ML023250504
| ML023250504 | |
| Person / Time | |
|---|---|
| Site: | Diablo Canyon  |
| Issue date: | 11/13/2002 |
| From: | Clair J US Dept of Justice (DOJ) |
| To: | Office of Nuclear Reactor Regulation, US Federal Judiciary, Court of Appeals, 9th Circuit |
| References | |
| 02-16990 | |
| Download: ML023250504 (80) | |
Text
No.
02-16990 IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT IN RE PACIFIC GAS AND ELECTRIC CO.,
a California Corporation, PACIFIC GAS AND ELECTRIC CO.,
Debtor-Appellees, V.
PEOPLE OF THE STATE OF CALIFORNIA, ET AL.,
Appellants.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA BRIEF FOR THE UNITED STATES AS AMICUS CURIAE IN SUPPORT OF VACATUR AND REMAND ROBERT D.
- MCCALLUM, JR.
Assistant Attorney General KEVIN V.
RYAN United States Attorney WILLIAM KANTER (202) 514-4575 JEFFREY CLAIR (202) 514-4028 Attorneys. Civil Division Room 9536. Department of Justice 601 -D" St.. NW Washinaton D.C.. 20530-0001 o&cco-
£@cL OGOj
TABLE OF CONTENTS Page STATEMENT OF INTEREST OF THE UNITED STATES QUESTION PRESENTED STATUTE INVOLVED STATEMENT OF FACTS AND COURSE OF PROCEEDINGS BELOW
SUMMARY
OF THE ARGUMENT........
ARGUMENT I.
The Bankruptcy Code Does Not Expressly Preempt All Other Laws Regulating The Debtor's Business....
A.
The Text And Structure Of Section 1123 Limit The Debtor To Means Of Reorganization That Are Consistent With All Applicable Law S.
17 22 S.
22 S.
22 B.
The Legislative History Is Inconsistent With A Congressional Intent To Preempt All Other Law That Might Impair The Debtor's Means of Reorganization..........
30 C.
The District Court's Construction Of Section 1123 Would Lead To Anomalous Results That Are Inconsistent With A Debtor's Continuing Obligation To Comply With Other Laws Protecting Important Public And Governmental Interests.............
43 D.
Case Law Does Not Support The District Court's Judgment...
51 i
II.
The Case Must Be Remanded For Consideration Of Serious Issues Of Whether State Laws Regulating The Debtor's Restructuring Are Impliedly Preempted By The Bankruptcy Code CONCLUSION STATEMENT OF RELATED CASES RULE 32 CERTIFICATE OF COMPLIANCE......
CERTIFICATE OF SERVICE TABLE OF AUTHORITIES 58 63 64 64 65 Cases:
Almendarez-Torres v. United States, 523 U.S.
224 (1998)..........
American Hospital Association v. NLRB, 499 U.S.
606 (1991)
Baltimore Gas & Electric Co. v. Natural Resources Defense Council, 462 U.S.
87 (1983)
Board of Governors of the Federal Reserve System v. MCorp Financial, Inc., 502 U.S.
32 (1991)..........
Brockett v. Winkle Terra Cotta Co.,
81 F.2d 949 (8th Cir. 1936)
S..
23 42 48 S.
s50 35 Cisneros v. Alpine Ridge Group, 508 U.S.
10 (1993)............
City of Cleveland, Ohio v.
U.S. Nuclear Regulatory Commission,68 F.3d 1361 (D.C.
Cir. 1995)............
Coleman v.
Thompson, 501 U.S.
722 (1991)
Federal Power Commission v. Southern Cal.
Edison Co.,
376 U.S.
205 (1964) ii S.
24 S.
48 S.
24 6
Griffin v. Oceanic Contractors, Inc., 458 U.S.
564 (1982)
Hillsborough County v. Automated Medical Laboratoriess, Inc, 471 U.S.
707 (1985)
Hines v.
Davidowitz, 312 U.S.
52 (1941)
In re Baker & Drake, Inc., 35 F.3d 1348 (9th Cir. 1994)
In re Buttonwood Partners, Ltd, 111 B.R.
57 (Bk. Ct.
S.D. N.Y. 1990)....
In re D.F. Antonelli, 148 B.R. 443 (D.
Md.
1992),
aff'd, 4 F.3d 984 (4th Cir.1993)
In re Entz-White Lumber & Supply, Inc.,
850 F.2d 1338 (9th Cir. 1988)
In re Public Serv. Co. of New Hampshire, 108 B.R. 854 (D.
N.H.
1989)
International Paper Co. v. Ouellette, 479 U.S. 481 (1987)
Jarecki v.
G.D. Searle & Co., 367 U.S.
303 (1961)
Kelly v. Robinsion, 479 U.S.
36 (1986) 43 60 60 21, 30, 46, 60 14, 54 36 14, 20, 51, 52, 53 14, 46, 55, 56 S.
59 S.
29 S.
35 Matter of Pacific Gas and Electic Co.,
55 N.R.C. 317 (NRC 2002),
pet. for review pending No.
02-72735 (9th Cir.)
Matter of Pressed Steel Car Co. of New Jersey, 16 F.
Supp. 329 (W.D.
Pa.1936)...
Medtronic, INc. v.
Lohr, 518 U.S.
470 (1996)
S.
48 S.
35 41 Midlantic National Bank v. New Jersey Department of Environmental Protection, 474 U.S. 494 (1986).......................
17, 35, 44, 46, 56 Morton v.
Mancari, 417 U.S. 535, 551 (1974)...
50 iii
NLRB v. Bildisco & Bildisco, 465 U.S.
513 (1984) 44 New York v.
FERC, 122 S.
Ct. 1012 (2002) 6 Perez v.
Campbell, 402 U.S.
637 (1971).................
60 Raleigh v.
Illinois Department of Revenue, 530 U.S.
15 (2000)................
44 Schneidewind v.
ANR Pipeline and ANR Storage Co.,
485 U.S.
293 (1988) 6, 59 United States Savings Association of Texas v.
Timbers of Inwood Forest Associate, Ltd, 484 U.S. 365 (1988)...
42 United States v.
Brown, 333 U.S.
18 (1948) 43 United States v. Energy Resources Co.,
495 U.S.
545 (1990).................
44 United States v. X-Citement Video, Inc.,
513 U.S.
64 (1994)............
43 Universal Cooperatives, Inc. v. FCX, Inc.,
853 F.2d 1149 (4th Cir. 1988),
cert. denied, 489 U.S.
1011 (1989)......
14, 20, 53, 54 Statutes:
California Public Utilities Code:
§816-830,
- 851, 852, and 854 Public Utility Holding Company Act, 15 U.S.C. 79 et seq..............
Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq....
11 U.S.C. 362(b) (4).....
11 U.S.C. 362(b) (5).....
11 U.S.C. 616(10).......
11 U.S.C.
1123 7
S....
7, 49 S....
7, 49 S..
46 S.
46 S.
33 S..
passim iv
11 U.S.C. 1123(a) (5) 11 U.S.C. 1125 11 U.S.C. 1125(b).....
11 U.S.C. 1142(b).....
15 U.S.C. 79i(a) (2) 15 U.S.C. 79j(b) 16 U.S.C. 801.
16 U.S.C. 824b 28 U.S.C. 959(b) 28 U.S.C. 517.
4'2 U.S.C. 2233 42 U.S.C. 2234 Pub.
L.
No.73-296, Pub.
L.
No.75-696, 7
7 46 3
7, 47 48 Stat. 911, 914 (1934)
S.
32 52 Stat. 840 (1938)
S.
33, 61 Pub.
L.
No.95-598,
§ 1123, 92 Stat.
2549, 2631-32 (1978) 3 Pub.
L.
No.98-353,
§ 507, 98 Stat. 333, ReQulations:
10 C.F.R. 50.33(f) (2)-(3).....
10 C.F.R. 50.40........
10 C.F.R. 50.80........
10 C.F.R. 50.80(b) 40 C.F.R. 264.140-151......
40 C.F.R. 270.40 385 (1984) 33 7,
47 47 47 47 Rules:
Fed. R.
Civ. P.
54(b)............
13 Fed.
R.
App.
P. 29(a)..................
3 V
passim 10 10 10 S..
33
Legislative Materials:
Bills:
H.R. 5174, 98th Cong.,
(1984) reprinted at 130 Cong. Rec.
H 1832-45 (March 21, 1984)........
S.
- 445,
§ 405(a),
98th Cong.,
1st Sess.
(1983)
S.
- 1013, 98th Cong.,
1st. Sess (1983)
H.R. 5174,
§ 513 (1984) (Thurmond Amendment in the nature of a substitute), reprinted at 130 Cong. Rec.
S 6124 (May 21, 1984)
Congressional Record:
129 Cong.
129 Cong.
129 Cong.
129 Cong.
130 Cong.
130 Cong.
130 Cong.
130 Cong.
130 Cong.
130 Cong.
130 Cong.
130 Cong.
Reports:
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
Rec.
S 5357 (April 27, 1983)
S 5381 (April 27, 1983)
S.
5358 (April 27, 1983)
S 5374 (April 27, 1983)
H 1796 (March 21, 1984)
S 6107-08 (May 21, 1984)
S.
6124 (May 21,1984)
S.
6177 (May 22, 1984)
S 6324 (May 23, 1984)
S.
6411 (May 24, 1984)
S 7625 (June 19, 1984)
H 7486 (June 29, 1984)
H.
Conf.
Rep.
No.98-882 (1984),
reprinted in 1984 U.S.C.C.A.N. 576.........
40, 41 H
R..
Rep.
No.95-595, 95th Cong.,
1st Sess.
(1978),
reprinted in 1978 U.S.C.C.A.N. 5963
.. 35 H.R.
Rep.
No.
96-1195 (1980)........
37 S.
Rep.
No.
- 482, 73d Cong.,
2d Sess.
(1934)...........
34 S.
Rep.
No.
1916, 75th Cong.,
3d Sess (1938) 34 S.
Rep. No.
989, 95th Cong. 2d Sess.
(1978),
reprinted in 1978 U.S.C.C.A.N. 5787...
35 vi 37 S..
38 S.
39 S.
37 39 39 39 39 37 37 38 38 38 38 38 40
S.
Rep.
No.
98-55, 98th Cong.,
1st Sess.
(April 7, 1983)...............
39 S.
Rep. No.
98-65, 98th Cong.,
1st Sess.
(1983)........
38 Miscellaneous:
Black's Law Dictionary at 40 (7th ed. 1999)...........
.. 24 Collier's On Bankruptcy (15th ed., rev'd 2002)........
33 Webster's Third New International Dictionary (1981) 24 3 Williston, A Treatise On The Law of Contracts (4th ed.1992).................
25 vii
IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT No.
02-16990 IN RE PACIFIC GAS AND ELECTRIC CO.,
a California Corporation, PACIFIC GAS AND ELECTRIC CO.,
Debtor-Appellees, V.
PEOPLE OF THE STATE OF CALIFORNIA, ET AL.,
Appellants.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA BRIEF FOR THE UNITED STATES AS AMICUS CURIAE IN SUPPORT OF'VACATUR AND REMAND STATEMENT OF INTEREST OF THE UNITED STATES This miatter arises out of bankruptcy proceedings commenced by the Pacific Gas and Electric Company.
At issue is a plan of reorganization proposed by P G & E that is based on the contention that 11 U.S.C. 1123(a) (5) of the Bankruptcy Code expressly preempts laws that might otherwise bar transactions necessary to implement the debtor's proposed restructuring.
Both the United States and the California Public Utilities Commission objected to further consideration
of P G & E's plan of reorganization on the ground that section 1123(a) (5) does not expressly preempt otherwise applicable law.
The district court, however, held that the Bankruptcy Code expressly preempts laws that might interfere with the reorganization and remanded for further proceedings.
Several federal interests are implicated by this case.
As an initial matter, the United States has a compelling interest in ensuring that debtors remain subject to the federal government's power to enforce laws protecting the public health, safety, and welfare.
The Bankruptcy Code vests in the debtor certain specified powers to modify creditor rights.
But those powers do not afford the debtor "carte blanche" to avoid compliance with all other law.
The district court has nonetheless adopted a broad construction of section 1123(a) (5) that potentially infringes on federal regulatory authority, and that risks placing the debtor's interests in reorganizing over the federal government's compelling interest in enforcing other law.
The United States has a strong interest in clarifying the relationship between the Bankruptcy Code and other federal law, and in ensuring that its regulatory powers are not improperly subordinated to the debtor's pecuniary interests in reorganizing.
At the same time, the United States has a strong interest in ensuring that an insolvent utility's federal right to reorganize in bankruptcy is not impermissibly frustrated by unreasonable state regulation.
A utility's right to reorganize in bankruptcy furthers an important national interest in maintaining the infrastructure necessary to deliver energy to industry and consumers in a safe and reliable manner.
State laws that stand as an obstacle to the accomplishment of this objective may be impliedly preempted under well-settled principles of Supremacy Clause jurisprudence.
The federal government thus also has a strong interest in the extent to which the Code may impliedly preempt state utility regulation.
The United States accordingly files this brief as amicus curiae, pursuant to 28 U.S.C. 517 and Fed. R. App.
P. 29(a).
QUESTION PRESENTED Section 1123(a) (5) of the Bankruptcy Code requires the debtor's reorganization plan to include "adequate means" for implementation, "notwithstanding any otherwise applicable nonbankruptcy law."
The question presented is whether this provision expressly and of its own force preempts any nonbankruptcy law that would otherwise bar transactions necessary to implement the reorganization plan.
STATUTE INVOLVED 11 U.S.C.
1123 provides:
(a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall-(5) provide adequate means for the plan's implementation, such as-(A) retention by the debtor of all or any part of the property of the estate; (B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan; (C) merger or consolidation of the debtor with one or more persons; (D) sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate a~mong those having an interest in such property of the estate; (E) satisfaction or modification of any lien; (F) cancellation or modification of any indenture or similar instrument; (G) curing or waiving of any default; (H) extension of a maturity date or a change in an interest rate or other term of outstanding securities; (I) amendment of the debtor's charter; or (J) issuance of securities of the debtor, or of any entity referred to in subparagraph (B) or (C) of this paragraph, for cash, for property, for existing securities, or in exchange for claims or interests, or for any other appropriate purpose.'
STATEMENT OF FACTS AND COURSE OF PROCEEDINGS BELOW
- 1.
On April 6, 2001, the Pacific Gas and Electric Company, a public utility that services Central and Northern
'The full text of 11 U.S.C. 1123 is reprinted in the addendum to this brief.
California, filed a voluntary petition to reorganize in bankruptcy.
P G & E essentially alleges that various state efforts to restructure and deregulate the electricity market compelled the utility to pay sharply increased rates for power purchased on the wholesale market without permitting these costs to be recouped from the utility's retail customers.
These conditions, P G & E asserts, caused it to default on billions of dollars of debt and compelled it to seek protection in bankruptcy.
On December 19,
- 2001, P G & E and its parent company filed a proposed plan of reorganization.
In broad outline, the reorganization plan would break P G & E into four separate companies operating discrete lines of business:
retail gas and electric distribution, electric transmission, gas transmission, and power generation.
As part of this restructuring, P G & E would transfer pertinent physical assets, licenses, and permits to each newly created company.
Thus, the company created to operate the P G & E power generation business would receive P G & E's hydroelectric facilities, nuclear power plant, other power generation assets, and the various governmental licenses and permits necessary to lawfully operate these facilities.
Similar transfers would be made to the electric transmission and gas transmission businesses created in the course of the restructuring.
One key advantage to P G & E is that, whereas the former, integrated utility was largely (albeit not entirely) subject to the regulatory and ratemaking jurisdiction of the California Public Utilities Commission, several of the restructured businesses will offer energy products in interstate commerce and come within the jurisdiction of the Federal Energy Regulatory Commission.
See generally New York v.
FERC, 122 S. Ct.
- 1012, 1017 (2002);
Schneidewind v.
ANR Pipeline and ANR Storage Co.,
485 U.S.
- 293, 300 (1988); Federal Power Commission v. Southern Cal.
Edison Co.,
376 U.S. 205, 215-16 (1964).
P G & E expects that FERC's ratesetting processes will enable it to derive more revenue for energy products offered in interstate commerce, and that the reorganization will give it greater flexibility to pass along to retail consumers the costs of energy purchased in the FERC-regulated interstate market.
Many of the asset dispositions, license transfers, and other transactions contemplated by the reorganization plan are ordinarily subject to review and approval by state or federal regulatory bodies applying nonbankruptcy law.
California state law, for example, requires CPUC approval of transfers of certain utility property, transactions involving the transfer of an interest in or control of a utility, and the issuance of debt or equity by a utility.
See California Public Utilities Code §§ 816-830,
- 851, 852, and 854.
Federal law similarly requires regulatory approval of the transfer of other assets, licenses, and permits held by P G &
E.
The Federal Energy Regulatory Commission, for example, must approve the transfer of P G & E's licenses to operate hydroelectric facilities and the sale of facilities used for the transmission of electricity for sale at wholesale in interstate commerce.
See 16 U.S.C. 801, 824b.
The Nuclear Regulatory Commission' must approve any transaction transferring the control over the ownership or operation of P G & E's Diablo Canyon nuclear power plant.
42 U.S.C. 2233 &
2234; 10 C.F.R. 50.80.
The Securities and Exchange Commission, under the Public Utility Holding Company Act, must approve aspects of the proposed restructuring that would vest in entities affiliated with the debtor direct or indirect control over a significant percentage of the voting stock of a public utility.
15 U.S.C. 79i(a) (2),
79j(b).
And environmental agencies must approve the transfer of various permits issued to P G & E under the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.
These permits govern the terms and conditions under which P G & E may handle hazardous waste and cannot be transferred absent prior governmental approval.
See 40 C.F.R. 264.140-151, 270.40.
- 2.
In its disclosure statement describing the reorganization plan, P G & E argued that many of the state utility laws governing these restructuring transactions were expressly preempted by 11 U.S.C. 1123(a) (5) of the Bankruptcy Code.
P G & E thus stated:
[T]he Proponents contend that the Confirmation Order approving the Plan and authorizing the transactions pursuant to the Plan will preempt "otherwise applicable nonbankruptcy law" in the following areas:
(1) any approval or authorization of the CPUC or compliance with the California Public Utilities Code or CPUC rules, regulations or decisions otherwise required to transfer public utility property (including authorizations to construct facilities), issue securities and implement the Plan; and (2) the exercise of discretion by any other state or local agency or subdivision to deny the transfer or assignment of any of the Debtor's property, including existing permits or licenses, or the issuance of identical permits and licenses on the same terms and conditions as the Debtor's existing permits and licenses where both the Reorganized Debtor and one or more of ETrans, GTrans and Gen require such permit for their post Effective Date operations.
Such preemption pursuant to section 1123(a) of the Bankruptcy Code shall occur at the time the Plan is implemented.
Bk Ct. No.
01-30923, NR.
3896, First Amended Disclosure Statement at 128 (December 19, 2001),
Excerpts of Record
("ER.")
37.2 P G & E did not categorically assert that federal laws governing the transfer of an asset, license, or permit are similarly preempted.
But its statements concerning the reorganization's impact on federal law are decidedly equivocal and plainly calculated to reserve the right to preempt these laws as well if the necessary federal approvals are not forthcoming:
The transfer or reissuance of the vast majority of permits and licenses issued by most state agencies and political subdivisions and federal agencies appears to be ministerial or governed by objective criteria that make it unlikely that the agencies could actor fail to act in a way that would interfere with consummation of the Plan.
As mentioned above, the Proponents intend to follow the established procedures for the transfer or reissuance of such permits and licenses.
For these permits or licenses for which otherwise applicable nonbankruptcy law precludes transfer or gives state or local officials discretion to deny the transfer or reissuance, the Proponents will rely on the protection of section 1123(a) to ensure that all of the reorganized companies obtain the permits and licenses they need to operate lawfully.
- Moreover, because of the volume of permits and licenses, should their transfer or reissuance become an impediment to the timely consummation of the Plan, the 2 Record citations refer to the excerpts of record filed by the California Public Utilities Commission with its opening brief.
Proponents will seek an order of the Bankruptcy Court pursuant to section 1142(b) of the Bankruptcy Code directing the execution and delivery of such permits and licenses as are necessary to consummate the Plan. 3 Id.
at 132-33, ER. 41-42.
- 3.
The bankruptcy court held that section 1123(a) (5) does not expressly preempt all other law that is contrary to the reorganization plan.
Procedurally, this decision arose out of the court's review of whether P G & E's disclosure statement satisfies 11 U.S.C. 1125.
This Code provision requires the proponents of a reorganization plan to distribute a written statement describing the plan in sufficient detail to ensure that interested parties can make an informed judgment about whether to accept or reject it.
The reviewing court is required to determine, after notice and a hearing, that the plan contains information adequate for this purpose.
11 U.S.C. 1125(b).
The CPUC and several other parties objected to P G & E's disclosure statement on the ground that it described a reorganization plan that depended on 311 U.S.C. 1142(b) authorizes the bankruptcy court to direct any "necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act *
- that is necessary for the consummation of the plan."
impermissible preemption of other law and was therefore facially invalid.
The United States filed objections to the plan and disclosure statement and also contested P G & E's assertion that section 1123(a) (5) broadly preempts otherwise applicable law.
Bk. Ct. No. 01-30923, NR.
8896.
Our brief noted that the proposed reorganization plan was premised on contentions that would conceivably permit the debtor, at later stages of the case, to seek preemption of various federal environmental laws, such as the Clean Air Act, the Clean Water Act, or RCRA, under which states are authorized to administer programs if certain conditions are satisfied.
We therefore argued that insofar as P G & E contended that section 1123(a) preempted federally approved environmental programs, the United States disagreed and reserved the right to further brief its objections'at the plan confirmation stage of the case.
The bankruptcy court disapproved the disclosure statement, holding that the statement described a plan which was contingent on the preemption of a set of state laws that were not in fact expressly preempted by the Bankruptcy Code.
The court reasoned that the section's introductory, "notwithstanding nonbankruptcy law" clause is merely intended to make clear that the content of and procedures for submitting a plan are to be governed exclusively by the Code.
The "notwithstanding" clause thus provides that section 1123 will supersede other laws that might purport to specify what must be contained within the plan, or the circumstances under which a reorganization plan could be submitted to the court such as laws conditioning the submission of a plan on prior shareholder approval or good faith negotiations with a labor union.
See Opinion of February 7,
- 2002, 273 B.R. 795,
- 805, ER.
146-47.
The court further noted that this construction of the plain language of the statute was supported by the legislative history, which characterizes the amendment adding the ostensibly preemptive "notwithstanding" clause as merely "stylistic," and which contains nothing suggesting Congress had the "revolutionary" purpose of permitting whatever is placed in the reorganization plan to preempt all nonbankruptcy law.
Id.
at 808-810, ER.
149-54.4 In a subsequent decision, the bankruptcy court reduced its decision to an order disapproving the disclosure statement 4 p G & E had also argued that state laws impeding the reorganization were impliedly preempted insofar as they frustrated the purposes of the Bankruptcy Code.
The bankruptcy court, however, did not decide this question, noting that it would resolve such contentions, if necessary, in determining whether the reorganization plan should be confirmed.
Opinion of February 7,
- 2002, 273 B.R. at 797-98, ER.
130-32.
and certified the order as a final judgment pursuant to FRCP 54(b) and Bankruptcy Rules 7054, 9014, and 9021.
Opinion of March 18,
- 2002, 275 B.R. 1, ER. 179-86.
The court reasoned that the decision denying express preemption resolved a separate and specific claim for relief, and that the size and scope of the bankruptcy gave P G & E as well as its creditors a strong interest in obtaining a prompt appellate disposition of the express preemption question.
Ibid.
- 3.
The district court reversed.
The court first found that it had appellate jurisdiction over the bankruptcy court's order, reasoning that order had been properly certified as a final judgment under Rule 54(b) or, in the alternative, that the order was properly subject to appellate review under the district court's discretionary authority to consider appeals from interlocutory orders of the bankruptcy court.
Order of June 24, 2002, 280 B.R. 506, 513-16, ER. 212-18.
On the merits, the district court held that Congress intended section 1123 "expressly to preempt nonbankruptcy laws that would otherwise apply to bar, among other things, transactions necessary to implement the reorganization plan."
Opinion of August 30, 2002, slip op. at 10, ER. 228.
First, the court noted that the pertinent precedents all supported the position that section 1123(a) broadly preempts nonbankruptcy laws that are inconsistent with actions contemplated by a plan of reorganization.
Id.
at 13-17, ER.
231-34, citing In re Public Serv. Co. of New Hampshire, 108 B.R. 854 (D.
N.H.
1989); Universal Cooperatives, Inc. v.
- FCX, Inc., 853 F.2d 1149 (4th Cir. 1988),
cert. denied, 489 U.S.
1011 (1989); In re Entz-White Lumber & Supply, Inc., 850 F.2d 1338 (9th Cir. 1988); and In re Buttonwood Partners, Ltd.,
111 B.R.
57 (S.D. N.Y. 1990).
Second, the court rejected the contention that according broadly preemptive effect to section 1123(a) would lead to absurd results by authorizing the debtor to engage in any otherwise unlawful activity -
such as violating criminal law merely by asserting that such action is necessary to carry out a reorganization plan.
As a threshold matter, the court stated that such "absurd results" arguments have no bearing on the meaning of the language of the statute.
Opinion of August 30, 2002, slip op. at 20, ER.
238.
It further explained that the parties' concerns that section 1123 could be used to sanction all manner of illegal conduct were overstated.
In that regard, it noted that section 1129(a) (3),
which precludes confirmation of a plan not proposed in good faith, imposed a check on plans purporting to permit illegal conduct.
Id.
at 21-22, ER. 239-40.
It further reasoned that any preemption authorized by 1123(a) (5) merely concerned laws impairing the restructuring transactions contemplated by the plan and thus could not authorize ongoing illegal activity once the debtor reorganized and commenced operations.
Id.
at 20-23, ER.
238
- 41.
The court, moreover, concluded that the preemption of other laws governing the transactions necessary to restructure the debtor would not necessarily be an undesirable result:
Consider, for example, a corporate debtor that could reorganize in order to satisfy creditors and emerge solvent, by among other things, merging with another corporation.
If such a merger would result in a monopoly, then a reorganization plan proposing it would be unlikely to be confirmed.
It is by no means clear, however, that a merger that would perhaps have some anticompetitive impact reachable by § 7 of the Clayton Act or some analogous state law, but which would not result in a monopoly - and which would, moreover, rescue a debtor from bankruptcy -
would be undesirable.
Nor is the court convinced that the temporary suspension of environmental'review requirements that would otherwise apply to (often somewhat fictional) restructuring transactions is undesirable.
Id.
at 23, ER. 241.
Third, the court concluded that the legislative history of provisions other than section 1123 supported the preemption of the state utility regulation that would be displaced by P G
& E's reorganization plan.
In that regard, the court noted that Congress had deleted from the prior bankruptcy law provisions that had specifically accorded state utility regulators a veto power over a utility's reorganization in bankruptcy.
The court further noted that, under current law, the only veto power vested in a state utility regulatory body is the far more limited requirement that rate changes contemplated by the plan be approved by the pertinent state agency before confirmation.
Id.
at 24-28, ER. 242-46.
These actions, the court reasoned, gave rise to an inference that Congress affirmatively intended to remove the power of a state regulatory body to review and approve utility reorganizations.
Finally, the court held that the plain language and legislative history of section 1123 indicated an intent to preempt nonbankruptcy law.
It noted that the "notwithstanding" clause employed a usage that-was known to supersede other laws.
It reasoned that although the bankruptcy court and the parties had argued that this clause merely superseded other laws purporting to specify the contents of a reorganization plan, no one had identified any nonbankruptcy laws that actually had this effect and that would thus require preemption in the first instance.
Moreover, the court reasoned that the legislative history characterizes the pertinent amendment adding the "notwithstanding clause" as a "stylistic" change, not because section 1123 lacks preemptive effect, but because the former version of the section, which authorized the same broad array of actions to implement the plan, already preempted nonbankruptcy law.
Id.
at 28-33, ER. 246-51.
The court accordingly reversed the bankruptcy court's order disapproving the disclosure statement and remanded the case for further proceedings.
SUMMARY
OF THE ARGUMENT
- 1.
Section 1123(a) (5) of the Bankruptcy Code does not accord debtors broad license to reorganize their business through transactions that would otherwise be barred by federal or state laws intended to protect the public health, safety, or welfare.
The Code is intended to facilitate a debtor's reorganization and, to that end, affords the debtor a set of statutorily-delimited rights to modify its
,financial obligations to creditors.
But as the Supreme Court has stressed, the Code does not give the debtor "carte blanche to ignore nonbankruptcy law." Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 502 (1986).
- Rather, like any other business, the debtor must operate within the constraints of other laws protecting important public and governmental interests.
The district court nonetheless found in the text of section 1123(a) (5) of the Code a broad warrant to preempt any other law that might interfere with the debtor's chosen means of implementing a plan of reorganization.
In an effort to cabin the extraordinary reach of this-holding, the court stressed that its decision applied only to those transactions necessary to effectuate a restructuring in bankruptcy and "would not authorize ongoing illegality by the reorganized debtor and any new entities created through reorganization."
Opinion of August 30, 2002, slip op. at 21, ER.
239.
Even as so limited, however, the court's holding still purports to excuse the debtor from complying with a wide array of laws intended to protect the public health, safety, and welfare.
The court's own examples of permissible preemption suggest that the debtor is free to reorganize its business through transactions that might otherwise violate Clayton Act restrictions on unfair competition or state laws that would bar the transfer of environmentally sensitive assets -
such as a hydroelectric dam -
if state regulators conclude that the transfer would adversely affect the environment.
Slip op. at 23, ER. 241.
The potential ramifications of the court's holding sweep even more broadly.
Indeed, the holding suggests that the bankruptcy court would have statutory authority, at later stages of this very case, to override the permitting, licensing, or regulatory decisions of environmental agencies, the Federal Energy Regulatory Commission, the Securities and Exchange Commission, or the Nuclear Regulatory Commission if any of these governmental decisions interfere with the implementation of the debtor's plan of reorganization.
Section 1123(a) (5) of the Bankruptcy Code does not authorize this wholesale displacement of other federal and state law.
First, the plain language and structure of section 1123(a) (5) show that Congress authorized the debtor to employ only those means of implementing a reorganization that are consistent with applicable law.
Congress did not state that "any" means of reorganization would be permissible.
It instead limited the debtor to "adequate" means - a term that, in this context, refers to transactions that are consistent with other law or a specific right set forth in another provision of the Code.
Second, the court's alternative construction of the statutory text is inconsistent with both the legislative history and general background principles that presume the Code is not intended to excuse the debtor from compliance with other laws intended to protect the public health, safety, and welfare.
The legislative history of section 1123 is conspicuously devoid of even the faintest suggestion that Congress intended this statute to displace the government's police and regulatory powers.
And attributing such an intent to Congress would run afoul of well-established principles that a bankruptcy petition is not license to evade compliance with other law.
Finally, contrary to the district court's reasoning, the scant case law construing section 1123(a) does not support wholesale preemption of state and federal regulatory power.
Indeed, the only pertinent appellate precedent stands for the far more limited proposition that a reorganization plan may include measures that modify creditor rights if authorized by a specific provision of the Code.
See In re Entz-White Lumber
& Supply, Inc., 850 F.2d 1338 (9th Cir. 1988); Universal Cooperatives, Inc. v.
FCX, Inc., 853 F.2d 1149 (4th Cir.
1988).
The district court therefore erred in construing section 1123(a) (5) to expressly preempt nonbankruptcy law.
- 2.
Although the district court erred in concluding that section 1123(a) (5) expressly preempts state law, the case must be remanded for further consideration of whether California law constraining the debtor's restructuring is economic regulation that is impliedly preempted by the Bankruptcy Code.
Principles of implied preemption make clear that state laws are invalid to the extent they "stand as an obstacle" to the achievement of federal objectives.
This Court has accordingly held that state laws impairing a debtor's ability to reorganize in bankruptcy may be impliedly preempted if the state action is intended to further an economic rather than regulatory purpose, or if the state action entails a discretionary determination targeted at the individual debtor rather than the enforcement of regulatory laws of broad and general application.
In re Baker & Drake, Inc., 35 F.3d 1348, 1353-55 (9th Cir. 1994).
This case should be remanded for consideration of whether these standards dictate the implied preemption of several aspects of California's regulatory scheme.
As P G & E has noted in its disclosure statement, several California laws constrain its authority to dispose of property, to issue equity or debt, or to enter or perform contracts.
These are economic activities that fall within the core of a debtor's right to reorganize in bankruptcy, and there is thus a substantial question as to whether these state laws are impliedly preempted by the Code.
Thus, while the Court should vacate the district court's holding that section 1123(a) (5) expressly preempts state law, the case should be remanded for further consideration of P G &
E's contention that state utility laws are impliedly preempted by the Bankruptcy Code.
ARGUMENT I.
The Bankruptcy Code Does Not Expressly Preempt All Other Laws Regulating The Debtor's Business.
A.
The Text And Structure Of Section 1123 Limit The Debtor To Means Of Reorganization That Are Consistent With All Applicable Law.
As its title "Contents of plan" -
indicates, section 1123(a) is intended to specify a set of mandatory elements that must be included in a plan of reorganization.
The section begins with an introductory proviso stating that "notwithstanding any otherwise applicable nonbankruptcy law,"
the plan must have the elements set forth in seven enumerated subsections.
Following the "notwithstanding" proviso are a set of requirements governing the form and content of a reorganization plan.
These subsections thus require the plan, among other matters, to classify the claims in accordance with the Code, (B 1123 (a)(1)), specify the treatment to be accorded impaired claims (§ 1123(a)(3)),
and treat equally each claim within the same class (§ 1123(a)'(4)).
The subsection at issue here, subsection 1123(a)(5),
states that the plan shall "provide adequate means for the plan's implementation," and then provides an illustrative list of appropriate means of implementation, such as transferring property, merging with other businesses, or curing a prior default.
The district court construed these provisions to expressly preempt all nonbankruptcy law that might otherwise apply to the means selected to implement the plan of reorganization.
The court's interpretation thus attributes an extraordinary substantive reach to a provision that is modestly entitled "Contents of a plan" of reorganization.
Indeed, the vast disparity between the substantive scope suggested by the provision's title and the court's broad preemption holding in and of itself casts doubt on the court's analysis.
See Almendarez-Torres v. United States, 523 U.S.
- 224, 234 (1998)
(section heading is a "tool[] available for the resolution of doubt" about the meaning of a statute).
A closer reading of the text and structure of section 1123 shows that the court has overlooked a more plausible interpretation of the provision and, in so doing, fundamentally misconstrued congressional intent.
As an initial matter, the "notwithstanding" proviso which begins the text of section 1123(a) does not displace all other law in the sense of occupying the entire field of potential regulation.
It instead has a narrower meaning which, in common usage, is intended to make clear that the provisions which follow it are intended to take precedence in the event of a direct conflict with some otherwise applicable law.
As the Supreme Court has explained, "the use of such a 'notwithstanding' clause clearly signals the drafter's intention that the provisions of the
'notwithstanding' section override conflicting provisions of any other section."
Cisneros v. Alpine Ridge Group, 508 U.S.
10, 18 (1993).
Thus, the notwithstanding proviso "preempts" other law only to the extent that the subsections of section 1123(a) authorize actions that are in direct conflict with otherwise applicable law.
Subsection (a) (5),
however, does not authorize the debtor to undertake measures that would conflict with other law.
To the contrary, these provisions limit the debtor to "adequate" means of implementation.
Dictionary definitions in turn make clear that the term "adequate" refers to whether a contemplated action is legally sufficient, not merely sufficient from an economic or business standpoint.
See Black's Law Dictionary at 40 (7th ed. 1999) (defining "adequate" as "legally sufficient"); Webster's Third New International Dictionary at 25 (1981)
(defining "adequate" as "legally sufficient:
such as is lawfully and reasonably sufficient").
Indeed, the use of the term "adequate" to connote "legal sufficiency" is commonplace throughout the law.
See, e.g.
Coleman v.
Thompson, 501 U.S. 722, 729 (1991)
(federal review of state court determination of a federal question is unavailable where judgment rests on "independent and adequate" state law grounds that are legally sufficient to support decision); 3 Williston, A Treatise On The Law of Contracts 27 29 & n.16 (4th ed. 1992) (courts use term "adequate consideration" to describe exchange that is legally sufficient to establish an enforceable contract).
- Thus, in similarly limiting the reorganization plan to "adequate" means of implementation, Congress set forth its intent to permit only those means which are "lawful and legally" sufficient under otherwise applicable law.
This does not mean that all nonbankruptcy law applies to a debtor's restructuring, without regard to the rights conferred by the Bankruptcy Code.
Other, specific provisions of the Code expressly afford the debtor power to modify the debtor-creditor relationship.
Where applicable, these specific provisions of the Code preempt conflicting state law and must be harmonized with conflicting federal law.
Similarly, and as we will explain more fully in point II below (infra pp. 58-63),
state laws that "stand as an obstacle" to the debtor's federal right to reorganize in bankruptcy may be impliedly preempted.
Thus, section 1123(a) (5)'s requirement that the means of reorganization be legally "adequate" does not divest the debtor of the protections otherwise afforded by the Code.
It does, however, impose a textual limit on the debtor's means of reorganization that requires the Court to consider whether the plan conforms to nonbankruptcy law that is not otherwise displaced by the Code.
The debtor may nonetheless dispute the textual limits of section 1123 by arguing that our construction of "adequate means" of reorganization nullifies the "notwithstanding" proviso's application to subsection (a) (5).
Analysis of the entirety of section 1123(a),
however, makes clear that Congress did not intend the "notwithstanding" proviso to qualify each and every application of the subsections that follow.
For example, subsections 1123(a) (l)-(3) deal with matters --
such as the classification of interests and specification of whether such interests are impaired --
that are governed exclusively by the Bankruptcy Code.
As the bankruptcy court noted below, no other "nonbankruptcy" law applies to such matters in the first instance, and the notwithstanding proviso thus has no conceivable application to these subsections of section 1123(a).
Opinion of February 7, 2002, 273 B.R. at 806 n.9, ER. 146-48.
The structure of the statute thus indicates that, despite the placement of the "notwithstanding" clause at the beginning of section 1123, Congress did not necessarily or invariably intend it to affect the scope of all the subsections that follow.
At the same time, this conclusion does not render the notwithstanding proviso wholly without effect.
First, as the bankruptcy court reasoned below (Opinion of February 7,
- 2002, 273 B.R. 806, ER.
146-48),
and as the CPUC has argued, the proviso operates to make clear that section 1123 supersedes the provisions of any state law that might purport to dictate the contents of a reorganization plan or the conditions under which the debtor may submit a reorganization plan for further consideration.
This is consistent with the title of section 1123, which shows that the entire provision is addressed to the "contents" of the reorganization plan, not the debtor's substantive rights.
It is also consistent with the grammatical placement of the "notwithstanding" proviso, which modifies, not what the debtor may do but what the plan must do, i.e.
what the plan must "designate" (§ 1123(a)(1))
or "specify" (§§ 1123(a)(2) & (3))
or "provide"
(§H 1123(a)(4) &
(5)) or "contain" (§1123(a) (7)f.
Second, the proviso also makes clear that where subsections of 1123(a) do authorize the debtor to undertake actions that are inconsistent with other law, section 1123 controls.
Subsection (a) (6),
for example, essentially requires the reorganization plan to include provisions requiring the charter of the reorganized debtor to include provisions prohibiting the issuance of nonvoting equity securities and ensuring that voting power is appropriately distributed in light of each stock class's equity interest.
Corporate charter provisions authorizing different voting arrangements may be permitted by some state law.
But the "notwithstanding" proviso" states that section 1123(a) supersedes these contrary state laws.
See e.g. In re Cajun Electric Power Cooperative, Inc., 230 B.R. 715 (Bk. Ct.
M.D.
La.
1999) (Louisiana cooperative law provisions establishing "one member, one vote" rule without regard to equity interest preempted by section 1123(a) (6)).
Thus, our construction, though limiting the impact of the proviso, would not render it mere surplusage.
This reading of the text of the statute is further supported by the examples of "adequate means" of implementation set forth in section 1123(a) (5) (A)-(J).
These examples include such measures as transferring or selling property, satisfying a lien, merging with another business, or amending the debtor's corporate charter.
Significantly, none of these measures entails an action that would require some extraordinary dispensation from other law.
Rather, each statutorily-specified example of an adequate means of implementing the reorganization plan involves actions that are either consistent with nonbankruptcy law or authorized by some specific Code provision permitting an adjustment of the debtor-creditor relationship.
These statutory examples shed further light on what constitutes an "adequate means" of implementation within the meaning of section 1123(a) (5).
The Supreme Court has explained that "[tihe maxim noscitur a sociis, that a word is known by the company it keeps, while not an inescapable rule, is often wisely applied where a word is capable of many meanings in order to avoid giving unintended breadth to the Acts of Congress."
Jarecki v. G.D. Searle & Co.,
367 U.S.
- 303, 307 (1961).
Here, the term "adequate means" of implementation is illuminated by a set of examples that all contemplate measures consistent with otherwise applicable nonbankruptcy law or a specific and identifiable provision of the Code.
None of these examples bespeaks a congressional intent to afford the debtor "carte blanche" to adopt "any" means of implementation that further its pecuniary interests, without regard to the requirements of other law or the importance of governmental regulatory schemes designed to protect the public health, safety, or welfare.
Rather, as this Court has noted:
Congress's purpose in enacting the Bankruptcy Code was not to mandate that every company be reorganized at all costs, but rather to establish a preference for reorganizations, where they are legally feasible and economically practical.
In re Baker & Drake, Inc., 35 F.3d 1348, 1354 (9th Cir. 1994)
(underscored emphasis in original, italicized emphasis supplied).
Thus, contrary to the district court's holding, the plain language of section 1123(a) (5) does not broadly preempt nonbankruptcy law.
It instead affirmatively limits the debtor to those means of implementation that are consistent with otherwise applicable law.
B.
The Legislative History Is Inconsistent With A Congressional Intent To Preempt All Other Law That Might Impair The Debtor's Means of Reorganization.
Our interpretation of the statutory text is buttressed by the legislative history of section 1123, which is conspicuously devoid of any indication that Congress intended to preempt laws regulating the public health, safety, or welfare in order to facilitate the debtor's reorganization.
As the bankruptcy court noted below (Opinion of February 7,
- 2002, 273 B.R. 806-10, ER.
146-56),
construing section 1123(a) to sweep aside any nonbankruptcy law that constrains a debtor's freedom to reorganize would mark an extraordinary departure from prior practice.
Yet nothing in the history of section 1123 or its predecessors remotely suggests that Congress intended to excuse the debtor from complying with the requirements of other law.
Rather, as is consistent with textual limitations confining the debtor to legally "adequate" means of implementation, the history of section 1123 shows that Congress merely intended to detail the appropriate contents of a reorganization plan and did not intend to supersede other laws protecting the public interest.
Bankruptcy law provisions governing suitable means for carrying out a plan of reorganization date back to well before the 1978 enactment of the Bankruptcy Code.
The first such law was enacted in 1934 as an amendment to Bankruptcy Act of 1898.
Much like the current Code provision, the amendment required that a plan of reorganization:
shall provide adequate means for the execution of the plan, which may include the transfer of all or any part of the property of the debtor to another corporation or to other corporations, or the consolidation of the properties of the debtor with those of another corporation, or the merger or consolidation of the debtor into or with another corporation or corporations, or the retention of property by the debtor, the distribution of assets among creditors or any class thereof, the satisfaction or modification of liens, indentures, or other similar instruments, the curing or waiver of defaults, extension of maturity dates of outstanding securities, the change in interest rates or other terms of such securities, the amendment of the charter of the debtor, and the issuance of securities of either the debtor or any such corporation or corporations,for cash,or in exchange for existing securities, or in satisfaction of claims or rights, or for other appropriate purposes.
Pub.-L. No.73-296, 48 Stat. 911, 914 (1934),
adding section 77B(b) of Bankruptcy Act of 1898.
In 1938, Congress recodified this provision and made some minor changes in wording.
It thus amended the pertinent provision of the Bankruptcy Act to require that a plan of reorganization:
shall provide adequate means for the execution of the plan, which may include:
the retention by the debtor of all or any part of its property; the sale or transfer of all or any part of its property to one or more other corporations theretofore organized or thereafter to be organized; the merger or consolidation of the debtor with one or more other corporations; the sale of all or any part of its
- property, either subject to or free from any lien, at not less than a fair upset price and the distribution of all or any assets, of the proceeds derived from the sale thereof, among those having an interest therein; the satisfaction or modification of liens; the cancellation or modification of indentures or of other similar instruments; the curing or waiver of defaults; the extension of maturity dates and changes in interest rates and other terms of outstanding securities; the amendment of the charter of the debtor; the issuance of securities of the debtor or such other corporations for cash, for property, in exchange for existing securities, in satisfaction of claims or stock or for other appropriate purposes.
See P.L.75-696, 52 Stat. 840, 896-97 (1938),
adding section 216(10) of the Bankruptcy Act of 1898.
These provisions remained essentially unchanged until the 1978 enactment of the Bankruptcy Code.
See Bankruptcy Act of 1898, section 216(10),
formerly codified at 11 U.S.C. 616(10),
and reprinted, as amended through April, 1976, in Collier's On Bankruptcy (15th ed., rev'd 2002) App. Pt. 3-132-133.
When Congress enacted the Bankruptcy Code in 1978, it included closely similar provisions in the new bankruptcy law.
The original Code provision thus tracked the language of its forerunners under the Bankruptcy Act, first providing that
"[a]
plan shall -
- *
- provide adequate means for the plan's execution" and then listing a set of illustrative examples largely the same as those set forth in the current statute.
Pub.
L.
No.- 95-598,
§ 1123, 92 Stat. 2549, 2631-32 (1978).
Congress amended section 1123(a) (5) in 1984.
Pub. L.
No.98-353, 6 507, 98 Stat. 333, 385 (1984).
The amendments added to the beginning of section 1123(a) the proviso that a plan shall, "Notwithstanding any otherwise applicable nonbankruptcy law" contain the elements specified in the remainder of the section.
Ibid.
These amendments also made a minor, semantic change in subsection (a) (5),
amending the provision to refer to adequate means for the "implementation" of the plan rather than adequate means for the "execution" of the plan.
Ibid.
The law now in effect thus provides that "Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall -
provide adequate means for the plan's implementation *
- 11 U.S.C. 1123 (a) (5).
Several key points emerge from tracing the historical development of these provisions.
First, although provisions closely analogous to section 1123(a) (5) were included in federal bankruptcy statutes for more than forty years before the 1978 enactment of the Code, there is nothing in the pre Code practice to suggest that Congress intended such provisions to preempt otherwise applicable nonbankruptcy law.
As is clear from the 1934 and 1938 statutes quoted above, the text of the pre-Code reorganization statutes does not apply "notwithstanding" other law and does not purport to supersede or displace otherwise applicable nonbankruptcy law.
The legislative history of each of these two, pre-Code statutes makes no reference whatsoever to preempting other law.'
And we have found no pre-Code case law construing these provisions to broadly preempt other law.
Indeed, the pre-Code case law 5 See, e.g.,
S.
Rep. No.
- 482, 73d Cong.,
2d Sess. at 5-6 (1934) and S.
Rep. No.
1916, 75th Cong.,
3d Sess at 34-35 (1938).
points in precisely the opposite direction and indicates that plans of reorganization were required to comply with non bankruptcy law.
See Matter of Pressed Steel Car Co. of New Jersey, 16 F. Supp. 329, 337-39 (W.D.
Pa. 1936)
(analyzing whether stock acquisition contemplated by plan of reorganization was consistent with the Clayton Act); Brockett
- v.
Winkle Terra Cotta Co.,
81 F.2d 949, 954-59 (8th Cir. 1936)
(analyzing whether stock issuance contemplated by plan of reorganization was consistent with state law).
Second, nothing in the 1978 enactment of the Bankruptcy Code suggests an intent to depart from this pre-Code practice by generally preempting otherwise applicable law that might interfere with the debtor's chosen means of reorganization.
Ordinarily, the Code is presumed to incorporate pre-Code practice absent an explicit revision of the governing substantive law.
Midlantic National Bank, 474 U.S. at 501; Kelly v. Robinsion, 479 U.S. 36, 47 (1986).
Here, moreover, committee reports discussing the original, 1978 version of section 1123(a) (5) note that these Code provisions were derived from the comparable provision of the pre-Code law.
See S.
Rep. No.
- 989, 951h Cong.
2d Sess. 118-19 (1978),
reprinted in 1978 U.S.C.C.A.N.
5787, 5904-05; H. Rep.
No.
95
- 595, 95th Cong.,
1st Sess. 406-07, reprinted in 1978 U.S.C.C.A.N.
5963, 6363-63.
There is accordingly nothing in the text or history of the original version of section 1123(a) (5) that purports to depart from pre-Code practice by generally preempting nonbankruptcy law.
The question, then, is whether the 1984 amendments adding the "notwithstanding" proviso to the beginning of section 1123(a) were intended to break with 50 years of pre-Code and Code practice and to suddenly vest in the debtor and bankruptcy court a sweeping power to supersede nonbankruptcy laws that might impair the debtor's prospects of reorganization.
Nothing in the legislative history of the 1984 amendment even remotely suggests such a legislative purpose, however.
Indeed, there is virtually no discussion of the pertinent provision in the legislative history -
a silence that is manifestly inconsistent with intent to work a far reaching change in substantive law.
Thus, as one district court has held, "the 'notwithstanding any otherwise applicable bankruptcy law clause in Section 1123 * *
- was added to the Bankruptcy Code merely as a technical amendment and was not intended to modify substantive law."
In re D.F. Antonelli, 148 B.R. 443, 446 (D.
Md.
1992),
aff'd 4 F.3d 984 (4th Cir.
1993)
(Table).
A more detailed analysis of the 1984 amendment's passage bears out this holding.
The House and Senate bills enacting this amendment were considered directly on the floor of Congress, without first being reported out of committee.
See 130 Cong. Rec.
H 1796 (March 21, 1984); 130 Cong. Rec.
S 6107 08 (May 21, 1984).
There are accordingly no committee reports on the specific 1984 bills that were ultimately passed by each chamber, reconciled in conference, and enacted into law.
See 1984 U.S.C.C.A.N. 576.
The floor debates barely mention the provision.
The House version of the bill did not contain the pertinent amendment or any comparable provision and there was thus no discussion of an amendment to section 1123 on the House floor.
See H.R.
5174, 98th Cong.,
reprinted at 130 Cong. Rec.
H 1832 45, 1854 (March 21, 1984) 6 The 1984 amendment of section 1123(a) (5) instead originated in the Senate.
See H.R. 5174 (Thurmond Amendment in the nature of a substitute),
§ 513 (1984),
reprinted in 130 Cong. Rec.
S 6124 (May 21, 1984).
6 The House had, however, in a prior legislative session reported a similar provision out of committee.
The accompanying committee report characterized the measure as a stylistic change and did not indicate that it would preempt other law.
See H.R. Rep. No.
96-1195 at 22, 122 (1980) (bill proposing amendment identical to pertinent 1984 amendment "makes it clear that the rules governing what is to be contained in the reorganization plan are those specified in this section; deletes a redundant word; and makes several stylistic changes").
The provision relevant here, however, drew no comment or explanation during the 1984 debate on the Senate floor.'
Although the 1984 floor debates are thus uninformative, the provision passed by the Senate was identical to provisions in a prior Senate bill that, though reported out of committee and passed by the Senate in 1983, was not enacted into law.
This 1983 measure originated in S.
445, a bill reported by the Senate Judiciary Committee.
See S.
- 445,
§ 405(a),
98th Cong.,
1st Sess.
(1983).
Like the 1984 amendments of section 1123(a) ultimately enacted into law, the pertinent provision of S.
445 set forth an introductory proviso stating that the requirements of section 1123(a) would apply "notwithstanding any otherwise applicable nonbankruptcy law."
Id.
§ 405(a) (1).
The 1983 Senate Committee report, however, attached no substantive significance to this proposed modification, noting only that the amendment "make[s] technical stylistic changes."
S.
Rep. No.
98-65 at 84 (1983).
On the Senate floor, S.
445 was considered in conjunction with another 1983 Senate bill proposing amendments of the SThe Senate debated the bill over the course of several days but did not mention the provision at issue here.
See 130 Cong. Rec.
S.
6124 (May 21,1984); 130 Cong. Rec.
S.
6177 (May 22, 1984); 130 Cong.
Rec.
S 6324 (May 23, 1984); 130 Cong.
Rec.
S.
6411 (May 24, 1984); and 130 Cong.
Rec.
S 7625 (June 19, 1984).
Bankruptcy Code:
S.
1013.
As reported out of Committee, S.
1013 did not have a pertinent amendment of section 1123 of the Code.
See S.
Rep. No.
98-55, 98th Cong.,
1st Sess.
(April 7, 1983).
On the floor, however, Senator Dole, joined by Senator Thurmond, proposed an amendment to S. 1013 that contained the text, verbatim, of S.
445.
See 129 Cong. Rec.
S 5357 (April 27, 1983).
This amendment proposed to add to S.
1013 a new Subtitle I of "Technical Amendments to Title 11.11 See 129 Cong. Rec.
S 5374 (April 27, 1983).
The subtitle in turn included a new section 706 that would have made amendments to section 1123(a) identical to both the pertinent provision of S.
445 and to the amendments ultimately enacted the next year.
See 129 Cong. Rec.
S 5381 (April 27, 1983).
Consistent with the Senate Report on S.
445, this subtitle was described as adding provisions to "correct grammatical, punctuation, and spelling errors in the code, clarify the intent of the drafters in certain sections, and generally refine procedures."
129 Cong. Rec.
S.
5358 (April 27, 1983)
(explanatory remarks inserted by Sen. Dole).
S.
1013, as so amended, passed the Senate in 1983.
129 Cong. Rec.
S 5364 (April 27, 1983).
But there is nothing in the Senate's consideration of this bill to suggest that the Senate believed the provision preempted other law or had any significant substantive impact.
The Senate floor debates on the 1984 legislation do not reference the prior year's consideration of S.
445 or S.
1013.
The most logical inference, however, is that, in incorporating identical provisions without further comment, the Senate understood the provision to have the same effect as that stated in the 1983 Judiciary Committee report on S.
445 and further noted in the 1983 floor debate on S. 1013:
the measure was a "technical stylistic change" that would not effect a significant substantive change in the law.'
The conference report on the 1984 amendment characterized the section 1123 provisions in the same way -- as a technical change without substantive effect.
The pertinent amendment was contained in section 507 of the conference bill and included within a subtitle of the law denominated "Miscellaneous Amendments to Title 11."
See 130 Cong. Rec. H 7486 (June 29, 1984).
The conferees referred to this as the "technical amendments" section of the bill and noted only that it made certain "technical reforms" in the Code.
See H.
Conf.
Rep. No.98-882, reprinted in 1984 U.S.C.C.A.N. 576, 581 8 This inference, moreover, is bolstered by the fact that Senator Thurmond, who introduced the 1984 bill passed by the Senate, was also chair of the 1983 Judiciary Committee when it reported S.
445.
(Statement of Sen. Thurmond); id.
at 587 (Statement of Sen.
Dole).
The absence in this legislative history of any discussion of preempting nonbankruptcy law is persuasive evidence that no such preemption was ever intended.
Express preemption of the scope contemplated by the district court's holding would effect a sea change in the applicable law.
It would radically depart from a half century of practice under a body of pre Code and Code law that had never recognized in the debtor or a bankruptcy court the authority to preempt other law that might constrain the debtor's ability to reorganize.
In so doing, it would empower debtors to displace a wide swath of nonbankruptcy laws protecting the public health, safety, and welfare whenever such action is deemed to facilitate the debtor's implementation of a plan of reorganization.
- Where, as we have shown above, the text of the statute admits of a different interpretation, the absence of any legislative history indicating an intent to so profoundly change the law and to depart from a firmly established practice in bankruptcy casts grave doubt on whether such changes in the law were ever intended.
See Medtronic, Inc. v. Lohr, 518 U.S. 470, 491 n.
13 (1996)
(Opinion of Stevens, J.) (statute unlikely to have been intended to broadly preempt state law remedies absent discussion of such purpose in legislative history); American Hospital Ass'n v.
NLRB, 499 U.S. 606, 613-14 (1991) (unlikely that amendment characterized as "clarifying" law intended to impose important limitation on agency's authority absent expression of such intent in legislative history); United States Savings Ass'n of Texas v.
Timbers of Inwood Forest Assoc., Ltd, 484 U.S. 365, 380 (1988)
("most improbable" that major change in bankruptcy rules "would have been made without even any mention in the legislative history")
The legislative history of section 1123, in what it says and in what it does not say, is utterly inconsistent with an intent to broadly preempt nonbankruptcy law.
The history instead shows that, when Congress first enacted section 1123(a) (5) in 1978, it merely intended to follow the well established bankruptcy practice of requiring the debtor to describe in its reorganization plan a set of workable and legally sufficient means of carrying out its business plan.
And the history further shows that, when Congress amended this Code provision in 1984, it did not vest in the bankruptcy court a new and extraordinary power to displace other law but merely enacted a "technical stylistic" amendment that would leave substantive law unchanged.
C.
The District Court's Construction Of Section 1123 Would Lead To Anomalous Results That Are Inconsistent With A Debtor's Continuing Obligation To Comply With Other Laws Protecting Important Public And Governmental Interests.
It is a truism that a reviewing court must ordinarily apply a statute as written, and that the untoward consequences of a particular interpretation will rarely justify departure from an unambiguous statutory command.
But where, as in this case, the statutory text and legislative history firmly support an alternative interpretation, well-settled principles of statutory construction require the reviewing court to reject an interpretation that yields anomalous or absurd results.
See, e.g., United States v. X-Citement Video, Inc.,
513 U.S.
64, 70-71 (1994)
(rejecting the "most natural grammatical reading" of the statute, where it would lead to anomalous and absurd results); United States v. Brown, 333 U.S.
18, 27 (1948)
("[n]o rule of construction necessitates our acceptance of an interpretation resulting in patently absurd consequences"); Griffin v. Oceanic Contractors, Inc.,
458 U.S. 564, 575 (1982) ("interpretations of a statute that would produce absurd results are to be avoided if alternative interpretations consistent with legislative purpose are available").
The district court's holding violates this principle in several crucial respects.
First, the court's construction of section 1123(a) is inconsistent with the cardinal, common sense rule that the filing of a bankruptcy petition does not afford the debtor "carte blanche to ignore nonbankruptcy law."
Midlantic Nat'l Bank v.
New Jersey Dep't of Envtl. Protection, 474 U.S. 494, 502 (1986).
The Code, of course, does authorize the debtor to modify and abridge its economic obligations in many important respects.
But absent a specific Code provision authorizing relief, the rights and duties of a debtor and its creditors remain determined by otherwise applicable state or federal law, not the bankruptcy's court's view as to what will best facilitate a reorganization.
Raleigh v. Illinois Dept.
of Revenue, 530 U.S.
15, 20 (2000); see also NLRB v. Bildisco
& Bildisco, 465 U.S. 513, 534 (1984) (debtor not relieved of labor law obligations merely by petitioning for bankruptcy);
United States v. Energy Resources Co.,
495 U.S. 545, 550 (1990)
("a bankruptcy court order might be inappropriate if it conflicted with another law that should have been taken into consideration in the exercise of the Court's discretion").
The district court's holding turns this principle on its head, essentially authorizing the debtor to undertake any restructuring action that would further the reorganization, without regard to the requirements of other law or the policy choices of federal or state legislators.
In the court's view, reorganizing debtors can restructure their business without fully complying with Clayton Act restrictions on unfair competition, and without undergoing the environmental scrutiny that would be applied to the same transaction outside of bankruptcy.
The court, in short, reads a six-word proviso Congress described as a "technical stylistic" amendment as permitting the debtor to restructure its business without regard to any consideration other than its economic impact on the reorganization.
That is a highly suspect result, one that is at odds with the overarching principle that a bankruptcy petition does not excuse the, debtor from complying with all other law.
Second, the court's holding in this regard is all the more problematic because it rests on a statutory rationale that draws no distinction between the preemption of economic regulation and the preemption of laws protecting public health or safety.
As the Supreme Court made clear in Midlantic, Congress has sought to ensure that debtors remain subject to laws protecting public health or safety by expressly exempting a governmental body's exercise of police or regulatory powers from the Code's automatic stay of other actions against the debtor, and by requiring the trustee or debtor-in-possession, to manage and operate estate property in accordance with valid laws of the State in which the property is situated.
Midlantic National Bank, 474 U.S. at 503-05, citing 11 U.S.C.
362(b) (5)
& 28 U.S.C. 959(b).
This Court has accordingly noted, in an implied preemption context, that Bankruptcy Code preemption of laws protecting public health and safety is less likely than preemption of economic regulation.
In re Baker &
Drake, 35 F.3d at 1353; accord In re Public Service Co. of New Hampshire, 108 B.R. at 890.
The district court's holding would vitiate this distinction.
Under the court's reading of section 1123(a),
the Code shows no particular solicitude for laws protecting the public health and safety.
Rather, these laws are simply lumped in with the other "nonbankruptcy" laws that may be displaced if they are an impediment to the restructuring transaction necessary to complete the debtor's reorganization.
This too is an anomalous result, one that is out of keeping with other Code provisions preserving the government's authority to exercise its police and regulatory powers (see 11 U.S.C. 362(b) (4)),
and one that is premised on the dubious notion that Congress intended to place the debtor's pecuniary interests in reorganization over the public interest in health and safety.
Finally, the holding would conceivably authorize a court sitting in bankruptcy to supersede the permitting and licensing decisions of a slew of regulatory agencies -
a result that would arrogate to bankruptcy courts broad powers that are far beyond their institutional competence, and one that would frustrate other statutes intended to vest in expert administrative agencies a delegated legislative power and substantial enforcement discretion.
To take one of many potential examples from this case, P G & E proposes to transfer its government license to operate the Diablo Canyon nuclear power plant to a new business entity created in the course of the proposed reorganization.
This license was issued by the federal Nuclear Regulatory Commission and cannot be transferred absent the NRC's written consent.
42 U.S.C. 2234; 10 C.F.R. 50.80.
In determining whether to approve a license transfer, the NRC considers whether, in its judgment, the proposed transferee has the necessary technical and financial qualifications, as well as whether approving the transfer would be inimical to the common defense and security or the public-health and safety.
10 C.F.R.,
50.33(f) (2)-(3), 50.40, 50.80(b).
As part of this review, the NRC typically considers, not only the technical capability of the transferee, but whether the transferee's resources and likely revenue stream will enable it to carry out critical plant maintenance and public-safety functions.
See, e.g. In the Matter of Pacific Gas and Electic Co.,
CLI 02-16, 55 NRC 317 (NRC 2002), pet. for review pending, No.
02 72735 (9th Cir.).
As this regulatory scheme indicates, the NRC has broad powers to disapprove a license transfer if, in the agency's expert judgment, the transfer could adversely affect public health, public safety, or national security.
These powers derive from express delegations of legislative authority, and the agency's decisions are accordingly entitled to substantial deference when challenged in an action for judicial review.
See, e.g. Baltimore Gas & Electric Co. v. Natural Resources Defense Council, 462 U.S.
87, 97 (1983); City of Cleveland, Ohio v.
U.S. Nuclear Regulatory Commission, 68 F.3d 1361, 1366-70 (D.C. Cir. 1995).
The district court's holding, however, nonetheless suggests that this "nonbankruptcy" law may be preempted by section 1123, and that the bankruptcy court therefore has the authority to override the NRC's determination if it concludes the agency's license transfer decision would interfere with debtor's chosen means of reorganization.
This potential interference with the decisions of a regulatory agency is by no means confined to the expert determinations of the NRC.
P G,& E is seeking regulatory approvals for the transfer of many other licenses, permits, and assets.
It has thus applied to the Federal Energy Regulatory Commission's for permission to transfer licenses required to operate hydroelectric facilities.
It has applied to environmental authorities for permission to transfer the permits that authorize it to handle hazardous waste in compliance with the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq.
And it has applied to the Securities and Exchange Commission for approval, under the Public Utility Holding Company Act, of transactions that would vest in entities related to the debtor direct or indirect control over a significant percentage of a public utility's voting stock.
Like the NRC's decision regarding the transfer of the Diablo Canyon license, each of these regulatory approvals turns on an expert agency's assessment of whether the transaction comports with the provisions and policies of the statute the pertinent agency is charged with administering.
But as P G & E's disclosure statement makes clear, P G & E regards the Code as empowering the bankruptcy court to override any agency determination that proves to be impediment to the debtor's chosen plan of reorganization. 9 See First Amended Disclosure 9 Even if P G & E's analysis of section 1123 were correct it would not, as P G & E suggests in its disclosure statement, Statement at 132-33 (December 19, 2001),
ER. 41-42.
The notion that section 1123 confers on the bankruptcy court this unfettered power to trump the determinations of expert administrative agencies should be viewed with great skepticism.
It would usurp powers that Congress has delegated to specialized administrative bodies and repose them in a forum that has no particularized expertise in the subject matter.
And it would give the bankruptcy court a virtually unchecked power to subordinate the policy objectives underlying many other statutes to the debtor's pecuniary interest in reorganization.
Cf. Board of Governors of the Federal Reserve Systemv.
MCorp Financial, Inc., 502 U.S.
32, 40 (1991)
(contention that bankruptcy court has power to determine the validity of Federal Reserve Board's actions to empower the bankruptcy court to override other federal law and issue orders superseding the licensing or permitting decisions of other federal agencies.
Unlike state law, a federal law that specifically conflicts with a provision of the federal Bankruptcy Code would not be wholly "preempted."
Rather, the court, if presented with such a conflict among federal laws, must strive to harmonize the two laws by giving each one effect insofar as possible.
See Morton v. Mancari, 417 U.S.
535, 551 (1974).
In any event, because section 1123(a) (5) only authorizes "adequate means" of reorganization that are consistent with other law in the first instance, the conflict between the Code and other federal law is illusory.
The bankruptcy court should thus have no occasion to "harmonize" a federal agency's licensing decision with the debtor's interest in reorganizing but must instead give full effect to other federal law regulating the debtor's restructuring.
protect financial integrity of a bank holding company "is problematic, both because it conflicts with the broad discretion Congress has expressly granted many administrative entities, and because it is inconsistent with the limited authority Congress has vested in bankruptcy courts.").
At bottom, a six-word proviso characterized by Congress as a "technical" change in provisions defining the contents of a reorganization plan cannot reasonably be construed to sanction such far-reaching and extraordinary preemption of other law.
D.
Case Law Does Not Support The District Court's Judgment There are only a handful of cases construing section 1123(a) and none purports to resolve the broad preemption question presented here.
Moreover, the few cases that do address section 1123 do not support the district court's judgment.
The relevant circuit precedent stands only for the unexceptionable proposition that a reorganization plan may be implemented through measures that modify the debtor-creditor relationship and abridge creditor rights established under nonbankruptcy law.
As such it is not persuasive authority here.
As an initial matter, and contrary to the district court's reasoning (see slip op. at 16, ER. 234), this Court's decision in In re Entz-White Lumber and Supply, Inc., 850 F.2d 1338 (9th Cir. 1988) does not hold that section 1123(a),
of its own force, preempts all nonbankruptcy laws that conflict with implementing the reorganization plan.
There, the debtor had signed a loan agreement requiring it to pay interest well I
above the contract rate upon its default.
The debtor's reorganization plan contemplated full payment of the loan principal and accrued interest at the initial rate specified in the original contract, but in derogation of the contract's terms, did not provide for payment of the higher interest rates due in the event of the debtor's default.
This Court, however, held that section 1123(a) (5) (G) authorized a reorganization plan to include provisions curing any default, and that the Code's concept of a "cure" meant that the debtor had the power to restore the status quo ante, which in this case meant that debtor could essentially vitiate the conditions triggering its obligation to pay higher interest.
Id.
at 1333-40.
Entz-White thus does not hold that' section 1123(a),
standing alone, vests in the debtor the power to displace contract rights based in state law.
It instead holds that, in the particular circumstances then before the Court, such powers derived from another section of the Code -- section 1124(2)
-- that affords a debtor the authority to cure a default by tendering full payment and compensating the creditor for any damages caused by the prior breach.
Id.
at 1340 & n. 3.
Thus, insofar as In re Entz White pertains to what may be included in a reorganization plan under section
- 1123, it merely stands for the modest proposition that a debtor may adopt in a reorganization plan provisions that modify creditor rights under state law if such remedies are expressly authorized by another specific provision of the Bankruptcy Code.
The district court's reliance on In re FCX, Inc., 853 F.2d 1149 (4th Cir. 1988),
is also misplaced.
There, the debtor had received from an agricultural cooperative a dividend payment in the form of a certificate ultimately redeemable for cash.
The cooperative's by-laws provided that a holder of these certificates could not redeem them or set them off against debts owed the cooperative absent the approval of the cooperative's board of directors.
Despite these by-law provisions, the debtor sought to include in its plan of reorganization provisions that would essentially set off the debtor's certificates against a claim asserted by the cooperative.
The court held that section 1123(a) (5) (D) authorized the set off, reasoning that the section's introductory clause authorizing property distributions "notwithstanding any otherwise applicable nonbankru]tcy law" "supersedes the discretionary power over surrender of the * *
- certificates bestowed on [the agricultural cooperative's]
board by its by-laws."
Id.
at 1154.
The Fourth Circuit's holding clearly authorized the debtor to modify the debtor-creditor relationship in a manner that was inconsistent with otherwise applicable state law.
But as in Entz-White, the court's decision is narrowly confined to matters concerning the rights and duties of a creditor and debtor.
The court had no occasion to address whether section 1123 authorizes the wholesale preemption of all other law, including state or federal laws intended to protect the public health, safety, or welfare.
The decision is thus of a piece with many other decisions recognizing that a creditor's rights with respect to property-of the debtor are subject to substantial modification in bankruptcy.
As such, it has little if any relevance to the issues presented here. 10 101n re Buttonwood Partners, Ltd, 111 B.R. 57 (Bk. Ct.
S.D. N.Y.
1990),
cited only in passing by the district court, is distinguishable for the same reason.
It involved a banking institution's claim that it could not vote for confirmation of a plan because the plan would compromise its interests in a manner that might be barred by certain federal banking laws.
The court expressed doubt that the plan measures were in conflict with the banking law in the first instance (see id.
at 60),
so its statements as to whether the Code takes precedence are mere dicta.
In any event, like Entz-White and FCX, the case involved only the adjustment of the debtor In re Public Service Co. of New Hampshire, 108 B.R. 854 (Bk. Ct. N.H.
1989) is the one case cited below that does go beyond the question of whether a reorganization plan may abridge a creditor's rights under nonbankruptcy law.
It states that the plain language of section 1123(a) (5) preempts a state regulatory body's power to review and approve a variety of transactions contemplated by a utility's plan of reorganization.
The court concluded that the plain meaning of section 1123 "contemplates that restructuring transactions necessary to the plan of reorganization may be provided notwithstanding nonbankruptcy law * * *."
Id.
at 881.
It further reasoned that the intent to preempt state regulatory law was further confirmed by Code provisions that, though conditioning a utility reorganization on a state authority's approval of necessary rate changes, failed to expressly recognize any other state authority to review the utility reorganization.
Id.
at 884.
Even this decision, however, does not support the expansive construction of section 1123 adopted by the district court here.
First, the New Hampshire court made clear that its preemption holding was confined to economic regulation and creditor relationship and thus has no relevance to the much larger preemption question presented here.
did not extend to laws protecting public health or safety.
The court thus stated that "the preemption involved here concerns only a possible transfer of economic regulatory jurisdiction as contrasted with the more acute situation where a transfer of state regulatory authority over health or safety is argued to be the effect of federal preemption."
Id.
at 890 (emphasis in original), citing Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494 (1986).
Second, the court did not rest its holding solely on section 1123(a) but instead relied as well on the history of Code provisions specifically addressed to state utility regulation [see id.
at 863-66,
- 884, 887-90)
-- provisions that have no relevance to whether the Code preempts other laws as well.
Finally, the court did not address the significance of pre-Code practice or textual limitations on preemption set out in the plain language of section 1123(a).
See id.
at 882-85.
It thus fails to note that there were decades of pre-Code practice in which no broad powers of preemption were recognized, and that well-established principles hold that the Code is presumed to continue a pre-Code practice absent an express provision to the contrary.
It similarly fails to note that section 1123(a) (5) limits the debtor to "adequate" means of implementation -
a term that signifies Congress's intent to limit the debtor to means that are legally sufficient under otherwise applicable law.
In sum, to the extent the decision is founded upon section 1123, the bankruptcy court's construction of section 1123 is not persuasive and should not be followed here.
At bottom, the question of whether section 1123(a) broadly preempts all nonbankruptcy law is a question of first impression.
There is no case law directly on point, and even those decisions that do address the scope of section 1123(a) are confined to debtor-creditor rights or economic regulation.
This case, in contrast, poses the larger question of whether section 1123(a) expressly preempts all law affecting a reorganization, including laws intended to protect the paramount interest in the public health, safety, and welfare.
The traditional tools of statutory construction show that the district court erred in declaring all such laws to be preempted.
The text of the Code, the long history of provisions governing a debtor's reorganization, and the conspicuous silence in the legislative history all belie any congressional intent to attach such overriding significance to the success of the debtor's bankruptcy.proceedings.
A debtor, like any other business, must operate under laws calculated to protect the environment or safeguard consumers from unfair competition or ensure public safety.
Contrary to the holding below, a filing of a bankruptcy petition does not subordinate these vital public interests to the debtor's interest in reorganizing.
II.
The Case Must Be Remanded For Consideration Of Serious Issues Of Whether State Laws Regulating The Debtor's Restructuring Are Impliedly Preempted By The Bankruptcy Code.
The district court's express preemption holding is animated in part by the concern that maintenance of state regulatory authority would "permit state regulators to exercise a veto over the restructuring of a utility in bankruptcy, which could potentially impose a dramatic limitation on P G & E's ability to reorganize despite the fact that no change s] whatever were made to any P B & E operation."
Opinion of August 30, 2002, slip op. at 23, ER.
241.
The Court, however, need not impose an ill-fitting gloss on section 1123(a) to protect a utility from arbitrary state regulation that unduly interferes with its right to reorganize in bankruptcy.
As an initial matter, state laws or regulatory initiatives intended to defeat federal jurisdiction over energy regulation or environmental safety are expressly or impliedly preempted by other federal regulatory schemes, wholly apart from any preemptive effect of the Bankruptcy Code.
The state, at several junctures of the proceedings below, has suggested that state regulation of these matters must be preserved because it is in some respects superior to or more protective than that administered by FERC or other federal agencies.
See, e.g. Lynch Decl.,
¶¶ 56-57, ER.
78; CPUC Dist. Ct. Br. As Appellee, NR.
78 at 13.
- States, however, do not have the authority to regulate matters falling within the exclusive jurisdiction of FERC or other federal agencies.
Schneidewind, 485 U.S. at 308.
Thus, state actions calculated to prevent or interfere with the exercise of federal regulatory jurisdiction over utility operations are preempted by other federal law, independent of the preemptive scope of the Bankruptcy Code.
Id.
at 307-11.
Moreover, and of particular significance in this case, under this Court's precedent, principles of implied preemption operate to bar a state agency from wielding its authority in a way that frustrates an insolvent utility's federal right to reorganize in bankruptcy.
Supremacy Clause jurisprudence makes clear that a state law is invalid to the extent it conflicts with a federal statute, and that "[sluch a conflict will be found when the state law 'stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.'"
International Paper Co. v.
Ouellette, 479 U.S. 481, 491-92 (1987),
quoting Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 713 (1985),
quoting Hines v. Davidowitz, 312 U.S.
52, 67 (1941).
Thus, state laws that purport to carve out exceptions to rights otherwise conferred on the debtor by the Code or that seek to divest the debtor of a right to reorganize under federal bankruptcy law would be impliedly preempted, regardless of the scope of section 1123(a).
In re Baker &
Drake, Inc., 35 F.3d 1348, 1352 (9th Cir. 1994); Perez v.
Campbell, 402 U.S. 637 (1971).
These principles do not displace every state law that merely makes it more difficult or financially burdensome for the debtor to reorganize.
In re Baker & Drake, Inc., 35 F.3d at 1354-55, This Court, however, has made clear that state regulation that stymies a debtor's right to reorganize may be impliedly preempted where the state is concerned with economic regulation rather than protection of the public health or safety, where the regulation entails an individual, discretionary action targeted at the debtor rather than the general public, or where the action does not serve a valid regulatory purpose.
Ibid.
The history of Code provisions specifically addressed to state utility regulation shows that these implied preemption principles protect an insolvent utility from state regulatory actions that unreasonably frustrate an insolvent utility's federal right to reorganize in bankruptcy.
As the district court noted below (ER.
244-45),
pre-Code bankruptcy law vested in state utility commissions an unqualified, federal right to veto a plan of reorganization the state commission deemed to be "unfair" or contrary to the public interest."
- Congress, however, did not include similar provisions when it enacted the Bankruptcy Code in 1978.
Thus, federal bankruptcy law no longer specifically sanctions a state veto power over a utility reorganization.
The deletion of a federally-secured right to veto a utility reorganization significantly enhances the protections afforded utilities by the implied preemption doctrine.
Unlike pre-Code practice, state utility commissions can no longer claim that'federal bankruptcy law itself vests state regulators with a federal right to block any reorganization 11 The provision stated in pertinent part that "In case a debtor is a public utility corporation, wholly intrastate, subject to the jurisdiction of a State commission having regulatory jurisdiction over such debtor, a plan [of reorganization] shall not be approved * *
- unless such State Commission shall have first certified its approval of such plan as to the public interest therein and the fairness thereof." Pub L.
No.75-696, 75th Cong. 3d Sess, 52 Stat. 840, 891 (1938),
adding section 178 of the Bankruptcy Act of 1898.
they deem "unfair" or contrary to the public interest.
Rather, under the Code and this Court's precedent, state utility regulation is impliedly preempted to the extent it stymies a utility's practical right to reorganize in bankruptcy.
The record here indicates that this case should be remanded for a hard look at whether California's regulation of P G & E's proposed restructuring is impliedly preempted by the Bankruptcy Code under this Circuit's standards.
Although the matter was not decided below, P G & E has squarely preserved the issue of whether California law is impliedly preempted by the Code.
See Bk. Ct. No.
01-30923, NR.
- 6054, Amended Disclosure Statement, April 19, 2002 at 92-93.
- Moreover, P G
& E has identified several state laws that constrain the disposition of utility property, the issuance of debt or stock by the restructured business, and the formation and performance of contractual agreements required to implement the plan of reorganization.
First Amended Disclosure Statement at 129-31, ER. 38-40.
This state regulation appears to be principally economic in character, and it limits restructuring activities that are at the core of the right to reorganize in bankruptcy.
Thus, while the district court erred in concluding that section 1123(a) (5) of the Code expressly preempts state law, the case must be remanded for careful and searching scrutiny of whether California state law is impliedly preempted by the Bankruptcy Code.
CONCLUSION For the foregoing reasons, the district court's judgment should be vacated and the case remanded for consideration of whether pertinent state law is impliedly preempted by the Bankruptcy Code.
Respectfully submitted, ROBERT D. MCCALLUM, JR.
Assistant Attorney General KEVIN V.
RYAN United States Attorney WILLIAM KANTER (202) 514-4575 JEFFREY CLAIR (202) 514-4028 Attorneys, Civil Division Room 9536, Department of Justice 601 "D" St.,
NW Washington D.C. 20530-0001
, >Ipr
STATEMENT OF RELATED CASES Counsel are unaware of any related cases pending in this Court.
RULE 32 CERTIFICATE OF COMPLIANCE I certify that this brief is printed in monospaced typeface that does not contain more than 10.5 characters per inch and that, based on word processing software,, the brief contains 13,325 words.
Jeffrey Clair, Attorney CERTIFICATE OF SERVICE I certify that on November 13,
- 2002, I served the foregoing Brief for the United States as Amicus Curiae by causing copies to be delivered, in the manner indicated below, on the counsel named on the attached "Service List."
- fey Clair, Attorney Service List Counsel for PG&E Co.,Debtor:
Counsel for the California Public Utilities Commission:
[By Overnight Delivery Service]
Jerome B. Falk James L. Lopes Jeffrey Schaffer Amy Margolin Howard, Rice, Nemerovski,
- Canady, Falk & Rabkin Three Embarcadero Center, 7 th Floor San Francisco, CA 94111-4024 (415) 434-1600 jschaffer@hrice.com; ilopes@hrice.com; amarcolin@hrice.com Counsel for PG&E Corporation:
[By Overnight Delivery Service]
Michael P. Kessler, Esq.
Oscar R. Cantu, Esq.
Weil, Gotschal & Manges, LLP 767 Fifth Avenue
-New York, NY 10153 (212)310-8000 michael.kessler@weil.com; oscar.cantu@weil.com Professor Laurence Tribe, Esq.
Hauser Hall 420 1575 Massachusetts Ave.
Cambridge, MA 02138 (617) 495-4621 Alan S. Gover, Esq.
Dewey Ballantine LLP 700 Louisiana, Suite 1900
- Houston, TX 77002 (713) 576-1500 aQover@deweyballantine.com
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Gary Cohen, Esq.
505 Van Ness Avenue San Francisco, CA 94102 (415) 703-2015
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Bill Lockyer Attorney General Richard M. Frank Thomas Greene Margarita Padilla, Esq.
State of California General's Office P.O. Box 70550 1515 Clay Street, 2 0 th Floor
- Oakland, CA 94612-0550 (510) 622-2135 Steven Felderstein, Esq.
Paul Pascuzzi, Esq.
Felderstein, Fitzgerald, Willoughby & Pascuzzi LLP 400 Capitol Mall, Suite 1450 Sacramento, CA 95814 (916)-329-7400 Attorney
Counsel for Official Committee of Unsecured Creditors:
[By First Class Mail]
Paul S. Aronzon, Esq.
Millbank, Tweed & Hadley 601 S.
Figueroa St.,
3 0 th Floor Los Angeles, CA 90017 Counsel for City of Redwood, CA.:
Counsel for California Dept.
of Transportation:
[By First Class Mail]
Bruce Behrens, Esq.
California Dept. of Transportation 595 Market Street, Suite 1700 San Francisco, CA 94120-7444
[By First Class Mail]
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Nossaman, Guthner, Knox & Elliott 445 S.
Figueroa Street, 31t Floor Los Angeles, CA 90071-1602 Counsel for Various California Secured Creditor Counties:
[By First Class Mail]
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Law Offices of Martha Romero Associates 7743 South Painter Ave., Suite E Whittier, CA 90602 Counsel for Various California Counties & City of San Francisco:
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D. Cameron Baker, Esq.
City Hall, Room 234 1 Dr. Carlton B. Goodlett Place San Francisco, CA 94102-4682 Attorneys for California Hydropower Reform Coalition:
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Trout Unlimited 828 San Pablo Ave. #208 Albany, CA 94706 (510) 644-2900 Richard Roos-Collins, Esq.
Natural Heritage Institute 2140 Shattuck Ave.,
St Floor Berkley, CA 94704 (510)528-4164 Attorney for Anderson Homes, et al.:
[By First Class Mail]
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Law Offices of Connie Easterly 5528 Pacheco Blvd.
Pacheco, CA 94553 Attorney for Raymon Tate, et al.:
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Murray & Murray 19330 Stevens Creek Blvd., Suite 100 Cupertino, CA 95012
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Perkins Coie LLP 1620 26th Street, 6th Floor Santa Monica, CA 90404 Attorneys for the Utility Reform Network:
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Robert Finkelstein, Esq.
Utility Reform Network 711 Van Ness Avenue, Suite 350 San Francisco, CA 94102 Attorneys for Certain Unsecured Debtholders:
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Pascoe & Rafton 1050 Northgate Drive, Suite 356 San Rafael, CA 94903 James Spiotto, Esq.
Chapman and Cutler I11 West Monroe Street Chicago, IL 60603 Attorneys for Creditor Wayne Roberts:
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Attorneys for np1tA Pnw-r et al
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Thomas E. Lauria, Esq.
Jerry R.
Bloom, Esq.
White & Case, LLP 633 West Fifth Street, Suite 1900 Los Angeles, CA 90071 Lynn Carman, Esq.
146 Mariner Green Court Corte Madera, CA 94925 Peter Keane, Esq.
536 Mission Street San Francisco, CA 94105 Attorneys for New West Enerav Corn.:
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Attornv for
.Tom
ptI ml -
[By First Class Mail]
Patricia Mar, Esq.
Morrison & Foerster 425 Market Street San Francisco, CA 94105-2482 Peter C. Califano, Esq.
Sean P. Beatty, Esq.
Denise C. Reagan, Esq.
Cooper, White & Cooper 201 California Street, 17th Floor San Francisco, CA 94111 Frank L.
Eaton, Esq.
White & Case LLP First Union Financial Center 200 South Biscayne.Boulevard
- Miami, Florida 33131-2352 AttnrnPvq fnr rpnt-rex Homes et al :
a
Attorneys for KB Homes, et~al.:
[By First Class Mail]
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Morrison & Foerster LLP 425 Market Street San Francisco, CA 94105-2482 Todd Duncan, Esq.
BNY Western Trust 700 South Flower, 5th Floor Los Angeles, CA 90017 Evan C. Hollander, Esq.
White & Case LLP 1155 Avenue of the Americas New York, NY 10036 Counsel for the United States Trustee:
[By First Class Mail]
Stephen Johnson, Esq.
Office of United States Trustee 250 Montgomery Street, Suite 1000 San Francisco, CA 94104
STATUTORY ADDENDUM
Page 1 Citation Found Document Rank 1 of 1 Database 11 USCA S 1123 USCA 11 U.S.C.A. § 1123 UNITED STATES CODE ANNOTATED TITLE 11. BANKRUPTCY CHAPTER 11-REORGANIZATION SUBCHAPTER II-THE PLAN Copr. © West Group 2002. No claim to Orig. U.S. Govt. Works.
Current through P.L. 107-245 (excluding P.L. 107-217, 107-228, 107-240) approved 10-21-02
§ 1123. Contents of plan (a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall-(1) designate, subject to section 1122 of this title, classes of claims, other than claims of a kind specified in section 507(a)(1), 507(a)(2), or 507(a)(8) of this title, and classes of interests; (2) specify any class of claims or interests that is not impaired under the plan; (3) specify the treatment of any class of claims or interests that is impaired under the plan; (4) provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest; (5) provide adequate means for the plan's implementation, such as-(A) retention by the debtor of all or any part of the property of the estate; (B) transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan; (C) merger or consolidation of the debtor with one or more persons; (D) sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property of the 6state; (E) satisfaction or modification of any lien; (F) cancellation or modification of any indenture or similar instrument; (G) curing or waiving of any default; (H) extension of a maturity date or a change in an interest rate or other term of outstanding securities; (I) amendment of the debtor's charter; or (J) issuance of securities of the debtor, or of any entity referred to in subparagraph (B) or (C) of this paragraph, for cash, for property, for existing securities, or in exchange for claims or interests, or for any other appropriate purpose; (6) provide for the inclusion in the charter of the debtor, if the debtor is a corporation, or of any corporation referred to Copr. © West 2002 No Claim to Orig. U.S. Govt. Works
in paragraph (5)(B) or (5)(C) of this subsection, of a provision prohibiting the issuance of nonvoting equity securities, and providing, as to the several classes of securities possessing voting power, an appropriate distribution of such power among such classes, including, in the case of any class of equity securities having a preference over another class of equity securities with respect to dividends, adequate provisions for the election of directors representing such preferred class in the event of default in the payment of such dividends; and (7) contain only provisions that are consistent with the interests of creditors and equity security holders and with public policy with respect to the manner of selection of any officer, director, or trustee under the plan and any successor to such officer, director, or trustee.
(b) Subject to subsection (a) of this section, a plan may-(1) impair or leave unimpaired any class of claims, secured or unsecured, or of interests; (2) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section; (3) provide for-(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or (B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest; (4) provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests; (5) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; and (6) include any other appropriate provision not inconsistent with the applicable provisions of this title.
(c) In a case concerning an individual, a plan proposed by an entity other than the debtor may not provide for the use, sale, or lease of property exempted under section 522 of this title, unless the debtor consents to such use, sale, or lease.
(d) Notwithstanding subsection (a) of this section and sections 506(b), 1129(a)(7), and 1129(b) of this title, if it is proposed in a plan to cure a default the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.
CREDIT(S) 1993 Main Volume (Pub.L.95-598, Nov. 6, 1978, 92 Stat. 2631; Pub.L.98-353, Title III, § 507, July 10, 1984, 98 Stat. 385.)
2002 Electronic Update (As amended Pub.L. 103-394, Title II, § 206, Title III, §§ 304(h)(6), 305(a), Title V, § 501(d)(31), Oct. 22, 1994, 108 Stat. 4123, 4134, 4146.)
<General Materials (GM) - References, Annotations, or Tables>
HISTORICAL AND STATUTORY NOTES Copr. © West 2002 No Claim to Orig. U.S. Govt. Works I1I USCA S 1123 Page 2