Dynegy gets Blocked by U.S. in its Plan to Leave Bankruptcy

Just when Dynegy had drafted a plan that made their creditors cheer, U.S. Trustee Tracy Hope Davis went and shot it all down. Dynegy Inc., to manage its cumulative debts of over $5 billion, declared bankruptcy. But they made a reorganization plan that would render them a seven-member board after it left bankruptcy, a plan that would pay creditors 59 to 89 cents on the dollar in cash and equity. Creditors holding $3.5 billion in claims representing 99 percent of the vote approved of the plan.

Dynegy’s woes are due to the falling prices of electricity, which they produce and sell on the open market. They had hoped to emerge from bankruptcy, both Dynegy Inc, which filed last September, and Dynegy Holdings LLC, which filed in July, from chapter 11 bankruptcies, but their plan may freeze out third parties from bringing legitimate liability claims.

Though given an overwhelming go ahead, Not so fast, says Davis. She filed an objection Monday in the U.S bankruptcy court of Poughkeepsie, New York, disputing it because the plan failed to show its proposed “broad, non-consensual third party releases of liability” are bankruptcy law compliant.

“A nondebtor release is a device that lends itself to abuse,” she wrote. “Unless and until the debtors meet their burden in demonstrating compliance with the law of this circuit and the bankruptcy code, the court should decline to confirm the plan as proposed.” She cited a 2005 decision by the New York federal circuit court of appeals to back this up.

Dynegy responded through Katy Sullivan, saying that “Our plan received widespread support from creditors and we will respond to the U.S. Trustee’s objections through the established legal processes.”