The Bankruptcy Court in Delaware recently denied a request for an administrative expense claim to an entity that tried but failed to buy a debtor’s key assets.  The decision arises out of the first of three attempts by entities to purchase Oncor Electric Delivery Company LLC (“Oncor”) in the complex Energy Future Holdings Corp. bankruptcy cases.  In re Energy Future Holdings Corp., 2018 Bankr. LEXIS 2257 (Bankr. D. Del. Aug. 1, 2018).

EFH and its affiliates — the largest group of utility companies in Texas — filed for chapter 11 in 2014 after an LBO failed.  The debt was incurred before the Great Recession on the assumption that natural gas prices would rise.  Instead, prices declined due to fracking and other factors and the EFH entities defaulted.

The debtors’ “crown jewel” asset was Oncor, an entity that had been ring-fenced from bankruptcy and remained a non-debtor.  The first entity that sought to buy Oncor was NextEra Energy, Inc. (“NextEra”).  Its bid was approved by the Bankruptcy Court but not the Public Utility Commission of Texas (“PUCT”).  A second bid by Berkshire Hathaway Energy Company (“Berkshire”) was denied by the PUCT as well.  Then, in 2017, the PUCT approved a deal proposed by Sempra Energy (“Sempra”).  This one received PUCT approval because Sempra satisfied certain conditions concerning Oncor that both NextEra and Berkshire would not meet.

After NextEra’s bid was rejected, NextEra requested a $275 million termination fee.  Bankruptcy Judge Christopher Sontchi initially approved the fee but later reconsidered that decision and denied the request.  Judge Sontchi said he realized that he had awarded the termination fee based on a confusing record.  His reconsideration decision denying the fee is on appeal to the U.S. Court of Appeals for the Third Circuit.

NextEra’s then filed a claim for an administrative expense for $60 million.  NextEra argued that its efforts had yielded an “actual, necessary” benefit to the debtors’ estates (i.e., a later deal for Oncor was approved) and had made a substantial contribution in these cases.  The claim was filed in the alternative to the termination fee.  In other words, NextEra sought the $60 million should the Third Circuit affirm Judge Sontchi’s reconsideration decision denying NextEra the termination fee.

Judge Sontchi ruled against NextEra, stating that it had satisfied neither the standard for an administrative expense claim nor a substantial contribution.  At the outset of his analysis, Judge Sontchi observed that the merger agreement that the debtors and NextEra had signed barred NextEra from recovering an administrative expense claim.  Judge Sontchi said the contractual language was unambiguous and that alone could end the matter.  His decision, however, went further, saying both that the reconsideration decision didn’t bar NextEra from seeking an administrative expense claim but that NextEra couldn’t satisfy the standard necessary for its claim to be allowed.

Bankruptcy Code section 503(b)(1) allows administrative expenses for “the actual, necessary costs and expenses of preserving the [bankruptcy] estate.”  2018 LEXIS 2257, at *23.  Judge Sontchi noted that an applicant “carries a ‘heavy burden of demonstrating that the costs and fees for which it seeks payment provided an actual benefit to the estate and that such costs and expenses were necessary to preserve the value of the estate assets.’”  Id. (quoting O’Brien Environmental Energy, Inc., No. 94-26723, slip op. at 30 (Bankr. D.N.J. Nov. 8, 1996)).  

Here, NextEra’s bid to buy Oncor ultimately failed.  But NextEra argued that its efforts had provided a “roadmap” for the Sempra deal that later succeeded.  Judge Sontchi cited a decision by fellow Delaware Bankruptcy Judge Mary Walrath that said a purchaser’s motivation isn’t what matters in this context.  “The relevant inquiry is not the motivation of the actor, but whether the estate benefitted by the actions taken,” Judge Walrath wrote in In re Women First Healthcare, Inc., 332 B.R. 115, 112 (Bankr. D. Del. 2005).  Because NextEra couldn’t satisfy the PUCT’s requirements, its efforts didn’t benefit the EFH estate.  2018 LEXIS 2257, at *27.

Bankruptcy Code section 503(b)(3)(D) permits creditors that make a substantial contribution to an estate to receive reimbursement for fees and expenses incurred.  But Judge Sontchi noted that, contrary to NextEra’s argument, it wasn’t a creditor but rather a purchaser.  “Creditors’ actions that may benefit the estate are not substantial for purposes of this section unless they also directly, materially, and demonstrably benefit the creditors generally, foster and enhance, rather than retard or interrupt the progress of reorganization, and are considerable in amount, value, or worth.”  Id. at *30 (quoting In re Kidron, Inc., 278 B.R. 626, 634 (Bankr. M.D. Fla. 2002)).

NextEra’s efforts were “solely related to NextEra’s efforts to close on the transaction in the Merger Agreement, there was no competitive bidding process nor was any transaction consummated.”  Id. at *32.  NextEra was “not a stalking horse and did not induce other bidders to give higher and better offers.”  Id. at 33.  As a result, Judge Sontchi concluded, NextEra’s substantial contribution claim “must fail.”  Id.