May 16, 2014
Derivative Standing Denied to Bring Claims for Recharacterization, Equitable Subordination and Breach of Fiduciary Duties
By Charlene D. Davis
On May 13, 2014, Judge Brendan Shannon of the United States Bankruptcy Court in Delaware entered an order and issued a decision denying a motion for derivative standing to pursue claims in In re: Optim Energy, LLC et.al. (Case No. 1410262 (BLS) against pre and post-petition lenders, who were also equity holders, for recharacterization, equitable subordination and breach of fiduciary duties. The Court found that the movant, Walnut Creek Mining Company (“Walnut Creek”), had failed to state colorable claims in the proposed complaint against the lenders/equity holders Cascade Investments, LLC (“Cascade”) and ECJV Holdings, LLC (“ECJV”). Colorable claims is one of three circumstances that the Third Circuit has held that a party seeking derivative standing must demonstrate. See Official Committee of unsecured creditors of Cybergenices Corp. ex rel. Cybergenics Corp. v. Chinery 330 F.3d 548 (3d Cir. 2003).
The Debtors own and operate three power plants in Texas. Each of the debtors is wholly owned indirectly by Cascade through its wholly owned subsidiary ECJV. ECJV owns one of the debtors, Optim Energy, LLC (“Optim Energy”) directly and the other two debtors indirectly through its own wholly owned subsidiary. In turn, Cascade is owned by PNM Resources, Inc. (“PNMR”), an energy holding company.
In early 2007, PNMR and Cascade (through ECJV) formed Optim Energy. Optim Energy was initially capitalized with $10.00 by each of ECJV and PNMR and $2.5 million from each for operating expenses.
Within 5 months, in May of 2007, Optim Energy sought to acquire the Altura Cogen Plant but needed to finalize a deal with Wells Fargo Bank National Association (“Wells Fargo”) for financial support for the bid. In the interim, according to board minutes, Optim Energy’s President advised that PNMR agreed (i) to provide a guaranty (contingent on a back-up guaranty for half of the obligation from Cascade) and (ii) to treat any payments on the guarantees as capital contributions. Subsequently, on June 1, 2007, a series of transactions occurred.
Later in June 2007, Optim Energy distributed $87.5 million to each of ECJV and PNMR from the WF Credit Facility and in August 2007, it acquired the Altura Cogen plant for $477.9 million, funded by cash contributions of $42.5 million from each of PNMR and ECJV and borrowings under the WF Credit Facility. Altura Cogen LLC pledged its real property including the Altura Cogen Plant to Cascade and ECJV. In August 2007, Optim Energy began a project with NRG Energy, Inc. to develop the Cedar Bayou Plant and EnergyCo Cedar Bayou 4, LLC pledged all of its real property including the Cedar Bayou Plant to Cascade and ECJV.
On May 13, 2014, Judge Brendan Shannon of the United States Bankruptcy Court in Delaware entered an order and issued a decision denying a motion for derivative standing to pursue claims in In re: Optim Energy, LLC et.al. (Case No. 1410262 (BLS) against pre and post-petition lenders, who were also equity holders, for recharacterization, equitable subordination and breach of fiduciary duties. The Court found that the movant, Walnut Creek Mining Company (“Walnut Creek”), had failed to state colorable claims in the proposed complaint against the lenders/equity holders Cascade Investments, LLC (“Cascade”) and ECJV Holdings, LLC (“ECJV”). Colorable claims is one of three circumstances that the Third Circuit has held that a party seeking derivative standing must demonstrate. See Official Committee of unsecured creditors of Cybergenices Corp. ex rel. Cybergenics Corp. v. Chinery 330 F.3d 548 (3d Cir. 2003).
The Debtors own and operate three power plants in Texas. Each of the debtors is wholly owned indirectly by Cascade through its wholly owned subsidiary ECJV. ECJV owns one of the debtors, Optim Energy, LLC (“Optim Energy”) directly and the other two debtors indirectly through its own wholly owned subsidiary. In turn, Cascade is owned by PNM Resources, Inc. (“PNMR”), an energy holding company.
In early 2007, PNMR and Cascade (through ECJV) formed Optim Energy. Optim Energy was initially capitalized with $10.00 by each of ECJV and PNMR and $2.5 million from each for operating expenses.
Within 5 months, in May of 2007, Optim Energy sought to acquire the Altura Cogen Plant but needed to finalize a deal with Wells Fargo Bank National Association (“Wells Fargo”) for financial support for the bid. In the interim, according to board minutes, Optim Energy’s President advised that PNMR agreed (i) to provide a guaranty (contingent on a back-up guaranty for half of the obligation from Cascade) and (ii) to treat any payments on the guarantees as capital contributions. Subsequently, on June 1, 2007, a series of transactions occurred.
- PNMR contributed its ownership of Altura Power L.P. (“Twin Oaks”) and its Twin Oaks plant to Optim Energy for an agreed fair market value of $553.8 million.
- ECJV made a cash contribution to Optim Energy of $276.9 million and Optim Energy distributed the cash to PNMR, making PNMR and ECJV each 50% owners.
- Optim Energy entered into a five year unsecured credit facility with Wells Fargo with initial availability of $1 billion (the “WF Credit Facility”).
- Cascade and ECJV jointly and severally guaranteed the WF Credit Facility (the “WF Guarantees”).
- Optim Energy entered into an agreement to reimburse Cascade and ECJV for any payments made on the WF Guarantees which payments were explicitly described as indebtedness not capital contributions (the “Guaranty Reimbursement Agreement”).
- Optim Energy gave Cascade and ECJV a security interest in substantially of the Debtors assets to secure obligations under the WF Guarantee (the “Security Agreement”).
Later in June 2007, Optim Energy distributed $87.5 million to each of ECJV and PNMR from the WF Credit Facility and in August 2007, it acquired the Altura Cogen plant for $477.9 million, funded by cash contributions of $42.5 million from each of PNMR and ECJV and borrowings under the WF Credit Facility. Altura Cogen LLC pledged its real property including the Altura Cogen Plant to Cascade and ECJV. In August 2007, Optim Energy began a project with NRG Energy, Inc. to develop the Cedar Bayou Plant and EnergyCo Cedar Bayou 4, LLC pledged all of its real property including the Cedar Bayou Plant to Cascade and ECJV.