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Aug. 6, 2002
The PUC Asks Judge Montali to Halt Voting by PG&E's Creditors Because Of What It Calls The Utility's 'Road Show'
SAN FRANCISCO - For weeks, Pacific Gas and Electric Co. has been waging an unusually aggressive campaign to defeat the state's reorganization plan for the bankrupt utility. The company may find out soon if its tough tactics have backfired.
State regulators today will ask a federal bankruptcy judge to declare votes cast so far to be tainted, order a new vote and send out letters correcting PG&E's statements about the state's plan.
"PG&E has done what it said it would not do - bash the [Public Utilities Commission] in a set of misleading solicitation materials sent ... to PG&E's creditors and equity holders," wrote Gary Cohen, the commission's chief counsel, in his request for a court injunction.
"The solicitation materials are replete with false statements, mischaracterizations and misleading selective quotations from various sources," Cohen complained.
The commission is asking U.S. Bankruptcy Judge Dennis Montali to enjoin the nasty campaigning and restart the election. Under Bankruptcy Code Sections 1125 and 1126, the court has the authority to discard tainted votes.
The approximately 74,000 eligible creditors are due to vote by Aug. 12.
The aggressive campaign tactics by PG&E, which began last month, exploit a loophole in the bankruptcy code, which does not address how far dissenters may go in objecting to a particular plan, according to bankruptcy experts.
The commission complained that "much of [PG&E's] solicitation efforts are being conducted by telephone or in person at 'road shows' and there are no controls on what defendants' agents are saying to creditors on those telephone calls or at such road shows."
PG&E spokesman Ron Low defended the company's tactics. "The commission's request is completely meritless," he said. "We believe all of our communications have been accurate and believe they were well within the rules."
PG&E Corp., the utility's parent, hired one of the top corporate elections campaign firms, D.F. King, to defeat the PUC plan.
Low noted that the PUC has done its share of negative campaigning. He also said all the PG&E materials used qualifiers such as "we believe" and "in our opinion."
"By contrast, if you look at what the commission has said from the beginning, they have said that our plan was illegal or not confirmable. The bottom line is, the commission has not used the same qualifiers in their attacks."
There is little case law and not much detail in the bankruptcy code spelling out the limits on solicitation of votes to defeat a particular plan, but the law makes clear that any false or misleading statements could risk disqualification of votes.
So far, PG&E's campaign has included mailing 75,000 letters to creditors and stockbrokers June 20 contending the PUC's proposal runs "an extreme risk of failure," is unlikely to be financed and is likely to result in lower returns to some groups. The letters were signed by PG&E Co. president Gordon Smith and Robert D. Glynn Jr., CEO of parent PG&E Corp.
The letters were specially tailored for different classes of creditors. Mortgage bondholders, for example, were told they stood to gain more from the PG&E plan, with a 100 percent cash payment, than from the commission plan, which PG&E said could result in bonds rated below investment grade, or junk bonds.
Ironically, the debt rating on two subsidiaries of PG&E Corp. was lowered to junk status Thursday, causing the company stock to plummet 30 percent in one day.
PG&E told owners of preferred stock shares in campaign letters that their investment could be "worth at least 20 percent less if the [commission] plan were implemented."
"Lawyers are creative folks, and I think [PG&E has] identified a loophole in the bankruptcy law in the solicitation of votes," said bankruptcy expert Jack Williams, of Georgia State University. To solicit votes in support of a reorganization plan, backers must seek approval of statements from the court. But to solicit votes against a plan, they can go right at it, so long as they don't misrepresent facts or engage in defamation, he said.
Bankruptcy attorney Penn Butler, of Brooks & Raub in San Francisco, described it as "one of these twilight zone areas" of bankruptcy law. He expressed concern that, if PG&E includes new information and makes statements beyond the court-approved disclosure statement to creditors, the utility could run afoul of the judge.
"It's a gray area," he said.
The mudslinging campaign has a powerful strategic purpose behind it, observers believe.
Tactically, PG&E not only needs to win approval of its own plan, it also needs to defeat the PUC plan, according to Williams.
The PUC plan has already dodged one potentially devastating setback, a refusal by Montali last month to order PG&E to pay $8 million in fees to the commission's chief investment adviser, UBS Warburg. PUC attorneys said late last week that an agreement is being worked out with Warburg, which is helping to arrange the financing at the center of the PUC plan, to defer payment until a new funding proposal can be brought to the judge showing that Warburg's work benefits the utility's bankruptcy estate.
Creditor approval of both plans would leave PG&E with a serious problem. Montali could easily decide to stick with the more immediate payment to creditors under the commission's plan and avoid the biggest legal question hanging over PG&E's plan - the validity of preempting state law to break up the company.
The judge could conclude that "a plan without the preemption issue could be effectuated immediately." But with preemption as an issue, appeals could drag out, denying creditors early payment, said Williams.
"For [PG&E] to win, if they've got a judge who does not want to address preemption, PG&E has to win [approval for its plan], and the other plan has to lose. If PG&E and the PUC plans are both approved, my guess is the PG&E plan will not be confirmed," Williams said.
To win approval, a reorganization plan must be approved by each class of creditors by a majority of class members. That majority must represent two-thirds of the total dollar amount at stake in each class.
One California bankruptcy expert unconnected with the case, who asked not to be identified, said if one side thought the other side did something improper, "they should hustle in to court at the earliest possible moment, yell and scream and make them recant. The judge could make them put off the vote until it is rectified. That is what happens in proxy contests."
That is just what the PUC is doing now.
PUC attorney Paul Kornberg, of New York's Paul Weiss, Rifkind, Wharton & Garrison, indicated in a recent court hearing that he was "shocked" by PG&E's campaign statements to creditors.
That prompted an immediate retort from PG&E attorney James Lopes.
"It is my turn to be shocked," said Lopes, of San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin. "I can't imagine Mr. Kornberg would think that we wouldn't solicit rejections for the PUC plan. That's part of the game."
Some experts think the PUC may have few options but to protest and seek a new election and extension of the voting deadline.
"If the court felt there was an invalid solicitation [of votes], there would be no option other than to order a new solicitation," said Scott McNutt, a San Francisco bankruptcy lawyer at McNutt & Litteneker. At a minimum, he said, such a result would add "millions and millions of dollars" in attorney fees and other costs to the case.
McNutt and others believe a challenge to PG&E's solicitation tactics is a long shot, given the scrutiny that has gone into the campaign to solicit creditors on both sides.
"You can be sure both the PUC and PG&E have thought long and hard about that one, because that's the death penalty," said Patrick Murphy, of San Francisco's Murphy Sheneman Julian & Rogers. It is "very rare that a judge would nullify balloting," he said.
PG&E and the PUC are locked in a battle to win control of the reorganization of the company, which would allow it to emerge from the nation's largest utility bankruptcy.
PG&E wants to break the company into four pieces. Three new firms would generate electricity, deliver natural gas or transmit power, all independent of state regulation, and the fourth would be a retail utility company with its customers as virtually its only asset. It would remain under state regulation.
By contrast, the PUC wants to keep PG&E intact and under its control by having the utility pay off its debt using $8 billion in accumulated cash and issuing $7.5 billion in bonds, new stock and other debt instruments.
Under bankruptcy law, creditors have the power to knock out a plan by voting against it. But among the plans accepted, the final choice of a survivor will be in Montali's hands.
Murphy said he did not find anything shocking in PG&E's letters, although they were more detailed than others he has seen.
"You cannot get into detailed restrictions on what people can say or do as long as the disclosure statement has been approved and sent out and the solicitation does not violate some order of the court," he said.
The disclosure statements, outlining each plan, are similar to a company prospectus or a ballot pamphlet in an election. The statement is intended to tell potential investors all they need to know about how the company will reorganize.
The complex voting regime outlined by federal bankruptcy law allows creditors, who are divided into classes according to their type of debt, to demonstrate their interest in a plan. Only if every voting class votes against a plan will it die, Murphy said. Otherwise, the proposal moves to the next step, known as confirmation, where it is examined for legal and financial soundness. Ultimately, it is Montali who must approve the final choice.
In its June 20 letters to creditors criticizing the PUC's plan, the utility devoted one paragraph to the most serious legal problem with its own plan: the controversial proposal to preempt state laws and regulation that might prevent its breakup.
"We believe the PG&E plan meets all legal requirements to be confirmed by the Bankruptcy Court, including the requirements the court said are necessary to justify preemption of state law," the letter states.
PG&E wanted to spend $325,000 of its own money to hire D.F. King, a move that would have required Montali's approval. The utility told the judge it would also pay King $4.50 ("plus related telecommunications charges") for every incoming or outgoing telephone call from or to creditors.
PG&E withdrew the funding request after both the PUC and former U.S. Trustee Linda Stanley objected.
Low, the utility's spokesman, said last week that PG&E Corp., the utility's parent company, is now picking up the tab for the King contract.
Responding to the assertions in the letters, PUC counsel Cohen said there was no basis for the claim that PUC bonds would be below investment grade.
He said the state's only campaigning so far has involved meetings and telephone calls with groups of creditors but nothing like PG&E's highly organized effort.
PG&E has been locking up votes another way: Because a claim paid in full counts as a vote to approve the plan, and because earlier this year Montali approved payment of small creditor claims, PG&E has moved quickly to pay thousands of such claims, in effect locking up "yes" votes for the plan.
Under the proxy fight scenario, fighting can be very aggressive. "It is the wild, wild West, so long as they don't misrepresent facts and don't libel or slander anyone," Williams said.
The PUC has been highly critical of the PG&E plan. Cohen said the plan is "completely unfinanceable" in the current market. "Companies that look like PG&E ... are getting killed in the market," he said.
"In this market, a reputable utility, where rates are tied to cost of service, may look a lot more attractive to people," he said.
The current request for an injunction against PG&E's tactics may be one of the only means the PUC has to effectively combat the big-money campaign being waged by the utility.
"You have Chicago machine politics played in a bankruptcy case: One side has the dough to make people get out and vote and the other side doesn't," said McNutt. "I don't know if there's anything wrong with that, but it's unusual."
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Pamela Mac Lean
Daily Journal Staff Writer
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