In re Women First Healthcare, Inc.

• Decision Date: 21 October 2005
• Docket Number: No. 04-11278(MFW).,04-11278(MFW).
• Citation: 332 B.R. 115
• Parties: In re WOMEN FIRST HEALTHCARE, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Delaware

Page 115

332 B.R. 115

In re WOMEN FIRST HEALTHCARE, INC., Debtor.

No. 04-11278(MFW).

United States Bankruptcy Court, D. Delaware.

October 21, 2005.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Anne Marie P. Kelley, Esquire, Dilworth Paxson LLP, Cherry Hill, N.J., for Mutual Pharmaceutical Company, Inc.

Scott Cousins, Esquire, Greenberg Traurig LLP, Wilmington, DE, Matthew E. Wilkins, Esquire, Butzel Long P.C., Detroit, MI, for Sun Pharmaceuticals Industries, Ltd.

Michael R. Nestor, Esquire, Young, Conaway, Stargett & Taylor LLP, Wilmington, DE, for the Debtor.

Kurt F. Gwynne, Esquire, Reed Smith LLP, Wilmington, DE, for the Creditors' Committee.

Laurie Silverstein, Esquire, Potter Anderson & Carroon LLP, Wilmington, DE, for the Lenders.

OPINION¹

MARY F. WALRATH, Bankruptcy Judge.

Before the Court is the Motion of Sun Pharmaceuticals Industries, Ltd. ("Sun") for the allowance of an administrative claim in the amount of $295,546 for expenses incurred by it in preparing to close on the sale of an asset of Women First Healthcare, Inc. (the "Debtor") before the sale order was rescinded and a new auction ordered. The United States Trustee (the "UST") and the ultimately successful bidder, Mutual Pharmaceutical Company, Inc. ("Mutual"), oppose the Motion. For the reasons set forth below, the Court allows the administrative claim in part.

I. BACKGROUND

On April 29, 2004, the Debtor filed a petition for relief under chapter 11. During the bankruptcy case, the Debtor sought to sell its pharmaceutical and related assets.

On August 31, 2004, Sun executed an asset purchase agreement with the Debtor and became the stalking horse bidder for the Bactrim assets. On September 2, 2004, the Debtor filed a Motion for approval of the sale of the Bactrim assets to Sun and for approval of bid procedures in connection with that sale (the "Sale Motion"). On September 8, 2004, the Court entered a Bid Procedures Order, which approved Sun as the stalking-horse bidder and allowed Sun a break-up fee of $50,000 and reimbursement of expenses up to $32,500. Under the Bid Procedures Order, the deadline for submitting competing bids was September 16, 2004. The Debtor received no other bids by that deadline. As a result, the Court approved the sale of the Bactrim assets to Sun for $1,750,000 on September 22, 2004 (the "Sun Sale Order").

On September 28, 2004, counsel for Mutual contacted counsel for the Debtor and stated that Mutual was interested in buying the Bactrim assets. Counsel for the Debtor advised that the assets had already been sold to Sun and referred her to Sun's attorney. Counsel for Mutual contacted Sun's attorney, advised that Mutual was the exclusive manufacturer of Bactrim for the Debtor, and inquired whether Sun intended to assume the Mutual manufacturing agreement. Sun's counsel advised that it did not.

Thereafter, on October 4, 2004, Mutual filed a Motion for reconsideration of the Sun Sale Order (the "Mutual Motion"). In its motion, Mutual alleged that it had not been served with notice of the Sale Motion, although it had an interest in the Bactrim assets to be sold to Sun. Specifically, Mutual claimed an interest in the inventory and intellectual property being sold. On that same date, counsel for Mutual advised counsel for the Debtor that Mutual was interested in bidding on the Bactrim assets and asked what the Debtor needed from Mutual. Counsel for the Debtor asked Mutual to provide him with a marked-up copy of the Sun asset purchase agreement and to deposit 10% of the proposed purchase price with Mutual's counsel.

After the Mutual Motion was filed, the Debtor proceeded on a parallel track: It negotiated a carve-out from the Sun sale of any assets in which Mutual had an interest to permit that sale to go forward if the Mutual Motion was denied or if, after the auction was reopened, Sun was the ultimate winning bidder. The Debtor also worked with Mutual to qualify it as a bidder should the Sun Sale Order be vacated.

On November 2, 2004, the Court held a hearing on Mutual's Motion. At that hearing, the Debtor admitted that it had not served Mutual with notice of the Sale Motion or the Bid Procedures Order. The Debtor acknowledged that Mutual was the Debtor's exclusive manufacturer of Bactrim and did have an interest in the manufacturing process but asserted that the sale to Sun did not implicate that interest. Mutual stated that it had an interest in the inventory and intellectual property to be sold and opposed the sale to Sun. Alternatively, Mutual asserted that it was prepared to bid on the assets. Sun opposed the Mutual Motion, arguing that it had expended considerable effort and expense in preparing for an expeditious closing on the Bactrim assets in reliance on the Sun Sale Order. At the conclusion of the hearing, the Court found that notice of the Sale Motion and the Bid Procedures Order had not been properly given. Consequently, the Court granted Mutual's Motion, vacated the Sun Sale Order, and set an auction of the Bactrim assets for November 10, 2004. The Court authorized Sun to submit a claim for an administrative expense for the efforts it had expended, subject to the right of all parties to object to that claim.

On the day before the scheduled auction, at the request of the Debtor, Sun transmitted to the Debtor the detail of its claimed administrative expense, which totaled nearly $300,000 in excess of the breakup fee and expense reimbursement already authorized.

At the auction held on November 10, 2004, both Sun and Mutual participated. Based on the original Bid Procedures Order, Sun was allowed to credit bid $82,500 for its break-up fee and expenses. To eliminate any issue regarding Sun's additional administrative claim, Mutual agreed to establish an escrow fund in the amount of $300,000 for that claim should it be the winning bidder.² Ultimately, Mutual's bid of $4,282,500 plus the escrow fund was selected by the Debtor as the highest and best offer. On November 19, 2004, the Court approved the sale of the Bactrim assets to Mutual.

On December 9, 2004, Sun filed its Motion for the allowance and payment of an administrative expense for the costs it incurred in reliance on the Sun Sale Order. Mutual and the UST objected to Sun's motion. Evidentiary hearings on the motion were held on April 7 and 14, 2005. Post-trial briefing is complete and the matter is ripe for decision.

II. JURISDICTION

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334 & 157(b)(2)(A), (B), (N) & (O).

III. DISCUSSION

Sun asserts that it is entitled to an administrative claim for its work in preparing to close on the purchase of the Bactrim assets from the date of the Sun Sale Order (September 22, 2004) until the new auction ordered by the Court (November 10, 2004). The UST and Mutual disagree.

A. Section 105(a)

Sun argues that this Court may order the Debtor to reimburse Sun under the equitable powers conferred by section 105(a), which authorizes the Court to "issue any order ... that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." 11 U.S.C. § 105(a). It asserts that the Court has broad equitable powers to do so. See, e.g., United States v. Energy Res. Co., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990) (holding that section 105(a) is "consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships.").

Mutual and the UST disagree. They argue that the Court's section 105(a) powers may only be exercised within the confines of the Bankruptcy Code. See, e.g., In re Continental Airlines, 203 F.3d 203, 211 (3d Cir.2000) (holding that release granted to debtor's directors and officers under section 105 was not supported factually or legally); In re Cajun Elec. Power Coop., Inc., 185 F.3d 446, 452 n. 9 (5th Cir.1999) (finding that use of section 105(a) to enjoin state utility from considering rate decrease was abuse of discretion). Therefore, they assert that Sun's administrative claim must be based on section 503(b) only and cannot rely on section 105(a).

The Court agrees with the UST and Mutual. Section 105(a) "supplements courts' specifically enumerated bankruptcy powers by authorizing orders necessary or appropriate to carry out provisions of the Bankruptcy Code. However, section 105(a) has a limited scope. It does not `create substantive rights that would otherwise be unavailable under the Bankruptcy Code'." Continental Airlines, 203 F.3d at 211, quoting United States v. Pepperman, 976 F.2d 123, 131 (3d Cir.1992).

The Third Circuit specifically cautioned, in the context of break-up fees, that the Bankruptcy Court may not "create a right to recover from the bankruptcy estate where no such right exists under the Bankruptcy Code." Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl. Energy, Inc.), 181 F.3d 527, 532 (3d Cir.1999) (concluding that break-up fees may be awarded only if they fall within the purview of section 503(b)).

There is no independent basis under section 105(a) for the allowance of an administrative expense. Therefore, the Court concludes that Sun must rely on other provisions of the Code for relief.

B. Section 503(b)(3)(D)

The UST argues preemptively that Sun is also not authorized under section 503(b)(3)(D) to seek an administrative claim. Specifically, the UST notes that that section authorizes claims only of "creditors" who provide a substantial contribution to the estate which is a benefit to the estate that is not merely incidental to the creditor's actions. See, e.g., Lebron v. Mechem Fin., Inc., 27 F.3d 937, 944 (3d Cir.1994) (holding that to have a § 503(b)(3)(D) claim, "the benefit received by the estate must be more than an incidental one arising from activities the applicant has pursued in protecting his or her own interests.").

Sun is not, however, seeking an administrative claim under...