By Hudson Sangree

The Federal Emergency Management Agency dropped its claim Tuesday to a large chunk of the $13.5 billion trust that Pacific Gas and Electric plans to fund for wildfire victims as part of its Chapter 11 reorganization.

Lawyers for FEMA and PG&E told U.S. Bankruptcy Judge Dennis Montali in San Francisco that FEMA had settled for $1 billion of its original $3.9 billion claim for wildfire expenses and can only recoup its money from the trust once all the individual wildfire victims have been paid.

Residents and business owners harmed by PG&E-sparked fires in 2015, 2017 and 2018 have filed more than 77,000 claims in the utility’s bankruptcy case. Montali pointed out the deal could mean FEMA winds up getting nothing from the trust, which is what wildfire victims have wanted.

“I’m sure the fire victims will be happy to see the outcome, and so am I. Congratulations,” Montali told attorneys Stephen Karotkin, who represents PG&E, and Matthew Troy, with the U.S. Department of Justice.

The dispute over whether FEMA could share in the victims’ trust was one of the biggest threats to PG&E exiting bankruptcy by June 30, which it must do to take part in a wildfire insurance fund established by the state last year.

FEMA, along with a number of California state agencies, argued it was entitled to get back billions of dollars it spent responding to disasters started by poorly maintained PG&E equipment, including the November 2018 Camp Fire that killed 86 people and destroyed the town of Paradise.

Fire victims were angered by the claims and rallied against the agencies. (See FEMA Wants $4 Billion from PG&E in Bankruptcy.)

PG&E and the government agencies reached the agreement during a mediation session Monday intended to resolve disputes over PG&E’s disclosure statement, a simplified explanation of its reorganization plan for fire victims and others. The statement will soon be sent to more than 300,000 interested parties who can vote on PG&E’s bankruptcy plan, the judge said. (See PG&E Tries to Put Bankruptcy Plan in Layman’s Terms.)

Montali ordered the mediation before retired U.S. Bankruptcy Judge Randall J. Newsome last October to try to bring a timely end to one of the largest bankruptcies in U.S. history. PG&E and its adversaries, including lawyers for the fire victims’ Tort Claimants Committee (TCC), said they’d worked out several disputes involving the disclosure statement in Monday’s mediation session.

“We’re pleased to report that objections raised by the TCC, the United States government and state agencies … have all been resolved,” Karotkin told the judge. The agreements will be filed with the court in next few days.

“Thanks to the involvement of former bank bankruptcy Judge Newsome, who’s been working very hard over the last few days … we were able to reach these agreements,” Karotkin said.

Montali responded: “He’s my secret weapon. I’m going to turn him loose on the coronavirus next.”

A hearing on PG&E’s planned financing to exit bankruptcy is scheduled for March 16.

The bankruptcy, now estimated by PG&E to cost close to $60 billion, relies on new stock and debt offerings. Fire victims and Gov. Gavin Newsom have expressed concern that a highly leveraged PG&E may be unable to upgrade its aging infrastructure or to fully compensate those who lost homes and family members.