On July 25, 2023, the U.S. Court of Appeals for the Fifth Circuit affirmed a bankruptcy court’s approval of a break-up fee and expense reimbursement owed to a debtor’s prior lender, after the lender was not the winning bidder at a bankruptcy sale. The debtor, Bouchard Transportation Company, Inc., sought to sell a number of its vessels. In approving an auction process, the bankruptcy court authorized Bouchard to select a “stalking horse” purchaser to whom it could offer bid protections, including a break-up fee and expense reimbursement. Hours before the auction was scheduled to begin, Bouchard entered into a stalking horse agreement, with bid protections, with its former lender, Hartree Partners, LP, whose secured debt was previously paid off during the bankruptcy case through new debtor-in-possession financing.
At the auction, Bouchard’s then-current lender submitted the winning bid. The bankruptcy court thereafter approved payment of the bid protections to Hartree—over the objection of the Official Committee of Unsecured Creditors—which argued that the protections were not necessary to achieve a higher purchase price and that the bid protections would deplete distributions to unsecured creditors. The district court affirmed, and the Committee appealed to the Fifth Circuit.
The Fifth Circuit initially noted a split of authority on the standard governing bid procedures. Some courts use the standard for approving administrative expenses under Section 503(b) of the Bankruptcy Code (i.e., “to qualify as an ‘actual and necessary cost’ . . . a claim against the estate must have arisen post-petition and as a result of actions taken by the [debtor-in-possession] that benefitted the estate”). Other courts use the standard for approving sales of estate property out of the ordinary course of business set forth in Section 363(b)(1) of the Bankruptcy Code (i.e., sales will be approved if the debtor provides “some articulated business justification for using, selling, or leasing the property”). The Fifth Circuit did not choose between the two standards because it found that the bid protections to Hartree were appropriate under both. The procedures were necessary and appropriate to avoid a “naked auction,” and they assisted Bouchard in setting a minimum price for the vessels, with the ultimate winning bid providing an additional million dollars to the bankruptcy estate. Moreover, the procedures were the best option under the circumstances given that the only other options were to proceed with a naked auction or accept an offer from another entity that was conditioned on questionable financing. The court thus held that Bouchard acted “well within the bounds of reasonable business judgment.”
The case is Official Committee of Unsecured Creditors v. Bouchard Transportation Co., Inc., No. 22-20321 (5th Cir. July 25, 2023). The Committee is represented by Ropes & Gray LLP. Hartree Partners, LP is represented by Paul, Weiss, Rifkind, Wharton & Garrison, LLP and Lugenbuhl, Wheaton, Peck, Rankin & Hubbard. Bouchard is represented by Kirkland & Ellis LLP. The opinion is available here.
