On March 15,2021, the Third Circuit held that a “stalking horse” bidder in a failed transaction may still be entitled to assert an administrative claim in the bankruptcy notwithstanding the fact that its “termination fee” was disallowed by the Court. In In re Energy Future Holdings Corp., 2021 U.S. App. LEXIS 7400, (3d Cir. 2021), the Debtors opted to terminate a merger agreement with NextEra Energy, Inc. ( “Bidder”) since the Bidder, which was a “stalking horse bidder”, failed to get the required regulatory approvals needed to meet its requirements under a Merger Agreement. The Delaware Bankruptcy Court denied the Bidder’s request for allowance and payment of its $275 million termination fee, which denial was subsequently affirmed by the Third Circuit in 2018. In the Third Circuit opinion, it recognized that the fee could be allowed as an administrative expense per 11U.S.C. Section 503(b)(1)(A) as it would foster competitive bidding in such a transaction.

Thereafter, the Bidder filed an application for allowance of an administrative claim which would allow for Debtor’s payment of all costs it incurred during its attempts to consummate the proposed merger. In this matter, the request for allowance of the administrative claim was for $60 million for such costs. Certain creditors filed a Motion to Dismiss and Motion for Summary Judgement, and the Bankruptcy Court granted both motions resulting in the denial of an allowed administrative claim and finding that the Bidder did not engage in any action to promote competitive bidding, but rather it forced the Debtor to seek other options at far less value. Thus, it found that the Bidder did not meet the standards as required for an allowed administrative clam under the Bankruptcy Code. This ruling was appealed to the District Court where it was affirmed. An appeal was taken to the Third Circuit.

The Third Circuit reversed the denial of the administrative claim and found that there existed a material issue of genuine fact as to the scope of the cost and expense provision in the Merger Agreement, and remanded the matter to District Court to vacate its orders with further remand to Bankruptcy Court. It found that the Merger Agreement itself allowed for recovery of the expenses per 503(b)(1)(A) and was addressed in the Debtor’s Chapter 11 Plan. The Third Circuit found that the Bidder plausibly alleged the requirements under Section 503(b)(1)(A), that the costs were actual, necessary costs and expended to preserve the estate. It further found that the Bidder had to make a showing (upon remand to Bankruptcy Court) that the benefit it provided to the estate exceeded any associated increased costs to the estate, which may include additional interest expenses while various appeals were being pursued.  In doing so, the Third Circuit confirms that there is an alternate remedy for stalking horse bidders to seek reimbursement for out of pocket expenses, notwithstanding the fact that there may be no entitlement to a break-up fee.

Practice Note- A potential purchaser must memorialize, in a merger or similar agreement, its ability to seek an administrative claim in trying to consummate a failed transaction. The flip side to this position is that Debtors may be able to avoid paying any such claim if it specifically puts in the controlling documents that if a termination fee is not allowed, the Bidder is precluded from requesting an administrative claim under Section 503(b)(1)(A).

To discuss this topic or any issues relating to creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at lbaskin@sgrvlaw.com or 215-241-8926.

On March 19, 2021, the Third Circuit, in In Re: Orexigen TherapeuticsInc., No. 20-1136, 2021 WL 1046485 (3d Cir. March 19, 2021) issued a unanimous and precedential opinion adopting the analysis set forth by Bankruptcy Judge Shannon in In Re: SemCrude L.P., 399 B.R. 388 (Bankr. D.Del. 2009) wherein the Court disallowed what is known as “triangular setoffs,” opining that they lack “mutuality” as required by Bankruptcy Code Section 553(a), and therefore are unenforceable. Here, although an issue of first impression in the Third Circuit, this ruling follows most of the other courts that have decided this issue, including three other Circuit Courts.

In this case, the Debtor owed a subsidiary (“Subsidiary”) of one of its creditors $9.1 million. That same creditor (“Creditor”) had owed the Debtor approximately $7 million. The issue to be decided was whether the creditor who had a right under non-bankruptcy law to set-off these amounts, had a right of setoff in the bankruptcy proceeding. This concept is generally known as a “triangular setoff.” Put another way, if the Bankruptcy Court allowed this right of setoff, the Creditor would owe nothing to the Debtor and the Debtor would owe the Subsidiary $2 million.

The Bankruptcy Court found that setoff was improper, opining that Bankruptcy Code Section 553(a)’s requirement of mutuality is immutable.  The District Court affirmed and the ruling was appealed to the Third Circuit. The Third Circuit, adopting the “sound analysis” presented by the Bankruptcy Court, found that the language of the statute imposed a distinct limitation on any exercise of setoff rights to a debtor’s claim against the creditor and that creditor’s claim against the Debtor. It was articulated that Congress intended for “mutuality” to mean only the debts between the same two parties. The concept of “mutuality” does not include anything except for a bilateral arrangement and that the triangular setoffs are not mutual, and that there can be no contractual exception to the mutuality requirement. The Third Circuit stated that allowing anything beyond this scope would fly in the face of a fundamental principle underlying the Bankruptcy Code which, inter alia, tries to maximize all returns to the creditors themselves. They stated that mutuality is literally tied to the identity of a particular creditor that owes an offsetting debt, declaring that this right is personal and that there is no way around the language of Section 553.

Interestingly though, in dicta, the Third Circuit did hint that there are measures which could be adopted by a number of market participants which could include the use of “joint and several” arrangements in tri-party structures.

To discuss this topic or any other issues relating to creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or lbaskin@sgrvlaw.com.

1. Help sole proprietors, independent contractors, and self-employed individuals receive more financial support.

2. Eliminate the exclusion of small business owners with prior non-fraud felony convictions from PPP eligibility.

3. Eliminate the exclusion of small business owners who are delinquent on their federal student loans from PPP eligibility because the exclusion disproportionately impacts people of color.

4. Ensure access for non-citizen small business owners who are not lawful US residents by clarifying that they may use Individual Taxpayer Identification Numbers (“ITINs”) to apply for a PPP loan.

The Fact Sheet also states that the Administration will take the following steps:

1. Promote transparency and accountability by improving the PPP loan application to encourage self-reporting of demographic data and better illustrate the impact of the PPP across various population segments

2. Improve the Emergency Relief Digital Front Door by updating the SBA websites to help applicants find resources about relief options and completing applications more easily.

3. Continue to conduct extensive stakeholder outreach to learn more about challenges and opportunities with the current emergency relief programs.

4. Enhance the current lender engagement model. The SBA is launching a new initiative to deepen its relationships with lenders and give lenders more opportunity to ask questions, provide recommendations, and help resolve open questions and concerns in a more streamlined way.

On January 14, 2021, the U.S. Supreme Court in City of Chicago vs. Fulton reversed a Seventh Circuit ruling that the City of Chicago violated the automatic stay created by car owners’ bankruptcy filings, when the City refused to immediately return the cars after the bankruptcy filing that had been impounded pre-bankruptcy for parking or traffic violations. Put another way, if a creditor is in possession of assets they seized prior to the bankruptcy filing, they do not necessarily have to return the repossessed property.

This unanimous ruling by the Supreme Court “resolves” a dispute among the federal appellate courts on a very discrete issue under Section 362(a) of the Bankruptcy Code.

The Third, Tenth, and District of Columbia Circuits had determined that creditors who maintained possession of seized property are NOT violating the automatic stay. Contrary to those Circuits, the Second, Seventh, Eighth, Ninth, and Eleventh Circuits found that holding on to seized property is a prohibited “act to exercise control over property” of the bankruptcy estate and therefore violative of the stay.

Justice Alito delivered the unanimous opinion of the Court. He wrote that the “most natural reading” of the Bankruptcy Code is that it “prohibits affirmative acts that would disturb the status quo of estate property as of the time when the bankruptcy petition was filed.” He further stated that the act of merely retaining possession of the repossessed property does not violate the automatic stay.

Justice Sotomayor, in her concurring opinion, highlighted the fact that the Justices did not decide whether other sub-sections of Section 362 may still require a creditor to return repossessed debtor property if the creditor is holding it for the purpose of extracting payment. She wrote her concurring opinion to emphasize that despite this ruling, the Court is not deciding whether and when Section 362’s other provisions may require a creditor to return property to the bankruptcy estate or debtor. See 362(a)(4) and (6). She also pointed out that this Opinion did not provide guidance as to how bankruptcy courts should actually enforce the creditor’s separate obligation to deliver property back under other sections of the Bankruptcy Code, including Section 542. Importantly, Justice Sotomayor articulated her social concerns as to how low-income communities are disproportionately burdened in this regard, as well as communities of color. She points out how many debtors who are affected by this problem rely on their cars to go to and from work and that in order to get their car back, they must rely on procedures in bankruptcy court which are extremely slow (proceedings to enforce turnover of property under Section 542) and how it is up to the legislatures to address this issue.

This opinion is a “must read” especially for consumer practitioners who represent not only creditors but debtors concerning the ability to retrieve repossessed property. Importantly, the Supreme Court in this opinion did not rule on whether debtors could achieve their desired results by invoking other provisions of Section 362 or 542, leaving the door open to other possible avenues of recourse.

To discuss this topic or issues relating to creditors rights and bankruptcy, please contact Leslie Beth Baskin at 215-241-8926 or at lbaskin@sgrvlaw.com