Opinion ID: 223265
Heading Depth: 2
Heading Rank: 2

Heading: Reimbursement Order

Text: Appellants raise three challenges to the Reimbursement Order. First, they contend that the bankruptcy court applied the wrong standard under the Bankruptcy Code to ASARCO's motion for authorization to pay reimbursement expenses. They argue that the bankruptcy court should have considered ASARCO's motion under section 503(b), [8] which applies to administrative expenses, and not under section 363(b), the business judgment standard. Section 503(b) is the more stringent of the two, and Appellants contend that under that standard the Reimbursement Order was in error. Second, Appellants argue that even assuming section 363(b) was the correct standard to apply, the bankruptcy court erred in finding that ASARCO's motion satisfied the business judgment standard. Finally, Appellants argue that the bankruptcy court abused its discretion by approving procedures that authorized ASARCO to reimburse particular bidders without notice to the Parent and without sufficient judicial oversight. Appellants did not raise this argument before the district court, however, and have not shown any exceptional circumstance that warrants-our addressing this waived issue. See In re Duncan, 562 F.3d 688, 697 (5th Cir.2009) (It is a bedrock principle of appellate review that claims raised for the first time on appeal will not be considered.); In re Bradley, 501 F.3d 421, 433 (5th Cir.2007) (Even if an issue is raised and considered in the bankruptcy court, this court will deem the issue waived if the party seeking review failed to raise it in the district court.). Accordingly, we address Appellants' first two arguments only.
We review the decision of a district court, sitting in its appellate capacity, by applying the same standards of review to the bankruptcy court's finding of fact and conclusions of law as applied by the district court. Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 480 (5th Cir.2009). A bankruptcy court's conclusions of law are reviewed de novo, as are mixed questions of law and fact. Tummel & Carroll v. Quinlivan (In re Quinlivan), 434 F.3d 314, 318 (5th Cir. 2005). A bankruptcy court's findings of fact are reviewed for clear error and may be reversed [o]nly upon a definite and firm conviction that the bankruptcy court erred. Id.
Section 363 of the Bankruptcy Code addresses the debtor's use of property of the estate and incorporates a business judgment standard. Subsection 363(b) provides that a debtor-in-possession, `after notice and hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate.' In re Cont'l Air Lines, Inc., 780 F.2d 1223, 1226 (5th Cir.1986) (quoting 11 U.S.C. § 363(b)(1)). In such circumstances, for the debtor-in-possession or trustee to satisfy its fiduciary duty to the debtor, creditors and equity holders, there must be some articulated business justification for using, selling, or leasing the property outside the ordinary course of business. Id.; see also In re Moore, 608 F.3d 253, 263 (5th Cir.2010) (A sale of assets under § 363 . . . is subject to court approval and must be supported by an articulated business justification, good business judgment, or sound business reasons.). The business judgment standard in section 363 is flexible and encourages discretion. Whether the proffered business justification is sufficient depends on the case. . . . [T]he bankruptcy judge `should consider all salient factors pertaining to the proceeding and, accordingly, act to further the diverse interests of the debtor, creditors and equity holders, alike.' Cont'l Air Lines, 780 F.2d at 1226 (quoting In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir.1983)). In contrast, the narrower standard in section 503 of the Bankruptcy Code pertains to entities that have incurred administrative expenses and wish to request payment from the estate. Claims under this section generally stem from voluntary transactions with third parties who lend goods or services necessary to the successful reorganization of the debtor's estate. In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387 (5th Cir.2001). Subsection 503(b) allows parties to recover administrative expenses including the actual, necessary costs and expenses of preserving the estate. 11 U.S.C. § 503(b)(1). But as used in this section, [t]he words `actual' and `necessary' have been construed narrowly: `the debt must benefit [the] estate and its creditors.' In re TransAmerican Natural Gas Corp., 978 F.2d 1409, 1416 (5th Cir.1992) (quoting NL Indus., Inc. v. GHR Energy Corp., 940 F.2d 957, 966 (5th Cir.1991)); see also Jack/Wade Drilling, 258 F.3d at 387 ([T]o qualify as an actual and necessary cost under section 503(b)(1)(A), a claim against the estate must have arisen post-petition and as a result of actions taken by the [debtor-in-possession] that benefitted the estate. (internal quotation marks omitted)). Appellants argue that the bankruptcy court erred in relying on section 363(b) to issue the Reimbursement Order. They assert that the business judgment standard in section 363(b) is too broadly worded to address what they contend is the salient issue here: whether third parties such as the Intervenors may recover expenses incurred in the course of due diligence. In Appellants' view, the correct and applicable standardthe one the bankruptcy court should have appliedappears in section 503(b)(1). Under that standard for administrative expenses, Appellants argue, the Reimbursement Order was in error because the requested reimbursements were not actually necessary to preserve the value of the estate. In support of their argument Appellants cite two Third Circuit decisions where the court applied section 503(b) and not 363(b) to requests for break-up fees. See In re Reliant Energy Channelview LP, 594 F.3d 200 (3d Cir.2010); In re O'Brien Envtl. Energy, Inc., 181 F.3d 527 (3d Cir.1999). In both Reliant and O'Brien, the bankruptcy court refused to approve break-up fees to unsuccessful stalking-horse bidders in bankruptcy auctions. [9] In O'Brien, the Third Circuit established that section 503 governs an unsuccessful bidder's request for break-up fees. 181 F.3d at 535. Applying the administrative expense standard, the Third Circuit concluded in both cases that the unsuccessful bidder had not made the requisite showing that the fees were actually necessary to preserve the value of the estate. We are not persuaded that Reliant and O'Brien are apt where, as here, a debtor requests the authority to reimburse expense fees for second-round `qualified' bidders in a multiple stage auction for a very unique and very valuable but possibly worthless asset. ASARCO LLC, 441 B.R. at 824. For one, the break-up fee provisions at issue in Reliant and O'Brien significantly differ from the due diligence reimbursement fees at issue in this case. The break-up fees were to be paid only if the prospective bidder was unsuccessful. Here, in contrast, prospective (and qualified) bidders could be reimbursed regardless of whether they were ultimately successful. Moreover, in both O'Brien and Reliant Energy the bankruptcy court refused to approve the break-up fee in part due to the concern that the fee would chill. . . the competitive bidding process. O'Brien, 181 F.3d at 529; see also Reliant Energy, 594 F.3d at 204. No such concern arises in this context, where ASARCO sought to increase competition by providing bidders an incentive to undertake the costly but necessary due diligence. On this record, we conclude that the business judgment standard is the better fit for assessing ASARCO's reimbursement motion. Section 363 addresses the debtor's use of the estate property, and in its motion ASARCO sought authorization to make discretionary use of the estate's funds. Section 503, in contrast, generally applies to third parties that have already incurred expenses in connection to the debtor's estate. The unsuccessful bidders in O'Brien and Reliant Energy sought payment for expenses incurred without the court's pre-approval for reimbursement, and thus section 503 was the proper channel for requesting payment. In ASARCO's case, however, the bankruptcy court issued the Reimbursement Order before any potential qualified bidders, including the Intervenors, had incurred due diligence and work fees. In this context, application of the business judgment standard is appropriate.
Appellants argue that even if section 363(b) applies in this case, there was insufficient evidence in the record to support the bankruptcy court's finding that the requested expense reimbursements had sound business justification. As stated in the Reimbursement Order, the bankruptcy court found that ASARCO's proposed reimbursement of expenses was designed to maximize the value of ASARCO's estate, and was fair, reasonable, and appropriate. The bankruptcy court further determined that the Reimbursement Order was in the best interests of ASARCO and its estate, creditors, interest holders, stakeholders, and all other parties in interest. On this basis, the bankruptcy court concluded that ASARCO had demonstrated a compelling and sound business justification for the reimbursement authority. Finding no clear error in the bankruptcy court's findings of fact, we defer to its findings. Quinlivan, 434 F.3d at 318. The district court similarly concluded that ASARCO's reimbursement motion satisfied the business judgment standard. The court determined that there was no evidence in the record of self-dealing or manipulation among the parties who negotiated the reimbursement procedures; the Reimbursement Order facilitated, not hindered, the auction process; and the approved maximum available size of the reimbursement fee was reasonable in comparison to the size of the SCC Judgment. ASARCO LLC, 441 B.R. at 831-33. [10] On this record, we agree with the district court that the bankruptcy court did not err in issuing the Reimbursement Order under the business judgment standard in section 363(b).