--Examiner will have 60 days to investigate

--Judge also says Dynegy can keep borrowing on loan

--PSEG settlement allows for $110m claim and $7.5m in cash

(Updates with judge approving appointment of an examiner, adds details throughout.)

 
   By Joseph Checkler 
   Of DOW JONES DAILY BANKRUPTCY REVIEW 
 

A judge on Friday said an examiner will be appointed in the bankruptcy case of Dynegy Holdings LLC, a win for creditors who want an investigation into the power company's unusual corporate reshuffling just before its Chapter 11 filing.

Judge Cecelia G. Morris of U.S. Bankruptcy Court in Poughkeepsie, N.Y. approved the independent examiner, who will get 60 days to look into the way Dynegy affiliates moved assets related to its parent company out of the reach of the holding company's creditors, capping a series of transactions that reshuffled its structure and location of assets. After that initial 60 days, additional time can be added, but only with court approval.

"This examiner will have unfettered access to all documents requested," said Morris, adding that creditors could not "tag along" in the investigation.

A group of bondholders led by bondholder trustee U.S. Bank had asked for the examiner to investigate a transfer of assets by Dynegy Inc. (DYN), before the Chapter 11 filing to keep them out of the reach of creditors. Hedge-fund manager David Tepper's Appaloosa Management LP also called for the examiner.

"This is a classic insider transaction that needs to be investigated," said Andrews Kurth LLP's Paul N. Silverstein, an Appaloosa lawyer. "There are a lot of things that are wrong with this transaction," he added, referring to Dynegy's asset movements.

Sidley Austin LLP's John Hutchinson, a Dynegy lawyer, said the seeking of an examiner was "a clear attempt to derail" the bankruptcy process, and would ensure the case "grinds to a halt." He wanted the judge to either deny the examiner motion or at least defer a ruling until later.

Morris on Friday also approved a settlement between Dynegy and landlord Public Service Enterprise Group Inc. (PEG) that will allow the power provider to reject its money-losing leases at two upstate New York power plants.

That approval helps Dynegy move forward with its restructuring, despite several unresolved gripes from other creditors.

The settlement allows PSEG a $110 million unsecured claim plus $7.5 million in cash in return for it withdrawing its request for Dynegy's bankruptcy case to be dismissed. The scheduled date for the rejection of the leases is Dec. 30, meaning parties will get a chance to object to some aspects of the settlement before that.

At the hearing Friday in the U.S. Bankruptcy Court in Poughkeepsie, N.Y., Cadwalader, Wickersham & Taft LLP's George A. Davis, a lawyer for U.S. Bank, said the settlement has "fatal flaws" that he would elaborate on in court papers later this month. The lease rejection could sharply reduce the amount of money bondholders represented by Davis can claim, since those bonds are tied to the leases. Creditors will get a chance to object to terms of the settlement at a Dec. 28 hearing.

Morris also said Dynegy could keep borrowing on its $15 million bankruptcy loan from another Dynegy-owned entity.

SEG and the bondholders sued Dynegy in state court seeking to claw back the company's valuable coal interests that were transferred in the corporate reshuffling. They claim the transfers were designed to shield shareholders--including a fund controlled by Carl Icahn--from a bankruptcy at the expense of bondholders. As part of the lease settlement, PSEG has agreed to drop its state lawsuit.

PSEG affiliates bought Dynegy's Roseton and Danskammer plants, both located in Newburgh, N.Y., about 70 miles north of New York City, for $920 million in 2001 and leased them back to the company, according to court papers.

The deal was financed with $800 million in debt, safeguarded by guarantees and tax indemnities. Those protections are being erased in the transfers that removed more than $1 billion worth of value from the reach of creditors, bondholders have alleged.

Last month, Dynegy Holdings and four subsidiaries filed for bankruptcy after senior bondholders, owed more than $1.4 billion, signed off on a restructuring deal.

The restructuring deal calls for the bondholders to trade in $4 billion in unsecured debt for $400 million in cash, $1 billion in new secured notes and $2.1 billion in convertible notes. In return, Dynegy must be out of bankruptcy by next August.

(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection.)

-By Joseph Checkler, Dow Jones Newswires; 212-416-2152; joseph.checkler@dowjones.com

--Patrick Fitzgerald contributed to this article.

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