Longview Power LLC told its bankruptcy court on Oct. 18 that it needs to draw on $59m worth of letters of credit in order to get its 700-MW (net), coal-fired plant fixed and consistently operational, so it can get out of Chapter 11 protection.
Longview Power, which a few years ago built its coal plant north of Morgantown, W.Va., sought Chapter 11 protection on Aug. 30 at the U.S. Bankruptcy Court for the District of Delaware. It blamed much its financial problems on a plant that has not worked properly since it was built, including boiler tube failures. It is engaged in disputes and arbitration with plant contractors that include Foster Wheeler and Siemens over these issues. There is a complex series of claims and cross-claims being litigated between the various parties about plant mechanical problems, project cost overruns and who is responsible for them.
“This dispute arises from the Debtors’ intent to draw under two letters of credit (the ‘LCs’), of which Debtor Longview Power, LLC (‘Longview’) is the beneficiary,” said the Oct. 18 filing by Longview Power. “The Debtors’ rights under the LCs are governed by clear principles of law, designed to promote simplicity and certainty. These principles lead to a series of conclusions that support the Debtors’ right to draw on the LCs and mandate denial of the Contractors’ numerous requests for relief.”
Longview said it is the owner of a $2bn power plant that is “plagued by failures caused by a defective boiler. The LCs were issued to Longview at the request of Foster Wheeler—the manufacturer of the defective boiler—as a source of liquid funds in the event that Foster Wheeler failed to perform its obligations. Due to the boiler defects and other economic factors, Longview has been forced to seek this Court’s protection to reorganize its debts and to obtain some breathing room from the Arbitration in order to fix the Plant. Longview has refrained from drawing on the LCs until now in the hope that Foster Wheeler would fix the defective boiler. Foster Wheeler, however, has failed to take responsibility for its breaches. Longview must, therefore, bear the burden of diagnosing and fixing the defective boiler. It is entitled to and must have the LC proceeds to do so.”
Longview said the contractors are not entitled to the “extraordinary remedy” of enjoining Longview’s draw under the LCs. Under applicable law such an injunction may only be issued where it is clear that a draw would be fraudulent or there has been fraud in the transaction. “The Contractors cannot meet this burden because it requires a showing that Longview would have no colorable right to draw under the LCs or that such a draw would have no factual basis,” Longview added. “Longview’s draw under the LCs is amply supported by facts, which Longview determined through its own detailed systematic investigation into the cause of the boiler failures. This Court need not—and in fact under applicable law cannot—adjudicate the underlying contractual dispute as this is distinct from and irrelevant to Longview’s rights under the LCs. The commercial purpose of letters of credit is dependent on this ‘separateness’ to ensure that the beneficiary’s access to funds is not delayed by litigation.”
The LC proceeds are vital to the immediate goals of fixing the plant and getting out of bankruptcy, Longview said. Furthermore, an adjudication of its rights in the LCs must occur before Dec. 15, 2013, when they currently expire by their own terms, it added.
This matter is due for hearing on Nov. 21 at the bankruptcy court.