Opinion ID: 1380390
Heading Depth: 2
Heading Rank: 2

Heading: Application of O'Brien To This Case

Text: Under O'Brien, we must decide whether an award of a break-up fee was necessary to preserve the value of the Debtors' estate. In this regard, we recognize that it could be argued that in either or both of two ways a break-up fee could have preserved the value of the estate. First, the opportunity to obtain a break-up fee could have induced Kelson to make its bid before the Bankruptcy Court ordered the auction, and second, the provision for a break-up fee may have been necessary to induce Kelson to adhere to its bid after the Court ordered the conducting of the auction. [9]
Kelson's bid undoubtedly provided a benefit to the estate by establishing a minimum price and a complete set of offer terms and, in fact, the Bankruptcy Court required that any competing bid exceed Kelson's bid by at least $5 million. Indeed, it is plausible to believe that an initial bid, ordinarily or perhaps even always, will provide a benefit to an estate because it will establish a floor price for the assets to be sold. But we have to decide a different question, i.e., was an award of a break-up fee necessary to produce this benefit and preserve the value of the estate? We recognize that the first bidder in a bankruptcy sale necessarily takes a risk at least to the extent of investing the time, money and energy needed to produce its bid. [10] Nevertheless, while we understand that the first bidder may be motivated in part to submit its bid by the possibility that it will receive a break-up fee, it does not follow from that motivation that the bidder will withdraw its bid, pass up on the opportunity to acquire the asset to be sold, and nullify its work in preparing its bid if a court, when ordering that there be an auction of assets, declines to authorize a break-up fee to be paid to the initial bidder. Surely O'Brien makes that clear because even though Calpine had made its bid contingent on the award of a break-up fee, it competed at the auction after the Bankruptcy Court rejected the request for a break-up fee. Here, however, Kelson argues that the provision of a break-up fee was necessary to entice it to bid, but the facts do not support this argument. We are satisfied that it is clear beyond doubt that Kelson did not condition its bid on the presence of a provision for a break-up fee, although it did condition the bid on the Debtors' promise to seek authority to pay it such a fee. Thus, section 8.1(d) of the APA provided that Sellers shall ... file a bidding procedures motion with the Bankruptcy Court ... seeking the entry of an order approving the bid protections. App. at 288 (emphasis added). These bid protections included the break-up fee. Accordingly, there is no escape from the fact that Kelson did make its bid without the assurance of a break-up fee, and this fact destroys Kelson's argument that the fee was needed to induce it to bid. [11] Rather, the mere possibility of the payment of a break-up fee was sufficient for that purpose.
The record suggests that although an assurance of a break-up fee may not have been needed to induce Kelson's bid, it nevertheless could have been useful to assure that Kelson adhered to its bid rather than abandoning its attempt to purchase the plant in the event that the Bankruptcy Court required an auction for its sale. A break-up fee certainly provides a benefit to an estate if a bidder remains committed to a purchase, though, as we have explained, we see no reason to believe that bidders who already have made a full and complete bid necessarily will abandon their efforts to obtain an asset without an assurance of a break-up fee. In this case, the Bankruptcy Court believed that the provision for the fee would deter other possible purchasers from bidding for the plant and would outweigh any possible benefit achieved for the estate by keeping Kelson committed to the purchase through the provision for the break-up fee. Clearly, the Bankruptcy Court was faced with a difficult choice. If the Court denied the break-up fee, then Kelson might abandon the purchase, as it supposedly did. If another suitable bid had not materialized and Kelson had walked away permanently from the purchase, the estate would have been harmed severely by the denial of a break-up fee. To avoid this result, the Court could have granted a break-up fee to secure Kelson's existing bid. Nevertheless, the Court decided that a $15 million break-up fee was not necessary for the protection of the estate. This decision, which we view from the Court's perspective on March 18, 2008, was justified by (1) Fortistar's assertion that it planned to continue bidding, (2) the binding language of the APA, and (3) the logical belief that Kelson would not abandon a fully negotiated agreement if no other bidder materialized. Though we do not decide the case on the basis of our knowledge of what happened after the Court denied the fee, as we decide the case on the basis of the record as of March 18, 2008, when the order from which Kelson appealed to the District Court was entered, there is no escape from the fact that the Bankruptcy Court's decision was shown to be correct when Fortistar placed a substantially higher bid for the assets.
We cannot say that the Bankruptcy Court abused its discretion in its application of the O'Brien standard. Though the allowance of a break-up fee might have benefitted the estate, Kelson made its bid before the auction knowing that it might not receive a break-up fee, and a retroactive grant of a break-up fee could not have induced a bid that Kelson already had made. Though, as we have made clear, the estate might have benefitted if on March 18, 2008, the Bankruptcy Court had provided for a break-up fee to secure Kelson's adherence to its earlier bid, the Court found that the potential harm to the estate that a break-up fee would cause by deterring other bidders from entering the bid process outweighed that benefit. We cannot say that the Bankruptcy Court abused its discretion in reaching its result.