ANDREW S. HANEN, District Judge.
ASARCO Incorporated and Americas Mining Corporation (together, the "Parent") have appealed the Bankruptcy Court's Order Approving the Expense Reimbursement in Connection with the Auction and Proposed Sale of the SCC Judgment (the "Reimbursement Order"), arguing that the Bankruptcy Court applied the wrong standard in evaluating the Debtor's Motion for an Order Approving the Expense Reimbursement in Connection with the Auction and Proposed Sale of the SCC Judgment (the "Reimbursement Motion") and that the Reimbursement Order is contrary to the proper legal standard. (Doc. Nos.3, 25.) The Reimbursement Order authorized the Debtor, subject to vetting procedures set out in the order, to reimburse certain bidders who participated in the auction of the SCC Judgment. (See R. 15.) Having considered the briefs and oral arguments of the parties, and for the reasons set forth below, the Court hereby AFFIRMS the Reimbursement Order.
This appeal arises out of an arduous, but successful bankruptcy reorganization proceeding. Ultimately, two plans of reorganization were submitted for consideration by the Bankruptcy Court and this Court—one filed by the Parent and one filed by the Debtor. Each plan provided for a unique disposition of the SCC Judgment, a substantial asset of the Debtor.
Before one can truly grasp the issues in this appeal, it is critical to have an understanding of how the SCC Judgment itself was reached.
It begins with a mining company. ASARCO
On top of the substantial long-term debt, ASARCO was also responsible for a $450 million revolving credit facility that was secured by ASARCO's assets, including 43,348,949 shares of Class A Common Stock that ASARCO held in Southern Peru Copper Company ("SCC"), representing a controlling (54.18%) interest. These particular shares were special "Founder's Shares" with enhanced voting rights.
According to certain governing provisions of the stock, the super-voting rights of any shares that were transferred to a party that was not an affiliate would be terminated. Grupo's concern was that if it pledged the SCC shares directly as collateral for the credit revolver, it would trigger the loss of the super-voting rights. Grupo thus implemented a restructuring in which it created Southern Peru Holding Company ("SPHC"), a totally owned subsidiary of ASARCO (and thus an affiliate) which would hold the SCC shares. Then, ASARCO pledged the SPHC stock as collateral. Grupo also formed AMC as a holding company for its mining interests and transferred all of its ASARCO stock to AMC. The result was a structure in which Grupo wholly owned AMC, which wholly owned ASARCO, which wholly owned SPHC, which owned the stock in SCC.
In addition to the debt it acquired from the 1999 leveraged buy-out, ASARCO was beset with legal troubles arising from environmental and asbestos claims, and the strain on ASARCO's finances began to take its toll. By the fall of 2001, ASARCO technically defaulted on the credit revolver, fell behind on its payments to critical vendors, and lacked the $50 million necessary to pay a bond debt that had become due. As a result of low copper prices, which languished at less than a dollar per pound (and were about 60 cents per pound in November 2001), ASARCO's sales volume and profit were not sufficient to cover its tremendous debt. The financial troubles continued through 2002: in January, ASARCO stopped paying various creditors and contractors, and it could not even pay the experts that it had retained to help it through its cash crisis. With limited options available to attempt to right the ship and mounting pressures from creditors (notably the head bank in the credit revolver threatening to foreclose on the security interests, including the SCC stock),
Not wanting to lose control of the SCC shares, Grupo's aim was to transfer them to AMC in a manner that would avoid a fraudulent conveyance action. Despite this aim, neither AMC/Grupo/ASARCO nor any third party marketed the SCC stock in a public fashion, nor solicited or sought third-party offers. Ultimately, the shares were transferred to AMC on March 31, 2003, in exchange for $672,653,400, most of which was distributed to various creditors. SPHC received a $123.25 million note from AMC, and ASARCO/SPHC also received forgiveness of a $41.75 million note that they owed to AMC and the Larrea family.
Despite the sale, ASARCO continued to have financial difficulties. While it was able to pay off some of its debts (including the revolver and $100 million of bonds that had come due) with the proceeds from the sale of the SCC stock, it did not have sufficient cash flow to make payroll, fund its mining operations, or cover its growing liabilities from environmental and asbestos-related litigation. In August 2005, ASARCO reluctantly filed for Chapter 11 bankruptcy. The fraudulent transfer suit was later filed by ASARCO and SPHC against AMC.
Following a four-week bench trial, this Court found in pertinent part that: (1) AMC was liable for actual intent fraudulent transfer under Delaware law because it entered into the SCC transfer "with full knowledge that ASARCO's creditors would be hindered or delayed as a result"; (2) pursuant to New Jersey and Delaware law, AMC was liable for aiding and abetting the ASARCO directors' breach of fiduciary duty to ASARCO's creditors; and (3) that AMC was liable under Arizona law for conspiracy with one or more of ASARCO's directors to fraudulently transfer the SCC stock.
After the parties failed to successfully mediate on the issue of damages, this Court issued an opinion on damages and judgment which ordered the return of all stock traceable to the 54.18% of SCC shares that were owned by SPHC and/or ASARCO on March 30, 2003, the day before the transfer took place. It also ordered that AMC pay damages in the amount of dividends that were awarded from March 31, 2003 through the date of the return of the stock. AMC was granted an offset in the amount of consideration that it originally paid for the stock. Ultimately, in the SCC Judgment this Court awarded the Debtor 260,093,694 shares of Southern Peru Copper Company common stock and $1,382,307,216.75 in cash plus post-judgment interest (to account for the dividends and prejudgment interest, less the offset of consideration that AMC paid for the stock), based on this Court's findings of liability and damages entered in two prior orders. See ASARCO III. AMC perfected its appeal from this judgment and was avidly pursuing this appeal at the time the Bankruptcy Court approved the auction process that is at the heart of the dispute in this appeal.
Suffice it to say, the SCC Judgment was the result of complex findings by this Court, and the bulk of its worth lay in the shares of SCC stock rather than the cash damages (which were essentially proceeds—dividends—from ownership of the stock). Ascertaining the value of the SCC Judgment required one to consider several variables, none of which were easy or simple. First, there are the legal findings
Second, as was made apparent throughout the fraudulent transfer trial as well as the confirmation proceedings, the price of copper significantly affects the value of the SCC stock and has the potential to wreak havoc similar to the way that it affected ASARCO's balance sheet and value. Further, the price of copper is subject to wild and unpredictable fluctuations. For example, the price of copper rose from less than a dollar per pound around the time that ASARCO experienced its greatest financial woes (1999 to 2004), to more than $3.50 per pound in 2008. Although prices fell with the economic recession in early 2009 to about $1.25 per pound, by the time of the confirmation trial (August 2009), prices were back up to nearly $3 per pound, a significant increase from the time that ASARCO was pushed into bankruptcy (in part by its inability to profit due to low copper prices). The increased price of copper is one of the primary reasons that the Bankruptcy proceeding was ultimately successful—with higher prices, ASARCO's operations returned to profitability and it again became a prized company. Nevertheless, the fluctuation of copper prices was another variable which a prospective buyer faced.
Third, evaluating Southern Peru Copper Company itself was another challenge. Although the SCC Judgment is for more than 260 million shares of SCC stock (representing all of the shares owned by AMC at the time of the judgment), that is not a controlling share in the company. Thus a potential acquirer of the SCC Judgment would have to consider how much it would be worth to own a significant, but nevertheless minority interest in the company, taking into account that it would not necessarily have the ability to alter SCC's internal management and operations. Furthermore, since the company is not domestically based, a potential acquirer would also have to determine and account for any potential costs of doing business in Peru—including, for instance, political or social stability issues that could arise. Finally, these shares were Founder's Shares with special voting privileges, but they were also subject to special restrictions on the ability to transfer them to third parties. The overall effect of these restrictions was not totally clear.
Thus, while on the one hand the SCC Judgment ultimately represented a potentially highly valuable asset, it was not an easy asset to value.
Given the novelty of the legal issues decided in the underlying case, the fluctuations in the price of copper and the overall uncertainty in the copper industry, itself, and the uncertainties inherent in investing as a minority owner in a foreign business, it could not be taken for granted that the Debtor would easily be able to recover the
The Debtor asked its financial advisors, Barclays Capital Inc., to assist in the auction process. (R. 5.) Initially, the Debtor introduced the auction concept formally by seeking permission to pay Barclays more fees and expand Barclays' original retention agreement to include the auction process. (R. 1.) The Debtor was not able to obtain Bankruptcy Court approval for such expansion, most notably due to the Parent's argument that Barclays had already been retained and paid for the purposes of selling the estate's assets and that this judgment was one of the assets.
As outlined in the Debtor's Reimbursement Motion, the auction involved "a two-part bid solicitation process, subject to a topping auction," which was "intended to induce parties to submit their highest and best bid at the outset of the process, create a level playing field, and maximize value for the benefit of ASARCO and its estate." (R. 5 at ¶ 5.) First, Barclays prepared informational materials that it sent to "more than 100 potential parties who Barclays believed were interested in acquiring all or a portion of the SCC Judgment." (Id.) These parties "primarily included hedge funds and private equity and institutional investors." (Id.)
Potential bidders were invited to submit preliminary, non-binding "written indication[s] of interest for a full or partial purchase of the SCC Judgment ... by July 16, 2009." (Id.) Those who submitted such "Indicative Offers" were the "Initial Bidders." (Id.) After reviewing the Indicative Offers and consulting with its advisors, the Debtor "decided to invite a select group of Initial Bidders to proceed to the second phase of the process." (Id.) In the second phase, this select group of "Qualified Bidders"—all of whom were believed "to have the financial wherewithal to complete the potential transaction"—would be given the opportunity to conduct additional due diligence. (Id.) It is for these Qualified Bidders
At the time the Debtor filed the Reimbursement Motion, the auction process was under way but not yet concluded. The additional steps that were contemplated were (1) after the second period of due diligence and beginning the week of August 3, 2009, Qualified Bidders would be invited to make binding proposals and (2) the "Independent Committee" of the ASARCO board of directors, "after consultation with its advisors and the key creditor constituents," would analyze and evaluate the binding proposals to decide "whether to enter into a stalking-horse purchase agreement with one or more of the Qualified Bidders." (Id. at ¶ 6.) Then, (3) if the Independent Committee decided to enter into a stalking-horse purchase agreement, it would submit a motion to the Bankruptcy Court seeking approval of the agreement. (Id.) If such an agreement were approved, (4) a topping auction would be held wherein ASARCO, again after consulting with advisors and key creditor constituents, would determine the bid "providing the highest and best value" for the bankruptcy estate. (Id.) At the topping auction, ASARCO would have been able to discuss terms of any bid with other bidders and "allow one or more other bidders to make higher and better offers." (Id.)
The Bankruptcy Court approved the Expense Reimbursement Order, but the SCC Judgment was not ultimately sold. According to the record, four of the initial bidders were invited to participate in the second phase of due diligence. (R. 23 at ¶ 62.) Two binding bids were submitted—one on August 13, 2009 and one on August 14, 2009. (Id.) There is nothing in the record to indicate how much further the Debtor intended or sought to pursue the auction process, but it bears noting that contemporaneously with the binding bid submission, the Debtor was in the middle of the confirmation trial.
The rationale for seeking reimbursement of expenses was to provide an incentive for bidders to pursue the diligence and expend the resources necessary to bid on the SCC Judgment. (R. 11 at 22-23.) Given the uniqueness of the asset, the Debtor anticipated that potential bidders would have to invest significant resources to evaluate the complex legal issues and financing considerations that would be required before such bidders could make their "highest and best offer[s]." (R. 5 at ¶¶ 8, 22.) This would be expensive and the bidders would have to do this facing the prospect that they might not be the successful bidder, or that even if they were the highest bidder, the judgment still might not be sold. When faced with the prospect of such a large expense plus the possibility of no return, Qualified Bidders would understandably be reluctant to participate.
The proposed expense reimbursement process set a cap on the total allowed reimbursements, which would be drawn from a specially-designated Expense Reimbursement Fund. (R. 5 at ¶ 13.) After determining the appropriate amount of reimbursement, but before distributing any funds, the Debtor would first notify the "Notice Parties"—the Asbestos Committee, Future Claims Representative, Department of Justice, ASARCO Committee, and United States Trustee.
In the Bankruptcy Court's Expense Reimbursement Order ultimately approving the Reimbursement Motion, the Bankruptcy Court also required that the Debtor notify the Bankruptcy Court, along with the Notice Parties, of the amount of any proposed reimbursement before distribution of funds. (Id.) Should the Bankruptcy Court determine a hearing to be necessary on the amount of an Expense Reimbursement, it would have twenty-four hours to set an emergency hearing sua sponte. (Id. at ¶ 4.) Absent objection by a Notice Party or a hearing ordered by the Bankruptcy Court, the Debtor would have the authority to distribute the reimbursement. (Id. at ¶ 8.)
The Reimbursement Order was entered, over the objection of the Parent, on July 29, 2009. (R. 15.) Prior to entering the Reimbursement Order, the Bankruptcy Court heard argument in three different hearings (R. 11, 13, 17), and received the proffer of George Mack, a Managing Director at Barclays. (R. 25.) Mr. Mack's proffer emphasized the unusual nature of
(Id. at 127:4-10.)
In its order approving the Reimbursement Motion, the Bankruptcy Court found that reimbursement of all or a portion of the Qualified Bidders' actual, documented due diligence expenses and, in some cases, the payment of work fees, in connection with the auction and potential sale of the SCC Judgment, is "fair, reasonable, and appropriate and is designed to maximize the value of ASARCO's estate." (R. 15 at ¶ C.) It further found that ASARCO had "demonstrated a compelling and sound business justification for the Expense Reimbursement under the circumstances, timing, and procedures set forth in the Motion." (Id.) Concluding that "[t]he entry of this Order is in the best interests of ASARCO and its estate, creditors, interest holders, stakeholders, and all other parties in interest," the Bankruptcy Court granted the Reimbursement Motion. (Id. at ¶ D.)
The Parent filed a Notice of Appeal on August 5, 2009. (R. 18.) On August 12, the Bankruptcy Court entered an order staying the Expense Reimbursement Order, effective from August 11, 2009 at 2:30 p.m. through August 31, 2009. (R. 22.) On September 2, 2009, the Bankruptcy Court extended the stay through September 30, 2009. (Doc. No. 25 at 11; see also Bk. Doc. No. 12773.)
On November 13, 2009, this Court entered the Memorandum Opinion, Order of Confirmation, and Injunction, in which it affirmed the selection of the Parent's plan of reorganization for confirmation over that of the Debtor. (Supplemental R. 30.) Pursuant to its plan of reorganization, the Parent gained control over the Debtor (in this case, the Appellee) and the SCC Judgment, which could have mooted the appeal and left the Reimbursement Order's beneficiaries in limbo. After the effective date of the Parent's plan, however, Elliot Management and the Baupost Group (the "Intervenors") jointly filed a Motion to Intervene. (Doc. No. 16.) The Intervenors applied as "the beneficiaries" of, and incurred fees "as a result of and in reliance on" the Expense Reimbursement Order before the initial stay of the Order. (Id.)
On June 24, 2010, following the completion of briefing by both sides, this Court held a hearing at which counsel for the Parent and the Intervenors appeared.
This Court reviews the Bankruptcy Court's findings of fact for clear error. Bass v. Denney (In re Bass), 171 F.3d 1016, 1021 (5th Cir.1999). That is, the Court will only reverse the Bankruptcy Court's findings of fact "if left with the definite and firm conviction that a mistake has been committed." Perry v. Dearing (In re Perry), 345 F.3d 303, 309 (5th Cir. 2003) (internal citations omitted). The Bankruptcy Court's conclusions of law, mixed questions of fact and law, and questions concerning the application of law to the facts, are reviewed de novo. In re Bass, 171 F.3d at 1021.
The Parent has challenged both the legal standard applied by the Bankruptcy Court when it evaluated the Reimbursement Motion and the Reimbursement Motion as evaluated under what it contends to be the "proper" legal standard. (Doc. No. 25.) Specifically, it argues that the business-judgment standard under 11 U.S.C. § 363(b) should not have been used to evaluate the Reimbursement Motion, and that the Bankruptcy Court should have used the more rigorous § 503(b) administrative expense standard. (Id.) Under the administrative expense standard, the Parent contends that the Reimbursement Motion could not have been granted because the record does not support a finding that it was "actually necessary to preserve the value of the estate." (Id.) The Intervenors argue that application of the business judgment standard was appropriate, and that the Expense Reimbursement Order would pass muster even if the "administrative expense" standard were applied. (Doc. No. 30.) The Intervenors also argue that this appeal is equitably moot. (Id.)
Section 363(b)(1) of the Bankruptcy Code provides that a debtor in possession, "after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. . . ." 11 U.S.C. § 363(b)(1). Approval of § 363(b) transactions requires that the bankruptcy court find that the debtor "justify[] the proposed transaction. That is, for the debtor-in-possession . . . 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." Institutional Creditors of Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air Lines, Inc.), 780 F.2d 1223, 1226 (5th Cir.1986) (citing In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983)).
Section 503 of the Bankruptcy Code allows parties to recover administrative
Traditionally, the purposes of these two sections are distinct in nature, even though some fee applications could qualify for approval under both standards. Section 363(b), which was introduced in the Bankruptcy Reform Act of 1978, was meant in part to unshackle courts from the more restrictive prior code provisions that provided for the sale of estate assets in very narrow circumstances. See Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063 (2d Cir.1983) (recounting the history behind the development of § 363(b)). At the same time, the Second Circuit in Lionel noted that § 363(b) was not intended to go to the other extreme and give bankruptcy courts carte blanche. Id. at 1069. Ultimately, the Lionel court imported the business judgment test as a means of balancing the competing concerns of flexibility—thus allowing debtors to enter into transactions that may enhance the business—with the need for accountability to creditors and equity. Id.; see also In re Continental, 780 F.2d at 1226 (citing Lionel and applying business judgment test for § 363(b) transactions in the 5th Circuit).
The award of administrative expenses for "actual and necessary" costs, on the other hand, provides "third parties who lend goods or services necessary to the successful reorganization of the debtor's estate" with priority claims over those of unsecured creditors. See Jack/Wade Drilling, 258 F.3d at 387; 11 U.S.C. §§ 503(b)(1)(A), 507(a)(1). The purpose of awarding such expenses (and granting them priority status) is to "permit the debtor's business to operate for the benefit of its prepetition creditors." Toma Steel Supply, Inc. v. TransAmerican Natural Gas Corp. (In re TransAmerican Natural Gas Corp.), 978 F.2d 1409, 1415 (5th Cir. 1992). At the same time, the § 503 "actual and necessary" test is strictly construed so as to keep costs to a minimum. NL Industries, Inc. v. GHR Energy Corporation, 940 F.2d 957, 966 (5th Cir.1991). The competing concerns of the administrative expense test are attracting third parties to assist the estate in its reorganization while still preserving the estate.
There being no "white horse" case on which standard should apply in this particular case—expense reimbursement fees for second-round "qualified" bidders in a multiple stage auction for a very unique and very valuable but possibly worthless asset
The Third Circuit has applied the § 503 administrative expense test in cases involving breakup fees
Since Calpine had stated that it was seeking approval for the fee and expenses "under the applicable case law setting standards for approval of break-up fees and breakup expenses," and not necessarily under § 503(b), the Third Circuit "consider[ed] whether any provision of the Bankruptcy Code . . . authorizes the award of break-up fees and expenses to an unsuccessful bidder at the plan-based sale of a debtor's assets." Id. at 532 (internal citations omitted). It concluded, after considering the "different approaches" taken by multiple bankruptcy courts, that there was no "compelling justification for treating an application for break-up fees and expenses under § 503(b) differently from
After examining the record evidence, the Third Circuit ultimately affirmed the bankruptcy court's denial of Calpine's application for the break-up fee and expenses because they were not necessary to preserve the value of the debtor's estate in the case. Id. at 536. Calpine had participated in the auction even after the break-up fee and expenses were initially rejected by the bankruptcy court, and the bankruptcy court believed that if it had approved the request for the breakup fee and expenses, it would have "chill[ed] or ... certainly complicate[d] the competitive bidding process." Id. (citing bankruptcy court's opinion). Thus, Calpine's application for breakup fee and expenses failed under the administrative expense test. See also Reliant, 594 F.3d at 206-209 (applying O'Brien approach to affirm bankruptcy court's rejection of a break-up fee request by failed stalking horse bidder, and reasserting that the business judgment rule should not apply in evaluating the request).
In contrast, several cases out of the Southern District of New York have applied the business judgment standard when evaluating proposed break-up fees. See, e.g., Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650 (S.D.N.Y.1992); In re Metaldyne Corp., 409 B.R. 661 (Bankr.S.D.N.Y.2009) (following Integrated Resources in applying the business judgment rule to evaluate proposed break-up fees); see also In re Twenver, 149 B.R. 954 (Bankr.D.Colo.1992) (adopting the Integrated Resources approach). In Integrated Resources, the district court considered an appeal, filed by a committee of subordinated bond holders, of the bankruptcy court's order approving a break-up fee arrangement between the debtor and a prospective purchaser. 147 B.R. at 653. The prospective purchaser, Bankers Trust, had entered into a nonbinding letter agreement with the debtor and two of the three creditors' committees appointed by the bankruptcy court in which Bankers Trust would fund a plan to reorganize the debtor with $565 million in cash, conditioned upon bankruptcy court approval. Id. This agreement provided that Bankers Trust would receive an expense reimbursement and a breakup fee should the transaction fail under certain circumstances. The bankruptcy court ultimately approved an amended version of the letter agreement, which reduced the maximum amount that Bankers Trust could recover as a break-up fee, based on its conclusion that the fee was allowed under the business judgment rule. Id. at 657-662. On appeal, the district court fashioned a three-question inquiry based on the business judgment rule, which it used to determine whether the break-up fee was permissible, asking:
Id. at 657. It ultimately determined that there was no evidence of self-dealing in the negotiation of the letter agreement; that the break-up fee fulfilled three possible useful functions—attracting or retaining a potentially successful bid, establishing a
This three-part test was again used in Metaldyne, where the Bankruptcy Court for the Southern District of New York approved an agreement wherein HHI Holdings, LLC was selected by the debtors to be the stalking horse in the auction of its Powertrain assets. 409 B.R. at 670. This agreement which included a proposed break-up fee and expense reimbursement worth less than 3% of the total purchase price, and the bankruptcy court ultimately upheld the bidder protections pursuant to the three-part test, noting that HHI was not an insider; that there was no evidence that the fee would hamper bidding and that the bid actually brought value to the estate by setting a floor on the price; and that the total fee amount fell "within the range of what courts in this jurisdiction have found to be acceptable break-up fees." Id. (citing Integrated Resources).
So too, the district court in Twenver adopted the Integrated Resources approach when it considered a request by plan proponents for a "topping fee" should the debtor's television station be sold to an entity other than the current proposed purchaser. 149 B.R. 954 (D.Colo.1992). There, the district court noted the potential value of break-up and topping fees, which "may encourage a potential purchaser to make an initial bid, which may then be used to attract higher offers." Id. at 955 (citing the Integrated Resources bankruptcy court's underlying opinion, 135 B.R. 746, 750 (Bankr.S.D.N.Y.1992)). The proposed topping fee of $50,000 in Twenver, however, exceeded 10% of the proposed purchase price, and that combined with the plan proponents' request that competing bids must be at least $100,000 higher than the existing bid caused the district court to conclude that such an arrangement would "hamper, rather than enhance, any prospects for a higher bid," was ultimately "not in the best interests of the estate." Id. at 956-57. After applying the Integrated Resources framework, it rejected the request for approval of the topping fee. Id.
The Reimbursement Motion and the Intervenors' Brief also pointed this Court to several additional instances where break-up fees and expense reimbursements were approved. (R. 5 at ¶ 22; Doc. No. 30 at 6.) These cases generally provide little analysis regarding the application of the business judgment standard, but two of them explicitly invoke the business judgment standard. See In re Loral Space & Commc'ns Ltd., Case No. 03-41710(RDD) (Docket No. 154 at 5) (Bankr.S.D.N.Y. Aug. 18, 2003); In re Exodus Commc'ns, Inc., Case No. 01-10539(PJW) (Docket No. 389 at 3) (Bankr.D.Del. Nov. 15, 2001) (finding that the expense reimbursement was both "a proper exercise of the Debtors' business judgment" and a "an actual and necessary cost and expense of preserving the Debtors' estates"). Others invoke § 503, but do not state that § 503 is the only source of authority. E.g., In re Bethlehem Steel Corp., Case No. 01-15288(BRL) (Docket No. 1066) (Bankr. S.D.N.Y. Mar. 27, 2003) (finding break-up payments to be "an actual and necessary cost and expense of preserving the Debtors' estates, within the meaning of section 503(b) of the Bankruptcy Code," without invoking, but not explicitly excluding § 363); In re Comdisco, Inc., Case No. 01-24795(BWB) (Docket No. 289 at 3) (Bankr.N.D.Ill. Aug. 9, 2001). Yet another cites § 363(b) as authority, but make findings
The Intervenor has also sought to analogize to reimbursement for due diligence fees incurred by prospective lenders of debtor-in-possession or exit financing. (Doc. No. 30 at 10.) Such reimbursement, it contends, is not uncommon in the debtor-in-possession financing context where a potential financer's concerns regarding the valuation of a complex asset are similar to those of a potential purchaser of the SCC Judgment. (Id. (citing In re Pilgrim's Pride Corp., Case No. 08-45664(DML) (Doc. No. 2996) (Bankr.N.D.Tex. Aug. 11, 2009)) (authorizing payment of expenses related to exit financing pursuant to § 363(b) of the Bankruptcy Code); In re Spectrum Jungle Labs Corp., Case No. 09-50455(RBK) (Docket No. 887) (Bankr. W.D. Tex. June 15, 2009) (similar)).
Earlier in this case, the Bankruptcy Court entered an order authorizing the reimbursement of such fees. (Doc. No. 30 at 10; R. 28.) The Debtor had based its motion on the business judgment standard, arguing that it had a legitimate need to pay due diligence fees in order to entice potential lenders to commit the resources necessary to develop loan terms. (R. 27.) Further, the Debtor sought approval under the deferential business judgment standard because "[m]ore exacting scrutiny would slow the administration of the debtor's estate and increase its cost, interfere with the Bankruptcy Code's provision for private control of administration of the estate, and threaten the court's ability to control a case impartially." (R. 27 at 5 (citing Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1311 (5th Cir. 1985)).)
This Court declines to adopt the administrative expense standard in this case for several reasons. First, the Court disagrees that the administrative expense standard is the only applicable test in this case. Second, this simply was not an application for administrative expenses, and the Reimbursement Motion is not the typical request for an administrative fee as that concept is typically applied in Bankruptcy cases. (While this Court finds neither analogy—break-up fees and post-petition financing—to be a proper fit, the latter is clearly closer.) Third, the modified business judgment test seems most applicable given factual context of the Debtor's proposal.
Although the Parent has treated the standard as an "either/or" issue, the Court does not find that the O'Brien reasoning is applicable in this case. Earlier in this case, the Debtor sought, and Bankruptcy Court granted, the Reimbursement Motion. Thus, before the Intervenors here incurred the due diligence and work fees at issue, they did so with the blessing of the Bankruptcy Court. In contrast, the failed bidder in O'Brien not only failed to obtain a similar such order approving its proposed break-up fee arrangement, but in fact had its motion for same denied. Having incurred expenses without pre-approval for reimbursement, it had to later seek relief in the form of an administrative expense. Thus, the O'Brien court was presented with the issue of whether it could apply the less rigorous business judgment standard in post-bidding administrative expense requests for break-up fees, and it concluded that it could discern no reason why break-up fee requests should be given
The Bethlehem Steel court considered the temporal distinctions between sections 363(b) and 503 of the Bankruptcy Code, and noted that they "serve different purposes in bankruptcy proceedings." Id. at *10. Section 363 is meant to "govern[] the use of funds by the debtor in possession while it operates its business after the bankruptcy petition is filed.... [U]nder § 363(b), if the debtor in possession wants to use funds from the estate for a transaction outside the ordinary course of business, the debtor must obtain advance approval from the bankruptcy court." Id. On the other hand, § 503 "allows entities that incurred certain expenses to request payment from the estate." Id. That is, § 503 applications generally can only be considered once the expenses have been incurred. As counsel for the Intervenors aptly summarized in oral argument, the difference is in asking for permission versus asking forgiveness. Where a debtor seeks permission, "[t]he authorization of certain types of payments under § 363(b) is not prohibited simply because there is another section of the Bankruptcy Code related to the same type of payment." Id. at *11. Cf. Official Comm. of Unsecured Creditors of Enron Corp. v. Enron Corp. (In re Enron Corp.), 335 B.R. 22 (S.D.N.Y. 2005) (relying on Bethlehem Steel to affirm Bankruptcy Court's order approving retention of law firm to represent debtors' employees based on the business judgment standard, and rejecting the argument that § 327(e) of the Bankruptcy Code, which deals with legal fees, was the exclusive authority under which the retention agreement could be approved).
Thus, in Bethlehem Steel, the district court affirmed the bankruptcy court's order allowing for the reimbursement of union expenses, sought by the debtor under § 363(b), for the purpose of ensuring that the union could meaningfully participate in developing a reorganization of the business. Id. at *10-12. In affirming the bankruptcy court's order, the district court found that the business judgment standard under § 363(b) was the appropriate legal test, and that the bankruptcy court had not erred in finding that making such payments for union expenses was in the debtor's business interest. Id. This Court also declines to find that the § 503 test was the only appropriate legal test, where the Debtor sought and was granted permission under § 363(b) to make the Expense Reimbursement.
Moreover, this is simply not the type of proceeding typically governed by the administrative expense standard.
Here, the Debtor's request for approval of expenses pursuant to the business judgment standard was anything but routine. The SCC Judgment itself was highly unique, but a successful sale of the judgment had tremendous upside. If the Debtor had been able to sell the SCC Judgment for even half of its estimated worth, it would have had more than sufficient funds to pay all creditors with certain cash on the closing date of its confirmation plan. Like other cases in which courts have applied the § 363(b) business judgment standard to evaluate unorthodox proposed transactions, this was a potentially
Finally, the Court finds that given the factual context of the Reimbursement Motion, the business judgment standard was the correct legal standard. The Debtor sought to auction the SCC Judgment in order to satisfy the preferences of creditors for cash, as opposed to shares in a litigation trust, upon confirmation. The major beneficiaries of the proposed trusts were creditors outside of the copper industry who would have little objective evidence to evaluate if what the estate was offering had any value at all. Further, a successful sale of the asset could have certainly benefitted the estate, providing creditors with the amounts of money owed to them sooner rather than later.
Several potential bidders for the SCC Judgment, however, had expressed concern regarding the complexity of the asset, and many had requested reimbursement for the due diligence that would be necessary for them to consider how and if they would be able to make their bids. Providing reimbursement for their due diligence would reduce the costs involved in making their bids, and could attract additional bidders that otherwise would be deterred by the uniqueness of the asset. Time was certainly of the essence because the Debtor faced with the competing plans and the demands of the fast-approaching confirmation trial. In addition, the Bankruptcy Court considered that the auction would aid in ascertaining the value of the estate, which would in turn aid the Bankruptcy Court itself in assessing the competing proposed plans of reorganization. All of these facts indicate that it was appropriate for the Bankruptcy Court to defer to the Debtor's business judgment in deciding the Reimbursement Motion.
Thus, given that the Debtor sought approval of the Reimbursement Motion prior to the relevant part of the sale process, that this was not the kind of transaction typically authorized by administrative expense provisions of the Bankruptcy Code, and that the urgencies of the reorganization process called for swift action, the Court finds that the § 363(b) business judgment standard was the appropriate legal standard in this case.
Under the three-question inquiry proposed by the Integrated Resources court, this Court finds that the Bankruptcy Court did not err in granting the Reimbursement
Second, the Intervenors' actions, and the requests of several other bidders, demonstrate that the Reimbursement Order facilitated the auction process, even if no sale was ultimately made. Perhaps the best evidence that the Reimbursement Order was beneficial is that the Intervenors in fact relied upon it when they opted to pursue additional due diligence that allowed them to make a binding bid offer after they had completed their due diligence. The Court disagrees that the Reimbursement Order was a payment for "mere shoppers," as the Qualified Bidders had all previously submitted non-binding offers that were serious enough to warrant being invited to proceed by the Debtor. There is no record evidence that the expense reimbursements in any way hampered the auction process. To the contrary it enhanced it. It is also worth noting that both the Bankruptcy Court and this Court found that the auction results had indeed been helpful in the confirmation process because it had provided the Parent and Sterlite with an incentive to propose full payment plans that would ensure all creditors would be paid what they were owed.
Finally, the Court finds that the approved maximum available size of the fee
The Bankruptcy Court determined that the Reimbursement Motion was "fair, reasonable, and appropriate" and that it was "designed to maximize the value of ASARCO's estate." (R. 15 at ¶ C.) It further found that "ASARCO ha[d] demonstrated a compelling and sound business justification for the Expense Reimbursement under the circumstances, timing, and procedures set forth in the [Reimbursement] Motion." (Id.) This Court cannot find that these conclusions were in error.
Having considered the competing legal standards proposed by the Parent and Intervenors, and having found that the Bankruptcy Court correctly applied the business judgment standard and did not err in finding that the Debtor had satisfied the business judgment standard, the Court therefore AFFIRMS the Reimbursement Order.
Some classic examples of the second heading include: "Code § 330 professional compensation and reimbursement to a trustee, examiner, or professional employed under Code § 327 or Code § 1103; reimbursement of the expenses of creditors or others who do something special in reference to the case [citing examples such as a creditor that recovers hidden assets and a creditor that prosecutes a criminal offense related to the case];. . . compensation for an indenture trustee that makes a substantial contribution to a reorganization case; U.S. Trustee quarterly fees; and witness fees and mileage." Id. (internal citations omitted).