Delaware Business Litigation Report

Corporation's Use of Sale Proceeds Violates Language in Indenture Agreements

Calpine Corporation v. The Bank of New York, C.A. No. 1669-N, 2005 WL 3454729 (Del. Ch. Nov. 22, 2005). Plaintiff energy company attempted to use proceeds from sale of certain assets to fund a series of purchases of natural gas for burning in its power plants. Plaintiff's note holders objected to those purchases because the relevant indenture agreements only allowed sale proceeds to be used for certain purposes. In response to the note holders' objection, the indenture trustees refused to authorize release of any additional monies to Plaintiff for those purchases. Plaintiff subsequently sued the indenture trustees seeking declaration that corporation's past and proposed use of proceeds was permissible. After expedited discovery and trial, the court issued a post-trial opinion rejecting Plaintiff's argument that the prior and planned transactions in natural gas constituted purchases of "Designated Assets" under the terms of the indenture agreements, which would have been a permissible use of the proceeds. The indenture agreements defined the Designated Assets as "all geothermal energy assets ... and ... all Gas Reserves ... but excluding (i) any geothermal energy assets that are both unproven and undeveloped and (ii) contracts for the purchase or sale of natural gas and natural gas supplied under such contracts. The court found that the transactions at issue clearly involved "natural gas supplied under [a] contact[] for the sale or purchase of natural gas ...," and therefore fell outside the scope of "Designated Assets." On that basis, the court held that Plaintiff's prior and planned use of the same proceeds was improper. Share