PG&E Corp. v. California Department of Water Resources

Background

PG&E Corporation and Pacific Gas and Electric Company, as debtors and reorganized debtors, appealed an April 22, 2022 order of the United States Bankruptcy Court for the Northern District of California. The bankruptcy court’s order resolved a dispute involving the California Department of Water Resources (CDWR) and a 1984 Agreement of Cotenancy concerning the Castle Rock Junction-Lakeville 230-kilovolt transmission line.

The agreement required one year’s advance notice for a cotenant to terminate its participation. It also contained provisions addressing removal costs when all cotenants stopped operating the line and financial obligations incurred before a cotenant’s termination when the other cotenants continued operating it. The agreement provided for binding arbitration of disputes.

CDWR gave notice in 2018 that it intended to terminate its participation. In 2019, it filed a proof of claim in the bankruptcy case for $101,026.75, representing alleged overpayment of operation and maintenance fees after termination. PG&E initially argued that CDWR had to pay its proportional share of estimated removal costs before termination could become effective. PG&E later stated that it would pay CDWR’s claim and argued that no further bankruptcy court proceedings were necessary.

The bankruptcy court granted CDWR’s motion for relief and denied PG&E’s motion to modify the plan injunction and compel arbitration. It later ruled for CDWR on the contract dispute, concluding that CDWR did not owe estimated future removal costs. PG&E appealed.

Timeliness of the Appeal

The district court held that PG&E’s appeal was timely. It concluded that the bankruptcy court’s March 8, 2022 order was not final because it did not conclusively resolve the removal-cost dispute and left open further proceedings. The April 22, 2022 order was the first final order, so PG&E’s appeal was timely.

Arbitration

The district court rejected PG&E’s argument that payment of CDWR’s claim made the dispute moot. The court explained that a live controversy remained because the effectiveness of CDWR’s termination without paying removal costs affected whether the cotenancy agreement remained an executory contract that could be assumed in the bankruptcy plan.

The court also held that the removal-cost issue was a core bankruptcy matter. A core matter is one closely connected to the bankruptcy case and its administration. The court found that the issue was inseparably connected to the bankruptcy court’s authority over executory-contract and claims disputes under PG&E’s confirmed reorganization plan.

Because the issue was core and arbitration could conflict with the bankruptcy plan’s centralized resolution of the debtors’ obligations, the bankruptcy court had discretion to deny arbitration. The district court held that the bankruptcy court did not abuse that discretion.

Adversary Proceeding

PG&E argued that the bankruptcy court should have required an adversary proceeding, a formal bankruptcy lawsuit with additional procedural requirements, to resolve the removal-cost dispute. The district court held that, even assuming the bankruptcy court made an error by not requiring one, the error was harmless.

Applying the stated factors, the court found that the material facts were undisputed, the remaining issues were legal questions about contract interpretation, PG&E had received notice and opportunities to brief and argue the issue, and PG&E had not shown that a formal adversary proceeding would have materially changed the factual record or legal presentation.

Contract Interpretation

The district court reviewed the bankruptcy court’s interpretation of the cotenancy agreement without deference. It upheld the conclusion that CDWR did not owe removal costs upon termination. The court noted that the remaining cotenants continued operating the transmission line and concluded that the agreement’s provisions did not require CDWR to pay the estimated future removal costs sought by PG&E.

The court rejected PG&E’s argument that the agreement’s reference to “financial obligations” included removal costs. It held that the agreement’s more specific treatment of removal costs controlled over the more general language and that the court could not add contract language the parties had not included.

Disposition

The court AFFIRMED the bankruptcy court’s ruling in its entirety and directed the clerk to close the case. It did not address the parties’ arguments about whether PG&E impliedly consented to bankruptcy court jurisdiction or whether the bankruptcy court had constitutional authority to enter a final judgment.