EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA a. □ Sal □□ 1 . □ □ □□ Signed and Filed: March 8, 2022 □□ 2 Grin J 4 Vin fod 5 DENNIS MONTALI U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re: ) Bankruptcy Case 10 ) No. 19-30088-DM PG&E CORPORATION, ) 11 ) Chapter 11 12 - and - ) ) Jointly Administered 13 |J/PACIFIC GAS AND ELECTRIC COMPANY, ) ) 14 Reorganized Debtors. ) 15 ) L] Affects PG&E Corporation ) 16 affects Pacific Gas and ) 7 Electric Company ) Xl Affects both Debtors 18 * All papers shall be filed in 19 Lead Case, No. 19-30088 (DM) . \ 20 ) 21 22 MEMORANDUM DECISION REGARDING DISPUTE BETWEEN DEBTORS AND THE 23 CALIFORNIA DEPARTMENT OF WATER RESOURCES 24 On March 2, 2022, the court heard oral argument regarding 25 ||\California Department of Water Resources’ Motion for Order 26 ||\Determining that The Castile Rock Agreement with PG&E Cannot be 27 Assumed and that The Department of Water Resources’ Claim No. 28 1178104 be Paid (the “DWR Motion”) (Dkt. 11887) and the Motion of =_ 1 =_
1 the Reorganized Debtors for Entry of an Order Modifying Plan 2 Injunction and Compelling Arbitration of Claim of California 3 Department of Water Resources (the “Debtors’ Motion”) (Dkt. 4 11896), together with the accompanying memoranda, declarations 5 and other filings. 6 Having considered the matters fully, the court concludes 7 that the DWR Motion should be GRANTED and the Debtors’ Motion 8 should be DENIED. 9 Long before these bankruptcy cases were filed, the dispute 10 between these opposing parties was identified and framed, and 11 either side could have initiated the arbitration procedures of 12 the 1984 Cotenancy Agreement (“Agreement”). Neither did. Even 13 after the petitions were filed on January 29, 2019, that 14 procedure was available, either by DWR, perhaps after first 15 seeking relief from stay, or by Debtors. Again, neither pursued 16 that procedure. 17 All that changed when the Debtors’ Plan of Reorganization 18 (the “Plan”) was negotiated, filed, considered and confirmed. 19 As pointed out by DWR, specific provisions were inserted into 20 the Plan and the Order Confirming the Plan (the “OCP”) to deal 21 with and reserve for later resolution very numerous open issues 22 relating to executory contracts between Debtors and many 23 governmental agencies, including DWR. 24 Among the most relevant of them are:
25 34. Determination of Cure Disputes. a. Pursuant to Section 8.2(c) of the Plan, in the event 26 of an unresolved dispute regarding (i) any Cure Amount, 27 (ii) the ability of the Reorganized Debtors or any assignee to provide “adequate assurance of future 28 performance” (within the meaning of section 365 of the -2- 1 B ua nn ek xr pu ip rt ec dy lC eo ad se e) tu on d be er at sh se u me ex de ,c u ot ro r (y i ic io )n t ar na yc t o to hr e r matter pertaining to assumption, assumption and assignment, or 2 the Cure Amounts required by section 365(b)(1) of the 3 Bankruptcy Code (each, a “Cure Dispute”), such Cure Dispute shall be resolved by a Final Order of the Court, 4 which may be entered after the Effective Date. (emphasis added). 5
6 67. Governmental Performance Obligations. d. Notwithstanding anything in this Confirmation Order, 7 the Plan, or the Plan Documents, the listing of a matter as an “executory contract” or an “unexpired lease” in 8 the Debtors’ schedules or Plan Documents (a “Potentially 9 Assumed Contract/Lease”) is without prejudice to any contention by any Governmental Unit that the matter is 10 not in fact an executory contract or unexpired lease as set forth in section 365 of the Bankruptcy Code. With 11 respect to any Cure Amount for a Potentially Assumed 12 Contract/Lease for which the United States or any department, agency, or instrumentality of the State of 13 California (collectively, the “Governmental Parties”) is listed as the Non-Debtor Counterparty, all parties 14 reserve all rights to dispute such Cure Amount. If any Governmental Party disputes (i) that any Potentially 15 Assumed Contract/Lease is in fact an executory contract 16 or unexpired lease or (ii) any Cure Amount, such Governmental Party shall have no later than ninety (90) 17 days after the Confirmation Date (or such later date as may be mutually agreed upon between the applicable 18 Governmental Party and the Debtors or Reorganized 19 Debtors) to file and serve an objection setting forth such dispute, and any such dispute shall be resolved by 20 the Bankruptcy Court. (Emphasis added). 21 DWR is adamant that after it gave its notice of termination 22 of its participation in the Agreement on June 30, 2018, 23 effective one year later, there was nothing left for it to do or 24 for Debtors to assume. All that remains is for Debtors to pay a 25 refund of $101,026.75, now reflected in Proof of Claim No. 78104 26 that is presumptively allowed and has not been the subject of an 27 objection. 28 -3- 1 Debtors take a contrary view, reflected as early as when 2 the court was considering confirmation of the Plan. Debtors 3 filed their Schedule of Executory Contracts and Unexpired Leases 4 to be Assumed Pursuant to the Plan and Proposed Cure Amounts 5 attached to the Plan Supplement as Exhibit B (“Cure Notice”) 6 (Dkt. 7037). 7 That lengthy schedule included the Agreement. Thus, even 8 to the present date, Debtors maintain that the Agreement was 9 subject to assumption because it was not rejected, and the 10 resolution of the remaining dispute that is the subject of the 11 present motions is part and parcel of the entire bundle of 12 rights and obligations of the parties that must be resolved 13 through arbitration. 14 Given the very specific attention given to matters that 15 plainly include the present dispute, the court is satisfied that 16 the Plan and the OCP reserving jurisdiction in this court to 17 resolve them prevail over those relied on by Debtors to require 18 the court to order arbitration. 19 In In re Thorpe Insulation Co., 671 F.3d 1011 (9th Cir. 20 2012), the court established the principles that guide 21 bankruptcy courts in dealing with arbitration provisions versus 22 bankruptcy alternatives. Those principles convince this court 23 to exercise its discretion not to order arbitration at present. 24 Thorpe involved a very complex reorganization of an 25 asbestos mass torts case and the implementation of 11 U.S.C. § 26 524(g). It was a dispute of massive proportions and was 27 obviously quite critical to the outcome of the bankruptcy as a 28 whole. -4- 1 In contrast, Debtors would not have been in bankruptcy at 2 all but for the tragic wildfires of 2015, 2017 and 2018, none of 3 which have anything to do with the present dispute. It is easy 4 to assume that had those fires not occurred, no bankruptcy court 5 would have been called upon to deal with the present dispute 6 with DWR. 7 The determination of whether the Agreement is an executory 8 contract that may be assumed, and if so under what circumstances 9 and leading to what consequences, is clearly a core matter for 10 determination unless the arbitration option is more appropriate. 11 The core question is not a dispositive factor, but one that 12 should be considered. Thorpe taught that“[i]n core proceedings, 13 by contrast, the bankruptcy court at least when it sees a 14 conflict with bankruptcy law, has discretion to deny enforcement 15 of an arbitration agreement.” Thorpe 671 F.3d at 1021 (citations 16 omitted). 17 The Ninth Circuit agreed with other circuit courts that 18 permit bankruptcy court discretion to decline enforcement or 19 otherwise applicable arbitration provisions “only if arbitration 20 would conflict the underlying purposes of the Bankruptcy Code.” 21 Id.
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EDWARD J. EMMONS, CLERK 13 □□ \o. U.S. BANKRUPTCY COURT □□ NORTHERN DISTRICT OF CALIFORNIA a. □ Sal □□ 1 . □ □ □□ Signed and Filed: March 8, 2022 □□ 2 Grin J 4 Vin fod 5 DENNIS MONTALI U.S. Bankruptcy Judge 6 7 UNITED STATES BANKRUPTCY COURT 8 NORTHERN DISTRICT OF CALIFORNIA 9 In re: ) Bankruptcy Case 10 ) No. 19-30088-DM PG&E CORPORATION, ) 11 ) Chapter 11 12 - and - ) ) Jointly Administered 13 |J/PACIFIC GAS AND ELECTRIC COMPANY, ) ) 14 Reorganized Debtors. ) 15 ) L] Affects PG&E Corporation ) 16 affects Pacific Gas and ) 7 Electric Company ) Xl Affects both Debtors 18 * All papers shall be filed in 19 Lead Case, No. 19-30088 (DM) . \ 20 ) 21 22 MEMORANDUM DECISION REGARDING DISPUTE BETWEEN DEBTORS AND THE 23 CALIFORNIA DEPARTMENT OF WATER RESOURCES 24 On March 2, 2022, the court heard oral argument regarding 25 ||\California Department of Water Resources’ Motion for Order 26 ||\Determining that The Castile Rock Agreement with PG&E Cannot be 27 Assumed and that The Department of Water Resources’ Claim No. 28 1178104 be Paid (the “DWR Motion”) (Dkt. 11887) and the Motion of =_ 1 =_
1 the Reorganized Debtors for Entry of an Order Modifying Plan 2 Injunction and Compelling Arbitration of Claim of California 3 Department of Water Resources (the “Debtors’ Motion”) (Dkt. 4 11896), together with the accompanying memoranda, declarations 5 and other filings. 6 Having considered the matters fully, the court concludes 7 that the DWR Motion should be GRANTED and the Debtors’ Motion 8 should be DENIED. 9 Long before these bankruptcy cases were filed, the dispute 10 between these opposing parties was identified and framed, and 11 either side could have initiated the arbitration procedures of 12 the 1984 Cotenancy Agreement (“Agreement”). Neither did. Even 13 after the petitions were filed on January 29, 2019, that 14 procedure was available, either by DWR, perhaps after first 15 seeking relief from stay, or by Debtors. Again, neither pursued 16 that procedure. 17 All that changed when the Debtors’ Plan of Reorganization 18 (the “Plan”) was negotiated, filed, considered and confirmed. 19 As pointed out by DWR, specific provisions were inserted into 20 the Plan and the Order Confirming the Plan (the “OCP”) to deal 21 with and reserve for later resolution very numerous open issues 22 relating to executory contracts between Debtors and many 23 governmental agencies, including DWR. 24 Among the most relevant of them are:
25 34. Determination of Cure Disputes. a. Pursuant to Section 8.2(c) of the Plan, in the event 26 of an unresolved dispute regarding (i) any Cure Amount, 27 (ii) the ability of the Reorganized Debtors or any assignee to provide “adequate assurance of future 28 performance” (within the meaning of section 365 of the -2- 1 B ua nn ek xr pu ip rt ec dy lC eo ad se e) tu on d be er at sh se u me ex de ,c u ot ro r (y i ic io )n t ar na yc t o to hr e r matter pertaining to assumption, assumption and assignment, or 2 the Cure Amounts required by section 365(b)(1) of the 3 Bankruptcy Code (each, a “Cure Dispute”), such Cure Dispute shall be resolved by a Final Order of the Court, 4 which may be entered after the Effective Date. (emphasis added). 5
6 67. Governmental Performance Obligations. d. Notwithstanding anything in this Confirmation Order, 7 the Plan, or the Plan Documents, the listing of a matter as an “executory contract” or an “unexpired lease” in 8 the Debtors’ schedules or Plan Documents (a “Potentially 9 Assumed Contract/Lease”) is without prejudice to any contention by any Governmental Unit that the matter is 10 not in fact an executory contract or unexpired lease as set forth in section 365 of the Bankruptcy Code. With 11 respect to any Cure Amount for a Potentially Assumed 12 Contract/Lease for which the United States or any department, agency, or instrumentality of the State of 13 California (collectively, the “Governmental Parties”) is listed as the Non-Debtor Counterparty, all parties 14 reserve all rights to dispute such Cure Amount. If any Governmental Party disputes (i) that any Potentially 15 Assumed Contract/Lease is in fact an executory contract 16 or unexpired lease or (ii) any Cure Amount, such Governmental Party shall have no later than ninety (90) 17 days after the Confirmation Date (or such later date as may be mutually agreed upon between the applicable 18 Governmental Party and the Debtors or Reorganized 19 Debtors) to file and serve an objection setting forth such dispute, and any such dispute shall be resolved by 20 the Bankruptcy Court. (Emphasis added). 21 DWR is adamant that after it gave its notice of termination 22 of its participation in the Agreement on June 30, 2018, 23 effective one year later, there was nothing left for it to do or 24 for Debtors to assume. All that remains is for Debtors to pay a 25 refund of $101,026.75, now reflected in Proof of Claim No. 78104 26 that is presumptively allowed and has not been the subject of an 27 objection. 28 -3- 1 Debtors take a contrary view, reflected as early as when 2 the court was considering confirmation of the Plan. Debtors 3 filed their Schedule of Executory Contracts and Unexpired Leases 4 to be Assumed Pursuant to the Plan and Proposed Cure Amounts 5 attached to the Plan Supplement as Exhibit B (“Cure Notice”) 6 (Dkt. 7037). 7 That lengthy schedule included the Agreement. Thus, even 8 to the present date, Debtors maintain that the Agreement was 9 subject to assumption because it was not rejected, and the 10 resolution of the remaining dispute that is the subject of the 11 present motions is part and parcel of the entire bundle of 12 rights and obligations of the parties that must be resolved 13 through arbitration. 14 Given the very specific attention given to matters that 15 plainly include the present dispute, the court is satisfied that 16 the Plan and the OCP reserving jurisdiction in this court to 17 resolve them prevail over those relied on by Debtors to require 18 the court to order arbitration. 19 In In re Thorpe Insulation Co., 671 F.3d 1011 (9th Cir. 20 2012), the court established the principles that guide 21 bankruptcy courts in dealing with arbitration provisions versus 22 bankruptcy alternatives. Those principles convince this court 23 to exercise its discretion not to order arbitration at present. 24 Thorpe involved a very complex reorganization of an 25 asbestos mass torts case and the implementation of 11 U.S.C. § 26 524(g). It was a dispute of massive proportions and was 27 obviously quite critical to the outcome of the bankruptcy as a 28 whole. -4- 1 In contrast, Debtors would not have been in bankruptcy at 2 all but for the tragic wildfires of 2015, 2017 and 2018, none of 3 which have anything to do with the present dispute. It is easy 4 to assume that had those fires not occurred, no bankruptcy court 5 would have been called upon to deal with the present dispute 6 with DWR. 7 The determination of whether the Agreement is an executory 8 contract that may be assumed, and if so under what circumstances 9 and leading to what consequences, is clearly a core matter for 10 determination unless the arbitration option is more appropriate. 11 The core question is not a dispositive factor, but one that 12 should be considered. Thorpe taught that“[i]n core proceedings, 13 by contrast, the bankruptcy court at least when it sees a 14 conflict with bankruptcy law, has discretion to deny enforcement 15 of an arbitration agreement.” Thorpe 671 F.3d at 1021 (citations 16 omitted). 17 The Ninth Circuit agreed with other circuit courts that 18 permit bankruptcy court discretion to decline enforcement or 19 otherwise applicable arbitration provisions “only if arbitration 20 would conflict the underlying purposes of the Bankruptcy Code.” 21 Id. (citations omitted). Had either party initiated arbitration 22 after DWR gave its notice of termination in 2018 but before the 23 bankruptcy, there is no doubt that such course would have to be 24 followed. Even if either party had sought to do so after 25 bankruptcy, but before consideration of the Plan, the same 26 result appears likely. 27 Regardless of what could have happened, Debtors chose to 28 reserve the disposition of this dispute as a post-Confirmation -5- 1 matter as indicated above. While this court is not unmindful of 2 the tremendous complexity of the reorganization effort, and even 3 the complexities encountered apart from the wildfire problems, 4 Debtors still made an election of how best to proceed. They 5 could have excluded the Agreement from the list of matters to be 6 disposed of later but did not. Thus, the deferral of resolving 7 the issue through the plan mechanisms was a conscious choice. 8 Thorpe stated:
9 “Arbitration of a creditor’s claim against a debtor, even if conducted expeditiously, prevents the coordinated 10 resolution of debtor-creditor rights and can delay the 11 confirmation of a plan of reorganization.” 12 Id. at 1023. 13 There was no delay in consideration of the Plan and its 14 subsequent confirmation and implementation. The court cannot 15 ignore that conscious choice of the Debtors to proceed under the 16 procedures and reservations they established and which DWR and 17 other governmental agencies responded by their reservation of 18 rights as noted. 19 Even though this issue is presented to the court nearly two 20 years after the Plan was confirmed, there is still a risk that 21 an outcome achieved via arbitration, at least on the issues of 22 whether the Agreement was to the reserved assumption provisions 23 of the Plan at all, and whether DWR could be required to pay 24 anything after it gave its notice of termination, would conflict 25 with those policies articulated by Thorpe and memorialized in 26 the Plan and the OCP. 27 Under the circumstances presented, and consistent with the 28 admonitions of Thorpe, the court prefers to exercise its -6- 1 discretion and keep that dispute here. If the outcome is as DWR 2 hopes, the matter is over, subject only to the possibility of 3 appellate review. If the outcome favors Debtors, the question 4 of liquidation of the amount of damages to be paid by DWR may be 5 more appropriately determined through arbitration. 6 There are no material facts in dispute regarding whether 7 DWR should or should not be ordered to pay its share of the net 8 loss upon termination of the Agreement. DWR looks to Section 9 14.5 of the Agreement to insulate it from such a charge because 10 the other parties continued to operate under it. Debtors rely 11 on Section 14.7 to hold DWR responsible for its share for 12 termination in the future. 13 Collateral to that, and of relatively minor importance, is 14 whether Claim No. 78104 should be paid. So far Debtors have not 15 asserted any substantive objection to it, but maintain that if 16 they prevail on the termination issue that would represent 17 little more than a minor offset in DWR’s favor. 18 It is now time to put this dispute to rest. Debtors have 19 until March 25, 2022, to file a memorandum, not to exceed twenty 20 pages and limited to this discrete issue described above, in 21 support of their position. DWR has until April 8, 2022, to file 22 a reply memorandum, not to exceed twenty pages and similarly 23 limited. After that the matter will stand submitted unless the 24 court decides to consider oral argument. 25 If the decision is that DWR prevails, then that should be 26 the end of it, subject only to Debtors paying Claim No. 78104. 27 If Debtors prevail on that discrete issue, the court will 28 revisit the question of the amount DWR’s future liability upon -7- 1 termination should be determined through arbitration or via a 2 damages trial in this court. 3 The court is concurrently issuing orders consistent with 4 this Memorandum Decision. 5 **END OF MEMORANDUM DECISION**
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