Official Committee v. Hartree

Case: 22-20321 Document: 00516833740 Page: 1 Date Filed: 07/25/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________ FILED
July 25, 2023
No. 22-20321
Lyle W. Cayce
____________ Clerk
In the Matter of Bouchard Transportation Company,
Incorporated,
Debtor.
The Official Committee of Unsecured Creditors,
Appellant,
versus
Bouchard Transportation Company, Incorporated;
Hartree Partners, L.P.,
Appellees.
______________________________
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:21-CV-2844
______________________________
Before Higginbotham, Smith, and Engelhardt, Circuit Judges.
Jerry E. Smith, Circuit Judge:
Bouchard Transportation Company and its affiliates (collectively
“Bouchard”)—debtors in bankruptcy—prepared to sell some of their assets
at an auction. Fearing the auction would go poorly, Bouchard solicited a
“stalking horse bidder” to start the auction and set a floor price. In exchange,
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Bouchard agreed to pay the stalking horse bidder a $3.3 million break-up fee
and to reimburse expenses up to $1.5 million. The question is whether those
payments were a permissible use of estate funds.
As the bankruptcy and district courts found, the stalking horse pay-
ments were lawful under both applicable provisions of the Bankruptcy
Code—they provided an actual benefit to the estate and were issued in the
reasonable exercise of business judgment. We accordingly affirm.
I.
A.
Bouchard, one of the largest petroleum shipping companies in the
United States, filed for Chapter 11 bankruptcy in 2020. The United States
Trustee for the Southern District of Texas created the Official Committee of
Unsecured Creditors (the “Committee”) to represent the interests of the
unsecured creditors. See 11 U.S.C. § 1102(a)(1).
During the bankruptcy, Bouchard went through two rounds of post-
petition financing. It first opened a credit facility with Hartree Partners, LP
(“Hartree”), but quickly defaulted. It then secured a second round of post-
petition financing with JMB Capital Partners Lending, LLC (“JMB”).
JMB’s loan was secured by a variety of liens on Bouchard’s shipping vessels.
Using its new funds, Bouchard paid off the outstanding principal, interest,
expenses, and fees owed to Hartree. But it still owed around $95 million to
JMB (notwithstanding its prepetition debts).
After efforts to jump-start the business failed, Bouchard decided to
sell some major assets. The court approved an auction, subject to a number
of rules. Importantly, the court’s bid-procedures order pre-authorized Bou-
chard to select a “stalking horse bidder.” A stalking horse bidder is an initial
bidder whose purchase offer is often negotiated in advance to guarantee a
minimum sale price. Because the first bidder in an auction incurs significant
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expense (including the cost of due diligence), a stalking horse bidder often
haggles for bid protections, such as reimbursement for expenses or a “break-
up fee” if it does not win the auction.1 The bankruptcy court expressly
authorized Bouchard to select a stalking horse bidder and to offer that bidder
a break-up fee and expense reimbursement.
The selection of a stalking horse bidder was subject to several limita-
tions. Any break-up fee could not exceed 3% of the purchase price, and any
expense reimbursement was subject to a cap. If a stalking horse bidder was
selected, Bouchard was required to notify the court and disclose the material
terms of the deal. And other parties were permitted to object to the stalking
horse agreement within three days of the notice. The auction was set for
July 19, 2021, but the court required that a stalking horse bidder (if any) be
selected by July 7.
Bouchard, however, struggled to generate interest in its vessels. It
discussed the possibility of a stalking horse bidder with prospective pur-
chasers, but no agreement was reached by July 7. With the consent of the
court, the deadline to select a stalking horse bidder was pushed back to July
11. Yet no agreements materialized. The deadline was delayed again to July
16. Still again, it was pushed back to 11:59 p.m. on July 18, just fifteen hours
before the start of the auction.
Finally, after days of negotiations, Bouchard had two sale offers for its
vessels: one from Hartree and one from Centerline Logistics (“Centerline”).
The board met twice on July 18 to consider the options. Centerline’s pro-
posal was initially attractive, but the board had concerns that Centerline
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1
See David M. Holliday, Annotation, Right to Recover Break-Up Fee Arising from
Sale of Bankruptcy Estate Property, 39 A.L.R. Fed. 2d 219 (2009).
3
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would not be able to secure the financing necessary for the transaction.
Centerline’s bid was also not a stalking horse bid; Centerline wanted Bou-
chard to cancel the auction and accept its deal outright, which concerned the
board. So Bouchard rejected their proposal.
That left Hartree’s proposal. Hartree offered $110 million for 29 of
the 31 vessels that secured JMB’s financing facility. But it demanded a break-
up fee of 3% of the purchase price ($3.3 million) and a maximum expense
reimbursement of $1.5 million. Those fees would be paid even if Hartree did
not submit the winning bid. Lastly, the proposal required any competitor to
bid at least $500,000 more than Hartree’s offer (plus the value of the bid
protections) to be successful.
After discussion, the board agreed to move forward with an auction
with Hartree’s offer as a stalking horse bid. Around 11 p.m. on July 18, the
Bouchard notified the court that Hartree had been selected as a stalking horse
bidder. It also disclosed that Hartree had been promised $4.8 million in bid
protections as part of the purchase agreement. 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. Shortly before it commenced, Bou-
chard learned that JMB also intended to bid on the vessels. After Hartree
submitted its opening bid, Bouchard 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. Then, JMB stated that it would bid exactly $115.3 million. Har-
tree declined to overbid, and JMB won the auction.2
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2
In accordance with the court’s bid procedures order, Bouchard orally designated
Hartree as the backup bidder in case closing negotiations between Bouchard and JMB fell
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The Committee objected to the break-up fee and expense reimburse-
ment three days later. It contended that the payments were administrative
expenses under 11 U.S.C. § 503(b) and that Bouchard had failed to satisfy the
statute’s strict necessity standard. Bouchard 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.
B.
The bankruptcy court eventually approved the sale of the assets to
JMB, but it withheld judgment on the legality of Hartree’s bid protections.
A few weeks after the auction, the bankruptcy court held a hearing to decide
whether it was lawful for Bouchard to designate Hartree as the stalking horse
bidder and to give Hartree bid protections. The hearing lasted for five hours,
and the court heard testimony from three witnesses: (1) Richard Morgner, a
director at Bouchard’s investment bank; (2) Patrick Bartels, the independent
director of Bouchard; and (3) Scott Levy, a partner at Hartree.
After the hearing, the bankruptcy court gave an oral ruling that the
break-up fee and expense reimbursement were permitted, but it capped the
expense reimbursement at $1 million (instead of the $1.5 million that Hartree
had requested). It reasoned that, regardless of whether 11 U.S.C. § 503(b) or
§ 363(b) applied, the payments to Hartree were lawful. The court thus
ordered payment to Hartree on August 23, 2021.3
C.
The Committee appealed the Hartree order, and the district court
_____________________
through. But the Committee disputes that on appeal.
3
Notably, the court approved Bouchard’s Chapter 11 reorganization plan three
days later, on August 26, 2021.
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affirmed. Official Comm. of Unsecured Creditors v. Bouchard Transp. Co. (In re
Bouchard Transp. Co.), 639 B.R. 697, 702 (S.D. Tex. 2022). As a threshold
matter, the court acknowledged that whether the bid protections were lawful
was a mixed question of law and fact. Id. at 707. But it concluded that it did
not matter whether the court employed de novo or deferential review. Under
either level of review, the bankruptcy court was correct to allow the fees. Id.Like the bankruptcy court, the district court also declined to decide
whether 11 U.S.C. § 503(b) or § 363(b) applied, as it found the payment law-
ful under either provision. Id. at 712. If the administrative expense standard
applied, the payment was necessary to secure a benefit to the estate—
namely, to procure a valuable bid in the asset sale and to force JMB to bid
higher than it otherwise would have. Id. at 718. If the business judgment rule
applied, then Bouchard prevailed for similar reasons. Bouchard reasonably
compensated Hartree in exchange for Hartree’s serving as the stalking horse
bidder. Id. at 721.
The Committee appeals again.
II.
In a bankruptcy appeal, we review the findings and conclusions of the
bankruptcy court, not the district court. See Official Comm. of Unsecured
Creditors v. Moeller (In re Age Refining, Inc.), 801 F.3d 530, 538 (5th Cir. 2015).
We generally review the bankruptcy court’s conclusions of law de novo and
its factual findings for clear error. Id. But the parties contest what level of
review applies to the bankruptcy court’s order permitting the break-up fee
and expense reimbursement.
Whether the payments meet the statutory standard—either § 503(b)
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or § 363(b)—is a quintessential “mixed” question of law and fact.4 When
reviewing a mixed question, we often choose the standard of review that best
reflects which “judicial actor is better positioned” to make the decision.
Miller v. Fenton, 474 U.S. 104, 114 (1985). That is, if the issue involves the
interpretation of legal rules—a skill firmly within the bailiwick of an appellate
court—we consider the issue de novo. See U.S. Bank Nat’l Ass’n ex rel.
CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, 138 S. Ct. 960, 967
(2018). But if a dispute would “immerse [the court] in case-specific factual
issues—compelling [it] to marshal and weigh evidence, make credibility
judgments, and otherwise address . . . multifarious, fleeting, special, narrow
facts that utterly resist generalization,” we should defer to the court that did
the factfinding. Id. (internal quotation marks and citation omitted).
The question in this case is firmly in the latter category. Whether the
break-up fee and expense reimbursement provided an “actual” benefit to
Bouchard under § 503(b), or whether the payments were a reasonable exer-
cise of business judgment under § 363(b), are the kind of fact-intensive
questions best directed to the bankruptcy court.5 Indeed, the bankruptcy
court ordered the payment to Hartree only after reviewing considerable rec-
ord evidence and hearing five hours of witness testimony. Because the issues
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4
See Pullman–Standard v. Swint, 456 U.S. 273, 289 n.19 (1982) (noting that mixed
questions ask whether “the facts satisfy the statutory standard, or to put it another way,
whether the rule of law as applied to the established facts is or is not violated”).
5
The § 503(b) analysis is comparable to the mixed question in Lakeridge, 138 S. Ct.
at 967–68. There, the Court reviewed for clear error whether a transaction was conducted
at “arm’s length.” Id. at 969. Under § 503(b), we ask a similarly fact-bound question:
whether a payment provided an “actual” and “necessary” benefit to a debtor in bank-
ruptcy. Likewise, in ASARCO, Inc. v. Elliott Mgmt. (In re ASARCO, L.L.C.), 650 F.3d 593,
603 (5th Cir. 2011), we applied clear-error review when we evaluated the propriety of
reimbursements under § 363(b)’s business judgment rule.
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are “primarily . . . factual,” we review for clear error. Trendsetter HR L.L.C.
v. Zurich Am. Ins. Co. (In re Trendsetter HR L.L.C.), 949 F.3d 905, 910 (5th
Cir. 2020) (omission in original) (quoting Lakeridge, 138 S. Ct. at 967). We
will affirm if the bankruptcy court’s determinations are “plausible in light of
the record.” Id. (quotation omitted).
III.
Having settled the standard of review, we now decide whether the
contested payments were lawful.
A.
In a Chapter 11 bankruptcy, fees related to the sale of assets are subject
to court approval. 2 William L. Norton III, Norton Bank-
ruptcy Law and Practice 3d § 44:28, Westlaw (database updated
July 2023). That includes “the payment of bidding incentives to prospective
purchasers,” such as the break-up fee and expense reimbursement at issue
here. Id. But there is a split of authority on what substantive standard a judge
should use to decide whether such payments are permissible.
Some courts6—including the Third Circuit—use 11 U.S.C. § 503(b),
under which estate funds can be used for “administrative expenses” if they
are “the actual, necessary costs and expenses of preserving the estate.” Id.§ 503(b)(1)(A). “[T]o qualify as an ‘actual and necessary cost’ . . . a claim
against the estate must have arisen post-petition and as a result of actions
taken by the [debtor-in-possession] that benefitted the estate.”7
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6
See, e.g., Calpine Corp. v. O’Brien Env’t Energy, Inc. (In re O’Brien Env’t Energy,
Inc.), 181 F.3d 527, 532 (3d Cir. 1999); In re Reliant Energy Channelview LP, 594 F.3d 200,
206 (3d Cir. 2010).
7
Nabors Offshore Corp. v. Whistler Energy II, L.L.C. (In re Whistler Energy II),
8
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Other courts have instead relied on 11 U.S.C. § 363(b)(1), which
governs the sale of estate property outside the ordinary course of business.8
Section 363(b) incorporates the “business judgment standard” from corpor-
ate law. ASARCO, 650 F.3d at 601. A debtor-in-possession may sell its estate
assets while satisfying its fiduciary duties if it gives “some articulated busi-
ness justification for using, selling, or leasing the property.” Id. (quotation
omitted). That standard is less exacting and gives the debtor more discretion
to sell assets (and pay fees) based on merely “sound business reasons.” See
Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 263 (5th Cir. 2010).
Unfortunately, ASARCO—our leading precedent on the issue—gives
mixed signals about which provision applies to these facts. ASARCO also
dealt with an asset sale in bankruptcy, but the debtor held a two-phase bidding
process. After the first round, the debtor asked the court whether it could
reimburse certain bidders for due diligence expenses they would incur in the
next round of bidding. 650 F.3d at 597–98. The court held that § 363(b) was
the governing provision because the debtor sought prospective authorization
to reimburse bidders during an asset sale. Id. at 602. But it reasoned that
§ 503(b) would apply to entities that had already “incurred administrative
expenses and wish to request payment from the estate.” Id. at 601.
This case is somewhere between the two situations that ASARCO
described. On the one hand, this case is also an asset sale, and the debtor
_____________________
931 F.3d 432, 441 (5th Cir. 2019) (quoting Total Minatome Corp. v. Jack/Wade Drilling, Inc.
(In re Jack/Wade Drilling, Inc.), 258 F.3d 385, 387 (5th Cir. 2001)) (first alteration in
original).
8
See, e.g., ASARCO, 650 F.3d at 602; see also Official Comm. of Subordinated
Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.), 147 B.R. 650, 657 (S.D.N.Y.
1992) (not citing § 363(b) but applying the business judgment rule to a break-up fee
arrangement).
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sought court approval to reimburse a bidder before the auction began. That
is similar to the facts of ASARCO and suggests that we should apply § 363(b).
On the other hand, the court did not evaluate the specific request for a break-
up fee and reimbursement until the after the auction when Hartree—a third
party—had already expended resources. Per ASARCO, § 503(b) should
apply to a backward-looking request for reimbursement.
Because of that uncertainty, both the bankruptcy court and the district
court found that the fees were lawful under either § 503(b) or § 363(b). We
elect to do the same. This case does not require us to specify which provision
of the bankruptcy code governs on these unique facts. Under either standard,
the stalking horse payment was legal.
B.
We start with the more stringent provision: § 503(b). As the “claim-
ant seeking administrative expenses,” Hartree has the burden of proving that
the break-up fee and expense reimbursement arose (1) “post-petition and as
a result of actions taken by” Bouchard. Whistler Energy II, 931 F.3d at 441(quoting Jack/Wade Drilling, 258 F.3d at 387). Hartree must also prove that
the fees were (2) “actual” and (3) “necessary costs and expenses of preserv-
ing the estate.” Id. (quoting § 503(b)(1)(A)). Hartree can satisfy each of
those requirements.
1.
As a threshold matter, there was a postpetition agreement between
Hartree and Bouchard. That is not a demanding requirement—all that the
statute requires is that the expenses were incurred “as a result of actions
taken” by the debtor, and that those actions occurred after bankruptcy. Id.
(quoting Jack/Wade Drilling, 258 F.3d at 387). Bouchard signed a purchase
agreement with Hartree, stipulating that Hartree would receive a break-up
fee and reimbursement even if it was not the winning bidder at auction. And
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it is undisputed that the agreement was reached after Bouchard had filed for
bankruptcy.
The Committee insists that the Hartree asset purchase agreement was
not enforceable until the bankruptcy court approved it, and therefore it was
not a valid postpetition transaction. But the Committee reads the “post-
petition agreement” requirement too strictly. The focus of the requirement
is not so much on the agreement, but on its postpetition nature. The reason
that a § 503(b) administrative expense must arise from a postpetition agree-
ment is that claims for administrative expenses get priority over most other
unsecured claims. See Whistler Energy II, 931 F.3d at 441–42 (citing 11 U.S.C.
§ 507(a)(2)). That priority encourages third parties to service the debtors’
estate that would otherwise not do so out of fear that they might not get paid.
But that incentive “is not required . . . when the relevant obligation pre-dates
the bankruptcy.” Id. at 442.
Therefore, an agreement for services in bankruptcy is enforceable
even if the “post-petition business relationship [is] not . . . clearly defined.”
Id. at 442. For example, in Whistler Energy II, we upheld the payment of fees
under § 503(b) where the debtor requested specific services and a counter-
party voluntary performed them, even though there was no formal written
agreement. Id. at 442–43. Here we have much more than that. Bouchard
not only asked Hartree to serve as a stalking horse bidder (a role it dutifully
fulfilled), but the parties signed a purchase agreement to that effect.
And although the associated fees were dependent on court approval,
that does not affect the postpetition nature of the transaction. Indeed,
§ 503(b) implicitly contemplates that debtors will incur postpetition adminis-
trative expenses before they seek court authorization.9 It is unsurprising,
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9
“An entity may timely file a request for payment of an administrative expense,
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then, that the Third Circuit assumed that a valid postpetition transaction
existed where a contract for break-up fees was contingent on approval by the
court. Calpine, 181 F.3d at 529, 533.
That is the situation here. Hartree made a deal with a debtor in bank-
ruptcy, carried out its half of the bargain, and now it wants its expenses paid.
That is a postpetition transaction covered by § 503(b).
2.
Furthermore, the break-up fee and expense reimbursement provided
numerous benefits to the estate. First, by securing Hartree’s participation as
the stalking horse bidder, it helped Bouchard avoid a “naked” auction.
When an auction begins with no known bidder, the debtor risks receiving no
offers or being forced to sell its assets below market value. As Bouchard’s
investment banker testified, that concern animated the decision to negotiate
with Hartree. With just hours to go before the sale, there was a real risk of a
naked auction. By getting Hartree to set a floor price, Bouchard secured
value for the estate.
The Committee responds that the risk of a naked auction was over-
blown. After all, at the same auction, Bouchard sold a different set of vessels
to satisfy a pre-petition debt to Wells Fargo and did not use a stalking horse
bidder. Those vessels—known as the “Wells Fargo collateral”—still
fetched millions. Yet the Wells Fargo auction proves how dangerous a naked
auction can be. Although the Wells Fargo collateral eventually sold, it went
for approximately $30 million less than was needed to clear the associated
debt. Bouchard wanted to avoid a similar scenario in the sale of the larger
share of its vessels, so it spent a comparatively small amount of its money to
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. . . [and] [a]fter notice and a hearing, there shall be allowed administrative expenses.” 11
U.S.C. § 503(a)–(b) (emphasis added).
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guarantee a minimum auction price.
The Committee says that the benefit of an initial bidder proves too
much. The very definition of a stalking horse bid is one that sets the floor
price at an action. If avoiding a naked auction is a per se “benefit” to the
estate, then it will always be permissible to pay break-up fees to a stalking
horse bidder. But we need not hold that avoiding a “naked” auction is bene-
ficial in every case and at any price. For example, the O’Brien court held that
offering break-up fees was unnecessary to avoid a naked auction where the
bidders had other market incentives to come forward. See 181 F.3d at 537.
If there were such evidence here, the analysis would be different. But
Bouchard produced evidence that it reached out to over 150 potential bid-
ders, and yet, on the eve of the auction, it had no assurance that anyone would
bid on its assets.10 Because the risk of a poor auction was real, it benefited
from Hartree’s generous stalking horse bid.
Still, the Committee insists that if the Hartree bid had been successful,
it would have been bad for the estate. Although it was a substantial cash
infusion, it would not have been enough to pay all of Bouchard’s postpetition
debts. And because of the nearly $5 million in bid protections, the estate
would have been left with an outstanding administrative expense claim that
it could not pay. On top of that, the unsecured creditors would receive no
relief.
Yet the Committee ignores the fact that, in the absence of the Hartree
bid, Bouchard faced the prospect of no viable bidders for most of its vessels.
Although the Hartree purchase agreement cost the estate $5 million, that
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10
And the only alternative to an auction—the Centerline purchase offer—lacked
the requisite financing. The board understandably felt that its best option was proceeding
with the auction with Hartree as the stalking horse bidder.
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cost is comparable to an insurance policy, under which avoiding a larger risk
justifies small premiums. If Bouchard had received no bidders, it would have
been far worse for the estate, resulting in paltry recovery for secured creditors
and even less for unsecured creditors.
Second, the bid protections forced JMB to pay more for Bouchard’s
vessels than it otherwise would have. To win the auction, JMB had to bid
$115.3 million, which added at least $500,000 in value to the estate, over and
above Hartree’s offer. Bouchard also maintains that selling the assets at that
amount was essential to paying off its postpetition debts and confirming its
Chapter 11 reorganization plan.
The Committee, however, contends that the bid benefited only JMB
and certain senior creditors while providing no recovery for other creditors.
But a benefit is still a benefit even if it helps only secured creditors. Although
the Committee’s loyalty to its interest group is understandable, the fact that
JMB’s bid helped mainly priority creditors is not a reason to reject the
administrative expenses. Unsecured creditors are in the back of the line, and
sometimes that comes with downsides.
And again, we are not comparing JMB’s bid to a perfect bid that made
both the debtors and creditors completely whole. We are comparing JMB’s
bid to the alternatives: Hartree’s stalking horse bid, or no bid for the vessels.
The Committee itself contends that the former option was flawed, and JMB’s
bid was assuredly an improvement on that deal. It was $5.3 million more than
Hartree’s offer, which, once the $3.3 million break-up fee and $1 million
capped expense reimbursement were subtracted, left $1 million for the estate
above what Hartree would have provided.
Indeed, if no bidder had come forward for Bouchard’s vessels, it may
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have doomed Bouchard’s chances of a Chapter 11 reorganization plan. 11
Bouchard did not have the money to repay its nearly $100 million in post-
petition debts, so a Chapter 11 failure might have kicked the case into Chap-
ter 7 and forced a complete liquidation. See Koerner v. Colonial Bank (In re
Koerner), 800 F.2d 1358, 1360, 1368 (5th Cir. 1986); see also 11 U.S.C.
§ 1112(b)(4)(M).
3.
The last requirement of § 503(b) is that the administrative expenses
were “necessary” to secure the claimed benefit. Hartree demonstrated that
as well.
For starters, Hartree would not have served as the stalking horse bid-
der were it not for the break-up fee and expense reimbursement. The Com-
mittee speculates that Hartree could not have been induced by the break-up
fee because it was contingent on court approval. The evidence in the record,
however, suggests that Hartree fully expected it would get court approval.
Indeed, the bankruptcy court had already pre-authorized a stalking horse
bidder within the limitations in the Hartree purchase agreement.
The Committee points out that the Third Circuit held in O’Brien that
break-up fees were unnecessary because the parties submitted bids with the
full knowledge that the court might not approve a break-up fee. O’Brien,
181 F.3d at 537. But there, the court had already declined a break-up fee
before the auction. Id. at 529. The bidders only hoped that the court would
change its mind after the auction.
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11
The Committee avers that the Hartree stalking horse bid also did not provide
enough money to avoid Chapter 7 conversion. But again, it would have been substantially
worse for both the estate and creditors if Bouchard received less money at the auction than
Hartree offered.
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Here, Hartree had not been previously denied fees. To the contrary,
the court’s bid procedures order explicitly contemplated break-up fees and
reimbursement at the rate Hartree had requested. Furthermore, in O’Brien,
there were strong incentives for the bidders to bid on the assets in the absence
of a break-up fee. Id. at 537; see also Reliant Energy, 594 F.3d at 206–07
(conducting a similar analysis on similar facts). The Committee has not iden-
tified comparable incentives here. That makes it considerably more likely
that the break-up fees incentivized Hartree.
The Committee’s more persuasive suggestion is that, even if the
break-up fee induced Hartree to bid in the first place, it did not induce JMB
to top that bid. The Committee claims that “JMB had every incentive to
submit a bid in the precise amount it submitted regardless of whether the
Hartree Bid was submitted.” That is because certain maritime lienholders
and administrative expense claimants would get paid out before JMB. So in
order for Bouchard to cover those payments plus its $95 million obligation to
JMB, it needed a minimum of $115.3 million at the auction, regardless of what
Hartree initially bid.
It does appear from the record that Bouchard needed at least $115.3
million to pay senior lienholders, professional fees, and its postpetition finan-
cers. The document prepared for Bouchard’s board by Kirkland & Ellis
suggests as much, and Morgner (Bouchard’s investment banker) testified to
it in bankruptcy court. If Bouchard got less than $115.3 million, the senior
lienholders and professionals would be paid first and JMB would not recover
the full amount that Bouchard owed. On the other hand, $115.3 million was
the exact amount needed to outbid Hartree and not one penny more. That
suggests that JMB bid that number because it was trying to beat Hartree.
Both of those interpretations of the evidence are at least plausible. On
clear-error review, there is no reason to reverse the bankruptcy court’s fac-
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No. 22-20321
tual finding. If anything, Bouchard and Hartree’s theory is slightly more per-
suasive. Bouchard had no indication that JMB was going to bid on its vessels
until Hartree was designated as the stalking horse bidder. And the agreement
with Hartree added a $5 million administrative expense claim to the balance
sheet that reduced JMB’s recovery. Companies tend not to spend an extra
$5 million if they do not have to.12 Thus, Morgner testified that JMB likely
would not have bid as highly if it were not for the Hartree stalking horse bid.
The bankruptcy court reasonably credited that testimony.
Considering the totality of the evidence, it is “plausible” both that
Hartree’s stalking horse bid created a benefit for the estate and that Hartree
would not have served as the stalking horse bidder without the prospect of
fees. It is also plausible that JMB only bid $115.3 million because it was forced
to beat out Hartree. Therefore, the break-up fee and the expense reimburse-
ment were “necessary” administrative expenses under § 503(b).
C.
Even if we were to apply § 363(b) instead of § 503(b), the result would
be the same. Section 363(b) incorporates the business judgment rule, familiar
to corporate law. ASARCO, 650 F.3d at 601. If the break-up fee and expense
reimbursement were “necessary” to provide a benefit to the estate, then they
easily satisfy a deferential reasonableness standard.
The Committee’s primary rejoinder is that, even if the agreement was
substantively reasonable, Bouchard failed appropriately to consider the con-
_____________________
12
Indeed, although JMB might not have recovered the full amount of its loan if it
bid less than $115.3, any shortfall would have given JMB a deficiency claim against the
estate for the difference. In that event, JMB would own the collateral outright and might
still recoup all the money after Bouchard liquidated its other assets and paid off the
deficiency claim.
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No. 22-20321
sequences of the Hartree purchase agreement. Given Bouchard’s perilous
financial straits, committing almost $5 million to Hartree was no small deci-
sion. And Hartree demanded that Bouchard reject certain charter agree-
ments that would have cost Bouchard more money that it did not have. Based
on the meeting minutes, it is unclear whether the board ever discussed those
shortcomings specifically.
The individuals who were involved in the transaction, however, did
not allege that the Hartree agreement was flawless. Instead, they testified to
the bankruptcy court that they faced multiple flawed options. Bouchard
could proceed with a “naked” auction and risk that a bidder would severely
undervalue its vessels. It could accept the Centerline deal, even though the
board had reason to doubt Centerline could finance the transaction and Cen-
terline insisted that Bouchard cancel the auction and accept the deal on the
spot. Or it could accept Hartree’s stalking horse bid, paying more fees and
reimbursement costs but guaranteeing a floor price at the auction. Given that
trilemma, the stalking horse arrangement was the lesser of multiple evils.
Nor can the Committee seriously contend that Bouchard’s leaders
violated their fiduciary duty to inform themselves adequately and make a con-
sidered decision.13 The process of finalizing the Hartree deal began on
July 16, when Bouchard’s board first met to discuss the prospect of Hartree
as a stalking horse bidder. According to the minutes, the board thoroughly
discussed “the advantages and disadvantages of designating Hartree as the
stalking horse bidder” at that time. Bouchard met again on July 17 to discuss
the plan. Meanwhile, Bouchard and Hartree exchanged nine drafts of the
_____________________
13
See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (“[D]irectors have a duty to
inform themselves, prior to making a business decision, of all material information
reasonably available to them.”), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244,
254 (Del. 2000).
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No. 22-20321
Hartree purchase agreement. Then, on July 18, the board considered a
24-page presentation on the bid. Only after two meetings on July 18 did
Bouchard approve Hartree as the stalking horse bidder.
True, as the Committee points out, the July 18 meetings lasted just
forty minutes total. But because of the impending auction deadline, every-
thing had to move quickly. To quote the district court, there is “no basis to
conclude that the board did not thoroughly review the presentation and make
a well-reasoned, careful decision to designate Hartree as the stalking-horse
bidder.” Bouchard Transp., 639 B.R. at 721.14 In signing the Hartree purchase
agreement, Bouchard acted well within the bounds of reasonable business
judgment. Section 363(b) does not require more.
IV.
Bouchard’s payment to the stalking horse bidder is justified under
either the stringent administrative-expense standard or the more relaxed
business judgment rule. We AFFIRM the district court’s judgment affirm-
ing the bankruptcy court’s order that Bouchard pay Hartree a break-up fee
and a capped expense reimbursement.
_____________________
14
There are also no allegations of self-dealing and the like, which might render a
business judgment a breach of fiduciary duty.
19