In the latest round of sparring between holders of bonds guaranteed by bankrupt defendant Dynegy Holdings LLC (Dynegy Holdings) and Dynegy’s equity holders, the indenture trustee for those bonds has moved that the Bankruptcy Court appoint an examiner to review the circumstances under which Dynegy sold its profitable coal-fired power plants to its parent company, Dynegy Inc., shortly before Dynegy Holdings filed for Chapter 11 protection.  Dynegy Inc. is not in bankruptcy and its shareholders stand to benefit from the deal at the expense of Dynegy Holdings’ bondholders.  The indenture trustee alleges, among other things, that the sale of assets was for less than fair value, involved self-dealing by Dynegy directors and was structured to frustrate the bondholders’ efforts to challenge the deal.  This article summarizes the bondholders’ allegations and legal arguments.  More generally, the motion illustrates one of the many fact patterns in which interests of holders of equity and debt of the same issuer group may diverge in a bankruptcy.  Hedge funds often get involved in distressed situations at different levels of the capital structure, and this article helps clarify the relative strengths and weaknesses of equity versus debt.  More generally, this article demonstrates that court decisions can affect investment outcomes in distressed investing as or more powerfully than economic fundamentals.  Given the unpredictability of legal outcomes, distressed investing – whether via debt, equity or something else – may offer a genuinely uncorrelated investment opportunity, which is increasingly rare in this era when debt, equity and even some commodity markets are moving in unison, all with an eye on Europe.  See “The Impact of Asymmetric Information, Trade Documentation, Form of Transfer and Additional Terms of Trade on Hedge Funds’ Trade Risk in European Secondary Loans (Part Two of Two),” Hedge Fund Law Report, Vol. 4, No. 38 (Oct. 27, 2011).