Earlier this month, William Giovanniello, acting as the creditor trustee (the "Trustee") for Raser Technologies ("Raser"), began filing complaints seeking to avoid and recover what the Trustee contends are preferential transfers under 11 U.S.C. sec. 547. Often, defendants receive preference complaints and have little or no information about the underlying bankruptcy proceeding and the reasons for the commencement of the avoidance action. This post will look at Raser’s business, why the company filed for bankruptcy and why the Trustee is pursuing the preference complaints.
Raser Technologies’ Business
Raser filed chapter 11 petitions for bankruptcy on April 29, 2011 (the "Petition Date"). According to the company’s Declaration in Support of Chapter 11 Petitions (the "Decl."), filed with the Delaware Bankruptcy Court, Raser was founded in 2002 to build geothermal electric plants and develop electric generating equipment for use in electric and hybrid electric vehicles. Decl. at *1-2. Raser traded as a public company on the New York Stock Exchange from October 2003 until the time of its delisting in November of 2010.
As part of its business model, Raser acquired "geothermal interests" in over 270,000 acres of land in the western United States. The company also acquired geothermal rights to over 100,000 acres of land in Indonesia. Once Raser acquired rights to a geothermal site, it conducted testing to determine whether the geothermal features warranted the construction of a power plant. If the company determined that a site had sufficient resources to support a power plant, Raser would construct plant facilities at the site that included injection wells, specialized turbines, transmission lines and pipelines. Decl. at *3.
Events Leading to Bankruptcy
Raser attributed its bankruptcy filing, in part, to the less than optimal performance of its one and only fully-operational energy plant. At the time of the Petition Date, Raser only operated one power plant ("Plant No. 1") which is located in southern Utah. Decl. at *3. The company’s business requires substantial amounts of investment to complete the exploration and development phases of a geothermal electric facility. Plant No. 1, for example, required $120 million in development and construction costs. Id. From its inception, the company raised over $200 million to explore and develop geothermal sites. Decl. at *13.
Plant No. 1’s performance was less than optimal. As of the Petition Date, this facility was generating 8 megawatts of electrical power, 2 megawatts of which were consumed by the plant’s own energy needs. This level of production was well below the amount of electricity the facility was designed to produce. Raser attributes the under performance to several factors, most notable being "inefficiencies occurring as a result of the failure of certain equipment to perform to contractual specifications, and the costs to operate and maintain said equipment." Decl. at 13.
The failure of Plant No. 1 to operate at expected levels, coupled with the tight capital markets that existed from 2009 through the date it filed for bankruptcy, created a liquidity crisis for the company. Although the company sought investments from third parties, it was unable to raise the cash necessary to maintain operations and complete construction of other energy production projects. Decl. at *14.
The Bankruptcy Proceeding and Preference Complaints
Raser filed Chapter 11 petitions for bankruptcy on April 29, 2011. On August 30, 2011, the Delaware Bankruptcy Court entered an order confirming Raser’s Third Amended Joint Plan of Reorganization. Pursuant to the Plan, the Creditor Trust was established and the Creditor Trustee was appointed to pursue the preference actions that were transferred to the Creditor Trust.
The Raser Technologies bankruptcy is before the Honorable Kevin J. Carey. Judge Carey previously served as the Chief Judge of the Delaware Bankruptcy Court. The Trustee pursuing the preference actions on behalf of the Creditor Trust is represented by the law firm Womble Carlyle Sandridge & Rice, LLP and Foley & Lardner LLP.
For reader’s looking for more information concerning preference litigation, attached is a booklet I prepared on the subject: "A Preference Reference: Common Issues that Arise in Delaware Preference Litigation."
Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427-5512, or firstname.lastname@example.org.