Relevant Document:Request for Guidance
At today’s hearing in the GenOn chapter 11 cases, Judge David Jones said that he is “worried” about the state of the chapter 11 cases and that “nothing has been done” since the judge
approved confirmation of the debtors’ plan last December. The judge said that he would “absolutely” be willing to accept jurisdiction over certain claims filed by lender Natixis against GenMA because he believed those claims have a “huge potential effect” on the outcome of the chapter 11 cases. The judge also commented that he may not have constitutional authority to enter a final judgment on the claims but that he does not believe that would prevent him from holding a trial on the claims. Rather, said Judge Jones, the bankruptcy court would make proposed findings of fact and conclusions of law on which a district court would enter a final judgment.
Today’s hearing relates to a dispute between the parties as to the proper court to hear the Natixis claims. As detailed below, Natixis brought various claims in New York that could result in liability against GenMA. An SDNY federal judge requested further information from Judge Jones as to whether it would be appropriate to transfer the claims to the bankruptcy court. As a result, the parties jointly filed a
request for guidance, which was heard today by bankruptcy Judge Jones.
The claims relate to a complaint filed by Natixis in February against the GenMA owner lessors, U.S. Bank and GenMA, in New York state court regarding GenMA’s agreement with NFC to procure letters of credit for the benefit of the owner lessors and U.S. Bank, and the owner lessors’ draw requests on the letters of credit. Judge Jones had presided over a trial in August 2017 relating to those draw requests and
estimated the owner lessors’ claims against GenMA at $0.
During oral argument at today’s hearing, Ravi Shankar of Kirkland & Ellis for GenMA asserted that the Natixis lawsuit could “materially impact” the compromises struck in the plan, because Natixis’ claims were “unanticipated at confirmation.” Shankar also argued that the GenOn debtors are currently sizing the exit financing for consummation of the plan and that the claims could affect the required amount of financing.
Additionally, he said, transferring the Natixis claims to this court would permit all parties to the GenOn chapter 11 cases to participate and renegotiate the plan if necessary.
Shankar said that if the claims are transferred to the bankruptcy court, the debtors could seek a global settlement mediation. He also noted that Natixis’ claims seek a return of approximately $125 million and that if Natixis is successful, third parties will then seek recovery from GenMA. Calling this the “overarching dispute,” he asserted that the debtors want to “nip it in the bud” by transferring the claims to the bankruptcy court. However, Neil Binder of Binder & Schwartz for Natixis argued that there is already another court reviewing the litigation and that that judge would have full familiarity with the issues.
Natixis Claims
Natixis’ complaint is attached as an exhibit to the parties’ request for guidance from the bankruptcy court, filed in July. In the complaint, Natixis asserts that on Jan. 27, 2017, Natixis and GenMA entered into a payment agreement pursuant to which GenMA paid $131.5 million to Natixis and Natixis agreed to issue 11 letters of credit to the owner lessors. Natixis says it held the payment as collateral for the L/Cs, and the payment agreement dictated that toward the end of the term of the sale-leaseback agreements, any remaining collateral that was no longer needed to collateralize L/C exposure would be used by Natixis to make direct payments to the owner lessors, on GenMA's behalf, to discharge certain of GenMA's lease payment obligations.
In the complaint, Natixis says one of its concerns was whether the structure of the transaction would be considered “uncollateralized” by GenMA's assets as required by section 5.13 of the sale-leaseback participation agreements and, recognizing the risk if the L/Cs were not deemed to be qualifying credit support under the participation agreements, Natixis obtained several contractual protections in the payment agreement. “As it turns out, … the Natixis Letters of Credit were not Qualifying Credit Support,” and therefore “GenMa's warranties set forth in Sections 8(h) and (i) of the Payment Agreement were false, resulting in an event of default under the Payment Agreement,” the complaint asserts.
Natixis seeks a judgment that the owner lessors’ outstanding draw requests are invalid and do not need to be honored by Natixis because the owner lessors “submitted draw requests that exceed the universally acknowledged $130 million threshold or, in the alternative, because the owner lessors “are attempting to draw down on the Natixis letters of credit based on the fault premise that they constitute Qualifying Credit support.” In the alternative, Natixis seeks a judgment that if it is required to honor the draw requests, that the owner lessors disgorge the funds to Natixis. Natixis also requested the return of all amounts that the owner lessors previously “improperly drew under the Natixis letters of credit,” as well as damages from GenMA as a result of its breaches of warranties.
On April 2, GenMA removed the two breach of contract causes of action against it seeking at least $34 million in damages to the Southern District of New York, arguing that the removed claims are “related to” the GenOn bankruptcy cases. NFC then moved to remand the claims back to the New York state court, and GenMA filed a cross-motion to transfer the claims to the Southern District of Texas for automatic referral to the bankruptcy court.
On July 18, Judge George Daniels of the Southern District of New York court heard oral argument on the motions and directed GenMA to request the bankruptcy court’s views regarding whether transfer of the claims to the bankruptcy court is appropriate. According to the parties’ request for guidance filed with the bankruptcy court, Judge Daniels stated, “I’m not prepared to grant your motion to transfer to the district of Texas unless I know that the bankruptcy judge says that this is so important, so related, that the bankruptcy judge thinks this should be in front of him.” Judge Daniels further commented,
“[I]t seems to me that the most compelling argument here by either side is a determination by the bankruptcy court after it has gone through these proceedings with all these related parties and adjudicated these issues and has a plan of reorganization in place, whether or not it believes that there’s a significant danger that adjudicating this case separately in the state court might interfere with that process. If that’s what the Court believes, then that’s probably going to be the determinative factor for me because I would be hard pressed for you to convince me to otherwise not give the bankruptcy court the opportunity to do that if the bankruptcy court thinks that that appropriate.”
Judge Daniels set a subsequent hearing for Sept. 26 on Natixis’ motion to remand and GenMA’s motion to transfer.