48:3 Give Me a Break-up Fee: In Re Reliant Energy Channelview LP and the Third Circuit’s Improper Rejection of a Bankruptcy Bid Protection Provision



When a debtor entity chooses to sell assets under Chapter 11 of the Bankruptcy Code, it may enter into an agreement with an initial “stalking horse” bidder to facilitate maximum payment of its debt. Fortunately for the stalking horse, break-up fees—mechanisms intended to reimburse an initial bidder for its expenditures leading up to an ultimately unexecuted transaction between itself and the debtor—protect stalking horses if they are outbid. However, many courts have become less willing to award break-up fees pursuant to non-bankruptcy standards of review, which are traditionally more deferential to the decisionmaking processes of the parties involved in the transaction.

A prime example of this trend is the decision of the Third Circuit Court of Appeals in In re Reliant Energy Channelview LP. In this case, the initial bidder was denied a break-up fee award because the debtor’s commitment to “seek” approval of the fee was deemed inadequate to demonstrate that the fee was necessary either to induce or maintain the initial bidder’s bid, or to preserve the value of the bankruptcy estate. Moreover, the mere presence of an alternative bidder who objected to the break-up fee provision but was not bound to submit a bid, was deemed adequate to protect the bankruptcy estate from the harm that would have arisen had it been left without a bid sufficient to cover its debts.

At first glance, the outcome in Reliant is hardly surprising given some courts’ increasing willingness to subject break-up fee provisions to greater scrutiny. However, this Note argues that the Reliant court not only lost sight of the reasons underlying bid protection mechanisms in bankruptcy asset sale agreements, but also unnecessarily subverted the reasonable business judgments of the parties in a decision that fundamentally undermines the reasoning behind bid protection mechanisms, especially in the context of solvent debtors.