Fraudulent Conveyance in Dynegy

From xtract research 9/20/11

There are two types of fraudulent transfers under the Delaware Fraudulent Transfer Act. The first, actual fraud, requires actual intent to hinder, delay or defraud any creditor. Actual intent is very difficult to prove, and we don’t believe, it can be successfully argued here. The second, constructive fraud, requires the holders prove (1) that Dynegy Holdings made the transfer without receiving a reasonably equivalent value in exchange for the transfer AND (2)(A) Dynegy Holdings was insolvent at that time of the transfer, or (B) became insolvent as a result of the transfer, or (C) or was engaged in a transaction for which its remaining assets would be unreasonably small in relation to the Transaction.”

After the initial step of the reorganization, bondholders argued that the ring-fencing of CoalCo and GasCo amounted to a fraudulent conveyance – stripping assets owned by Dynegy Holdings which provided credit support. The Delaware Chancery Court was able to dismiss the fraudulent transfer claim based on the simple fact that the ring-fencing did “not contemplate a predicate transfer of property belonging to Dynegy Holdings” and that “*Dynegy Holdings+ will have the same indirect ownership interest in the physical assets after the Transaction as it did before.” However, now that CoalCo has been transferred to Dynegy, the assets clearly have been transferred out from under Dynegy Holdings. In exchange, Dynegy promised to make payments under the Undertaking Agreement as described above. If the Board’s $1.25B valuation of CoalCo is correct then Dynegy can argue that equivalent value was provided. On the other hand, bondholders may claim that the undertaking of Dynegy, a holding company with no operations, is less valuable than the CoalCo equity previously owned by Dynegy Holdings. Even if this argument is successful, bondholders still face the difficult challenge proving that the transfer triggered one of the insolvency prongs of the second part of the statute.

Should Dynegy Holdings file for bankruptcy, the Bankruptcy Code contains a similar analysis with respect to fraudulent transfers and “reasonably equivalent value” under Section 548. If less than reasonably equivalent value can be established, then the transfer can be avoided if the debtor was insolvent and certain other elements exist.

In our estimation, the success of the Exchange Offer hinges on whether the transfer of CoalCo was proper and whether the transfer can withstand legal challenge. Although we have not conducted a lengthy analysis to determine all the arguments available to bondholders in connection with a fraudulent conveyance claim, it does appear that bondholders would face a difficult challenge in court and therefore are likely to accept the exchange.

Both comments and trackbacks are currently closed.