Dynegy says Peabody coal dispute should stay at its bankruptcy court

Dynegy Danskammer LLC, one of the bankrupt affiliates of Dynegy Holdings LLC, told its bankruptcy court on Aug. 21 that it should be allowed to go forward at the court with a complaint against Peabody COALTRADE International Ltd., though Peabody is asking the court to put this dispute in arbitration.

In an adversary proceeding within the bankruptcy case, Dynegy is seeking damages against Peabody COALTRADE, a unit of Peabody Energy (NYSE: BTU), for a missed ship of coal out of Venezuela, with that coal bound for the Danskammer power plant in New York. The bankruptcy case, filed in November 2011, is being pursued at the U.S. Bankruptcy Court for the Southern District of New York.

“Danskammer brought this adversary proceeding for a post-petition breach of a contract that obligated Peabody to deliver a shipment of coal for loading at a port in Venezuela for transportation to the United States on a vessel hired by Danskammer,” said the Aug. 21 filing. “In reliance on assurances from Peabody that it was holding the coal for delivery to Danskammer, Danskammer made the shipping arrangements. Shortly after Danskammer filed its Chapter 11 petition, and while its vessel was en route, Peabody suddenly announced that coal was not being held for Danskammer, and the coal was never delivered to Danskammer. The unmistakable conclusion, from Peabody’s conduct and its statements, is that Peabody’s actions were motivated by concerns over Danskammer’s filing and status as Debtor in Possession. As a result of Defendant’s unlawful conduct and breach, Danskammer has suffered substantial damages.”

Peabody wants to compel arbitration based on its claim that this adversary proceeding is “non-core” to the bankruptcy case. But, federal court precedent shows that an action alleging a post-petition breach of contract can be properly viewed as a “core” proceeding under the bankruptcy code, Dynegy said.

“Post-petition claims arise in the bankruptcy case; unlike pre-petition claims, they were not owned by the debtor at the time that the petition was filed,” Dynegy argued. “In addition, the claim here arose directly from conduct that Peabody undertook in response to Danskammer’s Chapter 11 filing, not only to violate Plaintiff’s rights but to frustrate the purposes of the Bankruptcy Code. As shown below, the facts of this case fully support the denial of this motion. Resolving the action in this Court will advance this Chapter 11 case, promote Danskammer’s reorganization, and prove more expeditious and cost-efficient than the three-arbitrator proceeding that Peabody seeks.”

The contract under dispute is a January 2008 deal for Guasare steam coal. The dispute is because the last shipload of coal under that contract couldn’t be delivered late last year by Peabody to a Dynegy-hired ship waiting at a Venezuelan port. Peabody eventually invoked force majeure, saying that rain had cut coal shipments over a road leading from the mine to the port.

Among other things, Dynegy said its bankruptcy was an apparent issue in Peabody’s decision. “Peabody’s conduct and its words show that its breaches of contract were a calculated response to Danskammer’s status as a Chapter 11 Debtor,” Dynegy wrote. “Peabody first announced that it had ceased holding coal for Danskammer just one day after it declared it was concerned about Danskammer’s non-payment of an invoice ‘under another contract with Peabody’ by reason of the Chapter 11 filing. Thereafter, on December 22, it explained that it had delayed refunding a prepayment from Danskammer for coal never delivered, because ‘[w]e were consulting with our legal department due to the bankruptcy situation’ of Danskammer. The only reason for such a consultation was to inquire whether Peabody could hold onto such funds owed Danskammer as an off-set to amounts allegedly owed by Danskammer to Peabody’s affiliate Peabody COALTRADE, LLC. As Danskammer informed Peabody by letter dated January 17, 2012: ‘No provision of the [Coal] Contract allows such offset of funds, and [Peabody’s] actions in doing so are another clear breach of the Contract.’ By letter dated January 19, 2012, Peabody even invoked the bankruptcy as a basis for terminating its obligations under the Coal Contract, declaring—in clear violation of [federal code]—that ‘in accordance with Section 19.2 of the above-referenced Agreement, Seller hereby notifies Debtor in Possession that it is exercising its right to terminate the Agreement as a result of the bankruptcy filing by Buyer.’”

Dynegy’s reasons for wanting this case before the bankruptcy court include that the resolution of all claims involving its estate should be decided at the court and that litigating the case in this court will expedite the bankruptcy process, while the arbitration sought by Peabody would impose “considerable costs and delays.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.