Without additional explanation, the Supreme Court recently denied NextEra’s request for further review of its $275 million break fee request following the scuttling of its multi-billion dollar transaction to acquire the majority of Energy Future Holdings Corp.’s assets (see item 8 under “Certiorari Denied” list here).
Following the bankruptcy court’s reconsideration (and reversal) of its prior approval of such fee, and the Third Circuit’s opinion affirming that decision, NextEra petitioned the Supreme Court, arguing that the issue deserved further review. In particular, NextEra noted that different Courts of Appeal were applying different standards to determine when break up fees were justified, with the Fifth Circuit applying the more liberal “business judgment” standard under Bankruptcy Code Section 363 and the Third Circuit applying the more exacting “actual, necessary cost or expense” standard under Bankruptcy Code Section 503. Absent additional clarity from the Supreme Court, NextEra argued, the “skittishness of some lower courts to approve” break up fees, “or, worse still, the willingness to employ Section 503 to retroactively rescind” them (as happened in the NextEra case) would “inevitably chill” potential bids in bankruptcy auctions, potentially costing debtors “millions or billions of dollars.”
Because the Supreme Court refused to grant certiorari, courts in the Third Circuit (notably Delaware bankruptcy courts) will continue to apply the more exacting standard, and some doubt will remain regarding the proper standard for break up fee review in other jurisdictions without binding Circuit-level precedent. It’s an issue worth watching going forward.