The Fifth Circuit has ruled that, under the facts of the
specific case, that bidders could recover their costs without a showing of
direct benefit to the estate. Matter of ASARCO LLC, No. 10-40930 (5th
Cir. 8/16/11). The specific holding was that reimbursement of costs incurred in
submitting a bid were governed by the business judgment standard under 11
U.S.C. Sec. 363(b) [an annotated version of this statute is available to lexis.com
subscribers] rather than the benefit to the estate standard under 11 U.S.C.
Sec. 503(b) [annotated version]. You can find the opinion here
[an enhanced version of this opinion is available to lexis.com
A Billion Dollar Judgment and an Auction That Wasn't
This was a case about a big judgment and a unique procedure to auction off that
judgment. In 1999, Grupo Mexico S.A.B. de C.V. (Grupo Mexico) purchased ASARCO.
ASARCO owned 260 million shares of Southern Peru Copper Company (SCC). Through
a series of transfers, the SCC shares were transferred from ASARCO to a
subsidiary of Grupo Mexico. After ASARCO filed for chapter 11 relief in 2005,
it sued the transferee, which was a subsidiary of Grupo Mexico. ASARCO won big.
It obtained a judgment for actual fraudulent transfer, aiding and abetting a
breach of fiduciary duty and conspiracy. ASARCO LLC v. Americas Mining Corp.,
396 B.R. 278 (S.D. Tex. 2008) [enhanced version]. Not only did it get the shares
back, but it also recovered a judgment for $1.4 billion. ASARCO LLC v.
Americas Mining Corp., 404 B.R. 150 (S.D. Tex. 2009) [enhanced version]. (I have included the citations
here because they are informative opinions for fraudulent transfer litigation).
Having a valuable asset in hand, ASARCO proposed a plan of reorganization. Its
plan was to be funded in part by selling the SCC Judgment. It proposed a
two-stage bid solicitation process. In the first stage, its financial adviser
identified potential bidders for the judgment. In a variant on the typical
auction process, ASARCO invited a select group of bidders to proceed to the
second phase of the process. In order to entice the bidders to perform the
expensive legal due diligence necessary to evaluate the asset, ASARCO sought
and obtained an order from the Bankruptcy Court authorizing it to reimburse
qualified bidders for their due diligence expenses. The Bankruptcy Court
granted the motion finding that ASARCO had demonstrated a "compelling and
sound business justification" for the order.
Grupo Mexico appealed the reimbursement order which was stayed. Meanwhile Grupo
Mexico confirmed a plan of reorganization which paid all creditors in full,
released the judgment and gave it control of ASARCO. Since Grupo Mexico now
controlled ASARCO, ASARCO was not interested in defending the appeal. However,
two of the bidders were granted leave to intervene and defend the order.
On appeal, the Appellants argued that because the sale was never concluded,
there was not a benefit to the estate and the bidders expenses could not be
reimbursed under Sec. 503(b). The bidders argued that the Bankruptcy Court
could authorize the payment under the business judgment standard of Sec.
363(b). The business judgment test was a lower bar since it looked at whether
the order was reasonable at the time it was sought; on the other hand, the
benefit to the estate standard would have analyzed the benefit in hindsight.
The Fifth Circuit distinguished two Third Circuit cases which had disallowed
break-up fees. While the Third Circuit had rejected break-up fees on the ground
that they chilled the bidding, here the Fifth Circuit found that the reimbursement
order sought to increase competition and was offered to all bidders invited to
the second round. The Fifth Circuit also distinguished the break-up fee cases
on the basis that the auction involved a "very unique and very valuable
but possibly worthless asset."
In upholding the order, the Fifth Circuit wrote:
On this record, we conclude that the business judgment
standard is the better fit for assessing ASARCO's reimbursement motion. Section
363 addresses the debtor's use of the estate property, and in its motion ASARCO
sought authorization to make discretionary use of the estate's funds. Section
503, in contrast, generally applies to third parties that have already incurred
expenses in connection to the debtor's estate. The unsuccessful bidders in O'Brien
and Reliant Energy sought payment for expenses incurred without the
court's preapproval for reimbursement, and thus section 503 was the proper
channel for requesting payment. In ASARCO's case, however, the bankruptcy court
issued the Reimbursement Order before any potential qualified bidders,
including the Intervenors, had incurred due diligence and work fees. In this
context, application of the business judgment standard is appropriate.
Opinion, pp. 11-12. Having concluded that the business
judgment standard applied, the court had no difficulty finding that the
standard had been satisfied.
In a final footnote, the Court hinted that it would have upheld the award under
the benefit to the estate standard as well, noting that the District Court had
found that the auction process "was perhaps the final impetus needed to
encourage the Parent to file its plan which pays creditors in full."
Why It Matters
This case is important for two reasons. One is that large
bankruptcy cases are increasingly being resolved by Sec. 363 sales. There are
not many circuit level opinions on 363 sales, since most appeals are rendered
moot by the sale closing. As a result, any opinion which explains the Sec. 363
process is useful.
Second, this particular opinion, while very fact specific, provides some useful
pointers. First, reimbursement orders should be obtained before any due
diligence expenses are incurred. Second, the complexity of the asset will
influence the advisability of reimbursing due diligence costs. There is a big
difference between a tract of raw land and a billion dollar judgment. Finally,
and perhaps most importantly, reimbursement orders are justifiable when they
will increase competition. In the typical case, a stalking horse bidder is granted
reimbursement if it is outbid. This encourages the stalking horse to invest in
the due diligence necessary to submit a bid. Conversely, it can be used to tilt
the auction procedures in favor of the stalking horse. Here, the unique aspect
of the process was that all bidders invited to the second round were granted a
right of reimbursement. Thus, the process was even-handed and fostered
competition rather than inhibiting it.
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