Calpine Corp. has received permission to turn its back on $80 million worth of preference-claim payments once its bankruptcy reorganization plan is confirmed.
On Tuesday, U.S. bankruptcy judge Burton Lifland approved Calpine’s petition to abandon efforts to collect preference claims that are less than $1 million. In aggregate, the claims amount to a small percentage of the total $2 billion Calpine seeks to recover for its creditors, notes the Associated Press.
Governed by the U.S. Bankruptcy Code, preference claims are meant to prevent an insolvent company from favoring one creditor at the expense of another. Basically, the bankrupt company has the right to sue vendors to force them to return payments that were made within 90 days of the bankruptcy filing. While the law’s rationale may not make immediate sense, its aim is clear: to stop failing companies from doling out payments to preferred vendors just before they go broke.
But the petition makes it clear that Calpine’s bankruptcy trustee does not want to track down smaller preference claims. Experts speculate that the administrative and legal costs of running down those claims would be moot because Calpine estimates it will be paying unsecured creditors — those most likely to be the target of preference actions — between 89 cents and 97 cents on the dollar. “It’s a futile effort [in Calpine’s case] if the company is paying out 95 cents on the dollar or more,” Hal Schaeffer, president of D&H Credit Services, told CFO.com.
Schaeffer explained that if unsecured creditors are made nearly whole, there is no reason for the trustee to spend money dogging relatively small preference claims. Indeed, the money spent on chasing the claims could reduce the ultimate payout. Further, Schaeffer pointed out that bankruptcy law requires that a debtor company increase the creditor’s original claim by the same amount as the preference action.
For example, consider a case in which an unsecured creditor files a claim with a bankruptcy trustee to recover $200,000 from an insolvent company. Subsequently, the bankrupt company files a preference claim against the creditor for $50,000. The creditor negotiates with the trustee to pay only $40,000 of the preference claim, the deal is accepted, and the creditor’s full claim is bumped up to $240,000. “Calpine would be on a merry-go-round” in terms of collecting the preference payment and adding it back to original claims when nearly full recovery is anticipated, said Schaeffer.
Calpine is a unique case because of the high estimated payout. In recent years, only the Delphi bankruptcy, which is currently wending its way through the Chapter 11 process, is paying out close to full recovery. Generally, unsecured creditors average between 7 cents and 10 cents on the dollar, according to Schaeffer. (Secured creditors usually recover 100 percent of their claims.)
What’s more, the secondary market confirms Calpine’s recovery estimates, added Schaeffer. He said that currently, companies that buy bankruptcy claims from creditors at a discount in exchange for cash up front are offering about 95 cents on the dollar.
Calpine, which filed for bankruptcy protection in December 2005, is scheduled to go before Judge Lifland on December 17 to seek approval of its plan.