A year later, the bankruptcy court can rescind approval of a breakup fee if the judge was not accurately told when the stalking horse could claim the fee.
Even though the debtor may have terminated the sale agreement, Delaware Bankruptcy Judge Christopher S. Sontchi also ruled in his opinion on Oct. 3 that a breakup fee can never be earned and paid if regulators or the court disapprove the underlying sale.
The opinion is remarkable, and will likely prompt an appeal, because Judge Sontchi revoked approval he had given for a $275 million breakup fee in the reorganization of electric energy giant Energy Future Holdings Corp. He was careful to say, however, that his action “does not impugn all termination fees. Parties that accurately and properly negotiate, structure, and disclose termination fees to a court can still rely on orders approving such fees.”
The Faulty Explication of the Agreement
Struggling to emerge from a chapter 11 reorganization begun in 2014, Energy Future negotiated an agreement to sell its Oncor regulated electric distribution business. The agreement included a $275 million breakup or termination fee payable to the purchaser.
In specifying when the intended purchaser would earn the $275 million breakup fee, the agreement was unclear. At the approval hearing, there was conflicting testimony from witnesses and statements by counsel about the circumstances when the buyer could claim the fee.
At the approval hearing, Judge Sontchi said he was told there would be no termination fee if state regulators refused to approve the sale and the buyer terminated the agreement. Significantly, however, Judge Sontchi said that no one had told him, despite his repeated inquiries, that the buyer “would never be required to terminate and could simply wait for mounting financial pressure to force the debtors to” terminate instead. Judge Sontchi also said that no one told him that the “termination fee could be triggered in the absence of a higher or better offer.”
Judge Sontchi approved the purchase agreement and the breakup fee in September 2016, but state regulators did not disapprove the sale until April 2017. Judge Sontchi said the deal was “clearly dead” when regulators refused to give approval a second time in late June 2017.
At that juncture, it “became clear,” Judge Sontchi said, that the purchaser would appeal the regulators’ disapproval “to all levels of review, leaving the debtors no choice but to terminate” the sale agreement and “risk triggering the termination fee or else incur months or years of continued interest and fee obligations.”
Judge Sontchi said that the debtor was “forced to terminate the [purchase] agreement [in July 2017] to pursue a lower offer because [the purchaser] had the debtor in a corner.” At the end of July, several creditors filed a motion for reconsideration, asking Judge Sontchi to revoke approval of the termination fee that he had granted in September 2016.
Grounds for Reconsideration
Judge Sontchi explained that there is either a motion to alter or amend a judgment under Bankruptcy Rule 9023 (incorporating F.R.C.P. 59) or a motion for relief from a judgment governed by Bankruptcy Rule 9024 (incorporating F.R.C.P. 60). Under either rule, he quoted a Third Circuit opinion to say that the purpose of a motion for reconsideration “‘is to correct manifest errors of law or fact or to present newly discovered evidence.’”
Judge Sontchi said he had a “fundamental misunderstanding of the critical facts” when he approved the breakup fee. The judge said he “simply did not understand” that the purchaser would be entitled to $275 million if the regulators disapproved the sale but the debtor terminated the agreement. Had he “understood these critical facts,” Judge Sontchi said that he “would not have approved” the termination fee in September 2016.
For approval of a breakup fee, the Third Circuit requires “actual benefit” for the debtor’s estate, Judge Sontchi said. He therefore granted the motion for reconsideration and said he would revoke approval of the breakup fee because there was no “actual benefit” as a result of the regulators’ disapproval of the sale.
Had he properly understood the facts, Judge Sontchi said he could not have approved the breakup fee. Doing so, he said, “constituted legal error.”
Judge Sontchi recognized that the purchaser had spent tens of millions of dollars pursuing the acquisition in reliance on the approval order. However, he said the purchaser remained “conspicuously silent” when the court was asking whether the fee would be payable if regulators disapproved the sale.
Notwithstanding the purchaser’s reliance on the order approving the breakup fee, Judge Sontchi said that the “interest of finality” was outweighed by the need for parties to be “accurate in their representations.”
Judge Sontchi said he did not “believe the debtor acted improperly or with malice.”