June 10 (Bloomberg) -- Longview Power LLC, a bankrupt energy producer, received court approval to halt a California state lawsuit by First American Title Insurance Co. that threatened its plan to exit bankruptcy.
U.S. Bankruptcy Judge Brendan Linehan Shannon at a hearing today in Wilmington, Delaware, ruled that Longview can extend the protections enjoyed by bankrupt companies to bar the state action even though it isn’t a part of the California case, because the power producer would “suffer immediate and irreparable harm.”
The judge found that the extension was necessary to protect Longview’s interests in the proceeds of an $825 million insurance policy, which is the cornerstone of its turnaround plan, and that he has authority to oversee the dispute because its interests constitute property of the estate.
The Maidsville, West Virginia-based power producer, an indirect unit of investment firm First Reserve Corp., sought bankruptcy protection after spending about $2 billion to build a 700-megawatt coal-fired plant that suffered from construction flaws, according to court documents. Longview blamed its contractors for the flaws, which they contest.
Under a revised reorganization plan, Longview proposed to resolve a dispute with Kvaerner North American Construction Inc. and a Siemens AG unit -- contractors that helped build the plant -- by paying their claims from secured lenders’ insurance policy. The secured lenders assigned their interest in the insurance proceeds to Longview to satisfy the claims.
A potential hitch in the plan is whether Longview is even allowed to use the policy to pay the contractors’ claims.
First American, which provided a title insurance policy to Longview lenders, sued their collateral agent in California state court May 16 arguing the policy proceeds aren’t available to Longview. The policy covers defects to title resulting from mechanic’s liens, according to court filings. A mechanic’s lien is a claim secured by property the creditor helped build.
Longview sued First American in bankruptcy court last month seeking a ruling allowing it to use the policy’s funds, if the contractors’ claims are found to be superior to the lenders’.
Kvaerner and the Siemens’ unit have filed about $335 million in mechanic’s liens that they claim should be paid ahead of lenders owed about $1 billion, court filings show.
Longview settled another dispute with a unit of Geneva-based Foster Wheeler AG, a third contractor. According to court papers, the unit agreed to fix, for free, flaws that the power producer valued at about $50 million.
Under the restructuring plan, Longview’s lenders will get 85 percent to 90 percent of the equity in the reorganized company. Some of them, which are providing as much as $150 million in bankruptcy financing, would get the remaining equity.
Longview argued that its reorganization plan will collapse if it’s denied access to the policy’s funds.
The California lawsuit “seeks to wipe out” Longview’s “interests in the insurance policy proceeds,” Eric F. Leon, a lawyer for the company said at a hearing today. “This is our path out of bankruptcy.” Without the proceeds, the company could end up in liquidation, he added.
Handling the dispute in a single court will eliminate the risk of confusion, delay and divergent rulings, while bringing all the parties together increases “the chances of a successful and possibly consensual reorganization,” the judge said at the hearing.
Dale K. Cathell, an attorney for First American, declined to comment on the judge’s ruling after the hearing.
“This isn’t going to be simple, this isn’t going to be quick,” he told Shannon during the hearing.
The case is In re Longview Power LLC, 13-bk-12211, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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