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Dynegy hit with trustee motion

by Kelsey Butler | Published March 12, 2012 at 11:35 AM

Dynegy Holdings LLC could have control of its Chapter 11 case switched off in the wake of the release of an examiner's report that found a fraudulent transfer of assets.

U.S. Trustee Tracy Hope Davis submitted a motion Sunday requesting the appointment of a Chapter 11 trustee for the electricity producer, asserting that the Friday report of Susheel Kirpalani of Quinn Emanuel Urquhart & Sullivan LLP "at a minimum, demonstrates gross mismanagement on the part of current management."

Davis also asserted the Dynegy Holdings board had "repeatedly breached its fiduciary duties" to the company.

"Whether ultimately the examiner's conclusions regarding an actual fraudulent transfer or constructive fraudulent transfer of valuable assets of Dynegy Holdings are sustained by this court, nonetheless, the breaches of duty of the various boards [of Dynegy Holdings and its affiliates] -- all alter egos of one another -- to the financial detriment of the debtors, demonstrates cause for the appointment of a Chapter 11 trustee," Davis said in the motion.

A hearing on the matter in the U.S. Bankruptcy Court for the Southern District of New York in Poughkeepsie had not been set as of Monday.

In the report, Kirpalani asserted the debtor transferred its interest in coal power assets division CoalCo Inc. to nonbankrupt parent Dynegy Inc. for less than 70% of its $1.25 billion stated value in September, just before its bankruptcy filing.

"Over the spring and summer of 2011, Dynegy devised and implemented a plan to move assets away from the reach of Dynegy Holdings's unsecured creditors in order to encourage, for lack of a better word, such creditors to accept less than full payment and at the same time permit a recovery for stockholders," Kirpalani said in court papers.

Kirpalani found the first part of the plan, which created two groups of assets, a coal power division and a gas power division, to be permissible but ruled the second part, involving the transfer of CoalCo to Dynegy Inc., to be "ill-conceived." The examiner said the transfer was solely "in exchange for a piece of paper that Dynegy actively avoided valuing."

The examiner asserted it does not appear that Dynegy intentionally misled creditors with the move, but it did intend to "hinder and delay" the creditors, which is sufficient to state a claim for fraudulent transfer.

Judge Cecelia G. Morris of the Poughkeepsie court on Dec. 16 had approved a motion for the appointment of an examiner. Kirpalani was tapped to serve in the role on Jan. 11, court papers show.

U.S. Bank NA had requested an examiner on the grounds that the debtor allegedly misrepresented facts and illegally transferred half of its operating assets in the form of its coal and gas portfolio companies to Dynegy Inc. on Sept. 2, with no notice to creditors or other third parties.

U.S. Bank is the holder of certain trust certificates used by Public Service Enterprise Group Inc. units Roseton OL LLC and Danskammer OL LLC to purchase the debtor's power generating facilities in Newburgh, N.Y. Roseton OL and Danskammer OL bought the Newburgh facilities from Dynegy on May 8, 2001, and entered a sale-leaseback agreement with debtors Dynegy Roseton LLC and Dynegy Danskammer LLC.

The debtor filed for bankruptcy protection on Nov. 7 with a prenegotiated reorganization plan in place that included a rejection of the leases for the Newburgh plants.

Under the plan, all of Dynegy's unsecured debt would be exchanged for $400 million in cash, $1 billion in new 11% senior secured notes due 2018 issued by Dynegy Inc. and $2.1 billion in preferred stock in Dynegy Inc.

A group holding more than $1.4 billion in senior notes that includes Aegon USA Investment Management LLC, Avenue Capital Group, Caspian Capital LP, Franklin Advisers Inc. and Venor Capital Management LP has agreed to support the plan.

The debtor on March 7 filed an amended plan that proposed to pay $216 million in subordinated notes claims in full in cash. The creditors were to be treated as unsecured creditors under the original plan. The amended plan included no other substantive changes.

Dynegy Inc. restructured out of court in August and wasn't included in the Chapter 11 filing. Carl Icahn's Icahn Capital LP owns 15% of Dynegy Inc.

Dynegy Holdings, a Houston producer and seller of wholesale electric energy, capacity and ancillary services, began its operations in 1985 as Natural Gas Clearinghouse as a natural gas marketer. In 1990, the company began expanding its operations through acquisitions, leaving it with operations in Canada and the U.K.

In 1995, Dynegy Holdings merged with Trident NGL Holding Inc., a natural gas liquids company, becoming NGC Corp. One year later, the company combined with Chevron USA Inc. It took the Dynegy Inc. name in 1998 and became Dynegy Holdings following the 2000 acquisition of Illinova Corp., which also created Dynegy Inc. as a new holding company.

James F. Conlan, Jeffrey E. Bjork, Paul S. Caruso, Matthew A. Clemente, Steven M. Bierman and John G. Hutchinson at Sidley Austin LLP are debtor counsel. FTI Consulting Inc. is financial adviser. Thomas E. Lauria and Gerard Uzzi of White & Case LLP are counsel to Dynegy Inc. Lazard is Dynegy Inc.'s financial adviser.

Anton R. Valukas, David J. Bradford, Daniel R. Murray and Heather D. McArn of Jenner & Block LLP represent PSEG.

Peter Friedman, John J. Rapisardi and George A. Davis of Cadwalader, Wickersham & Taft LLP are counsel to U.S. Bank.

Ira S. Dizengoff, Michael S. Stamer and Arik Preis of Akin Gump Strauss Hauer & Feld LLP represent the official committee of unsecured creditors.

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