In Continuing Battles Involving Creditors of Dynegy, Delaware Chancery Court Refuses to Enjoin Transfer of Power Plants from Existing Dynegy Subsidiaries to New “Bankruptcy-Remote” Subsidiaries

Plaintiffs in this action are the owners of four unprofitable power plants that are leased to subsidiaries of Defendant electricity producer Dynegy Holdings Inc. (Dynegy) under long-term leveraged leases.  Dynegy is the guarantor of those leases.  As one step in an unfolding plan to reorganize and restructure its outstanding debt, in July 2011, Dynegy announced that it was moving most of its power plants – but not Plaintiffs’ plants – from existing subsidiaries into new “bankruptcy-remote” subsidiaries.  Plaintiffs believed that the move would weaken the credit support for those leases.  After negotiations with Dynegy failed, Plaintiffs commenced an action seeking to enjoin Dynegy from proceeding with the restructuring.  They alleged that the transfer would violate the terms of the Dynegy guarantee and constituted a fraudulent conveyance under Delaware law.  The Delaware Court of Chancery denied their motion in its entirety.  We detail the legal analysis that led the Court to its decision.  For a related discussion of regulatory issues affecting hedge funds that trade in the debt of merchant power projects, see “Merchant Power Regulatory Roulette,” Hedge Fund Law Report, Vol. 4, No. 33 (Sep. 22, 2011).

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