NEW YORK (HedgeWorld.com)–Six appeals have been taken from the U.S. bankruptcy court’s order approving Enron Inc.’s reorganization plan, and the list includes one appeal from two hedge fund bondholders, Appaloosa Management LP, Chatham, N.J., and Angelo, Gordon & Co., New York, both debtors of Enron’s most important subsidiary, Enron North America Corp.

Brian Rosen, of Weil, Gotshal & Manges LLP, New York, counsel for the debtors, said Aug. 6 that of the other five appeals, three come from government agencies, one from American Electric Power and the other from Upstream Energy Services (an unsecured creditor of ENA).

Enron itself will liquidate, according to the plan, in the process spinning off three entities, Mr. Rosen said: Cross Country Energy, Portland General Electric and Prisma Energy International Inc. The first two will be sold to generate cash for debtors, and Prisma shall inherit what remains of Enron. Assuming the consummation of both of those sales, debtors will receive their pay-offs in 92% cash and 8% Prisma equity. Mr. Rosen expects that this process will be complete, and Prisma will emerge from the protection of the bankruptcy court, some time in September.

The bankruptcy judge, Arthur J. Gonzalez, overruled the last of more than 100 objections to the final debtors’ plan July 15, after a three-week trial, approving a plan that was in all essentials the same as that put forward by the debtors in January (see Previous HedgeWorld Story).

For the hedge funds involved, the crucial issue throughout the litigation has been whether the assets of Enron Inc. would be consolidated with those of ENA, the parent corporation’s cash cow. The two hedge fund appellants, as holders of ENA bonds, had an interest in preventing consolidation, because in doing so they prevented the dilution of their share of that cash flow. Other hedge funds, such as Racepoint Partners LP and Baupost Group LLC, are on the opposite side of this issue, owning Enron’s instruments and encouraging the consolidation of the debtors.

Second circuit precedent requires that a bankruptcy court judge consider two questions before ordering consolidation. One is whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit such that consolidation is fair from the vantage point of creditor expectations, taking into account any prejudice to certain creditors resulting from the consolidation The other hinges on whether the assets and liabilities of the entities in question are hopelessly entangled such that the process of untangling them would be so time-consuming and costly that it is not in the interest of the creditors to complete that process.

If the judge had been required to make a determination about consolidation, “he would have had to follow second circuit authority, which would mean looking at whether the books and records of the various companies were so entangled that they couldn’t be disentangled without extreme cost. …” in the paraphrase of Richard F. Casher, a partner for the firm of Kasowitz, Benson, Torres & Friedman LLP, which represents both Angelo Gordon and Appaloosa. That would have been an all-or-nothing determination. The two estates would either have been consolidated or not. Instead, the debtors proposed and the judge accepted a plan that finessed that issue, giving holders of unsecured claims 30% of what they would have received in the event of consolidation and 70% of what they would have received in the separated administration of the estates.

In January 2004, Mr. Casher opposed the effort of the debtors to obtain another extension while soliciting support for their plan. He wanted the creditors to have an opportunity to develop and solicit support for competing plans. He said then, when his motion failed, that his argument had been about preserving issues for appeal and that it was obvious the court “wants the [debtors'] plan to go through and doesn’t want any creditors’ plans.”

CFaille@HedgeWorld.com

Contact Robert F. Keane with questions or comments at: bkeane@investmentadvisor.com.