Eminent Domain Report

On November 27, 2019, U.S. Bankruptcy Judge Dennis Montali issued a Memorandum Decision on Inverse Condemnation (“Memorandum Decision”) in PG&E Corporation and Pacific Gas & Electric’s (together, “PG&E”) Chapter 11 Bankruptcy proceeding in the U.S. Bankruptcy Court for the Northern District of California (Case No. 19-30088).  PG&E challenged the application of the doctrine of inverse condemnation in connection with the 2015, 2017, and 2018 California wildfires.  In the Memorandum Decision, Judge Montali ruled against PG&E and instead concluded that the doctrine of inverse condemnation applied with respect to the wildfire damages.

Specifically, PG&E challenged the applicability of the doctrine of inverse condemnation given that it is a privately-owned utility.  PG&E asserted that it would be unconstitutional under the Fifth Amendment for the federal bankruptcy court to apply inverse condemnation liability without PG&E having the ability to pass on their inverse condemnation losses by recovery from ratepayers.  In support of that argument, PG&E focused on a 2017 California Public Utilities Commission (“CPUC”) decision in which the CPUC denied the request of San Diego Gas & Electric Company to recover costs it had incurred associated with inverse condemnation liability during a wildfire (“SDG&E Decision”). 

First, because inverse condemnation arises out of the California Constitution, Judge Montali looked to existing California state court decisions.  He noted that the California Supreme Court has yet to rule on whether inverse condemnation applies to a privately-owned utility.  He therefore analyzed California appellate court opinions in Barham v. Southern California Edison Co., 74 Cal. App. 4th 744 (1999) and Pacific Bell Telephone Co. v. Southern California Edison Co., 208 Cal. App. 4th 1400 (2012), as well as recent California trial court opinions that have addressed the issue.  In each these instances, the California courts have so far held that inverse condemnation applies to privately-owned utilities.  Despite PG&E’s attempts to discount Barham and Pacific Bell, Judge Montali ultimately found that “Debtors have not provided persuasive data to justify deviation from the intermediate appellate court cases discussed above.”  Memorandum Decision at 11.

Next, Judge Montali addressed PG&E’s arguments based on the recent SDG&E Decision.  He held that (1) the SDG&E Decision does not state that inverse condemnation costs will never be passed on to ratepayers, (2) the SDG&E Decision does not change the outcomes of Barham and Pacific Bell because those cases were not premised on cost spreading, but instead based on the concept of public use, and (3) the Bankruptcy Court is not tasked with deciding what the law should be, but instead what the law is based on California court decisions.  Therefore, he concluded that “the doctrine of inverse condemnation is applicable to Debtors and the California Supreme Court would likewise leave it in place.”  Memorandum Decision at 11.

Judge Montali indicated that an order consistent with the Memorandum Decision would be forthcoming and that he would certify it for direct appeal to the Ninth Circuit Court of Appeals when the order is issued.  We anticipate that PG&E will appeal the Memorandum Decision once certified.