In Re Energy Future Holdings Corp.
904 F.3d 298
3rd Cir.2018Background
- Debtors (EFH/EFIH) entered Chapter 11 and agreed to sell their ~80% economic interest in Oncor to NextEra for a transaction that included a $275 million termination (break-up) fee. The Merger Agreement did not set a deadline by which Texas PUCT approval had to be obtained.
- Bankruptcy Court approved the Merger Agreement and the $275M Termination Fee as an administrative expense under 11 U.S.C. §503(b), based on disclosures and testimony that inaccurately suggested the fee would not be payable if the PUCT simply rejected the deal.
- After the PUCT denied approval, NextEra pursued appeals rather than terminating; Debtors ultimately terminated the NextEra agreement and closed an alternative transaction. Creditors Elliott moved to reconsider the Approval Order to preclude payment of the Fee where PUCT rejection caused termination.
- The Bankruptcy Court granted reconsideration, finding it had misapprehended a critical factual point (no regulatory-deadline) and, applying the O'Brien standard, concluded the risk of harm outweighed any benefit—so the Fee was disallowed when termination resulted from PUCT nonapproval.
- NextEra appealed directly to the Third Circuit; the Third Circuit affirmed, holding the reconsideration was timely (Approval Order was interlocutory) and the Bankruptcy Court did not abuse its discretion in partially disallowing the Fee.
Issues
| Issue | Plaintiff's Argument (NextEra) | Defendant's Argument (Elliott/Bankruptcy Court) | Held |
|---|---|---|---|
| Timeliness of motion to reconsider Approval Order | Elliott’s motion was untimely; if Approval Order was final, Rule 60 limits apply and Elliott delayed unreasonably | Approval Order was interlocutory (reserved allocation/jurisdiction); no strict time bar and laches not shown | Approval Order was interlocutory; reconsideration timely and Bankruptcy Court did not abuse discretion in denying laches defense |
| Whether the $275M Termination Fee (as drafted) was allowable as an administrative expense under §503(b) (O'Brien standard) | The original Approval was correct: the Fee promoted bidding and preserved estate value and thus met §503(b) standards | The court initially misapprehended a critical fact (no PUCT deadline); with full facts the Fee posed predictable, substantial harm (NextEra could hold out), so Fee was not "actual, necessary" to preserve the estate and must be disallowed in PUCT-failure terminations | Court did not abuse its discretion: given the previously unrecognized fact, reconsideration was warranted and partial disallowance was appropriate because risk of harm outweighed benefit |
Key Cases Cited
- Law v. Siegel, 571 U.S. 415 (2014) (federal courts retain inherent authority over bankruptcy proceedings)
- Calpine Corp. v. O'Brien Environmental Energy, Inc. (In re O'Brien Environmental Energy, Inc.), 181 F.3d 527 (3d Cir. 1999) (termination fees reviewed under §503(b) as actual, necessary costs to preserve the estate)
- In re Reliant Energy Channelview LP, 594 F.3d 200 (3d Cir. 2010) (additional context on when breakup fees may assure bidder adherence and courts’ discretionary balancing)
- Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015) (bankruptcy finality and appeals context informs interlocutory/finality analysis)