Calpine third lien notes trustee requests relief to make remaining $228 million disbursement

By Reshmi Basu

New York, Sept. 13 - Calpine Corp. third priority notes trustee Manufacturers & Traders Trust Co. filed a complaint against a slew of creditors seeking to make the remaining $228 million payment to its constituents, arguing that it should not be held hostage to the demands of the representatives of other noteholders, according to a Thursday filing with the U.S Bankruptcy Court for the Southern District of New York.

In March, the court approved Calpine's $5 billion replacement debtor-in-possession facility that would be used to refinance its existing DIP and repay $2.516 billion of secured pre-bankruptcy debt at operating subsidiary Calpine Generating Co., LLC.

Under the court order, the creditors were allowed unsecured damages arising from Calpine's prepayment of CalGen's debt, which was seen as a breach of the prepayment provisions under the indenture agreement.

The dispute involves an intercreditor agreement, under which the third priority secured floating-rate notes due 2011 and 11½% third priority secured notes due 2011 are subordinated to first priority revolving loans, first priority notes and second priority notes, M&T remarked in the adversary proceeding filing.

According to the complaint, M&T named the trustees and administrative agents for CalGen's first priority and second priority loans as defendants, which include Wilmington Trust Co., The Bank of Nova Scotia, HSBC Bank USA NA and The Bank of New York.

At the end of March, Calpine prepaid to M&T the amount of $886.84 million in accordance with the prepayment order. However, the defendants demanded that M&T Bank withhold $228 million of the funds, saying that the holdback was necessary to satisfy their asserted deficiency claims if they were awarded less than the asserted amount of such claims or if Calpine does not pay those claims in full under its Chapter 11 plan.

In face of lawsuit threats, M&T made no distributions and continues to hold the money, actions it argued has been to the detriment of the third priority noteholders, according to the court document.

M&T contends that the intercreditor agreement does not require it to satisfy the asserted deficiency claims with the refinancing monies.

"Absent a declaratory judgment determining the parties' rights to the withheld funds, M&T Bank is constrained to withhold substantial funds indefinitely, until defendants' asserted deficiency claims are resolved with finality, and beyond, if the debtors' Chapter 11 plan fails to provide for payment in full of the asserted deficiency claim," M&T argued in the complaint.

Therefore M&T is asking the court to grant it relief so that it can make the remaining payments without being subjugated to the defendants' demands and threats.

Calpine, a San Jose, Calif., power company, filed for bankruptcy on Dec. 20, 2005. Its Chapter 11 case number is 05-60200.

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