                                                                                                                           Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-19-1999

In Re: O'Brien Env
Precedential or Non-Precedential:

Docket 98-6151




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"In Re: O'Brien Env" (1999). 1999 Decisions. Paper 208.
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Filed July 19, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 98-6151

IN RE: O'BRIEN ENVIRONMENTAL ENERGY, INC.,
       Debtor

CALPINE CORPORATION,
       Appellant

v.

O'BRIEN ENVIRONMENTAL ENERGY, INC.,
now known as NRG GENERATING (U.S.), INC.

On Appeal from the United States District Court
for the District of New Jersey
(D. C. No. 97-cv-01554)
District Judge: Honorable Joseph A. Greenaway, Jr.

Argued April 7, 1999

Before: SLOVITER, ALITO and ALARCON,*
Circuit Judges

(Filed: July 19, 1999)

Michael R. Griffinger (Argued)
Gibbons, Del Deo, Dolan,
 Griffinger & Vecchione
Newark, N.J. 07102



_________________________________________________________________

* Honorable Arthur L. Alarcon, Senior Circuit Judge, United States Court
of Appeals for the Ninth Circuit, sitting by designation.
       James A. Scarpone
       Hellring, Lindeman, Goldstein
        & Siegal
       Newark, N.J. 07102

        Attorneys for Appellant

       Craig J. Donaldson
       Riker, Danzig, Scherer, Hyland
        & Perretti
       Morristown, N.J. 07962

       Jeff J. Friedman (Argued)
       Rosenman & Colin
       New York, N.Y. 10022

       Mitchell A. Karlan (Argued)
       Gibson, Dunn & Crutcher
       New York, N.Y. 10166

        Attorneys for Appellees

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Calpine Corporation appeals from the order of the
District Court affirming the Bankruptcy Court's decision
not to award it a break-up fee or expenses in connection
with its unsuccessful bid to acquire O'Brien Environmental
Energy, Inc. ("O'Brien"), the Debtor in a Chapter 11
bankruptcy proceeding. The term "break-up fee" refers to a
fee paid by a seller to a prospective purchaser in the event
that a contemplated transaction is not consummated. This
appears to be the first court of appeals decision to consider
the standards that should govern an award of break-up
fees and related expenses in the bankruptcy context.

I.

The facts of this case are largely undisputed. O'Brien at
one time developed cogeneration, waste-heat recovery and
biogas projects for the production of thermal and electrical
energy. On September 28, 1994, it filed for Chapter 11

                                  2
protection and began operating as a debtor-in-possession
under 11 U.S.C. S 1107. John Kelly and Glass &
Associates, a crisis management firm, provided O'Brien
with interim management services.

In February 1995, Kelly, Arthur Anderson, and counsel
for O'Brien decided to proceed with a sale of all or almost
all of O'Brien's assets rather than attempt to continue
operating O'Brien as a going concern. Representatives of
O'Brien contacted over 300 potential buyers, and
approximately 125 expressed interest. The representatives
then gathered publicly available information about O'Brien
in "war rooms" in Philadelphia and New York. Potential
buyers were given access to the rooms upon the signing of
a confidentiality agreement.

Roughly fifty potential buyers signed agreements and
were given access. Approximately nineteen later formally
expressed an interest in purchasing the company, and ten
submitted bids. In May, seven were invited to improve their
bids, finish due diligence, and complete term sheets. At
least five submitted bids to the Debtor, the Equity
Committee, and the Official Unsecured Creditors'
Committee (the "Creditors' Committee") and made elaborate
oral, written, and videotaped presentations. Of the
submissions received, three were deemed highest and best:
those of Calpine, NRG Energy, Inc. ("NRG"), and Destec
Corp.

On July 10, 1995, O'Brien entered into a binding and
guaranteed purchase agreement with Calpine. The
agreement provided for the sale of O'Brien's business and
the transfer of $90 to $100 million of O'Brien's liability to
Calpine. The agreement did not provide for any payment to
O'Brien's existing shareholders and did not even provide for
full payment to creditors. See App. at 311. Significantly for
purposes of this appeal, Calpine's obligation to perform
under the contract was conditioned on the parties' ability to
secure the approval by the Bankruptcy Court of a break-up
fee of $2 million and expenses up to approximately $2
million to be paid to Calpine under certain circumstances.
See App. at 185-89.

O'Brien filed a motion in the Bankruptcy Court for such

                               3
approval on July 7, 1995. The Bankruptcy Court
considered the motion at a hearing held on August 17,
1995. The Debtor, the Creditor's Committee, O'Brien's
secured creditors, and several unsecured creditors each
supported the motion; the Equity Committee, Wexford
Management LLC ("Wexford") (O'Brien's controlling
shareholder), and NRG opposed it.1

The Bankruptcy Court refused to approve the break-up
fee and expense provisions, expressing concern that
allowing such fees and expenses would "perhaps chill or at
best certainly complicate the competitive bidding process."
App. at 643. The court indicated that it would be willing to
permit Calpine to seek a break-up fee and expenses at the
end of the process, but Calpine replied that it would not go
forward absent the buyer protection it had sought. The
court adjourned the hearing until August 25, 1995. See
App. at 643-45.

Notwithstanding its position at the hearing, Calpine soon
decided to reenter the bidding. On August 25, 1995, all the
major parties agreed upon bidding procedures, and, on
August 30, 1995, an order was entered by consent that,
inter alia, approved a modified version of the Calpine
contract. The order stated, in part, "Calpine's right to
request approval from the Court of the allowance and
payment of a Break-Up Fee and Break-Up Expenses is
hereby reserved." App. at 694-95. The order further
provided, "[S]hould the [Calpine Contract] be terminated
pursuant to Section 14.1(g) thereof, or the Court confirm a
Plan-based Bid other than Calpine's . . . , the Official
Committee of Unsecured Creditors . . . , certain of the
Debtor's secured creditors, . . . as well as Mr. John Kelly in
_________________________________________________________________

1. It is not entirely clear from the record whether it was Wexford or
Kelly
who was authorized to speak for the Debtor at the August 17, 1995
hearing. The brief filed for Wexford, O'Brien's largest shareholder,
contends it had control of the Board of Directors at that time. See
Appellees Cogeneration Corp. and Wexford's Br. at 8. The issue was
litigated, but the litigation resulted in a practical compromise rather
than a ruling of law. In any event, our resolution of the issues raised by
this appeal does not turn on a resolution of this controversy, and we
refer to the position taken by John Kelly as that of the Debtor merely for
convenience.

                               4
his capacity as the Debtor's Chief Administrative Officer,
shall support the allowances and payment of such Break-
up Fee and Break-up Expense." App. at 695.

An auction followed during which Calpine and NRG
competed, but NRG filed the last enhanced bid, which the
court deemed to be the last, best offer. Prior to confirmation
of NRG's plan, Calpine filed an Application for Payment of
Fees and Expenses Pursuant to 11 U.S.C. S 503(b), seeking
a $2 million break-up fee, $2,250,000 in break-up
expenses, and interest at the prime rate from January 15,
1996 through payment of the fee and expenses. NRG,
Wexford, and the Equity Committee objected to Calpine's
application; the Creditors' Committee, which had been
Calpine's supporter from the outset, supported it.

At a hearing held on June 6, 1996, the Bankruptcy Court
overruled objections to Calpine's right to present an
application seeking fees, and on August 28, 1996, it held
an evidentiary hearing on Calpine's application. On
November 8, 1996, the Bankruptcy Court filed a
comprehensive opinion denying Calpine's application and
entered the Order on November 27, 1996.

Calpine appealed to the United States District Court for
the District of New Jersey, which denied Calpine's appeal
by a brief order dated May 29, 1998. Calpine thenfiled a
timely appeal with this court, challenging both the
Bankruptcy Court's decision on August 17, 1995 not to
approve the proffered contract between the Debtor and
Calpine and the court's November 27, 1996 order denying
Calpine's motion for a break-up fee and expenses.

II.

At the outset, we address Appellees' contention that
Calpine lacks standing to challenge the Bankruptcy Court's
August 17, 1995 decision and that, therefore, that ruling is
not before us on this appeal. Appellees reason that because
only the debtor, O'Brien, had statutory authority to move
for approval of the contract provisions at the August
hearing, only O'Brien may appeal the denial of approval.

This court has emphasized that appellate standing in
bankruptcy cases is limited to "person[s] aggrieved."

                                5
Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737, 741 (3d
Cir. 1995). We consider a person to be "aggrieved" only if
the bankruptcy court's order "diminishes their property,
increases their burdens, or impairs their rights." General
Motors Acceptance Corp. v. Dykes (In re Dykes), 10 F.3d
184, 187 (3d Cir. 1993). Thus, only those "whose rights or
interests are directly and adversely affected pecuniarily" by
an order of the bankruptcy court may bring an appeal. Id.
(internal quotation marks omitted).

The "person aggrieved" standard, which is more stringent
than the constitutional test for standing, serves the acute
need to limit collateral appeals in the bankruptcy context.
Id. As the Court of Appeals for the Ninth Circuit explained:

       This need [to limit appeals] springs from the nature of
       bankruptcy litigation which almost always involves the
       interests of persons who are not formally parties to the
       litigation. In the course of administration of the
       bankruptcy estate disputes arise in which numerous
       persons are to some degree interested. Efficient judicial
       administration requires that appellate review be limited
       to those persons whose interests are directly affected.

Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443
(9th Cir. 1983).

The question whether a party has standing to appeal in
a bankruptcy case is generally an issue of fact for the
district court. See In re Dykes, 10 F.3d at 188. The
underlying order in this case does not indicate whether the
District Court considered Calpine's appellate standing.
Because the facts of this case are not in dispute, however,
it is appropriate for us to address this issue in the first
instance.

Courts that have considered appellate standing in the
context of the sale or other disposition of estate assets have
generally held that creditors have standing to appeal, but
disappointed prospective purchasers do not. See, e.g.,
Licensing by Paolo, Inc. v. Sinatra (In re Gucci) , 126 F.3d
380, 388 (2d Cir. 1997); see also In re Nepsco, Inc., 36 B.R.
25, 26-27 (Bankr. D. Me. 1983). We see no reason to hold
differently in this case.

                               6
On August 17, 1995, Calpine concededly was not a
creditor of O'Brien's estate. Nor did Calpine have a binding
contract with O'Brien, as the sale of substantially all of a
debtor's assets is a transaction outside of the ordinary
course of business, which requires bankruptcy court
approval to become effective. See 11 U.S.C.S 363(b);
Northview Motors, Inc. v. Chrysler Motors Corp., No. 98-
3387, 1999 WL 398881, at *4 (3d Cir. June 18, 1999). Nor
does Calpine's appeal challenge either the "intrinsic
fairness" of the process by which O'Brien's assets were sold
or the good faith of NRG as the ultimate purchaser. See
Kabro Assocs., LLC v. Colony Hill Assocs. (In re Colony Hill
Assocs.), 111 F.3d 269, 274 (2d Cir. 1997).

In this circumstance, we cannot conclude that the
Bankruptcy Court's decision diminished Calpine's property,
increased its burdens, or impaired its rights. See In re
Dykes, 10 F.3d at 187. The only rights Calpine had on
August 17, 1995 were the right to require O'Brien to seek
approval by the Bankruptcy Court as per its contract and
the right to enforce the contract if such approval was
secured. The first right was duly exercised when O'Brien
moved for approval at the August hearing; the second right
never became exercisable because the condition precedent
to its enforcement never occurred. Thus, neither of
Calpine's rights was impaired by the Bankruptcy Court's
decision to deny approval.

Moreover, the order disapproving Calpine's contract
lessened, rather than increased, Calpine's burdens: it
relieved Calpine of any contractual duty to perform. Finally,
Calpine's loss of the profit it hoped to gain from acquiring
O'Brien is too speculative a harm to constitute injury to
property for purposes of the standing test. See, e.g., In re
Colony Hill Assocs., 111 F.3d at 273; Davis v. Seidler (In re
HST Gathering Co.), 125 B.R. 466, 468 (W.D. Tex. 1991).
We, therefore, hold that Calpine lacks standing to appeal
the August 17, 1995 order of the Bankruptcy Court. 2
_________________________________________________________________

2. In light of our decision, we need not decide whether Calpine failed to
preserve its appeal by not filing a notice of appeal from the August 17,
1995 order.

                                7
III.

A.

Calpine also appeals the Bankruptcy Court's order of
November 27, 1996 denying Calpine's subsequent motion
for a break-up fee and expenses. The parties concede that
it has standing on this issue. There is, nonetheless, some
confusion concerning the legal basis on which Calpine
made and is prosecuting that motion. Calpine originally
captioned its motion under 11 U.S.C. S 503(b). At the
argument before the Bankruptcy Court on June 6, 1996,
Calpine's counsel stated: "We are not proceeding pursuant
to 503(b)," although counsel also expressed belief that
Calpine satisfied the requirements of that provision. App. at
1027. In reaching its determination, the Bankruptcy Court
stated: "Calpine . . . is not proceeding here under S 503(b)
or the traditional administrative expense claim analysis set
forth in S 503(b). Instead, the request is made under the
applicable case law setting [forth] standards for approval of
break-up fees and break-up expenses . . . ." In re O'Brien
Environmental Energy, Inc., No. 94-26723, slip op. at 30
(Bankr. D.N.J. Nov. 8, 1996). Calpine raises no challenge to
this portion of the Bankruptcy Court's ruling.

Neither Calpine nor the Bankruptcy Court have cited any
support for the proposition that courts may create a right
to recover from the bankruptcy estate where no such right
exists under the Bankruptcy Code. Nor have we found any
support for that proposition. The structure of the
Bankruptcy Code further counsels against judicial
expansion of the potential for recovery from the debtor's
estate. The filing of a petition for bankruptcy protection
under Chapter 11 of the Code creates an estate, consisting
of all property in which the debtor holds an interest, see 11
U.S.C. SS 301, 541, 1101, and precludes all efforts to obtain
or distribute property of the estate other than as provided
by the Bankruptcy Code, see 11 U.S.C. SS 362, 363, 1123.
This statutory control over the right to recover property
from the debtor's estate is integral to the purposes and
goals of federal bankruptcy law. See, e.g., City of New York
v. Quanta Resources Corp. (In re Quanta Resources Corp.),
739 F.2d 912, 915 (3d Cir. 1984) ("The objectives of federal

                               8
bankruptcy law can be broadly stated: to provide for an
equitable settling of creditors' accounts by usurping from
the debtor his power to control the distribution of his
assets.").

Respectful of this statutory background, we decline the
invitation to develop a general common law of break-up
fees. We instead consider whether any provision of the
Bankruptcy Code, as it is currently written, authorizes the
award of break-up fees and expenses to an unsuccessful
bidder at the plan-based sale of a debtor's assets.

B.

The most likely source of authority for Calpine's motion
appears to be 11 U.S.C. S 503, the provision on which its
motion originally relied. The parties concede that any right
Calpine may have to recover from O'Brien's estate arose
after O'Brien filed for bankruptcy protection and began
marketing its assets for sale. Further, claims that arise
after the date on which the debtor petitioned for
bankruptcy protection ("post-petition claims") are generally
allowed, if at all, only as administrative expenses pursuant
to 11 U.S.C. S 503. We, therefore, treat Calpine's arguments
as addressing whether it is entitled to receive break-up fees
and expenses under that provision.

Section 503 states, in relevant part:

       (a) an entity may timely file a request for payment of an
       administrative expense, or may tardily file such a
       request if permitted by the court for cause.

       (b) After notice and a hearing, there shall be allowed
       administrative expenses, . . . including --

       (1) (A) the actual, necessary costs and expense s of
       preserving the estate . . . .

"For a claim in its entirety to be entitled tofirst priority
under [S 503(b)(1)(A)], the debt must arise from a
transaction with the debtor-in-possession. . . .[and] the
consideration supporting the claimant's right to payment
[must be] beneficial to the debtor-in-possession in the
operation of the business." Cramer v. Mammoth Mart, Inc.,

                                9
(In re Mammoth Mart, Inc.), 536 F.2d 950, 954 (1st Cir.
1976). The Bankruptcy Court noted: "A party seeking
payment of costs and fees as an administrative expense
must . . . carry the heavy burden of demonstrating that the
costs and fees for which it seeks payment provided an
actual benefit to the estate and that such costs and
expenses were necessary to preserve the value of the estate
assets." In re O'Brien, slip op. at 30.

We assume that bidding at the sale of O'Brien's assets
constitutes a transaction with the debtor-in-possession for
purposes of S 503(b)(1)(A). This assumption is particularly
appropriate here in light of the Bankruptcy Court's order of
August 30 1995, which, by "reserving" Calpine's rights,
suggests that the court anticipated and intended to
preserve consideration of a later request for feesfiled by
Calpine. Such fees could be awarded under this section
only if Calpine's participation in the bidding process was
necessary to accord the estate an actual benefit.

Calpine argues that, much like in non-bankruptcy
contexts, break-up fees should be permitted where, after
careful scrutiny, the court determines that (1)"a debtor
believes in its business judgment that such fees will benefit
the estate," (2) there is no proof of self-dealing, and (3)
there is no proof of specific harm to the bankruptcy estate.
Appellant's Br. at 21.

The bankruptcy courts and district courts that have
addressed the standard for break-up fees and expenses in
bankruptcy proceedings have adopted very different
approaches. Some have assumed that break-up fees and
expenses should be treated in bankruptcy the same way
that they are treated in the corporate world, as Calpine
contends. In In re 995 Fifth Avenue Associates, L.P., 96 B.R.
24 (Bankr. S.D.N.Y. 1989), the debtor, the Creditors'
Committee, and a potential purchaser negotiated a form
contract that provided for the payment of $500,000 in
break-up fees and served as the basis for an auction of the
company. In ruling on a request to recover the fees
following the auction, the bankruptcy court began by
reviewing the treatment of break-up fees outside of
bankruptcy. It stated:

                               10
        In the corporate takeover context it is recognized that
       breakup fees are not illegal where they enhance rather
       than hamper the bidding. Breakup fees and other
       strategies may "be legitimately necessary to convince a
       `white knight' to enter the bidding by providing some
       form of compensation for the risks it is undertaking."
       When reasonable in relation to the bidder's efforts and
       to the magnitude of the transaction, breakup fees are
       generally permissible. But if such a fee is too large, it
       may chill the bidding to the detriment of shareholders
       (or, if the company for sale is insolvent, its creditors).
       In such instances, the fee is not protected by the
       business judgment rule (which bars judicial inquiry
       into actions of corporate directors taken in good faith
       and in the exercise of honest judgment in the lawful
       and legitimate furtherance of corporate purposes) and
       is thus subject to court review.

Id. at 28 (citations omitted). The court concluded that
"[t]hese principles have vitality by analogy in the chapter 11
context," and upheld payment of the break-up fees. Id.
(footnote omitted).

The District Court for the Southern District of New York
followed a similar approach in Official Committee of
Subordinated Bondholders v. Integrated Resources, Inc., 147
B.R. 650 (S.D.N.Y. 1992). There, the debtor moved for
authorization under S 363 to enter into a letter agreement
with a prospective lender. Under the contract, the lender
would agree to fund the debtor's plan of reorganization in
return for assurances that it would receive reimbursement
of its expenses and a break-up fee should the transaction
not go forward. Although the Subordinated Bondholders'
Committee objected to the reimbursement and break-up fee
provisions, the bankruptcy court approved the lender's
proposal, deferring to the debtor's business judgment. On
appeal, the district court identified three questions that a
court should ask in deciding whether to approve break-up
fee provisions: "(1) is the relationship of the parties who
negotiated the break-up fee tainted by self-dealing or
manipulation; (2) does the fee hamper, rather than
encourage bidding; [and] (3) is the amount of the fee
unreasonable relative to the proposed purchase price?" Id.

                               11
at 657. Because it found that the bankruptcy court had
properly answered each of these questions in the negative,
the district court affirmed.

Other courts have authorized more searching review,
identifying numerous factors that a court should consider
in determining whether a break-up fee is permissible in the
context of any particular bankruptcy. In In re Hupp
Industries, Inc., 140 B.R. 191 (Bankr. N.D. Ohio 1992), the
debtor sought authorization to enter into a letter of intent
that would have provided for the sale of many of the
debtor's assets under 11 U.S.C. S 363 and obligated the
debtor to pay up to $150,000 in break-up fees and
expenses if the deal were not consummated. The Creditors'
Committee and a principal secured creditor objected. The
court identified seven "[s]ignificant factors to be considered
in determining the propriety of allowing break-up fee
provisions" in the context of "a major preconfirmation
transaction":

       (1) Whether the fee requested correlates with a
       maximization of value to the debtor's estate;

       (2) Whether the underlying negotiated agreement is an
       arms-length transaction between the debtor's estate
       and the negotiating acquirer;

       (3) Whether the principal secured creditors and th e
       official creditors committee are supportive of the
       concession;

       (4) Whether the subject break-up fee constitutes a     fair
       and reasonable percentage of the proposed purchase
       price;

       (5) Whether the dollar amount of the break-up fee is so
       substantial that it provides a "chilling effect" on other
       potential bidders;

       (6) The existence of available safeguards beneficial to
       the debtor's estate;

       (7) Whether there exists a substantial adverse imp act
       upon unsecured creditors, where such creditors are in
       opposition to the break-up fee.

Id. at 193, 194.

                                12
The court further remarked, "In the context of a
nonbankruptcy asset sale, . . . break-up fees are
presumptively appropriate in view of the business judgment
rule, and thusly, seldom require judicial attention. In the
bankruptcy context, however, the Court must be
necessarily wary of any potential detrimental effect that an
allowance of such a fee would visit upon the debtor's
estate." Id. (citation omitted). After"carefully scrutiniz[ing]"
the bidding incentives, the court concluded that they
"would only be an unwarranted expense upon the Debtor's
estate" and refused to approve the agreement. Id. at 196.

Finally, in In re America West Airlines, Inc., 166 B.R. 908
(Bankr. D. Ariz. 1994), the debtor sought approval of an
interim procedures agreement that would have provided for
payment of between four and eight million dollars in break-
up fees. The debtor, the Creditor's Committee, the Equity
Committee, and the debtor's prospective contract partner
all supported authorization of the agreement. The court,
however, refused to apply the business judgment rule,
which it recognized had been applied outside of the
bankruptcy context, stating: "Acquisition of an ongoing
business which is in bankruptcy is fundamentally different
from that of an acquisition involving parties not in
bankruptcy." Id. at 911. It held:

       [T]he standard is not whether a break-up fee is within
       the business judgment of the debtor, but whether the
       transaction will "further the diverse interests of the
       debtor, creditors and equity holders, alike." The
       proposed break-up fee must be carefully scrutinized to
       insure that the Debtor's estate is not unduly burdened
       and that the relative rights of the parties in interest are
       protected. The analysis conducted by the Court must
       therefore include a determination that all aspects of
       the transaction are in the best interests of all
       concerned.

Id. at 912.

The court noted that the debtor had been "thoroughly
marketed" and concluded that "the proposed break-up fee
w[ould] not induce further bidding or bidding generally" but
would "unnecessarily chill[ ] bidding and potentially

                               13
deplete[ ] assets that c[ould] be better utilized to help fund
a plan of reorganization and continue to provide funds for
professionals, attorneys, accountants and consultants to
that end." Id. at 913. It held, "No funds of the estate should
be used to pay break-up fees in a transaction that .. .
would appear to yield a large profit to the top bidder." Id.

We have reviewed these cases and considered the
different approaches they represent. None, however, offers
a compelling justification for treating an application for
break-up fees and expenses under S 503(b) differently from
other applications for administrative expenses under the
same provision. We therefore conclude that the
determination whether break-up fees or expenses are
allowable under S 503(b) must be made in reference to
general administrative expense jurisprudence. In other
words, the allowability of break-up fees, like that of other
administrative expenses, depends upon the requesting
party's ability to show that the fees were actually necessary
to preserve the value of the estate. Therefore, we conclude
that the business judgment rule should not be applied as
such in the bankruptcy context. Nonetheless, the
considerations that underlie the debtor's judgment may be
relevant to the Bankruptcy Court's determination on a
request for break-up fees and expenses.

C.

All parties recognize that break-up fees and expenses are
accepted in corporate merger and acquisitions transactions.
In summarizing the corporate use of break-up fees, Calpine
has explained that such provisions are designed to provide
a prospective acquirer with some assurance that it will be
compensated for the time and expense it has spent in
putting together its offer if the transaction is not completed
for some reason, usually because another buyer appears
with a higher offer. Such provisions may also encourage a
prospective bidder to do the due diligence that is the
prerequisite to any bid by assuring the prospective bidder
that it will receive compensation for that undertaking if it is
unsuccessful.

Not all of the purposes that break-up fees serve in
corporate transactions are permissible in bankruptcy.

                               14
Although the assurance of a break-up fee may serve to
induce an initial bid (a permissible purpose), it may also
serve to advantage a favored purchaser over other bidders
by increasing the cost of the acquisition to the other
bidders (an impermissible purpose).

Moreover, even if the purpose for the break-up fee is not
impermissible, the break-up fee may not be needed to
effectuate that purpose. For example, in some cases a
potential purchaser will bid whether or not break-up fees
are offered. This can be expected to occur whenever a
potential purchaser determines that the cost of acquiring
the debtor, including the cost of making the bid, is less
than the estimated value the purchaser expects to gain
from acquiring the company. In such cases, the award of a
break-up fee cannot be characterized as necessary to
preserve the value of the estate. See generally , Bruce A.
Markell, The Case Against Breakup Fees in Bankruptcy, 66
Am. Bankr. L.J. 349, 359 (1992).

D.

The Bankruptcy Court identified at least nine factors that
it viewed as relevant in deciding whether to award Calpine
a break-up fee and expenses, which we summarize as
follows: (1) is the relationship of the parties who negotiated
the break-up fee tainted by self-dealing or manipulation; (2)
does the fee hamper, rather than encourage bidding; (3) is
the amount of the fee unreasonable relative to the proposed
purchase price; (4) did the unsuccessful bidder (Calpine)
place the estate property in a sales configuration mode to
attract other bidders to the auction; (5) did the request for
a break-up fee serve to attract or retain a potentially
successful bid, establish a bid standard or minimum for
other bidders, or attract additional bidders; (6) does the fee
requested correlate with a maximization of value to the
Debtor's estate; (7) are the principal secured creditors and
the official creditors committee supportive of the
concession; (8) were safeguards beneficial to the debtor's
estate available; and (9) was there a substantial adverse
impact on unsecured creditors, where such creditors are in
opposition to the break-up fee?

                                15
After weighing these various factors, the Bankruptcy
Court concluded that Calpine had not met the
requirements to recover break-up fees or expenses.
Although the court found no evidence of self-dealing and
concluded that "the requested break-up fee and break-up
expenses [were] within the range of fees approved by some
courts," it put most emphasis on its belief that approving
Calpine's request for a break-up fee at the August 17, 1999
hearing would have "chill[ed] or at best certainly
complicate[d] the competitive bidding process." In re
O'Brien, slip op. at 39. The court further found that the
Debtor, not Calpine or NRG, did the work of putting O'Brien
into a sales configuration mode (the fourth factor), and
noted that even before Calpine had emerged as a serious
bidder, O'Brien solicited bids from numerous companies
and pursued serious negotiations with at least five of them.

The court rejected any contention that the break-up fee
provisions had attracted or retained a potentially successful
bid, established a bid standard or minimum for other
bidders, or attracted additional bidders (the fifth factor).
The court noted that although it had originally been
suggested by the Debtor that the break-up fee was needed
to attract Calpine's bid, Calpine eventually decided to
reenter the bidding after approval for that fee had been
denied. Moreover, the court noted that the Calpine and
NRG bids changed substantially over the bidding process,
suggesting that Calpine's initial bid did not serve as a
standard for other bidders.

Ultimately, "the Court [could] draw no correlation
between the request for break-up fees and break-up
expenses and the value ultimately brought to the estate by
the competitive bidding process" (the sixth factor). Id. at 40.
It did recognize that permitting Calpine to recover the fee
and expenses would not injure unsecured creditors (the
ninth factor) who will be paid in full in any event. It found,
however, that awarding the fee and expenses would"have
an adverse effect of holders of old equity of O'Brien by the
dilution of at least a portion of the value that th[e] Court
determined was provided to them pursuant to the
successful NRG bid." Id. at 42.

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E.

Rather than adopting the specific factors the Bankruptcy
Court identified as the appropriate test to be used for all
break-up fee determinations, we consider whether the
record evidence supports the Bankruptcy Court's implicit
conclusion that awarding Calpine break-up fees was not
necessary to preserve the value of O'Brien's estate. As we
have explained, that inquiry stems directly from
S 503(b)(1)(A), which requires that an expense provide some
benefit to the debtor's estate.

As we have recognized, such a benefit could be found if
assurance of a break-up fee promoted more competitive
bidding, such as by inducing a bid that otherwise would
not have been made and without which bidding would have
been limited. Calpine argues that the fee and expenses were
necessary to retain its bid and contends that it was
improper for the Bankruptcy Court to draw a contrary
conclusion from Calpine's decision to return to the bidding.
We recognize that Calpine's decision to return to the
bidding may have been influenced by the Bankruptcy
Court's expressed willingness to reserve the question of fees
for later determination. Nonetheless, when Calpine decided
to reenter the bidding, it knew that it risked not receiving
any break-up fees or expenses. Its decision to proceed in
the face of this risk undercuts its current contention that
it viewed the fees and expenses as necessary to make its
continued involvement worthwhile. Indeed, the fact that
O'Brien turned out to be worth at least $52 million more
than Calpine's original bid (judging from what NRG was
ultimately willing to pay) strongly suggests that it was the
prospect of purchasing O'Brien cheaply, rather than the
prospect of break-up fees or expenses, that lured Calpine
back into the bidding.

Calpine also contends that its bid promoted competitive
bidding by serving as a minimum or floor bid. Calpine's
offer for the debtor's assets encompassed in the July 1995
agreement with the debtor was effectively the first bid, and
by definition, the lowest, at least for that moment. The
Bankruptcy Court, however, was not satisfied with the
mere showing that later bids exceeded Calpine's initial one.
Rather, the court required some showing that Calpine's bid

                               17
served as a catalyst to higher bids. We agree that this was
a relevant inquiry and conclude that Calpine failed to make
any such showing.

Arguably, if the availability of break-up fees and expenses
were to induce a bidder to research the value of the debtor
and convert that value to a dollar figure on which other
bidders can rely, the bidder may have provided a benefit to
the estate by increasing the likelihood that the price at
which the debtor is sold will reflect its true worth. Calpine
argues that it performed this research function and that the
fee and expenses were necessary to induce it to do so.
Calpine's argument ignores the fact that much of the
information bidders needed to evaluate O'Brien was
gathered by O'Brien itself at its own expense. Moreover, the
record in this case suggests that Calpine had strong
financial incentives to undertake the cost of submitting a
bid, including the cost of researching the company's worth,
even in the absence of any promise of reimbursement. We
cannot conclude on this record that it was error for the
Bankruptcy Court to find that the break-up fees and
expenses were not necessary to induce Calpine's bid.

Finally, Calpine argues that the presence of competitive
bidding during the O'Brien asset sale necessarily proves
that the break-up fee and expense provisions did not chill
the bidding, as the Bankruptcy Court feared. This is a
logical fallacy. While it is true that bidding remained
competitive in the face of uncertainty over whether such
fees would be awarded, the bidding might have been even
more heated had the court definitively ruled that Calpine
was not entitled to a break-up fee or expenses earlier in the
process. The results of the bidding therefore do not prove
what effect the break-up fee and expense provisions had on
other bidders' behavior. We note in this regard that NRG
claims that its winning bid was no more than $1,000,000
higher than Calpine's final offer. See Appellees
Cogeneration Corp. and Wexford's Br. at 21. If this claim is
accurate, then the award of $4,250,000 in break-up fees
and expenses certainly would have chilled the bidding by
making NRG's bid, which otherwise would have been the
winning bid, uneconomical.

                               18
The record thus adequately supports the conclusion that
awarding break-up fees and expenses to Calpine was not
actually necessary to preserve the value of O'Brien's estate,
and because this is the dispositive inquiry in a bankruptcy
case, we find no error or abuse of discretion by the
Bankruptcy Court.

IV.

For the reasons set forth, we will affirm the order of the
District Court denying Calpine's appeal from that decision.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

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