Section 363 sales under the Bankruptcy Code are designed to facilitate the sale of assets free and clear of existing liens and encumbrances. This legal provision offers companies a streamlined process to divest assets, enabling them to generate much needed liquidity while addressing financial obligations. The sale of assets under §363 also provides a mechanism to generate value back to interested parties and creditors during the bankruptcy process.

The expectation is that such sales can proceed without the usual encumbrances that might otherwise hinder asset transfers. However, this process is not always immune to external challenges. Regulatory bodies may intervene, could assert their authority and could raise concerns that can complicate the transaction.

This article explores two notable examples where regulatory opposition emerged during §363 sales. These case studies serve as reminders of the importance of anticipating regulatory scrutiny and preparing for possible impediments when pursuing asset sales through the §363 process. Both have commentary related to the specifics of these matters and do not indicate predictions for other scenarios with separate facts and circumstances.

Reasons that Regulators May Intervene

Regulators may utilize their right to oppose a §363 sale for several reasons, primarily related to their mandate to protect public interests and ensure compliance with legal and regulatory standards. There are three common reasons.

Public Safety Concerns

Regulators may oppose a §363 sale if they believe that the transaction could compromise public safety. For example, if the assets being sold include such critical infrastructure as utility lines or facilities that require ongoing maintenance and oversight, regulators might be concerned that the buyer lacks the capability of or commitment to maintaining safety standards.2

Service Reliability and Continuity

In cases where the assets are integral to public utilities or other essential services, regulators might scrutinize the buyer’s ability to uphold service levels. A possible fear is that the sale could lead to disruptions, reduced service quality or inadequate investment in infrastructure, which could negatively affect consumers.3

Protecting Ratepayer Interests

Regulators often have a duty to protect the financial interests of consumers, particularly in such sectors as utilities, where services are provided at regulated rates. If a §363 sale is perceived to result in higher costs for consumers or unfair financial burdens, regulators may

intervene. They could be concerned that the new owner might seek to increase rates to recoup their investment or fail to invest sufficiently in maintaining or improving services, thereby negatively impacting ratepayers.4

Case Study 1: Polaris

Polaris Operating LLC was a privately held independent oil and gas company focused on acquiring, optimizing and developing conventional oil and gas properties with redevelopment and new development opportunities. Its core area of operations was in the Texas Panhandle, where they owned and operated hundreds of shallow oil and gas wells with a significant amount of infrastructure, including gathering systems, power lines, disposal wells, workover rigs and water trucks.

Polaris faced significant financial headwinds and filed for bankruptcy on July 28, 2023, in the U.S. Bankruptcy Court for the Southern District of Texas.5

Polaris planned to sell its assets, which included both producing and nonproducing wells under a §363 sale process. However, the complexity of the asset portfolio, which included nonoperational wells needing significant investment for compliance, posed substantial challenges.

Impact of Regulators

The Railroad Commission of Texas (RRC) is the state agency that regulates the oil and gas industry, gas utilities, pipeline safety in the liquefied petroleum gas industry, and surface coal and uranium mining. Prior to and during bankruptcy, Polaris was subject to the rules and regulations of the state agency to continue operating oil-producing wells. Further, to transfer assets in a §363 sale, Polaris was required to have a current P-5 Organization Report, which is the registration that an operator makes with the commission if they plan on conducting business within the jurisdiction of the RRC.

During the bankruptcy, the RRC determined that the P-5 Organization Report for Polaris could not be renewed because it had not complied with the inactive well requirements of Statewide Rule 15. RRC Statewide Rule 15 was adopted in 2010 to address the growing inventory of inactive wells and surface equipment clean-up and removal based on the length of time that a well has been reported as being shut in.6

The rule requires operators to address their inactive wells by restoring the wells to active status, plugging the wells, or obtaining plugging extensions for wells that have future utility.7

In Polaris’s case, considerable financial resources would have been required to plug and abandon (P&A) all of the inactive wells to comply with Statewide Rule 15. Furthermore, the use of the estate funds was governed by the cash-collateral order, and funds had not been approved or allocated to P&A wells, as Polaris had no intentions of continuing as an operator; they intended to sell all assets in bankruptcy.

On July 19, 2024, an application by Polaris was brought before an administrative law judge (ALJ) with the RRC’s Hearings Division contesting the RRC’s determination that the P-5 Organization Report for Polaris could not be renewed. Expert testimony was solicited regarding Polaris’s financial state, its intention to sell the oil-producing assets, the lengths that Polaris took to address well violations (excluding P&A obligations), and the implications of regulatory requirements on the sale of assets.

The expert witness’s testimony highlighted the challenges that Polaris faced, particularly concerning compliance with the RRC’s regulations, which included addressing well violations prior to the asset transfer. The expert illuminated the financial impracticalities of resolving all violations and the potential impact on Polaris Operating’s ability to execute a successful asset sale.

Current Status of the Case

During the proceedings, Polaris sought an extension to address the violations or a reconsideration of the necessity to resolve these issues given their intention to transfer, rather than operate, the assets. While the RRC seemed to understand the challenges resulting from Polaris Operating’s bankruptcy and its liquidity constraints, the applicable statutory framework does not allow for such an extension or merit-based exception.

The ALJ did not immediately issue a written opinion upon conclusion of the hearing. During the period between the conclusion of the hearing and the revocation of the P-5 Organization Report, Polaris was able to complete the asset sale transaction.

Case 2: Pacific Gas & Electric

PG&E Corp. is a holding company headquartered in San Francisco. It is the parent company of Pacific Gas and Electric Co. (PG&E), an energy company that serves 16 million Californians across a 70,000-square-mile service area in Northern and Central California. PG&E Corp. and the utility are separate entities with distinct creditors and claimants, and they are subject to separate laws, rules and regulations.8

PG&E filed for chapter 11 protection in January 2019, which was primarily driven by PG&E’s billions of dollars in liabilities resulting from a series of devastating wildfires in California. This severely impacted PG&E’s financial stability and necessitated a comprehensive restructuring plan.

Asset-Sale Details

To generate funds to address its debts and obligations related to wildfire liabilities, PG&E proposed a strategic asset sale. In late April 2024, PG&E announced its intention to sell certain assets to KKR, a prominent global investment firm.

This proposed transaction was part of PG&E’s broader strategy to streamline operations and raise the necessary capital to fulfill its financial commitments, including settlements with wildfire victims and other creditors. The sale was intended to bolster PG&E’s financial footing, enabling the company to emerge more robustly from bankruptcy and address the substantial financial claims against it.

Regulators’ Impact

The proposed asset sale to KKR faced scrutiny and opposition from California regulators, specifically the California Public Utilities Commission (CPUC). In May 2024, the CPUC expressed concerns regarding the transaction, emphasizing potential adverse impacts on public safety, service reliability and the interests of ratepayers.

The CPUC argued that the divestiture of certain assets might undermine PG&E’s ability to maintain safe and reliable utility services, which are critical to the well being of California’s residents. In addition, there were apprehensions about how the sale might affect ratepayers, potentially leading to increased costs or reduced service quality. Consequently, the CPUC’s opposition introduced significant regulatory hurdles to the proposed sale, necessitating further negotiations and adjustments to address these concerns. As of November 2024, PG&E’s restructuring plan (including the proposed asset sale to KKR) remains under examination.

Closing Thoughts

Section 363 sales offer a critical mechanism for distressed companies to sell assets free and clear of existing liens and encumbrances, thus providing a vital means to generate liquidity and address financial obligations.

However, as demonstrated by Polaris Operating LLC and PG&E, the process is not immune to regulatory inquiry and intervention.

These case studies serve as important reminders for companies pursuing §363 sales. They emphasize the need to anticipate regulatory scrutiny and prepare for potential impediments that could arise. By understanding the regulatory landscape and engaging in proactive dialogue with relevant authorities, companies can better navigate these challenges, ultimately facilitating smoother transactions that align with both financial objectives and regulatory expectations.

This article originally appeared in the ABI Journal.

The information provided in this article is for general informational purposes only and does not constitute legal or tax advice. For disclosure purposes, the authors’ firm provided financial-advisory and expert-witness services in the Polaris Operating LLC case discussd herein.

  1. David E. McNabb, “Chapter 1: Public utilities: essential services, critical infrastructure,” Public Utilities, Second Edition (Elgar Publishing 2016), pp. 3-18.
  2. Id.
  3. Id.
  4. Case No. 23-3281
  5. Railroad Commission of Texas Statewide Rule 15, Thompson & Knight (Feb. 1, 2011).
  6. Id
  7. “PG&E Files for Reorganization Under Chapter 11,” PG&E Corp. (Jan. 29, 2019)