A court-appointed examiner said Dynegy Inc (DYN.N) harmed creditors by fraudulently transferring some coal-powered plant assets to itself before putting a unit into bankruptcy, and urged that the transfer be reversed.
Dynegy shares tumbled as much as 49.2 percent following examiner Susheel Kirpalani's issuance late Friday morning of his report on the events leading to the bankruptcy of the independent power producer's Dynegy Holdings LLC unit.
While Kirpalani said Dynegy Holdings can win court approval of a Chapter 11 plan, his findings could undermine support for or derail its planned restructuring of more than $4 billion of debt.
It could also spur a push for Dynegy Inc to move the coal assets, which its board had valued at $1.25 billion, back to Dynegy Holdings. This could make the parent company, which did not seek court protection, less valuable.
The transfer took place two months before Dynegy Holdings filed for bankruptcy protection last November 7.
"Throughout the planning and execution of the prepetition restructuring, the Dynegy Inc board favored paths that benefited Dynegy Inc and its stockholders to the detriment of Dynegy Holdings and its creditors," Kirpalani wrote in a 173-page report filed with the U.S. bankruptcy court in Poughkeepsie, New York.
Examiners work for the benefit of creditors, shareholders and the bankruptcy estate, and may investigate such allegations as dishonesty, fraud, incompetence and mismanagement.
Katy Sullivan, a Dynegy spokeswoman, said the Houston-based company is reviewing the report. Dynegy Holdings has said it hopes to emerge from bankruptcy in the summer. The next hearing in the case is scheduled for Monday.
Dynegy had put the holding company into bankruptcy with the backing of some bondholders.
But other bondholders had objected to the unusual restructuring, saying it would protect Dynegy Inc shareholders including billionaire financier Carl Icahn, the Seneca Capital Investments LP hedge fund, and Franklin Resources Inc's (BEN.N) Franklin Advisers unit at their expense. Bondholders typically rank ahead of shareholders in order of priority in bankruptcies.
In afternoon trading, Dynegy shares were down 43 cents, or 36.4 percent, at 75 cents, after earlier falling to 60 cents. They traded at $2.95 at the time of the bankruptcy filing.
Dynegy Holdings bond prices rose roughly two to three cents on the dollar, trading between 66 cents and 71 cents on the dollar, according to bond pricing service Trace.
"ACTUAL FRAUDULENT TRANSFER"
In his report, Kirpalani said many Dynegy officials had been ignorant of the significance to creditors of transferring the coal assets known as CoalCo, while others "knew exactly what was happening" and that Dynegy Holdings creditors could be harmed.
He also said many directors sat on both entities' boards, creating potential conflicts of interest. The examiner said it would be contrary to public policy to let a majority of Dynegy Holdings' directors stay in their roles.
"Reduced to its essence, the transaction transferred hundreds of millions of dollars away from Dynegy's creditors in favor of its stockholders," Kirpalani wrote.
"The conveyance of CoalCo to Dynegy was an actual fraudulent transfer ... and a breach of fiduciary duty" by Dynegy Holdings directors, he added.
Icahn, Seneca and Franklin owned roughly one-third of Dynegy Inc shares prior to the bankruptcy, according to the report. Icahn, a Seneca spokesman and a Franklin spokeswoman did not immediately respond to requests for comment.
The appointment of an examiner had been sought by a US Bancorp (USB.N) unit, US Bank NA, that represents bondholders in connection with leases associated with Dynegy Holdings' purchase of two electric power generating plants in Newburgh, New York.
US Bank has claimed that Dynegy Holdings' board knew the asset transfers were unfair. George Davis, a lawyer for US Bank, did not immediately respond to a request for comment.
Kirpalani is chairman of the bankruptcy and restructuring group at the law firm Quinn Emanuel Urquhart & Sullivan, and was appointed examiner by the U.S. Trustee's office in January.
Examiners' reports have derailed other bankruptcies. For example, an agreement to help Tribune Co (TRBCQ.PK) exit bankruptcy collapsed in July 2010 after an examiner identified possible claims tied to that publisher's $8.2 billion leveraged buyout. Tribune remains in Chapter 11.
In 2001, Dynegy canceled plans to buy Enron Corp as the business and finances of its larger rival deteriorated rapidly.
The case is In re: Dynegy Holdings LLC et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-38111.
(Reporting by Jonathan Stempel in New York; Additional reporting by Michael Erman; Editing by Lisa Von Ahn, Phil Berlowitz)