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11-38111-cgm Doc 490 Filed 03/09/12 Entered 03/09/12 11:51:40 Main Document Pg 1 of 173 1 REDACTED VERSION UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------------------------------------------x In re: : Chapter 11 : Case No. 11-38111 (CGM) DYNEGY HOLDINGS, LLC, et al., : Jointly Administered : Debtors. : ------------------------------------------------------------------------x REPORT OF SUSHEEL KIRPALANI, EXAMINER QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 865 South Figueroa Street, 10th Floor Los Angeles, California 90017 50 California Street, 22nd Floor San Francisco, California 94111 Counsel to Examiner March 9, 2012 1 Filed under seal pursuant to the Order Granting the Motion of U.S. Bank National Association, as Indenture Trustee, for Appointment of an Examiner Pursuant to Section 1104(c) of the Bankruptcy Code [Docket No. 276]. 11-38111-cgm Doc 490 Filed 03/09/12 Entered 03/09/12 11:51:40 Main Document Pg 2 of 173 TABLE OF CONTENTS Page I. EXECUTIVE SUMMARY OF THE EXAMINER’S CONCLUSIONS ....................................1 A. EXAMINER APPOINTMENT AND MANDATE ...............................................................1 B. SUMMARY OF FINDINGS AND CONCLUSIONS ...........................................................1 C. BASES FOR FINDINGS AND CONCLUSIONS ................................................................5 1. POTENTIAL ACTUAL AND CONSTRUCTIVE FRAUDULENT TRANSFERS ..........5 2. CONDUCT OF DEBTORS IN CONNECTION WITH PREPETITION RESTRUCTURING ...........................................................................................8 3. WHETHER DYNEGY HOLDINGS IS CAPABLE OF CONFIRMING A CHAPTER 11 PLAN ......................................................................................10 II. PROCEDURAL BACKGROUND...........................................................................................11 A. COMMENCEMENT OF CHAPTER 11 CASES ..............................................................11 B. EXAMINER MOTION, ORDER, AND APPOINTMENT ...................................................11 C. EXAMINER’S WORK PLAN ......................................................................................13 D. TOPICS EXCLUDED FROM THIS REPORT ..................................................................14 E. RETENTION OF PROFESSIONALS .............................................................................15 F. RULE 2004 MOTION AND REQUEST FOR PRIVILEGED DOCUMENTS .......................16 G. DISCOVERY CONDUCTED IN FURTHERANCE OF INVESTIGATION ............................17 H. MEDIATION .............................................................................................................18 I. CONFIDENTIALITY ISSUES RELATING TO REPORT PREPARATION ............................19 III. RELEVANT FACTUAL BACKGROUND AND FINDINGS ..............................................19 A. DYNEGY OPERATIONAL HISTORY AND BUSINESS LINES ........................................19 B. PRE-RESTRUCTURING CAPITAL STRUCTURE AND SIGNIFICANT INDEBTEDNESS ........................................................................................................21 1. DYNEGY INC. ..............................................................................................21 2. DYNEGY HOLDINGS ....................................................................................22 11-38111-cgm Doc 490 Filed 03/09/12 Entered 03/09/12 11:51:40 Main Document Pg 3 of 173 C. THE BLACKSTONE AND ICAHN ATTEMPTS TO ACQUIRE DYNEGY INC. ..................26 D. BOARDS OF DIRECTORS OF DYNEGY INC. AND DYNEGY HOLDINGS ........................27 E. NEW MANAGEMENT TEAM JOINS DYNEGY .............................................................30 F. DYNEGY DECIDES TO PURSUE PREPETITION RESTRUCTURING ...............................32 1. ARCHITECTS OF RESTRUCTURING ..............................................................32 2. IMPENDING DEFAULT UNDER OLD CREDIT FACILITY .................................33 3. INITIAL OUTLINE OF RESTRUCTURING INITIATIVES ....................................33 4. RETENTION OF RESTRUCTURING ADVISORS ...............................................35 G. REFINEMENT OF RESTRUCTURING PLAN ................................................................39 1. PRELIMINARY ACTION PLANS .....................................................................39 2. DYNEGY INC. BOARD OF DIRECTORS AND FRC DELIBERATIONS ..............42 3. SEPARATION OF COALCO TRANSFER FROM THE AUGUST REFINANCING; ORIGINS OF UNDERTAKING .................................................48 4. DYNEGY ANNOUNCES INTENT TO PURSUE PREPETITION RESTRUCTURING ON JULY 10, 2011 ...........................................................49 5. CREATION OF DYNEGY GAS INVESTMENTS ON AUGUST 1, 2011 ...............50 6. AUGUST 4, 2011 DYNEGY INC. BOARD MEETING .......................................53 7. LACK OF DELIBERATIONS BY DYNEGY HOLDINGS ....................................53 H. PHASE 1: RING-FENCE OPERATING ASSETS AND REFINANCE OLD CREDIT FACILITY .................................................................................................................54 1. SELECTION OF LEAD ARRANGERS ..............................................................54 2. IMPORTANCE OF VALUE OF COALCO ..........................................................55 3. LOAN SYNDICATION EFFORTS AND LENDER REACTIONS ...........................56 4. SOLVENCY REPRESENTATIONS ...................................................................58 5. SPECIFIC STEPS IN RING-FENCING TRANSACTION ......................................59 6. SOURCES AND USES OF AUGUST REFINANCING .........................................68 ii 11-38111-cgm Doc 490 Filed 03/09/12 Entered 03/09/12 11:51:40 Main Document Pg 4 of 173 7. TERMS OF COALCO AND GASCO CREDIT FACILITIES PRESERVE ABILITY TO TRANSFER COALCO ASSETS ...................................................69 8. EFFECT OF COALCO AND GASCO CREDIT FACILITIES ON DYNEGY HOLDINGS’S FINANCIAL CONDITION; MARKET REACTION .........................71 9. DELAWARE CHANCERY COURT LAWSUIT ...................................................72 10. OTHER LAWSUITS CHALLENGING THE RING-FENCING AND REFINANCING TRANSACTIONS ....................................................................74 I. PHASE 2: TRANSFER OF COALCO TO DYNEGY INC.; EXCHANGE OFFER ................75 1. BOARD DELIBERATIONS IN CONNECTION WITH COALCO TRANSFER AND UNDERTAKING EXECUTION ................................................................75 2. DIRECTOR AND OFFICER VIEW OF WHETHER DYNEGY HOLDINGS WAS SOLVENT AT TIME OF COALCO TRANSFER........................................80 3. TRANSFORMING DYNEGY HOLDINGS INC. FROM CORPORATION TO LIMITED LIABILITY COMPANY ....................................................................81 4. SPECIFIC STEPS OF COALCO TRANSFER .....................................................83 5. COALCO VALUATION AT TIME OF TRANSFER .............................................84 6. UNDERTAKING GIVEN IN EXCHANGE FOR COALCO TRANSFER ..................86 7. IMPACT OF COALCO TRANSFER ON DYNEGY HOLDINGS’S FINANCIAL CONDITION ...............................................................................95 8. SEPTEMBER 15, 2011 EXCHANGE OFFER ....................................................99 9. FORMATION OF AD HOC BONDHOLDER GROUP; RESTRUCTURING SUPPORT AGREEMENT ..............................................................................102 J. BANKRUPTCY FILING ............................................................................................102 IV. CONCLUSIONS AND RECOMMENDATIONS ................................................................104 A. ASSUMPTIONS APPLICABLE TO ALL CONCLUSIONS AND RECOMMENDATIONS .............................................................................................104 1. CHOICE OF LAW .......................................................................................104 2. ABILITY TO COLLAPSE CERTAIN TRANSACTIONS .....................................106 3. INDICIA OF INSOLVENCY ..........................................................................107 iii 11-38111-cgm Doc 490 Filed 03/09/12 Entered 03/09/12 11:51:40 Main Document Pg 5 of 173 B. CONCLUSIONS CONCERNING POSSIBLE CONSTRUCTIVE AND ACTUAL FRAUDULENT TRANSFERS .....................................................................................115 1. CONSUMMATION OF “RING-FENCING” TRANSACTIONS AND REFINANCING OF OLD FACILITY, IN ISOLATION, DOES NOT GIVE RISE TO ANY CLAIMS OR CAUSES OF ACTION .........................................115 2. TRANSFER OF DYNEGY HOLDINGS’S “OPPORTUNITY” TO RESTRUCTURE INDEBTEDNESS IS NOT A FRAUDULENT TRANSFER ..........117 3. COALCO TRANSFER INVOLVED TRANSFER OF AN INTEREST OF A DEBTOR (DYNEGY HOLDINGS) IN PROPERTY ...........................................118 4. COALCO TRANSFER WAS MADE WITH AN ACTUAL INTENT TO HINDER AND DELAY—BUT NOT NECESSARILY TO DEFRAUD— DYNEGY HOLDINGS’S CREDITORS ............................................................119 5. TRANSFER OF COALCO TO DYNEGY INC. IN EXCHANGE FOR UNDERTAKING WAS CONSTRUCTIVE FRAUDULENT TRANSFER ...............125 6. CLAIMS UNDER STATE FRAUDULENT TRANSFER LAW .............................129 7. POTENTIAL DEFENSES TO FRAUDULENT TRANSFER CLAIMS ....................130 C. CONCLUSIONS CONCERNING CONDUCT OF DEBTORS IN CONNECTION WITH PRE-PETITION RESTRUCTURING OF DEBTORS AND THEIR NON-DEBTOR AFFILIATES ...........................................................................................................131