GenOn Energy’s plan of reorganization faces a stern test from a wave of objections filed by GenOn Mid-Atlantic (GenMA) and REMA creditors and the US Trustee. The various objections threaten plan confirmation and put at risk the pre-petition deal entered into by GenOn, NRG Energy (GenOn’s non-debtor parent), and various noteholder groups representing class controlling stakes of the GenOn Energy and GenOn Americas Generation (GAG) bonds.
The most significant objection comes from GenMA owner-lessors that are in the midst of their own battle with the company estimating the value of their claims. In that litigation, which had closing arguments today, the owner lessors are asserting claims totaling over USD 500m, while the company argues that those same claims are valueless. At the heart of the GenMA owner-lessors objection lies the argument that they are receiving no consideration for numerous causes of action alleging fraudulent conveyance and other tort claims related to (1) the USD 125m of credit support it bargained for, (2) USD 320m of dividends from GenMA, and (3) significant shared services overcharges.
The owner-lessors argue that if they are successful in their fraudulent conveyance arguments, the plan would fail because either the debtors would be unable to distribute the property fraudulently conveyed or would lack liquidity to pay such a claim in full (as general unsecured creditors are currently being treated). On the first point, the owner lessors assert that the proper remedy for GenOn’s and NRG’s tortious pre-petition activity is to avoid the challenged transfers and return the funds to GenMA—a result that would significantly hamstring the current reorganization efforts. Yet, the GenMA owner-lessors expect that a new reorganization plan would be filed if they are (at least partially) successful in their claims, which could include a reclassification of their claims, separate and apart from GUCs. In that event, a new line of objections would likely follow if treatments between those claimants diverged.
On top of that, the current plan would provide broad releases and exculpations to NRG, GenOn and various current and former directors and officers (in addition to others) from GenMA and REMA, both currently non-debtors, in addition to the GenMA and REMA owner lessors/participants and lease/certificate trustees. This is a topic the Debtwire legal analyst team has covered at length in the Second and Third Circuits (including the recent Millennium Health decision). Relevantly, however, the Fifth Circuit is one of the most restrictive in the country regarding the granting of non-consensual third party releases and exculpations ever since the 2009 Pacific Lumber decision.
As a result, plan confirmation could be a significant issue if the owner-lessors are even partially successful. The owner lessors further allege that the proposed exculpations are too broad, extending past the Fifth Circuit precedent limiting such exculpation to estate fiduciaries. Note though, that one example of a potential cause of action that might be relevant if releases were not granted would be breach of fiduciary duty claims from GenMA against GenOn/NRG related to the alleged fraudulent transfers.
The debtors might be ruing their initial venue decision, choosing Texas over Delaware, which looks like it might have made the case for non-consensual third party releases more difficult to win.
U.S. Bank, as lease indenture trustee and pass through trustee in connection with the GenMA leveraged leases and the related pass-through certificates, joined the owner-lessors’ objection and shed further light on issues related to GenMA. Specifically, the trustee states that Natixis, which has been providing USD 130m of letters of credit as support for the GenMA leases, recently issued a notice of termination of those L/Cs and informed the trustee that it will not honor any further draw requests, further jeopardizing the current status of reorganization. Moreover, the trustee has asserted contractual claims against GenOn and various other claims (from the ongoing litigation) against both GenMA and NRG. Nonetheless, U.S. Bank states that its fix to its objection is simple—just add a sentence that the third-party release provisions do not apply to the leveraged lease transactions (or any claims/obligations of debtor and non-debtor parties). Despite that, at confirmation, the debtors will have to prove to the court the feasibility of any plan of reorganization and any infirmities at GenMA could make it an even greater uphill battle.
Not to be left out, REMA owner lessors/participants also joined the objection party, making a similar argument to the GenMA owner-lessors—namely, that releases are being granted by REMA for no consideration. Similarly, the REMA owner-lessors also argue that the proposed third-party releases could be read to apply to their claims against REMA, which they state are inappropriate. Much like U.S. Bank, they propose textual fixes to the releases that clarify that the REMA owner-lessors’ claims against REMA are not being releases and would preserve REMA’s rights against the debtors and third parties.
The US Trustee, as per usual, also objects to the release and exculpation provisions, arguing that they are far too broad and lack proper opt-out mechanisms.
Joshua Friedman is a former practicing restructuring attorney. Prior to joining Debtwire, Joshua practiced in the New York offices of Kramer Levin Naftalis& Frankel LLP. He has represented various constituencies in several high-profile restructurings, including Hostess Brands, General Motors, CapmarkFinancial Group, and Lehman Brothers.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.