NorthWestern loses effort to prevent class action suit claiming fraudulent conveyance

By Jeff Pines

Washington, June 17 - NorthWestern Corp. is vulnerable to a class action suit over allegations the company fraudulently conveyed assets from Montana Power LLC in 2002.

A bankruptcy court judge said that more than 100,000 former shareholders of the Montana Power Co. can go forward with their class action suit. The decision was contained in a Wednesday filing with the U.S. Bankruptcy Court for the District of Delaware.

The shareholders allege the company "sold substantially all of its assets without shareholder approval."

They want the issue resolved while NorthWestern is in bankruptcy and treated in the reorganization plan, according to the filing.

NorthWestern acquired the assets and agreed the plaintiffs retained the right to sue them for fraudulent conveyance in an agreement in Montana state court.

In his ruling that the class action suit can go ahead, judge Charles Case wrote that NorthWestern's attempts to merge its agreements to remain liable for fraudulent conveyance into a general claim against the company are "too clever" - but apparently not clever enough.

In a related matter, the judge denied Comanche Park LLC's bid to start a lawsuit against the company to reverse the alleged fraudulent transfer.

Comanche Park also is the plaintiff in a pre-Chapter 11 lawsuit against the company in Montana state court. In its motion, it asked the court to let it file a lawsuit to unwind NorthWestern's acquisition of Montana Power alleging it was a fraudulent conveyance. Judge Case said Comanche did not file its claim before the bar date expired. To rule for Comanche Park "would be to render the bar date process meaningless."

Judge blocks move to bring in SEC

In a related matter, the judge ruled Wilmington Trust Co. and Harbert Management Corp. may not proceed with their attempt to bring NorthWestern before the Securities and Exchange Commission for violating the Public Utilities Holding Company Act.

Wilmington is the trustee for four series of NorthWestern's trust preferred securities and Harbert is an investor in those securities. Under the company's plan, the holders of these securities would only get 2% of the reorganized company's common stock.

According to Wilmington and Harbert, Northwestern's acquisition of Montana Power Co. in 2002 made the company a holding company under the definition of the Public Utilities Holding Company Act.

The application for an exemption "rested on a highly distorted and misleading recitation of the pertinent facts," they said. NorthWestern argued the Montana power company was providing electricity to its telecommunications and energy services so its utility operations were incidental and therefore eligible for the exemption, Wilmington and Harbert said in their original filing.

The problem, they said, is the Sioux City, S.D.-based NorthWestern was really a utility holding company. NorthWestern supplies electricity and natural gas.

NorthWestern argued it legitimately obtained an exemption.

Judge Case said the issue can be tried in his court during the confirmation hearing.

The confirmation hearing is scheduled for Aug. 25.

NorthWestern filed for bankruptcy on Sept. 14, 2003. Its Chapter 11 case number is 03-12872.

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