Third Circuit Affirms Reversal of $275M Break-Up Fee in Del. Bankruptcy Case

As a part of the deal, EFH agreed to pay NextEra $275 million if the merger didn't go through or if it failed to win approval from Texas utility regulators. The Public Utility Commission of Texas later blocked the deal as adverse to the public interest, paving the way for U.S. Bankruptcy Judge Christopher S. Sontchi to approve the fee.

However, Sontchi later realized that the merger agreement lacked a clear deadline for when EFH would have to call off the deal in order to trigger the payment. The oversight, he said, essentially allowed NextEra to run out the clock and simply wait for EFH to terminate the agreement.

If it weren't for that oversight, Sontchi said, he never would have allowed NextEra to collect the break-up fee.

On appeal, NextEra argued that the court was correct to allow the payment in the first place because the fee, as originally drafted, qualified as an allowable administrative expense under U.S. bankruptcy law.

A majority of the three-judge panel, however, agreed that Sontchi had initially misapprehended the facts of the case, and that the error had changed the calculus for assessing the termination fee on a motion for reconsideration. In a 37-page opinion, the appeals court found that, while the fee promoted competitive bidding, it also had the “possibility to be disastrous” to EFH, should the company have to pay it.

“Once it had a complete understanding, the bankruptcy court properly weighed the various considerations and determined that the potential benefit was outweighed by the harm that would result under predictable circumstances,” Circuit Judge Joseph A. Greenaway Jr. wrote.

“In other words, the risk was so great that the fee was not necessary to preserve the value of debtors' estates. Having made such a determination, the bankruptcy court did not abuse its discretion in denying the fee in part.”

Greenaway was joined in the decision by Judge Julio M. Fuentes.

However, the panel's third member, Judge Marjorie O. Rendell, rejected the majority's reasoning. Rather than committing an error of fact, she said, the court had simply failed to consider the potential consequence of the deal failing to secure regulatory approval.

“But hindsight cannot justify nullifying a material term of the deal that was struck with all of the facts on the table,” she wrote in a six-page dissent.

“Parties to commercial transactions present the terms of the deal to the court for approval and, once approved, are entitled to rely on the court's order, which is based on a thoughtful, well-reasoned analysis,” Rendell said. “Here, that should have been the guiding principle, and the grant of reconsideration so as to nullify the previously approved fee when there was no clear error of fact or law was an abuse of discretion.”

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Tom McParland writes for Delaware Law Weekly, an ALM affiliate publication of The Bankruptcy Strategist. He can be reached at [email protected].