A judge ordered the appointment of an examiner for the bankruptcy of Dynegy Holdings LLC, after a bond trustee said an investigation was needed to determine whether bondholders were being treated fairly.

The examiner will investigate a series of transactions that took place shortly before last month's Chapter 11 filing by the holding company for power producer Dynegy Inc, which is trying to restructure more than $4 billion of debt.

This restructuring is unusual because it would cause losses for bondholders, yet protect shareholders such as the Seneca Capital hedge fund and billionaire financier Carl Icahn.

The examiner shall conduct an unfettered investigation into Dynegy Holdings' conduct, and assess whether it is capable of confirming a Chapter 11 plan, Bankruptcy Judge Cecelia Morris in Poughkeepsie, New York, wrote on Thursday.

Examiners are appointed for the benefit of creditors, equity investors and the bankruptcy estate. They may investigate allegations such as dishonesty, fraud, incompetence and mismanagement. A finding that management has done something wrong could undermine support for or derail a reorganization.

Dynegy Holdings' examiner will have the power to issue subpoenas, and examine whether any transactions predating the bankruptcy constituted fraudulent conveyances, Morris wrote.

Company spokeswoman Katy Sullivan said: We intend to cooperate fully with the examiner, and don't expect the appointment to slow down the implementation of our reorganization plan.

SELF-DEALING ALLEGED

The appointment of an examiner had been sought by US Bank NA, the trustee for financings tied to leases associated with Dynegy Holdings' purchase of the Roseton and Danskammer electric power generating plants in Newburgh, New York.

Dynegy Holdings sought Chapter 11 protection on November 7, two months after it transferred assets related to coal-powered plants to its parent, which did not file for bankruptcy.

US Bank, a unit of US Bancorp, claimed that Dynegy Holdings' board knew the asset transfers were unfair to the company and its creditors, and that the transfers violated laws designed to thwart self-dealing and fraudulent transfers.

Dynegy Holdings' reorganization plan calls for the company to offer $2.1 billion of preferred stock, $1 billion of notes and $400 million of cash, and replace $3.6 billion of notes and $130 million of interest and payments on the two power plants.

In July 2010, an agreement to help Tribune Co emerge from bankruptcy collapsed after an examiner identified possible legal claims tied to that publisher's $8.2 billion leveraged buyout.

A decade ago, Dynegy had agreed to buy Enron Corp, but canceled the purchase as the business and finances of its larger Houston rival deteriorated rapidly.

In midday trading, Dynegy shares were up 5 cents at $2.86.

The case is In re: Dynegy Holdings LLC et al, U.S. Bankruptcy Court, Southern District of New York, No. 11-38111.

(Reporting by Jonathan Stempel in New York, editing by Matthew Lewis)

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