By Ronit J. Berkovich (Weil)
In a recent decision, In re Energy Future Holdings Corp., 2021 U.S. App. LEXIS 7400 (3d Cir. 2021) (“EFH II”), the Third Circuit held that a stalking horse may assert an administrative expense claim under section 503(b)(1)(A) of the Bankruptcy Code for certain transactional expenses, even when it is not entitled to a termination fee.
In EFH II, the debtors terminated a merger agreement with a stalking horse and the stalking horse applied for payment of a termination fee. After the application was denied, the stalking horse filed an administrative expense application for costs incurred in attempting to complete the merger. In response, various bondholders jointly filed a motion to dismiss and a motion for summary judgment. After the Delaware Bankruptcy Court granted the bondholders’ motions, the Third Circuit ruled that the administrative claim should not have been denied without further factual inquiry because the stalking horse plausibly alleged that it benefited the estate by providing information, accepting risks, and paving the way for a later successful deal.
In so holding, the Third Circuit applied a broad standard for pleading a plausible administrative claim under section 503(b)(1)(A). Going forward, it may be harder to obtain denial of an administrative expense application in the Third Circuit without a discovery process and evidentiary hearing. While this decision establishes an alternative means for stalking horses to recover certain transactional expenses, its actual impact remains to be seen, as parties can draft provisions in transactional documents to address the scope of recoverable administrative claims.
The full article is available here.