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Facts: Kelson Channelview LLC ("Kelson") requested to be disbursed, as an administrative expense, a break-up fee. The request was denied by the bankruptcy court. The facts are as follows. Reliant Energy Channelview LP and Reliant Energy Services Channelview LLC (the "Debtors") decided to sell their largest asset, a power plant in Texas. The Debtors hired consultants to assist them with the sale and there were a number of interested parties. Ultimately, there were 12 bids for the power plant all of which, with the exception of Kelson's bid, were subject to the bidder getting financing. Kelson bid $468 million (not contingent on financing) and was selected as the purchaser. Accordingly, Kelson and the Debtors entered into an asset purchase agreement (the "APA"), which was, of course, subject to bankruptcy court approval. The Debtors agreed that if the bankruptcy court required there to be an auction, the Debtors would ask for bid protections and a break-up fee for Kelson. Ultimately, the bankruptcy court did require an auction of the power plant. The Debtors then asked the court to approve bidding procedures and break-up fee for Kelson. Foristar, one of the original bidders whose bid was contingent on financing, objected and argued that a break-up fee would chill the bidding. The bankruptcy court agreed and denied the break-up fee but approved certain bidding procedures as well as a reimbursement of Kelson's expenses up to $2 million. Kelson did not participate in the subsequent auction and in fact argued that the APA was no longer valid and Foristar won the auction and paid a price that exceeded Kelson's offer by $32 million. Kelson then sought a break-up fee.
Issue: Whether Kelson's request for a break-up fee should be granted.
Rule: The Third Circuit had set forth the legal principles at issue here in Calpine Corp. v. O'Brien Env't Energy, Inc., 181 F.3d 527 (3rd Cir. 1999): a bidder must seek a break-up fee pursuant to § 503(b), which allows a post-petition payment so long as the expense was for the "actual, necessary costs and expenses of preserving the estate." A request for a break-up fee should be analyzed in the same manner as any other request for reimbursement of a fee or expense under § 503(b). "'[T]he allowability of break-up fees, like that of other administrative expenses, depends upon the requesting party's ability to show that the fees were actually necessary to preserve the value of the estate.'" Break-up fees cannot advantage a favored purchaser over other bidders and is not necessary to benefit the estate if the bidder would have bid even without the break-up fee.
Holding: The bankruptcy court's denial of the break-up fee is affirmed.
Reasoning: The court first recognized that two arguments exist in Kelson's favor: first, if Kelson had obtained a break-up fee, it would have bid on the power plant in the auction; and second, if Kelson had obtained a break-up fee it may have been induced to stick with the APA after the court ordered the auction. The court stepped through each argument in turn. As for the first, the court believed that Kelson "undoubtedly provided a benefit to the estate by establishing a minimum price and a complete set of offer terms and, in fact, the Bankruptcy Court required that any competing bid exceed Kelson's by at least $5 million." But the question is slightly different in that what is asked is whether the break-up fee was necessary to produce this benefit. Here, it was not because Kelson entered into the APA before the Debtors even sought approval of a break-up fee. Moreover, Kelson did not condition its bid on the approval of a break-up fee (although it did condition the bid on the Debtors' promise to seek authority to pay such a fee). As for the second argument, the court felt that it was important that the bankruptcy court believed that a break-up fee would chill the bidding, which would outweigh the benefit achieved for the estate of keeping Kelson committed to the APA. Although the bankruptcy court's decision was a difficult one to make, the court believed that it was justified because (i) Foristar stated that it was going to bid at the auction; (ii) the binding language of the APA; and (iii) the belief that Kelson would not really walk away if no other bidder materialized. For these reasons the court affirmed the bankruptcy court's decision. Additionally, the court specifically denied Kelson's argument that the business judgment rule should be used in determining whether a break-up fee is appropriate. Instead, the court reiterated that the standard provided in O'Brien is the
©2010 Leif M. Clark
