. Under the reorganization plan, ratepayers were responsible for $7.2 billion of the company’s debt from the electricity crisis.

The utility’s power-generation unit, National Energy & Gas Transmission, filed for bankruptcy in 2003.

However PG&E decides to proceed in the months ahead, lawyers for fire victims aren’t happy the company has chosen the rocky road of bankruptcy to address their claims.

Steve Skikos, a lawyer in Santa Rosa, California, who represents fire victims from the 2017 blaze in that area, said in court filings he’s concerned PG&E’s plan “prejudices the rights’’ of those whose homes were destroyed or damaged by the utility’s missteps.

“The impacted California communities are not going to tolerate the shuffling of finances between Wall Street interests, especially if the plan is to cram down’’ unfair settlements on homeowners, the lawyer said in an email.

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