In Roseton OL, LLC v. Dynegy Holdings Inc., C.A. No. 6689-VCP (Del. Ch. July 29, 2011), read opinion here, the Delaware Court of Chancery refused to grant injunctive relief requested by PSEG to block a restructuring by Dynegy that transferred assets to “bankruptcy remote” entities. The business press has written three articles about this decision since it was issued yesterday and those reports by Reuters, Bloomberg and The Wall Street Journal are available here, here and here.
Practice Pointers: Many practical guidelines for those who make their living practicing corporate and business litigation in Delaware are contained in this 57-page opinion that was written within 4 days of an expedited hearing on a TRO request. For example, there are nuanced differences between the standard for a TRO and the prerequisites that must be satisfied for a preliminary injunction (“PI”), and this opinion gingerly glides between them–and explains why the Court applied the PI standard even though it was a TRO that was sought by the plaintiffs.
As is common in opinions from the Court of Chancery, the beginning of the decision devotes many pages to an exhaustive description of the many factual details that form the complex context and background of this matter, before the legal issues are “teed up” for analysis. However, in a short blog post, we focus on the legal principles and refer the reader to the link above for the whole decision to satisfy one’s appetite for minutiae that are not generally applicable in future cases.
The named plaintiffs, Roseton OL, LLC and Danskammer OL, LLC, are Delaware LLCs that are indirect subsidiaries of Public Service Enterprise Group Incorporated (“PSEG”), a company engaged in various aspects of the electric power business. In a “bare bones” summary of the facts, a subsidiary of Dynegy sold two power plants to PSEG and then entered into a leaseback transaction which included a guarantee agreement executed by Dynegy’s subsidiary, DHI. PSEG argued that the guaranty provisions were designed to protect against the risk that the cash flow from the two plants did not create sufficient cash to cover the lease payments payable to PSEG. A related provision prohibited the transfer of assets that would make the guarantee less valuable.
This action was filed on Friday, July 22, along with an opening brief in support of a TRO to enjoin the closing of a restructuring transaction in which assets related to the above-referenced sale-leaseback would be transferred to “bankruptcy remote” entities. The TRO was sought based on the argument that the restructuring would violate “successor-obligor” and related provisions of the guarantees, and would also constitute a fraudulent transfer. On Monday morning, July 25, an Answering Brief was filed, and on Monday afternoon, July 25, the Court held a hearing on the TRO that lasted about two hours. Supplemental briefing by each side was submitted the following day and this 57-page opinion followed a few short days later.
Whether the criteria for either a TRO or a Preliminary Injunction were satisfied based on the arguments and evidence presented on a very expedited schedule, claiming that the challenged transaction was: (i) a breach of the guarantee provisions; and (ii) a fraudulent transfer.
Bullet Points on Court’s Analysis of the Law
- The Court explains why it did not find irreparable harm despite the argument that fewer assets were available to cover the guarantee in light of the transfer to “bankruptcy remote” entities. That discussion is at pages 16 and 17 of the slip opinion. Useful definitions and descriptions of bankruptcy remote entities are provided at footnotes 20 and 21. (By comparision, those interested in this topic should review: (i) the Chancery decision of about two years ago in the Mitsubishi case summarized here, in which a TRO was granted to enjoin the transfer of assets by a debtor; and (ii) a Chancery decision of earlier this month summarized here, in which the Court found that the debtor was not impecunious enough to satisfy the irreparable harm test. The different results may justify the fact-laden aspects of many Chancery decisions.) See also page 48 for a fuller discussion of different types of irreparable harm that the Court may recognize.
- Laches can bar a request for expedited proceedings or a motion for emergent injunctive relief even if the delay in requesting the relief was only a few days. At page 19, the Court reasons why the facts in this case don’t support that defense, in part because the parties were negotiating during that period.
- The prerequisites for a TRO are outlined on page 20.
- The circumstances in which the standard for granting a Preliminary Injunction–even when a TRO is sought, will be applied, as in this case, (such as when the parties have developed a robust record), was explained by the Court at pages 21 through 23.
- The criteria to satisfy for obtaining a Preliminary Injunction were recited at page 23.
- The Court explained the common situation where the party with the burden of persuasion in a TRO hearing may not always have the burden of proof at trial. (Page 40).
- The elements of a fraudulent conveyance claim were set forth at page 41.
UPDATE: It was reported here that an interlocutory appeal to the Supreme Court was initiated over the weekend. Although in an Order issued on August 4, 2011, available here, the Court of Chancery denied a motion for interlocutory appeal, the Supreme Court makes its own independent determination on requests for interlocutory appeals nothwithstanding whatever Chancery’s position on the interlocutory appeal might be. (It makes one wonder why there is a requirement to file the motion initially with Chancery.) Here is a post on the Order of the Supreme Court dated Aug. 5, 2011, denying the interlocutory appeal of the 57-page Chancery decision, which comes a mere two weeks after the complaint was filed in Chancery.