In re Integrated Resources, Inc.
| Decision Date | 28 October 1992 |
| Docket Number | No. 92 Civ. 430 (MBM).,92 Civ. 430 (MBM). |
| Citation | 147 BR 650 |
| Parties | In re INTEGRATED RESOURCES, INC., also d/b/a IRI Services, Inc., Debtor. The OFFICIAL COMMITTEE OF SUBORDINATED BONDHOLDERS, Appellant, v. INTEGRATED RESOURCES, INC. and Bankers Trust New York Corporation, Appellees. |
| Court | U.S. District Court — Southern District of New York |
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Steven E. Greenbaum, Carole L. Fern, John P. Biedermann, Berlack, Israels & Liberman, New York City, for appellant.
Jeanne M. Luboja, Myron Trepper, Willkie Farr & Gallagher, New York City, for appellee Integrated Resources, Inc.
Thomas J. Moloney, Shari Siegel, Cleary, Gottlieb, Steen & Hamilton, New York City, for appellee Bankers Trust New York Corp.
Appellant, a committee of subordinated bondholders, appeals from an order and memorandum decision of the United States Bankruptcy Court for the Southern District of New York (Blackshear, J.), approving a break-up fee arrangement among appellees, the debtor and a prospective purchaser. For the reasons set forth below, the challenged order is affirmed.
Appellees are Integrated Resources, Inc. ("Integrated") and Bankers Trust New York Corporation ("BT"). On February 13, 1990, Integrated filed a voluntary petition for relief under chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq. (the "Bankruptcy Code"). See In re Integrated Resources, 135 B.R. 746, 748 (Bankr.S.D.N.Y.1992). The bankruptcy court appointed three creditors' committees to serve in this case: (1) Committee of Holders of Bank Debt (the "Bank Committee"); (2) Committee of Senior Public Debt and Commercial Paper Holders (the "Senior Debt Committee"; together with the Bank Committee, the "Senior Committees"); and (3) the Official Committee of Subordinated Bondholders (the "Sub-Debt Committee").
On November 8, 1991, Integrated, the Senior Committees, and BT entered into a letter agreement (the "BT Proposal"), whereby BT offered to fund a plan to reorganize Integrated with $565 million in cash, conditioned upon the bankruptcy court's approval by November 25, 1991. The BT Proposal provided for an expense reimbursement and break-up fee arrangement (the "Break-up Fee") in favor of BT. A break-up fee, or more appropriately a termination fee, is an incentive payment to a prospective purchaser with which a company fails to consummate a transaction.
Integrated sought approval of the BT Proposal and Break-up Fee on November 12, 1991. At a conference the next day, the bankruptcy court rejected the claim by the Sub-Debt Committee, not a party to the BT Proposal, that it needed discovery on the broad issue of which, if any, third-party offer was the highest or best. The court refused to reschedule the hearing and limited discovery to the narrow question to be heard on November 25, 1991: whether it should approve the BT Proposal.
Between November 13, 1991 and November 24, 1991, the Sub-Debt Committee conducted document discovery and took the depositions of representatives of Integrated, BT, and the two Senior Committees. On November 25, 1991, Judge Blackshear, after a lengthy hearing, approved the Break-up Fee, as modified. He rejected the Sub-Debt Committee's argument that the process which led to the BT Proposal was tainted by the self-dealing of Integrated's management. In re Integrated Resources, 135 B.R. at 752. On December 5, 1991, the Sub-Debt Committee filed a Notice of Appeal from the bankruptcy court's Order and subsequent Memorandum Decision on Motion for Approval of Break-Up Fee and Expense Reimbursement Agreement. Id.
Integrated is primarily a holding company that owns numerous operating entities whose prepetition business included operating life insurance companies; organizing, managing, and selling direct participation investment programs; providing investment counseling and money management services for private accounts and mutual funds sponsored by Integrated; equipment leasing; operating media properties; and managing certain contractual rights and obligations. Since filing its petition, Integrated has continued to manage, as debtor-in-possession pursuant to §§ 1107 and 1108 of the Bankruptcy Code, its partnership-related businesses, equipment leasing business, contract rights operations, certain operating subsidiaries, and other less significant assets. Integrated has streamlined its operations, reduced costs, and sold or otherwise disposed of various assets and business lines. In re Integrated Resources, Inc., 135 B.R. at 748.
Initially, Integrated tried to develop an internally funded plan of reorganization. However, Integrated and the Senior Committees disagreed about Integrated's ability to confirm and consummate such a plan. As a result, since June 1991, Integrated has pursued third-party funding in an effort to resolve key issues dividing itself and the Senior Committees, and has contacted numerous parties in an effort to locate a buyer. Integrated entered into confidentiality agreements with those entities that showed serious interest, in order to permit those entities to conduct the detailed investigations necessary to informed decisions about acquisition — often referred to as "due diligence" — while at the same time safeguarding Integrated's confidential information.
In January 1991, BT prompted Integrated to establish a data room and began to examine Integrated in earnest. On or about January 23, 1991, Integrated entered into a confidentiality agreement with BT. Importantly, it was the Senior Committees, sophisticated investors with approximately $1.5 billion in claims, not Integrated management, who led the negotiations with BT. BT and the other prospective bidders have used the data room since early 1991. (Weinroth Dep. at 66, 208)
Because BT expressed serious interest in funding a plan, Integrated filed a motion for authorization to enter into an agreement to reimburse BT's expenses. However, the Creditors' Committees strenuously objected and Integrated withdrew the motion. Nonetheless, BT continued its investigation without such reimbursement. In re Integrated Resources, 135 B.R. at 748-49.
Integrated successfully used BT's bid both as a bid comparison to spur existing bidders and as a magnet to attract additional bidders. By summer 1991, Integrated had contacted approximately 30 potential bidders. (11/25/91 Hr'g Tr. at 50) The Hallwood Group Incorporated ("Hallwood"), which previously had considered purchasing certain limited assets from Integrated, began investigating a bid for Integrated's entire business in April 1991, but when BT temporarily withdrew in August 1991, "the Hallwood offer was substantially lower." (11/25/91 Hr'g Tr. at 66) Integrated Chairman Stephen Weinroth showed documents to Hallwood that compared the values in the BT Proposal and in Hallwood's bid. (Weinroth Dep. at 193) Following the BT Proposal, another group, Penguin Realty Associates Limited Partnership ("Penguin"), which had expressed interest in funding a plan and had investigated Integrated's assets, raised its tentative offer. In re Integrated Resources, 135 B.R. at 752. At the November 25, 1992, Chairman Weinroth reaffirmed "our determination that we have to keep them BT in the hunt and it the Break-up Fee does establish what we believe to be a decent price as a floor for any other plan funder." (11/25/92 Hr'g Tr. at 67)
However, none of the prospective buyers has been willing to sign a binding agreement, because a plan to reorganize Integrated would entail a commitment of hundreds of millions of dollars and considerable risk. The bid preparation required extensive investigation. Integrated's assets were, and still are, complicated and not easily valued. These assets include so-called deferred origination contract rights, which represent future rights to payment in connection with real estate limited partnerships Integrated sponsored throughout the country. (11/25/92 Hr'g Tr. at 154-57)
Not surprisingly, BT and the other bidders incurred substantial out-of-pocket expenses and opportunity costs in trying to understand and evaluate Integrated's finances. To sustain the bidders' interest and ensure the maximum value of their estate, Integrated and the Senior Committees considered proposals for break-up fees and expense reimbursement from all the bidders, not only from BT. An earlier proposal by Hallwood had provided for a $4 million break-up fee, and the current proposal by Penguin provides for a break-up fee of $8.5 million and expense reimbursement of $2 million. In re Integrated Resources, 135 B.R. at 753 n. 6.
The Break-up Fee which appellants challenge is a component of the BT Proposal and a condition precedent to funding a plan of reorganization. The Break-up Fee would be payable to BT if (1) Integrated sells to anyone other than BT any material assets proposed to be acquired by BT or enters into a transaction that otherwise is materially inconsistent with the BT Proposal (an "Alternative Transaction"); (2) a plan of reorganization based on the BT proposal or a subsequent definitive agreement with BT (a "Definitive Agreement") is abandoned; or (3) the creditors of Integrated receive a material divided or distribution respecting their claims. By contrast, the Break-up Fee would not be payable if BT abandons its proposal because of a material adverse change, is unable to obtain any necessary regulatory approvals, or materially breaches the BT Proposal or a Definitive Agreement.
The Break-up Fee originally provided for the following amounts to be paid to BT: (1) $500,000 if the BT Proposal is abandoned because Integrated and the Senior Committees find unacceptable the list of Integrated subsidiaries that BT requires to file bankruptcy petitions (a condition of the plan funding proposal); (2) $2 million if Integrated and the Senior Committees elect to terminate ("Termination Election") negotiations with BT by February 15, 1992, and do not agree to pursue an...
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