In what it called an “anomalous” case, the Third Circuit upheld the revocation of a $275 million breakup fee because the bankruptcy judge had “failed to discern a critical fact that profoundly altered the underlying legal determination.”
The 2/1 opinion on September 13 is a meticulous exploration of the law governing reconsideration. In the future, another buyer is unlikely to be deprived of a seemingly vested breakup fee, because the appeals court said “our conclusion may very well have been different” if the underlying facts were “anything less.”
The Genesis of the Breakup Fee
Laying the groundwork for emerging from a chapter 11 reorganization, electric energy giant Energy Future Holdings Corp. negotiated an agreement to sell its Oncor regulated electric distribution business for a price that would have brought $9.5 billion into the estate. The agreement included a $275 million breakup or termination fee payable to the purchaser.
At the approval hearing, Bankruptcy Judge Christopher S. Sontchi of Delaware was told the buyer would not earn the termination fee if state regulators were to refuse to approve the sale and the buyer terminated the agreement. The agreement gave the breakup fee to the buyer if the debtors were to terminate the agreement for almost any reason.
Later, Judge Sontchi said that no one had told him 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 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.
After the second rejection by regulators, the debtors terminated the agreement. At that juncture, the buyer seemed entitled to the $275 million breakup fee because the agreement, as it was written, called for the payment if the debtors terminated, even though regulators had disapproved the acquisition. The agreement had no deadline for the buyer to obtain regulatory approval.
At the end of July 2017, several creditors filed a motion for reconsideration, asking Judge Sontchi to revoke approval of the termination fee that he had granted in September 2016.
Ruling on the creditors’ motion for reconsideration, Judge Sontchi said it “became clear” after the second disapproval that the purchaser would appeal the regulators’ decision “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.”
In his opinion in October 2017 revoking approval of the breakup fee, Judge Sontchi said the debtor had been “forced to terminate the [purchase] agreement [in July 2017] to pursue a lower offer because [the purchaser] had the debtor in a corner.” The Third Circuit accepted a direct appeal, overstepping an intermediate appeal in district court.
Time Limits for Reconsideration
There may or may not have been a time limit for reconsideration, depending on the nature of the approval order.
Writing for the majority, Circuit Judge Joseph A. Greenaway, Jr. said that federal courts have inherent authority to permit reconsideration, although there is no express authorization in the rules. If the approval order was interlocutory, he said there would be “no strict time limit” regarding reconsideration.
On the other hand, if the creditors’ motion were under Rule 60(b) based on fraud or mistake, Judge Greenaway said the time limit would be one year under Rule 60(c), made applicable by Bankruptcy Rule 9024.
To decide that Rule 60(b) did not apply, Judge Greenaway concluded that the approval order was interlocutory, considering the “flexible, pragmatic approach to finality in the bankruptcy context.” The initial order was interlocutory, he said, because the allocation of the breakup fee among the debtors’ estates was left to later determination. The order was also interlocutory because the bankruptcy court reserved jurisdiction to resolve disputes.
Even if the order was interlocutory and gave rise to no explicit time restriction, Judge Greenaway said that the doctrine of laches could make reconsideration untimely. However, he found no abuse of discretion by the bankruptcy judge in refusing to bar the reconsideration motion based on laches because the creditors acted within weeks of the termination of the acquisition.
The Merits of Reconsideration
Having decided there was no time bar, Judge Greenaway turned to the merits of the decision to reconsider and the legal standards to be applied.
Although reconsideration based on the court’s inherent power gives rise to no rigid set of rules, Judge Sontchi had applied the standards under Rule 59(e), made applicable by Bankruptcy Rule 9023. A motion under Rule 59(e) requires a clear error of law or fact. Saying that Judge Sontchi’s approach “makes sense,” Judge Greenaway employed the same standard.
According to Judge Greenaway, Judge Sontchi concluded that he “had a fundamental misunderstanding of the critical facts.” In particular, Judge Sontchi had not been told there was no time limit within which the buyer was required to obtain regulatory approval.
“Despite this heightened standard,” Judge Greenaway said that appellate review of a motion for reconsideration is for abuse of discretion. With regard to the bankruptcy court’s subjective understanding of the deal, he concluded that the findings were not clearly erroneous.
By misunderstanding the facts, Judge Greenaway said that Judge Sontchi “failed to weigh this potential harm to the estates [the requirement to pay $275 million] against the potential benefits.” He said “the error of fact was obvious and indisputable,” leading the bankruptcy judge to improperly weight the factors to consider when approving a breakup fee under Third Circuit precedent.
“Looking at the totality of the circumstances,” Judge Greenaway said that the bankruptcy court “did not abuse its discretion” in disapproving the breakup fee after correctly understanding the facts.
The Dissent
Finding an abuse of discretion, Circuit Judge Marjorie O. Rendell dissented. Although the bankruptcy judge may have misapprehended the facts, she said, “this was no legal or factual error.” She said that “hindsight cannot justify nullifying a material term of the deal.” In her view, “the parties fully appreciated the potential scenarios” when the bankruptcy judge was approving the breakup fee.
Judge Rendell concluded by saying that reconsideration “based on a bankruptcy court’s failure to appreciate all of the potential ramifications of the terms sets a troubling — if not dangerous — precedent.”
Judge Rendell seems to believe that the parties’ correct understanding of the deal mattered, while the majority focused on the bankruptcy judge’s misunderstanding. Neither the majority nor the dissent analyzed whether the bankruptcy judge had been intentionally misled, possibly because Judge Sontchi did not lay blame in his opinion.
To justify reconsideration in the future and avoid the high standard in the Third Circuit, the party seeking reconsideration should attempt to prove that someone misled the bankruptcy court, whether intentionally or not.