Dynegy Examiner: Asset Shuffle Was 'Fraudulent Transfer'
March 09 2012 - 1:19PM
Dow Jones News
A court-appointed examiner Friday said Dynegy Holdings LLC's
board of directors breached its fiduciary duty when it transferred
coal assets to its parent company before its bankruptcy filing,
calling the shuffling a "fraudulent transfer" that shielded
shareholders from losses but hurt other creditors.
The board "did not appreciate that what may be good for Dynegy's
ultimate parent, Dynegy Inc. (DYN), may not be good for Dynegy
Inc.'s insolvent subsidiary, Dynegy Holdings," Quinn Emanuel
Urquhart & Sullivan LLP's Susheel Kirpalani wrote in his
173-page report issued late Friday morning.
Kirpalani said that, while some members of parent company Dynegy
Inc.'s board "did not even understand" the transfer of coal assets
that essentially shielded shareholders from losses at the expense
of other creditors, others--including a representative from top
shareholder Carl Icahn's investment fund--did.
The examiner added that he believes Dynegy can still file a
viable and "confirmable" plan to exit bankruptcy, but that "any
plan that provides for these individuals to continue as directors
would not be consistent with the interests of creditors and with
public policy."
Dynegy said in a release that it is reviewing the report, and
intends to take its findings seriously. A spokeswoman didn't
comment beyond the release. Icahn's office didn't immediately
respond to requests for comment.
The report sets the stage for a contentious day in court Monday,
when Judge Cecilia G. Morris of U.S. Bankruptcy Court in
Poughkeepsie, N.Y. is set to decide whether to send Dynegy's latest
restructuring plan to creditors for a vote.
Dynegy Holdings and its creditors have been sparring since
Dynegy affiliates moved assets related to its parent company,
Dynegy Inc., out of the reach of the holding company's creditors in
September, capping a series of transactions that reshuffled its
structure and location of assets.
One bondholder group is suing Dynegy in state court, alleging
that the asset shift last year was designed to shield Icahn and
other shareholders from a bankruptcy.
In December, Morris agreed to appoint an examiner in the case,
although Dynegy said in a filing earlier this year that "his
findings serve an informative purpose only and have no binding
effect on any party or the Bankruptcy Court." The company added
that creditors believed the report "could have an impact" on the
case.
In his report, Kirpalani said that Dynegy has several potential
defenses against the "fraudulent transfer" claims, and that he
believes the shuffle of the coal assets was made with an intent to
"hinder and delay--but not necessarily defraud" the company's
creditors.
Dynegy's latest proposal calls for unsecured noteholders owed
about $4 billion to share $400 million in cash and $2.1 billion in
new convertible preferred stock, and gives them $1.015 billion in
new senior notes.
Holders of the subordinated notes, owed about $216 million, also
have the option of collecting 35 cents on the dollar for their
notes, up from 25 cents in a plan filed last December.
Dynegy's new plan also takes into account a PSE&G (PEG)
settlement that allows the utility company a $110 million claim and
$7.5 million in cash in exchange for ending a legal fight against
Dynegy.
(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
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