Longview Power wins interim cash collateral use; denied credit draw

By Jim Witters

Wilmington, Del., Sept. 3 - Longview Power, LLC and some of its affiliates, including Mepco Holdings, LLC, won interim use of their lenders' cash collateral during a Sept. 3 hearing in the U.S. Bankruptcy Court for the District of Delaware.

But numerous objections from contractors prompted the judge to nix a provision that would have allowed the debtors to draw on a $59 million pre-petition letter of credit.

Longview attorneys argued that access to the letters of credit are essential to maintain minimum cash balances required in the cash collateral agreement with the lenders.

But contractors - including Siemens Energy, Inc., Foster Wheeler North America Corp. and Foster Wheeler AG - and the consortium of companies involved with Longview in the construction and operation of a coal mining operation and a $2 billion, 750 megawatt, coal-fired power plant claim that the letters of credit may not belong to the debtors.

Responsibilities for project delays, failures, environmental problems and other issues have been the subject of state court lawsuits and ongoing arbitration proceedings that are scheduled to conclude in the first quarter of 2015.

The contractors and the consortium argued that the bankruptcy court is not the proper forum for breaking off part of the arbitration dispute.

Credit dispute

Consortium attorney Eric L. Schnabel said the debtors assigned those letters of credit to the consortium.

The debtors say the letters of credit are assets of the estates and may be drawn down in the usual course of business. And they insist that the additional liquidity is needed as a cushion through the bankruptcy process.

But judge Brendan L. Shannon asked why the debtors have not drawn on the letters of credit in the six years since they were issued.

Longview's special litigation attorney David F. Yates responded that "things changed."

The electrical energy market changed, the company's plans have changed, and the debtors now find themselves in bankruptcy, he said.

Yates also said the bankruptcy court is the proper forum for affirming that the letters of credit are assets of the estates, because the lenders involved in the credit facilities and the cash collateral use are not parties to the arbitration proceedings.

Shannon agreed that lenders are entitled to negotiate the terms under which a debtor may use cash collateral. But, at the same time, the judge was unprepared during a first-day bankruptcy hearing to resolve a six-year-old dispute.

"It is my responsibility to approve funding to avoid immediate and irreparable harm to the debtors as they make the transition into Chapter 11," the judge said.

He assured all parties that nothing in his decision to grant interim cash collateral use is intended to decide any of the issues regarding the letters of credit or to prejudice anyone's rights.

"It is my intention to leave those issues open for full disposition," Shannon said.

Some agreement

Schnabel and the contractors' attorneys said they plan to file motions to lift the automatic stay of non-bankruptcy litigation. And they threatened temporary restraining orders should the debtors attempt to draw on the letters of credit.

During several breaks in the hearing, the attorneys discussed the issues in the courtroom and the hallways.

At the end of the four-hour hearing, debtors attorney Daniel J. DeFranceschi told the court they had agreed on the concepts for a form of order for interim use of cash collateral.

Under the agreement, the debtors will not draw any funds on the letters of credit without further approval from the bankruptcy court; the lenders agreed to extend the deadline for the cash balance covenant through Oct. 9 from Oct. 2; and the objecting parties agreed to an "escape valve" that allows the debtors to seek emergency relief from the court in the case of an emergency.

The attorneys were to work out the language for the order and submit it to Shannon for his signature on Sept. 4.

Pending disputes

Meanwhile, Shannon scheduled a hearing at 9 a.m. ET on Oct. 7 to hear arguments on whether the bankruptcy court holds jurisdiction in the dispute over the letters of credit and the disposition of those assets.

The issues surrounding the letters of credit run deep into the full dispute in the arbitration proceedings, lawyers say.

Shannon told the parties to confer to try to delineate the specific issues they want him to consider at the Oct. 7 hearing.

The judge scheduled a 9:30 a.m. ET teleconference on Sept. 9 for an update on the proposed Oct. 7 agenda.

The Oct. 7 hearing also will include consideration of final approval of the use of cash collateral.

Longview and Mepco, an integrated power generation enterprise based in Maidsville, W.Va., filed for bankruptcy on Aug. 30. Their Chapter 11 case number is 13-12211.

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