In re Integrated Resources, Inc.
| Decision Date | 13 January 1992 |
| Docket Number | Bankruptcy No. 90-B-10411. |
| Citation | 135 BR 746 |
| Parties | In re INTEGRATED RESOURCES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Willkie Farr & Gallagher by Myron Trepper, Alan Lipkin, Michael Kelly, Jeanne Luboja, New York City, for debtor.
Berlack, Israels & Liberman by Edward Weisfelner, Steven Greenbaum, Carole Fern, New York City, for Official Subordinated Bondholders Committee.
Kramer, Levin, Nessen, Kamin & Frankel by Kenneth Eckstein, New York City, for Official Committee of Senior Public Debt and Commercial Paperholders.
Wachtell, Lipton, Rosen & Katz by Chaim Fortgang, Howard Glazer, New York City, for Official Committee of Holders of Bank Debt.
Cleary, Gottlieb, Steen & Hamilton by Thomas Moloney, New York City, for Bankers Trust New York Corp.
On February 13, 1990 (the "Petition Date"), Integrated Resources, Inc. ("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"). Integrated continues in possession of its properties and management of its business as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. The United States Trustee has appointed three creditors' committees (the "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) Committee of Subordinated Public Debt Holders (the "Sub-Debt Committee"). This Court appointed Karen Gross as Special Representative for certain partnerships sponsored by Integrated for which there is no counsel of record in this case.
Integrated is primarily a holding company which owns operating companies that, prior to the Petition Date, engaged in, inter alia, the operation of life insurance companies; the organization, management and sale of direct participation investment programs; and the provision of investment counseling and money management services for private accounts and mutual funds sponsored by Integrated. Since filing for bankruptcy protection, Integrated has attempted to streamline its operations and reduce costs, and towards that endeavor, Integrated has sold or otherwise disposed of several lines of business. Integrated continues to manage its partnership-related businesses, equipment leasing business, contract rights operations, certain operating subsidiaries and other less significant assets.
Integrated has been attempting to formulate a plan of reorganization since early in this case. Initially, and for the greater part of this case, the Debtor had desired a "Stand-Alone," or internally funded, plan. However, the Senior Committees and the Debtor were in discord regarding the ability of the Debtor to confirm and consummate such a plan. In fact, the disharmonious relationship between Integrated and the Senior Committees, which was evident to the Court, became increasingly acrimonious as the case continued. In June 1991, with the desire to ameliorate the then-existing impasse to a consensual plan, this Court terminated the application of the exclusive period as to the Creditors' Committees in this case.
Since that point, Integrated has pursued third party funding of a plan of reorganization in an effort to bridge key issues dividing Integrated and the Senior Committees. Integrated contacted numerous potential third party plan funders. When such entities demonstrated serious interest in funding a plan, Integrated entered into confidentiality agreements with such entities to permit them to perform due diligence while safeguarding the Debtor.
On or about January 23, 1991, Integrated entered into a confidentiality agreement with Bankers Trust New York Corporation ("Bankers Trust") to enable Bankers Trust to proceed with due diligence regarding potential plan funding. After Bankers Trust expressed serious interest in funding a plan, Integrated filed a motion for authorization to enter into an agreement to reimburse expenses of due diligence incurred by Bankers Trust. The motion was withdrawn after the Creditors' Committees voiced strenuous objection. Nonetheless, Bankers Trust continued to proceed on an interim basis without expense reimbursement.
Bankers Trust eventually made a proposal to fund a plan of reorganization. After negotiation with the Debtor and Senior Committees, the offer was improved to a level where it was acceptable to those constituencies.
On November 25, 1991, this Court conducted a hearing on a motion for an order authorizing Integrated to enter into a break-up fee and expense reimbursement agreement (the "Break-up Fee") with Bankers Trust. The Break-Up Fee is a component of the proposal made by Bankers Trust and a condition precedent to the funding of a plan of reorganization. The motion was supported by the Senior Committees. The motion was vigorously objected to by the Sub-Debt Committee.
The November 25, 1991 hearing encompassed many hours, testimony, documentary evidence, and over 260 pages of transcript.
The Break-Up Fee, as explained in Integrated's moving papers, provided: (1) $500,000 if the Bankers Trust proposal is abandoned because Integrated and the Senior Committees find the list of Integrated subsidiaries that Bankers Trust requires to file bankruptcy petitions unacceptable (one of the conditions of the plan funding proposal); (2) $2,000,000 if Integrated and the Senior Committees (a) elect to terminate ("Termination Election") negotiations with Bankers Trust concerning the Definitive Agreement by the later of December 15, 1991 and the fourteenth day after Bankers Trust delivers a draft of the Definitive Agreement, and (b) prior to February 15, 1992, do not agree to pursue an Alternative Transaction with a party other than Bankers Trust; (3) $4,000,000 if (a) the Termination Election is not made or an Alternative Transaction is agreed upon prior to February 15, 1992, and (b) no Definitive Agreement with Bankers Trust has been executed; and (4) $9,000,000 if and when the Definitive Agreement has been executed.
Accordingly, the Break-Up Fee would be payable if (1) Integrated enters into an Alternative Transaction; (2) a plan of reorganization based on the Bankers Trust proposal or the Definitive Agreement is abandoned; or (3) the creditors of Integrated receive a material dividend or distribution respecting their claims. The Break-Up Fee would not be payable if Bankers Trust: (1) abandons its proposal because of a material adverse change, or exercise of the Due Diligence Out,;1 (2) fails to obtain any necessary regulatory approvals; or (3) is in material breach of the proposal or the Definitive Agreement.
An additional requisite of the Bankers Trust proposal provides that upon execution of a Definitive Agreement, Integrated and the Senior Committees shall not solicit or initiate the submission of offers to engage in or enter into an agreement to pursue an Alternative Transaction. The Creditors' Committees would not be prohibited from holding discussions or negotiations with any parties who initiate or with whom they are currently having negotiations. Subject to the foregoing, Integrated and the Senior Committees would retain the right to proceed with any Alternative Transaction so long as the consideration paid to Integrated pursuant to any Alternative Transaction occurring after the Definitive Agreement is signed exceeds the cash portion of the plan funding proposal by no less than $20,000,000.
Under the Bankers Trust proposal, Bankers Trust would be paid $250,000 promptly as partial reimbursement for certain of its reasonable out-of-pocket expenses incurred in connection with the development and implementation of the Bankers Trust proposal. Additionally, Bankers Trust would receive up to an additional $1,250,000 for the remainder of such expenses if the proposal is abandoned for any reason.
When a debtor desires to sell an asset, its main responsibility, and the primary concern of the bankruptcy court, is the maximization of the value of the asset sold. Jerome and Drain, Bankruptcy Court Is Newest Arena For M & A Action, N.Y.L.J., June 3, 1991, at 8, col. 4. In general, to receive approval of a proposed sale of assets, the debtor will need to demonstrate to the bankruptcy court that the proffered purchase price is the highest and best offer. These tenets also apply to the outright purchase of a debtor or its primary assets, as well as the effective acquisition of a debtor through the funding of a plan of reorganization.
In order to encourage the making of bids, debtors entice potential purchasers by utilizing various incentives, such as break-up fees, topping fees and expense reimbursement agreements. A "break-up fee" is a fee paid to a potential acquiror of a business, or certain assets, by the seller, in the event that the transaction contemplated fails to be consummated and certain criteria in the purchase agreement are met. The condition most commonly giving rise to the payment of a break-up fee is the seller's acceptance of a later bid. Break-up fees may take the form of paying the out-of-pocket expenses incurred in arranging the deal, including due diligence expenses, or break-up fees may be wholly independent of the transaction costs. For example, a break-up fee may include compensation for a bidder's lost opportunity costs. In re 995 Fifth Avenue Associates, L.P., 96 B.R. 24, 29, n. 6 (Bankr.S.D.N.Y.1989).
There are several reasons why a seller is willing to agree to a break-up fee. Such fees may encourage the making of what is colloquially referred to as a "stalking horse" offer, which is an initial bid that is then "shopped...
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