## Facts

- America West Airlines, Inc., a Chapter 11 debtor-in-possession, sought outside capital and a plan sponsor after internal funding efforts failed.
- The debtor conducted a broad marketing process to potential airline-industry buyers and received multiple initial bids.
- The debtor selected AmWest Partners, L.P. as the lead bidder and stalking-horse plan sponsor for a proposed § 363(b) sale process tied to a restructuring plan.
- The debtor sought court approval of an interim procedures agreement governing the sale process.
- The agreement provided for expense reimbursement and a breakup fee payable to AmWest (up to approximately $8 million) if a competing transaction or alternative restructuring proposal replaced AmWest’s deal.
- The Official Unsecured Creditors’ Committee and other constituencies objected, arguing the breakup fee misused estate assets, was unnecessary and excessive, and would deter competing bids.

## Issues

1. Whether a debtor-in-possession may, under 11 U.S.C. § 363(b), agree to pay a breakup fee to a stalking-horse bidder/plan sponsor as part of a court-supervised sale and plan process.
2. Whether the proposed breakup fee was a reasonable, compensatory transaction cost likely to increase value to the estate, rather than an improper preference that would chill bidding.

## Decision

- The court granted the debtor’s motion to approve the interim procedures agreement, including the breakup-fee provision, subject to the agreement’s limits.
- The court overruled objections seeking categorical denial of any breakup fee.
- The court held the breakup fee was fair and reasonable and in the estate’s best interests because it reflected sound business judgment, was negotiated in good faith and at arm’s length, and was structured to support competitive bidding and value maximization.

## Legal Principles

- Under § 363(b), a debtor-in-possession may use estate property outside the ordinary course if the transaction reflects sound business judgment, made on an informed basis, in good faith, and without self-dealing, and is reasonable and beneficial to the estate.
- A breakup fee may be approved in Chapter 11 when it functions as a legitimate, compensatory transaction cost that is reasonable in amount and tied to a demonstrable estate benefit (e.g., inducing a stalking horse to commit resources, set a bid floor, and facilitate an auction).
- The court must consider the debtor-in-possession’s fiduciary duties and evaluate whether the breakup fee is likely to foster competitive bidding rather than chill it.
- Prior breakup-fee analyses derived from non-debtor corporate settings are not applied mechanically in bankruptcy; the § 363(b) and fiduciary-duty framework controls.

## Conclusion

The court approved a stalking-horse breakup fee in a Chapter 11 § 363(b) sale process because the debtor showed the fee was a reasonable, good-faith exercise of business judgment designed to attract a committed bidder, support an effective auction, and increase the likelihood of maximizing value for the estate and creditors.


In re America W. Airlines, Inc., 166 B.R. 908 (Bankr. D. Ariz. 1994)