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Third Circuit Reversal Paves the Way For NextEra to Potentially Recover Administrative Expenses Incurred in Connection With Failed Merger

In re Energy Future Holdings Corp., No. 19-3492, 2021 WL 957301 (3d Cir. Mar. 15, 2021)

In this precedential opinion, the United States Court of Appeals for the Third Circuit (the “Third Circuit”) reversed the decisions of the Delaware Bankruptcy and District Courts denying the application filed by NextEra Energy, Inc. (“NextEra”) for $60 million in administrative expenses under Section 503(b)(1)(A) of the Bankruptcy Code in connection with a sale that ultimately did not go through.  

The dispute arose in the chapter 11 bankruptcy cases of Energy Future Holdings Corp. and its affiliated debtors (collectively, the “Debtors”) in connection with a merger agreement (the “Merger Agreement”) pursuant to which NextEra sought to purchase the Debtors’ most valuable asset, a significant economic interest in Oncor Electric Delivery Co. LLC (“Oncor”), for $9.8 billion.  Oncor is subject to regulatory control of the Public Utility Commission of Texas (“PUCT”), which placed a “ring fence” around Oncor that provided for an independent board with the sole right to determine dividends and placed restrictions on upstream distributions.  While the Bankruptcy Court blessed the deal, the PUCT would not approve the merger without the ring fence, and the Debtors ultimately terminated the Merger Agreement.  However, the Debtors subsequently closed a transaction that allowed for the ring fence to stay in place with Sempra Energy (“Sempra”), albeit for substantially less value than the NextEra deal, which the PUCT approved. 

NextEra’s subsequent efforts to recover a $275 million break-up fee under the Merger Agreement proved unsuccessful.  We previously discussed those decisions here.  NextEra, however, separately sought to recover $60 million as an administrative expense under Section 503(b)(1)(A) of the Bankruptcy Code for its work on the Merger Agreement.

In its Section 503(b)(1)(A) application, NextEra asserted, among other things, that its efforts to close the merger served as a “roadmap” that ultimately led to the successful deal with Sempra.  More specifically, it argued that “by negotiating the Merger Agreement and the Plan, and by settling objections with creditors as well as by providing further due diligence, it created guideposts that directly facilitated the Sempra merger.”  Opinion at 33.  Creditors Elliott Associates, L.P., Elliott International, L.P. and the Liverpool Limited Partnership (collectively, “Elliott”) and UMB Bank NA, as indenture trustee (together with Elliott, “Appellees”) moved to dismiss NextEra’s application, or alternatively, for summary judgment denying the request, arguing, among other things, that the Merger Agreement required each party to bear its own costs and NextEra did not provide a benefit to the estate.  To the contrary, Appellees contended that NextEra actually imposed costs to the estate, including approximately $250 million in interest that accrued during NextEra’s pursuit of “fruitless” appeals of the PUCT decision.  

The Bankruptcy Court agreed with Appellees and granted both the motion to dismiss and motion for summary judgment.  As an initial matter, the Bankruptcy Court rejected NextEra’s reliance on In re Women First Healthcare, Inc., 322 B.R. 115, 121 (Bankr. D. Del. 2005) (“Women First”) in which the Court awarded an unsuccessful bidder administrative fees.  In so doing, the Bankruptcy Court found Women First to be factually distinguishable in several respects, including that the bidder was “ready, willing, and able to close the transaction,” unlike NextEra which was unable to consummate the transaction due to lack of regulatory approval.  Opinion at 11.  Moreover, the Bankruptcy Court rejected NextEra’s “roadmap” argument, holding that the inquiry under Section 503(b)(1)(A) is “limited to whether the estate benefitted” by the actions taken, and because the Debtors were “forced . . . to find an alternative transaction at far less value . . . there was no benefit to the estate.”  Opinion at 11.  In granting the motion for summary judgment, the Bankruptcy Court concluded, as a matter of law, that the terms of the Merger Agreement unambiguously barred NextEra’s application.  Opinion at 11-12.  The District Court affirmed, and NextEra’s appeal to the Third Circuit followed.

In reversing the lower courts, the Third Circuit held that the Merger Agreement did not bar NextEra from recovering administrative expenses.  While Section 6.7 of the Merger Agreement requires each party to bear its own costs and expenses, the plain language of the Merger Agreement “exempted from the general rule expenses addressed in the Plan” which, in turn, “provides for the recovery of administrative claims as defined by Section 503(b) of the Bankruptcy Code.”  Opinion at 20, 38.  In other words, since the Debtors’ Plan defined “administrative claim” consistent with the Bankruptcy Code, the Third Circuit concluded that the “plain text of the Merger Agreement and the Plan” allow for the payment of administrative expenses if the requirements of Section 503(b)(1)(A) are met.  Opinion at 20-23.    

In order to qualify for an administrative expense claim under Section 503(b)(1)(A) of the Bankruptcy Code, there must be a post-petition transaction that yielded a benefit to the estate.  As articulated by the Third Circuit, the benefit must be actual, but does not have to be substantial, and “a hindsight-based analysis of the benefit to the estate requirement is appropriate.”  Opinion at 30.  In addition, the alleged benefit must be weighed against the costs to the estate.  Here, in the context of the motion to dismiss, the proper inquiry is “not whether NextEra actually benefitted the estate, but whether it plausibly alleged that it did so.”  Opinion at 38.  Applying this standard and drawing all inferences in NextEra’s favor, the Third Circuit held that “NextEra [has] plausibly alleged that through a post-petition transaction, the Merger Agreement, it benefitted the estate by providing valuable information, and accepting certain risks, that paved the way for the later Sempra deal.”  Opinion at 38.  Recognizing that “[t]he precise monetary value of this benefit [and the costs NextEra allegedly imposed on the estate] cannot be distilled from pleadings alone,” the Third Circuit opined that “[w]ith the benefit of discovery NextEra may (or may not) prove that the actual benefit conferred on the estate outweighed the costs it imposed, such that it is entitled to administrative fees.”  Opinion at 38.  

Accordingly, the Third Circuit remanded to the District Court to vacate its order affirming the Bankruptcy Court and remanded to the Bankruptcy Court for reconsideration as to whether NextEra provided a net benefit to the estate.

What’s next?

On March 26, 2021, the Bankruptcy Court held a status conference to discuss the Third Circuit decision.  Counsel to the Plan Administrator Board provided an update on the post-effective date status of the bankruptcy case.  It should come as no surprise that nearly three years after the Plan went effective, hundreds of millions of dollars have been distributed to creditors in accordance with the Plan and there are limited funds remaining in the estate of approximately $2 million. 

Once the case has been remanded from the District Court, the parties intend to discuss a scheduling order and commence discovery.  Creditors beware – If NextEra ultimately prevails in establishing its entitlement to administrative fees, payment of such may require creditors to disgorge their distributions, including Appellee Elliott who received more than $600 million in distributions under the Plan.  Stay tuned.



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