Ad Hoc Comm. of Holders of Trade Claims v. Pac. Gas & Elec. Co. (In re PG&E Corp.)

46 F.4th 1047

IN RE PG&E CORPORATION; Pacific Gas & Electric Company, Debtors,

Ad Hoc Committee of Holders of Trade Claims, Appellant,

v.Pacific Gas and Electric Company, Appellee.

No. 21-16043

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 6, 2021 San Francisco, California

Filed August 29, 2022

Matthew D. McGill (argued) and David W. Casazza, Gibson Dunn & Crutcher LLP, Washington, D.C.; David M. Feldman and Matthew K. Kelsey, Gibson Dunn & Crutcher LLP, New York, New York; for Appellant.

Theodore E. Tsekerides (argued), Jessica Liou, and Matthew Goren, Weil Gotshal & Manges LLP, New York, New York; Jane Kim and Thomas B. Rupp, Keller Benvenutti Kim, San Francisco, California; for Appellee.

Sabin Willett and Andrew J. Gallo, Morgan Lewis & Bockius LLP, Boston, Massachusetts; Nakisha Duncan, Morgan Lewis & Bockius LLP, Houston, Texas; Renee M. Dailey, Akin Gump Strauss Hauer & Feld LLP, West Hartford, Connecticut; for Amici Curiae Ultra Noteholders.

Before: Carlos F. Lucero,^* Sandra S. Ikuta, and Lawrence VanDyke, Circuit Judges.

Opinion by Judge Lucero;

Dissent by Judge Ikuta

LUCERO, Circuit Judge:

This case involves an oddity in bankruptcy law: a solvent bankrupt. Specifically, it involves Pacific Gas & Electric Company ("PG&E"), which sought chapter 11 protection in a bid to proactively address massive potential liabilities related to a series of wildfires in Northern California. But PG&E was, and has remained, solvent. Its assets at the time of the bankruptcy filing exceeded its known liabilities by nearly $20 billion. As a result, several creditors—including plaintiffs, the Ad Hoc Committee of Holders of Trade Claims—claimed PG&E must pay postpetition interest at the rates required by their contracts in order for their claims to be "unimpaired" by the reorganization plan. See 11 U.S.C. § 1124(1). In other words, plaintiffs argued PG&E had to honor its contractual obligations before its shareholders reaped a surplus from the bankruptcy estate. The bankruptcy court and the district court disagreed. They concluded that In re Cardelucci , 285 F.3d 1231 (9th Cir. 2002), and the text of the Bankruptcy Code limited plaintiffs to recovery of postpetition interest at the much lower federal judgment rate. We have jurisdiction under 28 U.S.C. § 158(d)(1) and REVERSE .

I

PG&E filed for chapter 11 bankruptcy in January 2019. The company initiated the proceedings in response to catastrophic wildfires that occurred in Northern California during the preceding years. Following the fires, PG&E faced tens of billions of dollars in potential liabilities to fire victims, in addition to the tens of billions of dollars the company owed pursuant to its outstanding contractual commitments.¹ However, the company was solvent at the time of filing: it reported $71.4 billion in assets compared to $51.7 billion in known liabilities. PG&E nonetheless insisted bankruptcy was necessary to resolve its wildfire liabilities and ensure the liquidity needed to sustain operations. The company has never contested its ability to pay non-wildfire creditors in full.

After PG&E filed for bankruptcy, California enacted Assembly Bill 1054 ("A.B. 1054"). See Act of July 12, 2019, ch. 79, 2019 Cal. Stat. 1888 (codified in scattered sections of Cal. Pub. Util. Code). The act created a multi-billion-dollar safety net to compensate future victims of utility fires. Cal. Pub. Util. Code §§ 3284, 3288. For PG&E to participate in the fund, A.B. 1054 required that the bankruptcy court confirm its reorganization plan by June 30, 2020. Id. § 3292(b).

PG&E's proposed chapter 11 plan ("the plan") classified plaintiffs' non-wildfire-related claims as general unsecured claims. The plan provided that plaintiffs would be paid the full principal amount of these claims. It further stipulated that plaintiffs would receive postpetition interest at the federal judgment rate of 2.59 percent, see 28 U.S.C. § 1961(a), accruing from the date of PG&E's bankruptcy filing through the date of distribution. However, this interest rate was significantly lower than plaintiffs were entitled to under state law for contractual obligations not paid. Some of plaintiffs' contracts with PG&E contained bargained-for interest rates on unpaid obligations, while California law sets a default interest rate of ten percent. See Cal. Civ. Code § 3289(b). Plaintiffs claim that, by paying them the lower federal judgment rate, PG&E's plan denied them roughly $200 million they would have received pursuant to interest rates in their contracts or, in the absence of such terms, the California default rate.

Notwithstanding the difference in interest payments, PG&E's plan classified plaintiffs' claims as "unimpaired," a statutory term used to denote which bankruptcy creditors are entitled to vote on a reorganization plan. See 11 U.S.C. § 1124. As supposedly unimpaired creditors, plaintiffs were deemed to automatically accept the plan and therefore had no power to vote. See 11 U.S.C. § 1126(f). Conversely, all classes of impaired claims were entitled to vote and could assert other statutory protections under the Bankruptcy Code if they voted against the plan. See 11 U.S.C. §§ 1129(a)(7), 1129(b)(1).

Plaintiffs and other unsecured creditors objected to the amount of postpetition interest provided under the plan. They argued that, because PG&E was solvent, they must receive interest at the contractual or default state law rates to be considered unimpaired. In a ruling prior to plan confirmation, the bankruptcy court disagreed. That court concluded it was bound by Cardelucci , which it read as establishing a broad rule that all unsecured creditors of a solvent-debtor, regardless of impairment status, are entitled only to postpetition interest at the federal judgment rate. The bankruptcy court alternatively ruled that, even if Cardelucci did not control, PG&E would prevail because the Bankruptcy Code limits unsecured creditors of a solvent debtor to interest at the federal judgment rate, and therefore plaintiffs' claims were not actually impaired. The bankruptcy court confirmed PG&E's plan on June 20, 2020, thus satisfying the deadline set by A.B. 1054.

Plaintiffs appealed the bankruptcy court's confirmation order, which incorporated the postpetition interest order, to the district court. That court affirmed, adopting the bankruptcy court's reasoning that Cardelucci controlled the postpetition interest dispute. Plaintiffs appeal that ruling to us.

II

We review de novo a district court's decision on appeal from a bankruptcy court, applying the same standard of review to the bankruptcy court's decision as did the district court. Northbay Wellness Grp., Inc. v. Beyries , 789 F.3d 956, 959 (9th Cir. 2015). The bankruptcy court's conclusions of law, including its interpretation of the Bankruptcy Code, are reviewed de novo. In re Smith , 828 F.3d 1094, 1096 (9th Cir. 2016).

III

The question we must answer is this: what rate of postpetition interest must a solvent debtor pay creditors whose claims are designated as unimpaired pursuant to § 1124(1) of the Bankruptcy Code ?² No circuit court has addressed this issue, and bankruptcy courts have reached different conclusions. Compare In re Ultra Petroleum Corp. , 624 B.R. 178, 203–04 (Bankr. S.D. Tex. 2020) (unimpaired creditors must receive postpetition interest at the contract rate), with In re Energy Future Holdings Corp. , 540 B.R. 109, 124 (Bankr. D. Del. 2015) (unimpaired creditors are entitled to interest "under equitable principles" at a rate "the Court deems appropriate"), and In re The Hertz Corp. , 637 B.R. 781, 800–01 (Bankr. D. Del. 2021) (unimpaired creditors need only receive interest at the federal judgment rate).

Plaintiffs contend that the bankruptcy and district courts in this case erred in holding that, as unimpaired creditors, they were only entitled to postpetition interest at the federal judgment rate of 2.59 percent. We agree that these rulings were in error. Under the long-standing "solvent-debtor exception," plaintiffs possess an equitable right to receive postpetition interest at the contractual or default state law rate, subject to any other equitable considerations, before PG&E collects surplus value from the bankruptcy estate. Cardelucci , which interpreted a statutory provision inapplicable to unimpaired creditors, does not hold otherwise. Moreover, we disagree with PG&E's assertion that this solvent-debtor exception was abrogated by passage of the Bankruptcy Code. To the contrary, the Code required PG&E's plan to leave "unaltered" all of plaintiffs' "legal, equitable, and contractual rights," § 1124(1) —including their equitable right to receive the bargained-for postpetition interest under the solvent-debtor exception. PG&E's plan failed to compensate plaintiffs accordingly.

A

Statutory analysis of the Bankruptcy Code is a "holistic endeavor." United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd. , 484 U.S. 365, 371, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Our analysis in this case requires reference to various statutory and historic sources. We begin by summarizing (1) the common-law solvent-debtor exception, and (2) key provisions of the Bankruptcy Code.

Although the concept of a solvent bankrupt may seem contradictory, the scenario occurred frequently enough for the common law to develop a special rule for such cases. That rule, in short, is that a solvent debtor must generally pay postpetition interest accruing during bankruptcy at the contractual or state law rates before collecting surplus value from the bankruptcy estate.

The default rule in bankruptcy law is that interest ceases to accrue on a claim once a debtor has filed for bankruptcy. See Sexton v. Dreyfus , 219 U.S. 339, 344, 31 S.Ct. 256, 55 L.Ed. 244 (1911) ; 11 U.S.C. § 502(b)(2). This rule is one of necessity: in most chapter 11 cases, the debtor cannot pay all its creditors, and therefore payment of interest accruing after filing would diminish...