The Ninth Circuit Court of Appeals reversed the District Court and held that complaints filed by various state entitles against PG&E under Cal. Business & Professions Code Section 17200 were exempt from removal to Bankruptcy Court under 28 USC Section 1452(a).

In 2002, the California Attorney General and the City and County of San Francisco filed separate actions against PG&E alleging violations of section 17200 of the California Business and Professions Code. The actions sought injunctive relief, civil remedies and restitution for taxpayers as remedies in connection with the upstream payments of billions of taxpayer dollars from PG&E to its holding company parent. Both actions were removed to Bankruptcy Court and both governmental entities moved to remand the actions.

In June 2002, the Bankruptcy Court held that: (a) the Eleventh Amendment did not bar removal of the Section 17200 actions; and (b) all the section 17200 actions were exempt from removal under 28 USC Section 1452(a) because they were “police or regulatory actions.”

The District Court affirmed the Bankruptcy Court’s holding with the exception of the restitution actions, because they did not fall within the “police or regulatory” exception and that the restitution claims were property of the Debtor’s estate. All parties appealed. Subsequently, as part of its confirmed plan, the Debtor released any and all claims it had against its parent and its parent’s officers.

The only issue before the Ninth Circuit was whether the restitution claims brought under section 17200 satisfy the requirements to be exempt from removal. The Ninth Circuit held that the restitution actions were “police or regulatory powers” and, therefore, unable to be removed to Bankruptcy Court.

The Court analyzed the restitution claims under both the “pecuniary interest” test and the “public policy” test, as articulated in University Life Church v. United States, 128 F.3d 1294 (9th Cir. 1997). Satisfaction of the requirements of either test will suffice to exempt the action from removal. Under the “pecuniary interest” test, the Court analyzes whether the government action relates primarily to the protection of the government’s pecuniary interest in the debtor’s property or to matters of public welfare. Since the government does not stand to benefit directly from restitution and the public welfare will be benefited from penalizing the unlawful conduct, the Court reasoned that the section 172000 claim was a legitimate use of “police and regulatory power” under applicable law and therefore exempt from removal.

For good measure, the Court also analyzed the facts under the “public policy” test. Under this test, the Court must determine whether the government seeks to “effectuate public policy” or to “adjudicate private rights.” If private rights are the primary focus, the action is not exempt from removal. However, the Court quoted the California Supreme Court, which determined that the section 17200 was “designed to protect the public and not to benefit private parties.” Holding that the restitution actions were “fundamentally law enforcement actions,” the public policy test was satisfied under this theory as well and the restitution action was deemed exempt from removal.