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Dennis F. Dunne (admitted pro hac vice) 

Samuel A. Khalil (admitted pro hac vice) 

MILBANK LLP 

55 Hudson Yards 

New York, New York 10001-2163 

Telephone: (212) 530-5000 

Facsimile: (212) 530-5219 

and 

Gregory A. Bray (SBN 115367) 

Thomas R. Kreller (SBN 161922) 

MILBANK LLP 

2029 Century Park East, 33rd Floor 

Los Angeles, CA 90067 

Telephone: (424) 386-4000 

Facsimile: (213) 629-5063 

Counsel for the Official Committee 

of Unsecured Creditors

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

In re: 

PG&E CORPORATION 

 -andPACIFIC GAS AND ELECTRIC 

COMPANY, 

 Debtors.

Case No. 19-30088 (DM) 

Chapter 11 

(Lead Case) 

(Jointly Administered) 

CORRECTED1 OBJECTION OF THE 

OFFICIAL COMMITTEE OF UNSECURED 

CREDITORS TO MOTION OF DEBTORS 

PURSUANT TO 11 U.S.C. § 105(a) AND 

363(b) AND FED. R. BANKR. P. 2002 AND 

6004(h) FOR AN ORDER (A) AUTHORIZING 

DEBTORS TO ESTABLISH AND FUND 

PROGRAM TO ASSIST WILDFIRE 

CLAIMANTS WITH ALTERNATIVE 

LIVING EXPENSES AND OTHER URGENT 

NEEDS AND (B) GRANTING RELATED 

RELIEF 

Date: May 22, 2019 

Time: 9:30 a.m. (Pacific Time) 

Place: United States Bankruptcy Court 

 Courtroom 17, 16th Floor 

 450 Golden Gate Avenue 

 San Francisco, CA 94102 

Re: Docket No. 1777

 Affects PG&E Corporation 

 Affects Pacific Gas and Electric 

Company 

 Affects both Debtors 

* All papers shall be filed in the Lead 

Case, No. 19-30088 (DM)

 

1

 The Committee files this Corrected Objection to address a formatting issue in its originally filed objection. 

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TABLE OF CONTENTS 

PRELIMINARY STATEMENT .................................................................................................... 1

BACKGROUND ............................................................................................................................ 4

ARGUMENT .................................................................................................................................. 5

A. THE PRE-PLAN DISBURSEMENTS CONTEMPLATED BY THE 

PROGRAM CONFLICT WITH EXPRESS AND FUNDAMENTAL 

PROVISIONS OF THE BANKRUPTCY CODE. ................................................... 5

B. IF AUTHORIZED, THE PROPOSED PROGRAM MUST BE 

MODIFIED. ............................................................................................................ 12

CONCLUSION ............................................................................................................................. 13

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TABLE OF AUTHORITIES 

 Page(s) 

Cases 

In re B&W Enters., Inc., 

713 F.2d 534 (9th Cir. 1983) ............................................................................... 6, 8, 10 

Berg & Berg Enters., LLC v. Boyle, 

178 Cal. App. 4th 1020 (Ct. App. 2009) ........................................................................ 8 

In re Berry Good, LLC, 

400 B.R. 741 (Bankr. D. Ariz. 2008) ............................................................... 5, 6, 8, 10 

Creditors v. Johns-Manville Corp. (In re Johns-Manville Corp.), 

60 B.R. 612 (Bankr. S.D.N.Y. 1986) ............................................................................. 8 

Czyzewski v. Jevic Holding Corp., 

137 S. Ct. 973 (2017) ................................................................................................. 7, 8 

In re FCX, Inc., 

60 B.R. 405 (E.D.N.C. 1986) ....................................................................................... 12 

FDIC v. Castetter, 

184 F.3d 1040 (9th Cir. 1999) ....................................................................................... 8 

In re Gulf Coast Oil Corp., 

404 B.R. 407 (Bankr. S.D. Tex. 2009) .......................................................................... 7 

Gurney v. Arizona Dep’t of Revenue (In re Gurney), 

192 B.R. 529 (B.A.P. 9th Cir. 1996) ........................................................................... 10 

Institutional Creditors of Continental Air Lines, Inc. v. Continental Air 

Lines, Inc. (In re Continental Air Lines, Inc.), 

780 F.2d 1223 (5th Cir. 1986) ....................................................................................... 7 

In re Ionosphere Clubs, Inc., 

98 B.R. 174 (Bankr. S.D.N.Y. 1989) ................................................................... 8, 9, 10 

In re Just For Feet, Inc., 

242 B.R. 821 (D. Del. 1999) ........................................................................................ 10 

In re Kmart Corp., 

359 F.3d 866 (7th Cir. 2004) ....................................................................................... 10 

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Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re 

Integrated Res., Inc.), 

147 B.R. 650 (Bankr. S.D.N.Y. 1992) ........................................................................... 8 

Official Committee of Equity Security Holders v. Mabey, 

832 F.2d 299 (4th Cir. 1987) ................................................................................. 10, 11 

Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff 

Airways, Inc.), 

700 F.2d 935 (5th Cir. 1983) ......................................................................................... 7 

In re Pioneer Health Services, Inc., 

570 B.R. 228 (Bankr. S.D. Miss. 2017) ....................................................................... 10 

Scouler & Co. v. Schwartz, 

No. 11-CV-06377 NC, 2012 WL 1502762 (N.D. Cal. Apr. 23, 2012) ......................... 8 

In re Timberhouse Post & Beam, Ltd., 

196 B.R. 547 (Bankr. D. Mont. 1996) ....................................................................... 6, 8 

Statutes 

11 U.S.C. § 105 .......................................................................................................... passim

11 U.S.C. § 363 .......................................................................................................... passim

11 U.S.C. § 503 ................................................................................................................... 9 

11 U.S.C. § 507 ........................................................................................................... 5, 6, 7 

11 U.S.C. § 510 ................................................................................................................. 10 

11 U.S.C. § 1123 ................................................................................................................. 6 

Rules 

Fed. R. Bankr. P. 2002 ........................................................................................................ 1 

Fed. R. Bankr. P. 6003 ........................................................................................................ 9 

Fed. R. Bankr. P. 6004 .................................................................................................... 1, 9 

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1 

The Official Committee of Unsecured Creditors (the “Committee”) appointed in the abovecaptioned chapter 11 cases of PG&E Corporation and Pacific Gas and Electric Company (the 

“Debtors”), by its attorneys, Milbank LLP, hereby submits this objection to the Motion of Debtors 

Pursuant to 11 U.S.C. §§ 105(a) and 363(b) and Federal Rules of Bankruptcy Procedure 2002 

and 6004(h) for an Order (a) Authorizing the Debtors to Establish and Fund Program to Assist 

Wildfire Claimants with Alternative Living Expenses and Other Urgent Needs and (b) Granting 

Related Relief [Docket No. 1777] (the “Motion”).2 In support of its objection, the Committee 

respectfully represents as follows:

PRELIMINARY STATEMENT 

1. The 2017 and 2018 Wildfires left behind a tragic trail of devastation and 

destruction. Victims of those fires continue to suffer. The Committee is sympathetic to those 

victims, including the intended beneficiaries of the Motion—a group defined as “certain” wildfire 

victims “who have been displaced from their primary residence as a result of the 2017 and 2018 

Wildfires.” The Committee also understands the Debtors’ proposal to establish the fund described 

in the Motion (the “Fund”) in order to facilitate distributions to that particular group (the 

“Program”). The Committee’s overarching objective in these cases is to achieve confirmation of 

a comprehensive plan of reorganization that treats all creditors, including wildfire victims, fairly 

and equally, and in a manner that is consistent with the Bankruptcy Code. The Program does not 

do this. 

2. The Program, while laudable in concept, is flawed in construction. As presented, 

the Program neither satisfies longstanding legal standards nor contains appropriate safeguards to 

protect the equal-ranking unsecured creditors that are the Committee’s constituency. To be clear, 

the Committee absolutely supports the swift resolution and payment of all unsecured claims, 

including those of the victims of these tragedies, and will work tirelessly to achieve that goal, but 

the Committee cannot support the Motion as it has been crafted by the Debtors.

3. As a statutorily appointed fiduciary, duty-bound to safeguard the interests of a 

broad constituency of unsecured creditors holding more than $22 billion of claims in a wide variety 

 

2

 Capitalized terms not defined herein have the meanings ascribed to them in the Motion.

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of capacities, the Committee cannot support the pre-plan distributions or the piecemeal approach 

to payment of claims proposed in the Motion, particularly when the Debtors have not yet 

articulated a legal basis for making such payments or constructed basic safeguards around the 

mechanics of and accounting for such payments. 

4. The Debtors chose to file for chapter 11 protection. While that decision afforded 

them the unique opportunity to use certain bankruptcy tools to attempt to comprehensively address 

all of their wildfire claim liability, it also bound them to two fundamental chapter 11 principles: 

subject to certain limited exceptions that do not apply here, prepetition claims cannot be paid other 

than under a confirmed plan of reorganization, and all claims of equal priority must be treated 

equally. The distributions contemplated in the Program would violate both of these principles. 

5. The proposed distributions would also reduce the estate by $105 million without 

assurance that these funds would be either (i) paid to claimants who the Debtors believe will have 

allowable claims against the estates or (ii) applied as a credit against future plan distributions on 

account of those claims if and when allowed. Rather, the Debtors state that “as of the date of this 

Motion, there has been no legal determination that the Debtors are liable for any claims associated 

with the 2017 and 2018 Wildfires” and that “any payment made . . . is not intended to be and 

should not be construed as an admission to the validity of any claim. . .” Mot. at 4, 8. At the same 

time, the Debtors seek appointment of an Administrator who has broad authority to determine 

eligibility and make payments from the Fund, with no guarantee that the recipients of these 

payments are creditors of the Debtors’ estates or, if they are, that payments made under the 

Program will not be duplicated later through other assistance programs or future recoveries that 

may be provided to allowed wildfire claims under a confirmed plan of reorganization. 

6. As a fiduciary to a broad constituency of creditors of the Debtors’ estates, the 

Committee cannot support the Debtors’ proposal to disburse these estate funds outside a confirmed 

plan of reorganization without a corresponding reduction in liability or other demonstrable benefit 

to the estates. 

7. If the Court nonetheless is inclined to authorize the Program, the Committee 

respectfully submits that certain safeguards must be built into it to mitigate these problems: 

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 First, and most critically, any disbursements made under the Program must reduce dollarfor-dollar the amounts allocable, pursuant to a plan of reorganization ultimately confirmed 

in these cases, to the payment of allowed claims relating to the 2017 and 2018 Wildfires. 

While the Debtors state that distributions made under the Program “might” be made to 

individuals who hold legitimate claims against the estates arising from the 2017 and 2018 

Wildfires and that the Debtors do not “expect[]” those individuals to seek a double recovery 

(see Mot. at 7 n.2), neither the relief requested in the Motion nor the Debtors’ proposed 

order includes any measures to eliminate these uncertainties. 

 Second, the Program must be modified to include verifiable criteria with respect to 

eligibility, including restricting eligibility to the individuals harmed by the particular 

wildfires for which the Debtors’ liability has already been determined or for which the 

Debtors are likely to be held liable. As proposed, the eligibility criteria is determined by 

the Administrator in its sole discretion, without any relationship to the Bankruptcy Code 

or the Debtors’ potential liability. 

 Third, the Committee must have meaningful oversight over the implementation and 

administration of the Program, including with respect to the determination of the eligibility 

criteria and the disbursement of and accounting for the funds. 

 Fourth, any disputes arising from the implementation of the Program must be resolved by 

this Court. 

8. Finally, the Committee is concerned that, even if all of the proposed modifications 

are made, the authorization of the Program will invite additional requests for other forms of preplan payments on account of other prepetition claims. If the Court approves a carefully crafted 

program for immediate relief to certain wildfire victims, it should remain mindful that it stands 

atop a slippery slope that very well may lead to additional “creeping confirmation” requests from 

a variety of constituencies that believe they are just as worthy of preferred or accelerated treatment. 

The Court should make clear that approval of a modified Program cannot be precedent or used as 

a basis for future distributions of this kind outside of a confirmed plan of reorganization. 

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BACKGROUND 

9. On January 29, 2019, the Debtors filed petitions for relief under chapter 11 of the 

Bankruptcy Code. 

10. On February 12, 2019, the U.S. Trustee appointed and formed the Committee. The 

Committee is statutorily charged with the fiduciary responsibility to represent all of the Debtors’ 

unsecured creditors (other than those represented by the Official Committee of Tort Claimants) 

and is tasked to provide a reliable and independent check on, and balance to, the Debtors’ actions. 

The individuals and companies that compose the Committee span from line-workers to key 

vendors and play a critical role in supporting PG&E’s operations and their support is essential to 

preserving the operations of the restructured company. 

11. The Debtors filed the Motion on May 1, 2019 seeking authorization to fund and 

establish the Program to aid “certain” victims who have been displaced from their primary 

residences with “the costs of substitute or temporary housing . . . or other urgent needs.” Mot. at 

4. The Debtors propose to deposit $105 million of estate funds into the Fund, to be controlled by 

an Administrator to be mutually selected by the Debtors and the statutorily appointed Committees. 

Id. at 5. The Administrator would have sole authority to determine (i) the “eligibility criteria for 

participation in and receipt of funds from the Wildfire Assistance Program” and (ii) “the types of 

expenses Wildfire Claimants can obtain financial assistance for and the amount of assistance to be 

provided to each eligible Wildfire Claimant”—subject to the broad provisos that distributions must 

be made in a “fair and equitable manner” with assistance “prioritized to those . . . who are most in 

need.” Id. As such, the Program reserves to the Administrator virtually unfettered discretion to 

disburse estate funds without a clear mandate as to whom those payments will be made and for 

what particular needs. This broad (and unsupervised) discretion could give rise to ambiguities, 

confusion, and even duplication in the administration of the Program. For example, the Committee 

understands that when the Debtors approached FEMA about the Debtors’ program—then-styled 

as a “Temporary Housing Assistance Fund”—FEMA informed the Debtors that the program 

would overlap with FEMA’s ongoing efforts in assisting California wildfire victims to secure 

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temporary housing. As a consequence, the Debtors revised the program to provide the 

Administrator with discretion to allocate estate funds toward unspecified “other urgent needs.” 

12. Although the Administrator must file quarterly reports with the Court describing 

the number of applications submitted and processed and accounting for receipts and 

disbursements, as well as keep administrative and financial records for inspection by the Debtors 

and the Committees, the Motion does not require the Administrator to consult the Committee (or 

the Debtors or anyone else) in the formulation of the Eligibility Criteria or disbursement of funds, 

and the Committee is not expressly permitted to formally challenge any of the Administrator’s 

decisions with respect to the Program. Mot. at 6. 

13. Most critically, the Program does not require that disbursements be credited against 

distributions ultimately payable on account of allowed claims under the plan of reorganization to 

be confirmed in these cases—including claims relating to the 2017 and 2018 Wildfires. The 

Debtors instead note that disbursements under the Program “might” be made to those with 

legitimate claims against the Debtors, which implicitly recognizes that payments may also be made 

to some who do not.3

 In addition, the Motion states that it is the Debtors’ “expectation” that those 

who receive assistance under the Program will not later seek a double recovery on account of any 

expenses already reimbursed. Id. at 7 n.2. But there is nothing in the Motion or the proposed order 

that would mandate the kind of simple crediting mechanism that would actually safeguard against 

any such double recovery. 

ARGUMENT 

A. The Pre-Plan Disbursements Contemplated By The Program Conflict With 

Express And Fundamental Provisions Of The Bankruptcy Code. 

14. It is “[b]asic to bankruptcy jurisprudence” that prepetition claims “may not be paid 

in the absence of a confirmed reorganization plan.” In re Berry Good, LLC, 400 B.R. 741, 744 

(Bankr. D. Ariz. 2008). In Bankruptcy Code section 507, Congress established a carefully 

 

3

 Indeed, the Debtors note that any payment made under the Program “is not intended to be and 

should not be construed as an admission to the validity of any claim...” (Mot. at 8) and that there 

has been “no legal determination that the Debtors are liable for any claims associated with the 2017 

and 2018 Wildfires.” Id. at 4. As a consequence, the Program allows for the payment of estate 

funds to those who may never be able to prove up a claim against the estates, and thus are not and 

will not be creditors in these cases. 

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calibrated priority scheme for satisfying allowed prepetition claims with which, in the reasoned 

opinion of the Ninth Circuit, it is “unwise to tamper.” In re B&W Enters., Inc., 713 F.2d 534, 537 

(9th Cir. 1983). Coupled with this priority scheme is the statutory requirement, set forth in 

Bankruptcy Code section 1123(a)(4), that claims with legally similar rights against a debtor’s 

estate must receive the same treatment under a plan. Id. Indeed, the Bankruptcy Code does not 

“authorize courts to allow preferential payment of prepetition obligations in contravention of its 

claims priority scheme or outside of a confirmed plan of reorganization.” In re Berry Good, 400 

B.R. at 746 (denying debtors’ request to pay certain prepetition claims in the absence of a 

confirmed reorganization plan). 

15. The Debtors’ Program would be funded with $105 million of estate funds, for the 

purpose of making pre-plan distributions to select victims of the 2017 and 2018 Wildfires. To the 

extent such wildfire victims are ultimately proven to have legally cognizable claims against the 

Debtors, such claims will be general unsecured claims entitled to pari passu treatment with all 

other general unsecured claims. Paying such claims under the Program would prioritize and 

elevate (or at least accelerate) them over all other unsecured claims, including other wildfire 

victims not selected by the Administrator for inclusion in the Program, in contravention of the 

priorities established by Bankruptcy Code section 507 and implemented by section 1123(a)(4). 

16. The Committee is not aware of any legal precedent that would support the Program 

as proposed. To the contrary, as the Ninth Circuit has stated, “[t]here is no indication that Congress 

intended the courts to fashion their own rules of super-priorities within any given priority class.” 

In re B&W Enters., Inc., 713 F.2d at 537; see also In re Timberhouse Post & Beam, Ltd., 196 B.R. 

547, 550-51 (Bankr. D. Mont. 1996) (denying request to make payments on prepetition claims 

prior to confirmation of a plan, and noting that “[t]his Court adopts the bright line rule set forth in 

B&W Enterprises [and other cases] that a prepetition unsecured claim cannot be elevated to an 

administrative expense since the . . . Bankruptcy Code does not allow this Court to change the 

classification of claims set by Congress in the Code.”). 

17. The Motion asserts that the Court has the authority to grant the requested relief 

under Bankruptcy Code sections 105(a) and 363(b). That is not the case. 

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18. As a preliminary point, section 363, and the exercise of business judgment 

thereunder, does not permit the Debtors to circumvent other provisions of the Bankruptcy Code. 

To the contrary, “the bankruptcy court must not authorize a § 363(b) transaction if the transaction 

would effectively evade the ‘carefully crafted scheme’ of the chapter 11 plan confirmation 

process.” In re Gulf Coast Oil Corp., 404 B.R. 407, 422 (Bankr. S.D. Tex. 2009) (refusing to 

approve proposed sale because it would deprive creditors of protections they would have received 

if the sale was conducted as part of a chapter 11 plan confirmation process). 

19. Furthermore, courts do not allow circumvention of the chapter 11 reorganization 

process in order to re-shuffle section 507 priorities. See, e.g., Czyzewski v. Jevic Holding Corp., 

137 S. Ct. 973, 985-86 (2017).4

 This is true even in “‘rare case[s],’ in which courts could find 

‘sufficient reasons’ to disregard priority.” Id. at 986 (alteration in original) (quoting In re Jevic 

Holding Corp., 787 F.3d 173, 175, 186 (3d Cir. 2015)). In Czyzewski, the Supreme Court held 

that a bankruptcy court may not approve a chapter 11 structured dismissal that alters section 507 

priorities without the consent of affected creditors. Id. at 985-87. In so doing, the Czyzewski Court 

concluded: “Congress did not authorize a ‘rare case’ exception” to the section 507 priority scheme, 

so “[w]e cannot ‘alter the balance struck by the statute,’ not even in ‘rare cases.’” Id. at 987 

(quoting Law v. Siegel, 571 U.S. 415, 427 (2014)). 

20. Consequently, the Program, which appears to violate fundamental bankruptcy 

principles—i.e., the prohibition of payments on account of prepetition claims in the absence of a 

confirmed plan of reorganization and the disparate treatment of claims of equal priority—cannot 

be insulated from scrutiny by appeal to section 363 and the “business judgment rule.” 

 

4

 See also Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 

F.2d 935, 940 (5th Cir. 1983) (“The debtor and the Bankruptcy Court should not be able to short 

circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the 

terms of the plan sub rosa” regarding sales of assets). Furthermore, “if a debtor were allowed to 

reorganize the estate in some fundamental fashion pursuant to § 363(b), creditors rights under [other 

Bankruptcy Code sections] might become meaningless.” Institutional Creditors of Continental Air 

Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air Lines, Inc.), 780 F.2d 1223, 1227-

28 (5th Cir. 1986) (remanding motions to enter into lease agreements in response to creditor 

assertions they were being denied protections they would have been afforded if lease agreements 

were part of a reorganization plan). 

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21. And while some courts have used section 363 to authorize payments of certain 

prepetition claims under the so-called “doctrine of necessity” (a doctrine not invoked in the 

Motion), that doctrine is inapplicable here. To begin with, the doctrine of necessity is narrowly 

applied to situations in which the payment of prepetition obligations are necessary for the 

preservation and enhancement of the value of a debtor’s estate for the benefit of all creditors and 

other stakeholders. See In re B&W Enters., Inc., 713 F.2d at 537.5 Indeed, payments of select 

prepetition claims pursuant to the doctrine of necessity may only be allowed “when such payment 

is needed to facilitate the rehabilitation of the debtor”—i.e., “where such payment is essential to 

the continued operation of the debtor.” In re Ionosphere Clubs, Inc., 98 B.R. 174, 175-76 (Bankr. 

S.D.N.Y. 1989); see also In re Berry Good, 400 B.R. at 744 (denying debtor’s motion to authorize 

pre-plan payment on prepetition claim, despite debtor’s assertion that payment was “critical to the 

Debtors’ abilities to reorganize, and . . . a proper exercise of the Debtors’ business judgment”); see 

also Czyzewski v. Jevic Holding Corp., 137 S. Ct. at 985 (2017) (noting that courts have approved 

distributions that are not consistent with ordinary priority rules where necessary to enable a 

successful reorganization and listing examples such as “‘first-day’ wage orders that allow payment 

of employees’ prepetition wages, ‘critical vendor’ orders that allow payment of essential suppliers’ 

prepetition invoices, and ‘roll-ups’ that allow lenders who continue financing the debtor to be paid 

first on their prepetition claims”).6

 

5

 See also In re Timberhouse Post & Beam, 196 B.R. at 549.

6

 Other than Ionosphere, none of the cases cited by the Debtors involve payments on account of 

prepetition claims outside of a confirmed plan, and the majority do not concern section 363 at all. 

See Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., 

Inc.), 147 B.R. 650, 656-57 (Bankr. S.D.N.Y. 1992) (approving breakup fee and expense 

reimbursement, without reference to Bankruptcy Code section 363); FDIC v. Castetter, 184 F.3d 

1040, 1041 (9th Cir. 1999) (analyzing the business judgment rule outside of the bankruptcy context, 

without reference to section 363); Scouler & Co. v. Schwartz, No. 11-CV-06377 NC, 2012 WL 

1502762, at *4 (N.D. Cal. Apr. 23, 2012) (upholding debtor’s prepetition purchase of interest in 

joint venture); Comm. of Asbestos-Related Litigants and/or Creditors v. Johns-Manville Corp. (In 

re Johns-Manville Corp.), 60 B.R. 612, 618-19 (Bankr. S.D.N.Y. 1986) (finding debtor’s retention 

of certain lobbyists was ordinary course under section 363); Berg & Berg Enters., LLC v. Boyle, 

178 Cal. App. 4th 1020 (Ct. App. 2009) (affirming insufficient facts were pled to find directors’ 

actions liable under the California business judgment rule). 

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22. By way of example, the Debtors in these cases filed first day motions to pay 

prepetition obligations owed to certain critical safety and reliability, outage, and nuclear facility 

suppliers, shippers, and warehousemen—noting, among other things, that the failure to pay these 

claims “would cause irreparable financial harm to the Debtors and their reorganization efforts 

under chapter 11.”7 The Committee conducted substantial due diligence in respect of these 

proposed payments and because the Committee’s diligence supported the Debtors’ 

representations, the Committee chose not to object to the motions. The Court subsequently 

approved them, agreeing that the payments were “necessary to avoid immediate and irreparable 

harm to the Debtors and their estates.” [Docket Nos. 213, 214]. In this case, while the Committee 

has compassion for the wildfire victims, the Program does not satisfy the aforementioned 

parameters with respect to the doctrine of necessity. 

23. Indeed, the Debtors do not claim that the proposed expenditure of $105 million 

outside of a confirmed plan is “needed to facilitate the[ir] rehabilitation” or “essential to the[ir] 

continued operation”. In re Ionosphere Clubs, 98 B.R. at 175-76. And while the Committee is 

very sensitive to the continuing hardships faced by those who have been displaced from their 

homes by the 2017 and 2018 Wildfires, the payments contemplated by the Motion are not of the 

kind needed to forestall an existential threat, or to ensure the Debtors’ ability to reorganize. As 

such, they are not authorized by the Bankruptcy Code. 

24. Nor does Bankruptcy Code section 105(a) provide the Court with the necessary 

authority to approve the Program. While section 105(a) endows bankruptcy courts with broad 

equitable powers, such powers “may be exercised only in a manner not inconsistent with the 

 

7

 See, e.g., Motion of Debtors Pursuant to 11 U.S.C. 105(a), 363(b), and 503(b)(9) and Fed. R. Bankr. 

P. 6003 and 6004 for Interim and Final Authority to Pay Prepetition Obligations Owed to Certain 

Safety and Reliability, Outage, and Nuclear Facility Suppliers at 14 (“Operational Integrity 

Motion”) [Docket No. 12]; see also Motion of Debtors Pursuant to 11 U.S.C. 105(a), 363(b), and 

503(b)(9) and Fed. R. Bankr. P. 6003 and 6004 for (I) Interim and Final Authority to Pay Prepetition 

Obligations Owed to Shippers, Warehousemen, and Other Lien Claimants, and (II) Granting 

Administrative Expense Priority Status for Claims Arising from Goods Delivered to the Debtors 

Postpetition (“Lien Claim Motion”) [Docket No. 13]. The Debtors cited a wealth of case law in 

support of these motions suggesting that payment on prepetition claims “must be ‘necessary to 

avert a serious threat to the chapter 11 process.’” Operational Integrity Mot. at 20 (citing In re 

Eagle-Picher Indus., Inc., 124 B.R. 1021, 1023 (Bankr. S.D. Ohio 1991) (emphasis added)); Lien 

Claim Mot. at 13 (same). 

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provisions of the [Bankruptcy] Code.” Gurney v. Arizona Dep’t of Revenue (In re Gurney), 192 

B.R. 529, 537 (B.A.P. 9th Cir. 1996) (citing Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 

199 (1988)). Consistent with this principle, “most circuit courts, including the Ninth, have held 

that the bankruptcy court does not have general equitable power . . . to overrule the Code’s priority 

scheme by favoring one class of unsecured creditors over another.” In re Berry Good, 400 B.R. 

at 746. Indeed, as the Ninth Circuit has observed, the only statutory provision to which a 

bankruptcy court might point to elevate certain claims over other, legally similar, claims would be 

Bankruptcy Code section 510(c), which provides for equitable subordination of claims upon the 

showing of inequitable conduct and resulting harm to the estate. In re B&W Enters., Inc., 713 F.2d 

at 537. In the absence of demonstrable “misconduct on the part of all the other unsecured 

creditors,” a single subset of unsecured claims cannot be given preferential treatment. Id. at 538. 

In any event, courts that have considered their authority with respect to authorizing payment of 

prepetition claims outside of a plan in the context of section 105(a) required a similar showing of 

exigency as required under § 363(b)—a showing the Debtors have not made.8

 

25. Indeed, the Fourth Circuit has struck down a program very similar to the Program 

in Official Committee of Equity Security Holders v. Mabey, 832 F.2d 299 (4th Cir. 1987)—even 

though the Mabey program explicitly sought to credit the pre-plan payments against the intended 

beneficiaries’ ultimately allowed prepetition claims. The Mabey debtor, A.H. Robins Co. 

(“Robins”), “sought refuge in Chapter 11 because of a multitude of civil actions filed against it by 

women who alleged they were injured by use of [its] Dalkon Shield intrauterine device”—

including women who asserted that the device had rendered them infertile. Mabey, 832 F.2d at 

 

8

 See In re Kmart Corp., 359 F.3d 866, 874 (7th Cir. 2004) (affirming reversal of bankruptcy court’s 

order to pay critical vendors in absence of evidence that any vendor would cease doing business 

with the debtor if not paid for prepetition deliveries and thus impair the debtor’s operations); In re 

Pioneer Health Services, Inc., 570 B.R. 228, 236 (Bankr. S.D. Miss. 2017) (denying payment on 

prepetition claims because there was “no significant offsetting bankruptcy-related justification” for 

classifying the creditors as critical vendors necessary to continue the debtor’s business operations); 

In re Ionosphere, 98 B.R. at 176 (“the Bankruptcy Court’s equitable power may be used to 

effectuate the purposes of Chapter 11, which include the restructuring of a business’ finances to 

enable it to operate productively, provide jobs for its employees, pay its creditors and produce a 

return for its stockholders.”) (quotations omitted)); In re Just For Feet, Inc., 242 B.R. 821, 826 (D. 

Del. 1999) (authorizing payment of prepetition claims because such payment “[was] essential to 

the survival of the debtor during the Chapter 11 reorganization”).

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300. The debtor, along with a tort claimants’ committee and others, sought, pursuant to the 

bankruptcy court’s equitable powers and the debtor’s “business judgment,” to establish an 

“Emergency Treatment Fund” (the “Dalkon Fund”) that would, through an appointed 

administrator, make $15 million in pre-confirmation disbursements “for tubal reconstructive 

surgery or in-vitro fertilization for Dalkon Shield claimants who have asserted that they have been 

rendered infertile as a consequence of their use of the product.” Id. The Dalkon Fund program 

set forth specific eligibility requirements and provided that “[a]ny amounts paid under the Program 

on behalf of a participating claimant will be deducted from the amount of disbursement the 

claimant would otherwise receive under a confirmed Chapter 11 plan of reorganization of Robins.” 

Id.

26. The Fourth Circuit reversed the District Court’s authorization to establish the 

Dalkon Fund, cautioning that, while “the equitable powers emanating from § 105(a) are quite 

important . . . [they] are not a license for a court to disregard the clear language and meaning of 

the bankruptcy statutes and rules.” Id. at 302. See also id. (“the fact that a proceeding[] is equitable 

does not give the judge a free-floating discretion to redistribute rights in accordance with his 

personal views of justice and fairness, however enlightened those views may be.”) (citation and 

internal quotation marks omitted). The Fourth Circuit found that the debtors’ argument under 

section 105(a) and their appeal to the “business judgment” standard were equally without merit, 

concluding that the contemplated Dalkon Fund would “violate the clear dictates of the Bankruptcy 

Code, by paying certain unsecured claimants before their claims have been allowed and before a 

confirmed plan of reorganization is in place.” Id. at 303. 

27. The Debtors have made the decision to file for bankruptcy protection and use the 

protections and benefits of the Bankruptcy Code as a means for resolving wildfire claims against 

them. That is certainly the Debtors’ prerogative. But the Debtors’ choice of this course of action 

means that their other unsecured creditors will have to go unpaid until a reorganization plan is 

confirmed in these cases. If implemented as proposed, the Program could infringe on the rights of 

those other creditors to be treated equally with all other creditors of equal priority. To structure 

the Program the way the Debtors are proposing would not only subvert the Bankruptcy Code’s 

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priority scheme, but could potentially compromise recoveries by all other unsecured creditors in 

certain scenarios. See, e.g., In re FCX, Inc., 60 B.R. 405, 410 (E.D.N.C. 1986) (reversing 

bankruptcy court order permitting pre-plan payments to subgroup of unsecured creditors and 

noting that “because there is always a possibility that [the debtor] will not have sufficient assets to 

pay all general unsecured creditors, it is legally improper to subordinate the claims of the remaining 

unsecured creditors absent inequitable conduct by them.”). 

B. If Authorized, The Proposed Program Must Be Modified. 

28. Should the Court decide that the circumstances of these cases warrant authorization 

of the Program, the Committee respectfully submits that it should be modified in several material 

respects. 

29. First, the disbursements under the Program must not be purely gratuitous. The 

Committee is not aware of a single instance in which a court has considered, let alone authorized, 

gratis distributions of estate assets, and the Motion does not cite to any. Instead, to the extent that 

any given Program participant receives a payment from this Program, then that payment must 

reduce, on a dollar-for-dollar basis, the aggregate payout allocated on account of allowed claims 

relating to the 2017 and 2018 Wildfires under the plan ultimately confirmed in these cases to ensure 

fairness for all creditors. 

30. Second, the disbursements under the Program must not be unmoored from legally 

cognizable prepetition claims against the Debtors. As proposed, the Program grants the 

Administrator broad authority to “develop[] the specific eligibility requirements and application 

procedures for the distribution of the Wildfire Assistance Fund to eligible Wildfire Claimants.” 

Mot. at 5. At least two eligibility requirements must be explicit: (i) the Program should restrict 

eligibility for the Program payouts to the Wildfire Claimants harmed only by those fires for which 

the Debtors are likely to be found liable and (ii) as a condition precedent to eligibility, the 

Administrator must make a determination that the particular claimants’ damages are likely to be 

in an amount substantially comparable to or greater than the payout to such claimant from the 

Fund. 

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31. Third, the Committee should be given consultation rights or otherwise meaningful 

oversight with respect to the Program. Currently, the Motion contemplates that an Administrator 

will have the sole authority to “determine the eligibility criteria for participating in and receipt of 

funds” from the Program, subject only to the requirement that the funds be distributed “in a fair 

and equitable manner,” with a priority toward “those eligible Wildfire Claimants who are most in 

need . . .” Mot. at 5. The Committee has the consent right only with respect to the selection of the 

Administrator—the Motion does not provide the Committee, or anyone else, with meaningful 

oversight over the implementation of the Program and/or administration of the Fund. The 

Committee respectfully requests that, as a condition to approving the Program, the Court ensure 

that the Committee is given meaningful oversight with respect to the determination of the 

Eligibility Criteria and the disbursement of funds, the criteria for regular reporting, inspection 

rights and notice of actions, and a protocol for challenging actions and resolving disputes with the 

Court. 

32. Fourth, the Debtors must provide more specificity regarding how the Program will 

be implemented and administered to avoid disputes regarding who is eligible to receive funds, who 

has authority to make these decisions, and how the Program and any disbursements are treated in 

connection with a plan of reorganization. As currently proposed, the Program affords virtually 

unfettered discretion to the Administrator to disburse estate funds without further court supervision 

and leaves unclear the criteria for eligibility, as well as the exact purposes for which these funds 

may be used. 

33. Finally, the order approving the Program should be clear that any disputes, 

questions, or issues that arise in connection with the Program will be resolved by the Court. Given 

that the Program would be funded by the estates, its administration should remain within the 

Court’s purview. 

CONCLUSION 

34. The Committee supports the swift resolution and payment of all unsecured claims, 

including those of the victims of these tragedies, and will work tirelessly to achieve that goal. The 

Program, while laudable in concept, is flawed in construction. As proposed by the Debtors, the 

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Program neither satisfies longstanding legal standards nor contains any of the appropriate 

safeguards to protect the equal-ranking unsecured creditors that are the Committee’s constituency, 

and therefore the Motion should not be approved. 

DATED: May 16, 2019 MILBANK LLP 

 /s/ Dennis F. Dunne 

DENNIS F. DUNNE 

SAMUEL A. KHALIL 

GREGORY A. BRAY 

THOMAS R. KRELLER 

Counsel for the Official Committee of Unsecured 

Creditors 

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