Relevant Document:Hearing Agenda
During a winding hearing in bankruptcy court in San Francisco today, Judge Dennis Montali brokered an eventually agreed-upon
intervention by various power purchase agreement counterparties in the PG&E debtors’
adversary proceeding against the Federal Energy Regulatory Commission. A hearing that was scheduled to be focused on the procedural intervention requests turned into a “preview” (Judge Montali’s descriptor) of the underlying substantive arguments for and against an injunction related to the bankruptcy court’s jurisdiction and authority to approve the debtors’ assumption or rejection of PPAs.
Without deciding any of the underlying substance of the jurisdictional dispute, and expressly in a self-proposed hypothetical whereby an injunction against FERC was not being sought, Judge Montali today stated that section 365 of the Bankruptcy Code would simply authorize a rejection of a PPA, resulting in a breach of the PPA and a rejection damages claim, but the rejection itself would not, under his “read,” implicate the filed rate doctrine - which, at least in part, governs FERC’s jurisdiction as it accepts or approves rates. The judge added that FERC, in that context, would still have “something to do.” Counsel to one of the PPA counterparties, responding to the judge’s hypothetical, stated that the debtors’ requested injunction would prevent any proceedings before FERC, with Judge Montali responding that such concern involves the
scope of any injunction, if one were to be granted.
Continuing, the judge posed another hypothetical involving issuing an order stating that FERC does not have authority to undermine any bankruptcy court decision to reject an executory contract - a hypothetical quickly meeting the approval of debtors’ counsel. And in that context, Judge Montali questioned the need for an injunction
per se if he were to grant the debtors’ requested declaratory relief concluding that the bankruptcy court has exclusive jurisdiction over the rejection of executory contracts under section 365 considering that if such an order would be entered, and although FERC could appeal, FERC would not be able to flout that order without facing contempt of court.
Going further, Judge Montali said that
he would recommend to the district court that it not withdraw the reference and thus to allow the jurisdictional dispute to remain before the bankruptcy court. Even with such a recommendation, the presiding district court judge - Judge Haywood Gilliam, Jr. - will ultimately decide whether to withdraw the reference.
In disclosing that forthcoming recommendation,
Judge Montali further stated that there does not appear to be a “clash” between the Bankruptcy Code and the Federal Power Act, or FPA, but instead are two “parallel” statutes with the jurisdictional question - whether section 365 “stands alone” or must be considered alongside the FPA when it comes to the rejection of a PPA - being a pure question of law. In that context, according to Judge Montali, any decision he would make on that jurisdictional question would be subject to
de novo review by the district court in any event, if an appeal were to be taken.
Judge Montali went further, stating that he would certify any decision for direct appeal to the U.S. Court of Appeals for the Ninth Circuit.
As part of the brokered intervention, and after discussion of the potential for unnecessary and potentially duplicative hearings on a preliminary and then permanent injunction, Judge Montali also adjusted the schedule of the adversary proceeding litigation. A status conference,
and not the preliminary injunction hearing as originally scheduled, in the adversary proceeding is now scheduled for Feb. 27 at 4:30 p.m. ET. FERC’s opposition to an injunction remains due Feb. 15 and a consolidated opposition by the intervenors is due Feb. 22. At the Feb. 27 status conference, the judge would set the deadline for the debtors’ reply to the oppositions filed and would schedule a hearing on the debtors’ requested injunction. Although the date of the injunction hearing now remains to be determined, according to Judge Montali, it would remain before the late March
deadline for the debtors to seek rehearing at FERC with respect to the Jan. 25 FERC
order having found concurrent jurisdiction.
Counsel to the newly-appointed unsecured creditors
committee, Gregory Bray of
Milbank, made a brief introductory appearance at today’s hearing. Bray also noted FTI’s
selection as financial advisor but did not mention a selection of an investment banker by the committee.
Also at today’s hearing, the judge approved the debtors’
motion confirming the interim wages order, that was supported by a
declaration from deputy CRO John Boken, which sought certain supplemental relief tied to the wages motion.
Prior to today’s hearing and also related to the adversary proceeding against FERC, the debtors and the California Public Utilities Commission submitted a
stipulation providing that the debtors have not and will not seek in the adversary proceeding “an order or judgment (a) affecting the Commission’s right to contend that the Debtors may not reject the executory power purchase agreements at issue in the FERC Adversary Proceeding or any other power purchase agreements (‘PPAs’) without prior permission to do so from the Commission, or (b) otherwise preempting, dislodging, or affecting any regulatory jurisdiction that the Commission may have under California law with respect to the PPAs.” Further, the debtors have reserved their right to contend, outside of the adversary proceeding, that they may reject PPAs without permission from the CPUC and the CPUC has reserved the right to oppose any such contention.
In connection with the FERC adversary proceeding, Chevron on Tuesday submitted an
amicus brief in support of the debtors’ jurisdictional position, arguing, among other things, that it “would disturb the foundation of the bankruptcy process to allow a governmental agency to supplant a bankruptcy court’s decisions on what contracts a debtor can reject.” Chevron is a PPA counterparty but also notes in its filing that “[d]ue to the nature of their long relationship, the PG&E bankruptcy involves issues for Chevron that are more complex and nuanced than the binary issue of rejection of power purchase agreements.”