Dynegy Directors Sued by Investor Over Plants’ Transfer

Dynegy Inc.’s directors were sued by an investor claiming they wrongfully agreed to transfer power plants from a unit the company later put into bankruptcy to benefit billionaire Carl Icahn and other shareholders.

Board members of Houston-based Dynegy, the U.S.’s fourth-largest independent power producer by revenue, should be held liable for damaging the company by shifting the coal-fired plants to keep them out of bankruptcy, Cleo Zahariades said today in a Delaware Chancery Court lawsuit. A bankruptcy examiner in March found the move amounted to a “fraudulent transfer” that harmed creditors.

Directors “were fully aware and participated in the improper actions taken by Dynegy and its subsidiaries, as well as the cover-up of the fraudulent transfer,” Zahariades said in the complaint filed in Wilmington.

Dynegy put units including Dynegy Holdings LLC into Chapter 11 bankruptcy in November after bondholders sued Dynegy in New York state court over the power-plant shift.

Katy Sullivan, a Dynegy spokeswoman, said in a telephone interview that company officials “were reviewing the complaint” and declined to comment further on the suit.

Bondholders Sue

The Illinois-based plants that were transferred have a combined capacity of more than 3,100 megawatts, according to Dynegy’s website. That’s enough to power 2.5 million average U.S. homes, based on Energy Department data.

Dynegy said in July it would restructure to avoid violating a covenant in the company’s loan agreement. Dynegy created two units, one owning eight natural-gas-fired power plants and another the six coal-fired plants. Both would be “bankruptcy remote,” insulating them if affiliates became insolvent, according to a statement.

After the Chapter 11 filing, bankruptcy examiner Susheel Kirpalani concluded the plant transfer wasn’t proper and backed creditors’ complaints that the shift shielded half of Dynegy Holdings’ revenue-generating assets from their claims. Kirpalani was selected by the U.S. Trustee, an arm of the Justice Department that oversees bankruptcies.

The examiner said the Dynegy board’s actions in connection with the plants’ transfer “were an invitation to litigation,” according to the Delaware complaint.

Kirpalani’s report prompted lawyers for the U.S. Trustee to ask U.S. Bankruptcy Judge Cecelia Morris in Poughkeepsie, New York, to appoint a trustee to run Dynegy Holdings.

Bankruptcy Settlement

The report also spurred Dynegy officials last month to negotiate a settlement with creditors holding $2.5 billion in claims against the bankrupt unit. Under the accord, Dynegy Holdings’ unsecured creditors will get 99 percent of the equity in the reorganized company, the parent company said.

Directors’ miscues in overseeing the transfer of the plants harmed Dynegy by putting it in a position to lose control of the unit as part of the bankruptcy case, Zahariades said in the Delaware suit.

The investor’s so-called derivative lawsuit would return any recovery from insurance covering Dynegy officers and directors to the company’s coffers.

The investor case is Zahariades v. Elward, CA No. 7539, Delaware Chancery Court (Wilmington). The bankruptcy case is In re Dynegy Holdings LLC, 11-38111, U.S. Bankruptcy Court, Southern District of New York (Poughkeepsie).

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