I have seen numerous articles that say PG&E (a utility in California) is declaring bankruptcy in anticipation of huge liabilities from the recent wildfires.
Note that the quote says “potentially staggering liability.” To me that reads that PG&E is solvent right now but fear of possibly losing a lot of lawsuits has them seeking bankruptcy protection from the people who might sue them and might win.
So this is a thing? If I burn down my neighbor’s house I can declare bankruptcy before he sues me to protect me from a future civil suit? (Yes, I know that is also criminal so I would go to jail…just asking about the civil suit and bankruptcy protection.)
I’m not sure if you’re using the word incur in the way that I would expect. PG&E’s liabilities for prior actions already exist and have already been incurred, they just haven’t been adjudicated and quantified yet.
You can, in principle, declare bankruptcy to protect from a claim that you have incurred but for which all litigation to quantify its amount has not yet been completed.
Any debts incurred after a bankruptcy (which wouldn’t include your example of prior liabilities, those were before the bankruptcy) would not be covered by that bankruptcy. This wouldn’t be pro-active, it’d be pointless: you can still incur debts after a successful bankruptcy.
If they anticipate costs will effect operations they could be looking for various protections like:
[ul]
[li]Automatic stays on new obligations from court cases, allowing the bankruptcy court to structure payments.[/li][li]Cancel existing long term contracts that may impact their ability to pay court claims.[/li][li]Seek new financing and giving this new debts first priority which will be lower cost or possibly their only option for new financing.[/li][/ul]
Remember that PG&E holds a lot of municipal bonds and has several collective bargaining agreements with unions.
With the understanding I am making no claim on their intents or if those intents are moral or not they may be concerned that without court protection judgement would effect their ability to repay bonds or to fund union agreements. It is quite likely that any significant judgement that exceeds their insured amounts would be enough to impact their ability to continue operations.
As this is Chapter 11 it won’t discharge any potential debts due to lawsuits, it will enable a court to structure payment of obligations in a way that will prevent the utility from failing. While some debts may be discharged those a discharges would be granted by the court in separate action from a restructuring filing.
The quote also says “preparing to seek bankruptcy protection”. Even if they can’t actually file for bankruptcy just yet, if they can see it coming, there are doubtless lots of things they can do to get ready for it (even if it’s just things like gathering up all the paperwork they’ll need).
Also know that the wildfire costs are know to be at least $30 billion right now so even if a fraction of that cost is passed onto them it could cause issues with them continuing operations.
I don’t know California law but judgement would possibly be considered unsecured creditors.
The liability for PG&A exists today. It just hasn’t been fully quantified yet. They can argue that they are liable for the consequences of the forest fire (which has already happened) and that such amounts will likely exceed their net worth, and therefore they need bankruptcy protection.
Just like you are liable for burning down your neighbors house, you are not sure of its exact worth, but you reasonably expect its value to be greater than your own net worth, therefore you want to declare bankruptcy.
This wouldn’t work, if you hadn’t burned your neighbors house down, but you were thinking of doing so.
Entering bankruptcy just requires not paying your debts as they come due, and basically hands over to the court all of your assets and debts and tries to resolve them. You can declare bankruptcy for not paying your $5 credit card bill. If you were to go to court, they’d pay the bank $5 out of your bank account and wonder why you wasted your money on legal fees. But a huge utility has many obligations that it is constantly paying, and they want the ability now to structure their repayment through the bankruptcy court so that they can continue to operate. They are willing to let a court decide in what order and at what speed their obligations are going to be paid instead of their own management in order to get the protection from the court to not have to pay them according to their original agreement. Being insolvent is entirely irrelevant.
Right, they want a bankruptcy to protect themselves from the results of actions that have already occurred. That can potentially work. They are arguing that they have already incurred enough debt to actually be bankrupt, even if they don’t precisely know the details of the amounts yet. They don’t agree that they fall within the title you chose for this thread, as the actions that have incurred the debts have already taken place.
I would not find it unreasonable if a court were to look at this and see that it’s obvious that the liability will eventually far exceed their assets, and not require a delay to wait for the inevitable to happen.
But while it may be expected that a court case (or more than one) will result in a debt you cannot pay why pre-emptively declare bankruptcy? Why not wait till you see how it all plays out and when it looks like you cannot service your debts then declare bankruptcy.
I thought that is how it works. Not that I think I will have some debt I cannot pay so protect me ahead of time but rather that I have actual debt that I cannot pay.
Put another way, why not wait till the debts pile up to the point of bankruptcy (as most people see it) and then file for protection?
What does doing it now gain them that waiting till the debts are real and then declaring bankruptcy?
This method it seems I could just assume any future debt I might have (never mind if it comes to pass) and claim it today.
If you are not in bankruptcy and need/want to void a contract or get out of a lease, then you can expect to owe damages to the other party, and to have that other party pursue legal action to collect damages or enforce the contract. If you are in bankruptcy, however, the other party has far fewer options, and almost any attempt to enforce or collect requires the court’s consent. Waiting may further damage your financial position.
The argument is that PG&E already has actual debt; they just don’t have a dollar value assigned.
Consider a much smaller situation: your car has been repossessed. You will end up owing the lienholder the outstanding balance on the loan, plus the fees and costs of repossession, minus whatever the car fetches at auction. Until the car sells and the final bill is calculated, you don’t know the dollar value of that debt, but it is very likely that there will be one.
You could assume any future debt you might have that resulted from actions you have already taken. Bills from the car accident you caused yesterday can be included in today’s filing, because whatever liability you do or do not have, it is predicated on what has already happened. Accidents that happen tomorrow, however, can’t be included in today’s filing, because the accident itself has not happened and cannot reasonably be foreseen. Yesterday’s loan can be claimed today; the credit card bills you plan to run up tomorrow cannot be.
There have already been news reports about PG&E equipment being the cause of several serious fires. There have also been news reports making rough estimates of the damages - property destroyed, cost of fighting fires, etc. I’m going to guess the lawyers for the state, multiple insurance companies, and other affected entities - cities, other public utilities, businesses, and uninsured individuals - have had lawyers contact PG&E once the source of their particular fires are alleged. They probably know fairly well the liability that could be dumped on them. I don’t imagine it’s difficult to plunk those numbers in front of a judge and point out they seriously exceed ability to pay.
I wonder how California law works in this regard. If an unsettled lawsuit is one of the debts in bankruptcy, does the judge for the bankruptcy get to adjudicate the debt? It would be futile to continue the case in a separate court knowing the award may end up paying pennies on the dollar. I assume too, the trustee or bankruptcy judge gets to decide if they will even fund a legal defense against claims (why throw away money?) Particularly, there could be dozens or hundreds of separate cases. The legal bills alone could put them into bankruptcy. So it may simply be a way to consolidate and simplify the upcoming lawsuits.
I think the earlier posts are right. The debt is demonstrably bigger than ability to pay, so the sooner they push that debt to the side and allow the orderly continuation of the business (which is what Chapter 11 is, IIRC) the less disruption to the business. Then the outstanding debt not critical to ongoing business can be assembled and paid out as far as the company is capable.
“Chapter 11” is a special kind of American bankruptcy that is intended to allow a company to continue trading after it is technically insolvent. Which is not the same as “ran out of money”. When the company “runs out of money” it’s probably already to late to try to continue trading.
The thing that is “protected” by ch 11 is supposed to be the value of the trading company, which disappears if you stop trading when insolvent. But trading while insolvent is a bad thing, hence ch 11 bankruptcy.
I don’t really focus on bankruptcy in my practice but I dabble in it. I took two courses on it in law school.
Waiting until you are absolutely destitute before declaring bankruptcy is one of the worst things you could financially do, whether you are an individual or a corporation.
Keep in mind, I am not talking about a hypothetical thought of a possibility of bankruptcy. You have looked at your books or your personal budget along with your income and see that while you are keeping the creditors at bay right now, it is almost a certainty that in, say, six months, there will be wolves at the door.
Don’t let the wolves come to the door. If you are reasonably certain that you are heading down the tubes, then file now and get a bankruptcy lawyer while you can still afford it. You won’t be talking to the drones on the collection calls. Your lawyer will be talking to other lawyers who will try to convince the creditors that they can get at minimum SOME money back.
You and your attorney put together a plan to present to the creditors, which, at least at the outset lets you sleep at night. The collection efforts stop. You have a direction to move forward instead of transferring balances between credit cards and having fights with your spouse.
Then, if you have some money, you can move forward with a different plan. The creditors that will get screwed will take less in exchange for a bankruptcy plan. Your lawyer will tell the bankruptcy trustee that it is not right to give the last $3k in savings to the most obnoxious creditor because you can use that money to do other things to both help out you and all creditors.
If you have $11.32 in your account, there is nothing left to do but liquidate.
That’s the short version, but bankruptcy law is very complicated and when you have room to wiggle, the other side wiggles. When you have no room to work, they send out the wolves.
I think the motive is debtor in possession (DIP) dfinancing. See, if I’m a bank, and they come to me for a loan, I might say “screw you, I’m never gonna get paid back after all the fire victims sue your ass”. But if they declare bankruptcy, and get court permission to secure DIP financing, the lender of the DIP loan gets precedence over (most) all existing creditors. Meaning it is financing they will actually be able to get. IANAL , and May have this wrong. Don’t think so, though.
Right. The cliff notes version of the reason behind Chapter 11 bankruptcy is to salvage what is otherwise salvageable and to prevent greater harms.
If this power company could not have bankruptcy protection right now, the wolves will be coming. Every creditor has an incentive to be first in line and attack it the hardest because they might not get anything. The company gets pummelled with lawsuits and cannot pay employees and has to liquidate. People go without power, employees get fired, creditors (except the most aggressive) do not get paid, investors lose everything. A company goes under and a new one has to start from the ground up.
When bankruptcy is filed, the most important thing for the debtor is that collection efforts stop. Every creditor is now on an equal footing (at least equal under the law depending on the priority of their claims) so there is no benefit or loss from chilling out and letting the debtor breathe.
The debtor, in conjunction with the creditors (and employees who are under contract and owed money or have pension plans are creditors), and potential claimants, with the oversight of a U.S. Trustee, and if needed a judge, can now look at the big picture and work out a deal that is beneficial to all.
In the best case scenario, the parties see that but for this temporary snag, the company can work through the issue and restore itself to profitability. In the best case scenario that means that everyone gets paid 100% just on a longer term. In the slightly less best case scenario some of the creditors must accept 60% of what they are owed, but liquidation might only get them 20% or 0%.
This is much better for society and all parties involved than simply allowing the most aggressive creditor to run off with everything and destroy a business and putting thousands out of work.
This works for individuals as well. Imagine a plumber. Why let the first creditor who races to the courthouse and gets a judgment take the plumber’s house, his work truck and his plumbing tools? Wouldn’t it be better to allow the plumber to keep those things and work to pay back the debts for everyone? The creditors benefit and so does the plumber, his employees, and his customers.
But the other question is - given that your typical big-ass-lawsuit can take years, what happens next? Does the trustee take over the lawsuits? Is there an automatic settlement, or is the bankruptcy simply leverage - “If you win anyway, your $1M settlement becomes $100K. If it’s $2M it’s $150K. Might as well settle…”? Does the judge in the bankruptcy get to determine the result of the lawsuit?
I’ve heard of the reverse, where someone who goes bankrupt is the possible beneficiary of a lawsuit - in which case the trustee is duty-bound to pursue that lawsuit for the best result no matter what the bankruptee wants to do.
Yes, correct. Any of the above. The lawsuit would then be handled in bankruptcy court in an adversarial proceeding (AP for short) because the bankruptcy halts any collection attempts including state or federal civil cases seeking to collect against the debtor.
But your second point is also mostly correct. What would happen is that a proposal would be made by any party: the debtor, a creditor, a group of creditors, etc. The proposal groups similarly situated creditors.
For example, the debtor could propose that Class A creditors are those that have suffered a death and those will be paid $1M each. Class B creditors are those that have lost a home, and they will be paid $250k each. Class C creditors are those that suffered other property damage $50k each.
Now we are going well past Cliff notes, but the Cliff notes version above this is that there are complex rules allowing higher classes of creditors to “cramdown” or force approval over a single lower class of creditors. Of course, when debtors propose a plan, they like to get somewhat ridiculous on how they classify creditors so the higher classes get favorable treatment and screw the lower classes so as to get a cramdown, but a judge will decide if it is reasonable.
But back to Cliff notes #1. The creditors will look at this plan to see if they agree and a majority vote is needed among each class to approve the Chapter 11 plan (subject to the complex cramdown in the last paragraph). If no deal is reached, then we start again from scratch with someone else proposing a plan–sort of well, pal, you didn’t like mine, what’s yours?
The Trustee’s job is invaluable in these situations and I wish there was a mechanism for this outside of the bankruptcy context. He or she has a fiduciary duty to all creditors equally and therefore will not liquidate Plumber Bob because he can pay them back.
This system works well and APs are surprisingly rare when people sit down and see the full picture.