PG&E Corporation – Public Entities Object to DIP Financing, Citing Issues with Giving DIP Lenders First Lien on Avoidance Actions and Superpriority Administrative Expense Claim

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February 20, 2019 – A group of representative governmental bodies of communities that were impacted by the 2017 Northern California Wildfires and the 2018 Camp Fire (the “Public Entities”) objected [Docket No. 494] to the Debtors' proposed $5.5bn debtor-in-possession (“DIP”) credit facility [Docket No. 23]. The Public Entities objection was subsequently joined by the SLF Fire Victim Claimants [Docket No. 519].

The Public Entities’ objection states, “In the DIP Facility Motion, the Debtors seek a Final Order allowing the Debtors to grant to the DIP Lenders and/or the DIP Agents a perfected first priority security interest and lien on essentially all of the Debtors’ unencumbered assets and property. This first lien would attach to, inter alia, all the Debtors’ causes of action under Chapter 5 of the Bankruptcy Code (‘Avoidance Actions’)….The Public Entities object to any such grant of a lien on the Avoidance Actions. In the DIP Facility Motion, the Debtors further seek a Final Order granting to the DIP Lenders and/or DIP Agents a superpriority administrative expense claim for all of the Debtors DIP Obligations under the DIP Loan Documents, which claims would only rank junior to the Carve-Out claims and have priority over all other claims against the Debtors. Notably, the Carve-Out does not include claims by unofficial committees or others seeking reimbursement on the basis of substantial contribution to the estate under 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4). The Public Entities assert that the DIP Liens and DIP Superpriority Claim should rank junior to substantial contributions claims under 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4) and such should be included in any carve-out with the other estate professionals.

In light of the Court’s general disapprobation of the granting of liens to the DIP Lenders on the Avoidance Actions (or the proceeds thereof), the Debtors must show some extenuating circumstances that would warrant the Court’s deviation from its guidelines. The Debtors have failed to do so. Instead, the Debtors merely claim that ‘the DIP Lenders were unwilling to extend $5.5 billion in credit without such terms’ and ‘the terms of the DIP Facilities are otherwise favorable to the Debtors and their estates.’ If the Debtors’ perfunctory rationale was sufficient for this Court to deviate from its own guidelines, the guidelines would be rendered meaningless.

The Debtors propose that the DIP Liens and DIP Superpriority Claim be granted priority over all other claims in this bankruptcy, except for the Carve-Out administrative claims, which receive priority up to $25 million but are limited to (a) U.S. Trustee fees and Clerk of Court fees, (b) fees and expenses (not to exceed $100,000) of a trustee under 11 U.S.C. § 726(b),8 and (c) fees and expenses of the Debtors’ professionals and the professionals of the official committees formed in these cases….There is no reason why administrative expense claims approved by this Court under 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4) should not have the same priority of payment under the Carve-Out as claims for professionals of the Debtors or the official committees.”

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