## Facts

- Chapter 11 debtors sought to sell their largest asset, a Texas power plant, after marketing the asset to numerous potential purchasers and receiving multiple bids.
- The debtors entered an asset purchase agreement with Kelson Channelview LLC for about $468 million; the bid was complete and not contingent on financing.
- The agreement required the debtors to seek court approval of bid protections if an auction were required, including (1) a $5 million minimum overbid increment, (2) a $15 million breakup fee, and (3) up to $2 million in expense reimbursement if another bid were accepted.
- The bankruptcy court refused to approve an immediate sale and instead ordered an auction.
- A competing bidder, Fortistar (through an affiliate), objected to the proposed breakup fee and reimbursement as likely to deter competitive bidding.
- After a hearing, the bankruptcy court approved the $5 million overbid requirement and the expense reimbursement, but denied the $15 million breakup fee.
- Kelson did not participate in the auction; Fortistar’s affiliate won with a fully financed bid about $32 million higher than Kelson’s.
- Kelson appealed the denial of the breakup fee; the district court affirmed, and Kelson appealed to the Third Circuit.

## Issues

1. Whether the bankruptcy court abused its discretion by denying Kelson’s requested $15 million breakup fee as an administrative expense under 11 U.S.C. § 503(b).
2. Whether the breakup fee was an “actual, necessary” cost of preserving the estate under the Third Circuit’s § 503(b) standard for breakup fees.
3. Whether the bankruptcy court reasonably concluded that the proposed breakup fee risked deterring competitive bidding.

## Decision

- The Third Circuit affirmed the district court and the bankruptcy court.
- The bankruptcy court did not abuse its discretion in denying the $15 million breakup fee.
- The breakup fee was not shown to be actually necessary to preserve estate value under § 503(b).
- The bankruptcy court permissibly considered that a $15 million fee could deter competing bids.

## Legal Principles

- Breakup fees in bankruptcy are evaluated under 11 U.S.C. § 503(b) as administrative expenses and are allowable only if they are “actual” and “necessary” costs of preserving the estate.
- The proponent of a breakup fee must show a concrete benefit to the estate, commonly by demonstrating that the fee was needed to induce a bid or to maintain a competitive sale process.
- A stalking-horse agreement and creditor support do not control the § 503(b) inquiry; the court must apply the statutory standard rather than rely solely on debtor business judgment or notions of fairness.
- A bankruptcy court may deny a breakup fee that is not necessary to obtain the stalking-horse bid and that carries a meaningful risk of suppressing competing bids.
- Denials or awards of breakup fees under § 503(b) are reviewed for abuse of discretion.

## Conclusion

The Third Circuit held that the bankruptcy court acted within its discretion in refusing to award a $15 million stalking-horse breakup fee because Kelson did not show the fee was necessary to preserve or increase estate value, and the record supported concern that such a fee could deter competitive bidding.


In re Reliant Energy Channelview LP, 594 F.3d 200 (3d Cir. 2010)