A federal appeals court upheld a decision blocking FPL Group’s parent from collecting a $275 million merger termination fee in the bankruptcy case of Energy Future Holdings Corp. and a subsidiary.
The precedential decision published Thursday by U.S. Court of Appeals for the Third Circuit concluded the lower court judge was correct to backtrack on an initial order allowing Juno Beach-based NextEra Energy Inc. to claim the breakup fee.
The split panel found the judge overlooked crucial evidence. But the judge in the minority said the decision set a “troubling, if not dangerous” precedent.
The ruling stemmed from EFH’s Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware. Shortly after the company filed for protection, it agreed to sell its $18.7 billion stake in Oncor Electric Delivery Co., the largest electricity transmission and distribution system in Texas, to NextEra in a move that would have added $9.5 billion to the bankruptcy estate.
As a part of the deal, EFH agreed to pay NextEra $275 million if the merger didn’t go through or if it failed to win regulatory approval in Texas. The Texas Public Utility Commission later blocked the deal as adverse to the public interest, paving the way for U.S. Bankruptcy Judge Christopher S. Sontchi to approve the fee.
However, Sontchi later realized the merger agreement lacked a clear deadline for when EFH would have to call off the deal to trigger payment. The oversight, he said, essentially allowed NextEra to run out the clock and simply wait for EFH to terminate the agreement.
If it weren’t for that oversight, Sontchi said he never would have allowed NextEra to collect the breakup fee.
On appeal, NextEra, the owner of Florida’s largest electrical utility, argued the court was correct to allow the payment in the first place because the fee, as originally drafted, qualified as an allowable administrative expense under U.S. bankruptcy law.
A majority of the three-judge panel, however, agreed Sontchi initially misapprehended the facts of the case, and concluded the error changed the calculus for assessing the termination fee on a motion for reconsideration. In a 37-page opinion, the appeals court found that, while the fee promoted competitive bidding, it also had the ”possibility to be disastrous” to EFH should the company be compelled to pay.
“Once it had a complete understanding, the bankruptcy court properly weighed the various considerations and determined that the potential benefit was outweighed by the harm that would result under predictable circumstances,” Circuit Judge Joseph A. Greenaway Jr. wrote.
“In other words, the risk was so great that the fee was not necessary to preserve the value of debtors’ estates. Having made such a determination, the bankruptcy court did not abuse its discretion in denying the fee in part.”
Greenaway was joined in the decision by Judge Julio M. Fuentes.
However, the panel’s third member, Judge Marjorie O. Rendell, rejected the majority’s reasoning. Rather than committing an error of fact, she said the court simply failed to consider the potential consequence of the failure to secure regulatory approval.
“Hindsight cannot justify nullifying a material term of the deal that was struck with all of the facts on the table,” she wrote in a six-page dissent.
“Parties to commercial transactions present the terms of the deal to the court for approval and, once approved, are entitled to rely on the court’s order, which is based on a thoughtful, well-reasoned analysis,” Rendell said. “That should have been the guiding principle, and the grant of reconsideration so as to nullify the previously approved fee when there was no clear error of fact or law was an abuse of discretion.”
Attorneys for both sides had no comment by deadline on the ruling.
Howard Seife of Norton Rose Fulbright in New York argued the appeal for NextEra.
Mark McKane of Kirkland & Ellis’ San Francisco office argued for EFH.
The case is captioned In re Future Energy Holding.