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Official Committee v. Hartree

Case Type:
Case Status:
22-20321 (5th Circuit, Jul 25,2023) Published
Affirming the U.S. Bankruptcy Court and U.S. District Court for the Southern District of Texas (BC and DC), the U.S. Court of Appeals for the Fifth Circuit deemed the payment of a $3.3 million break-up fee and reimbursement expenses of up to $1.5 million to a stalking horse bidder by Bouchard Transportation Company and its affiliates (DRs) to be lawful under both § 363(b) and § 503 of the Bankruptcy Code, as they provided an actual benefit to the estate and were issued in the reasonable exercise of business judgment.
Procedural context:
Three days after the DRs’ auction ended, the Official Committee of Unsecured Creditors (Committee) created by the United States Trustee for the Southern District of Texas thereafter created to represent the interests of the unsecured creditors objected to the break-up fee and expense reimbursement provided to Hartree Partners, LP (Hartree), the DRs’ ultimately unsuccessful but nonetheless unmistakable stalking horse bidder. It contended that the payments were administrative expenses under 11 U.S.C. § 503(b) and that the DRs had failed to satisfy the statute’s strict necessity standard. The DRs countered that the fees were governed by 11 U.S.C. § 363(b), which allows payments related to an asset sale if they are spent in the reasonable exercise of business judgment.
The DRs, collectively one of the largest petroleum shipping companies in the United States, filed for chapter 11 relief in 2020. During the bankruptcy, the DRs went through two rounds of post-petition financing. When these resuscitation attempts bore no fruit, the BC approved an auction of its asset, subject to several. Specifically, as set forth in the bid-procedures order, the BC authorized the DRs to select a stalking horse bidder and offer that bidder a break-up fee and expense reimbursement. But there were limitations: (1) any break-up fee could not exceed 3% of the purchase price; (2) any expense reimbursement was subject to a cap; (3) if a stalking horse bidder was selected, the DR was required to notify the BC and disclose the material terms of the deal; (4) and other parties were permitted to object to the stalking horse agreement within three days of the notice; and (5) any such bidder would have to be selected by July 7, 2021. The auction was scheduled for July 19, 2021. Initially, the DRs struggled to find stalking horse bidders; indeed, because no agreement had been reached by July 7, 2021, the deadline was pushed back to July 11, then July 16, and then to July 18 at 11:59 P.M., “just fifteen hours before the start of the auction.” After securing several extensions, the DRs eventually netted two offers for a proposed sale of substantially all or all their assets: one from Hartree Partners, LP (Hartree), an entity with which the DRs had first opened a credit facility and had, post-default, paid off during their bankruptcy, and another from Centerline Logistics (Centerline). On July 18, 2021, the day before the auction, the DRs’ board of directors met twice to consider the two offers. The board found Centerline’s offer attractive, but doubted whether Centerline would be able to secure the financing necessary for the transaction and concerned that Centerline wanted the DRs’ to cancel the auction and accept its deal outright, rather than actually make a stalking horse bid. For these reasons, the board rejected the Centerline proposal and accepted Hartree’s. The Committee was informed of the negotiations and agreement with Hartree, but it filed no objections before the auction. The auction started the next day. Before it did so, JMB Capital Partners Lending, LLC (JMB), which had provided post-petition financing (after Hartree) to the DRs that was secured by a variety of liens on their shipping vessels, announced its intent to bid. After Hartree submitted its opening bid, the DRs announced that a second bid would need to be a minimum of $115.3 million—Hartree’s bid was $110 million, $4.8 million was owed in bid protections, and the minimum bid increment was $500,000. In response, JMB bid exactly $115.3 million. Har-tree declined to overbid, and JMB won the auction.
Jerry E. Smith; Patrick E. Higginbotham; and Kurt D. Engelhardt

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