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The U.S. Court of Appeals for the Third Circuit on Thursday upheld a Delaware Bankruptcy Court's decision to block a Florida-based energy company from collecting a $275 million merger termination fee against the bankruptcy estates of Energy Future Holdings Corp. and a subsidiary.

The precedential decision, published Thursday, held that the lower court judge was correct to backtrack on an initial order allowing NextEra Energy Inc. to claim the break-up fee, finding that  the judge had overlooked evidence crucial to the case. However, Thursday's ruling came over the objection of one appellate judge, who said the decision set a “troubling, if not dangerous” precedent.

The ruling stemmed from EFH's Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware. Shortly after the company filed for bankruptcy protection, it agreed to sell its $18.7 billion stake in Oncor Electric Delivery Co., the largest electricity transmission and distribution system in Texas., to NextEra in a move that would have provided approximately $9.5 billion to its estate.

As a part of the deal, EFH agreed to pay NextEra $275 million if the merger didn't go through or if it failed to win approval from Texas utility regulators. The Public Utility Commission of Texas later blocked the deal as adverse to the public interest, paving the way for U.S. Bankruptcy Judge Christopher S. Sontchi to approve the fee.

However, Sontchi later realized that the merger agreement lacked a clear deadline for when EFH would have to call off the deal in order to trigger the payment. The oversight, he said, essentially allowed NextEra to run out the clock and simply wait for EFH to terminate the agreement.

If it weren't for that oversight, Sontchi said, he never would have allowed NextEra to collect the break-up fee.

On appeal, NextEra argued that the court was correct to allow the payment in the first place because the fee, as originally drafted, qualified as an allowable administrative expense under U.S. bankruptcy law.

A majority of the three-judge panel, however, agreed that Sontchi had initially misapprehended the facts of the case, and that the error had changed the calculus for assessing the termination fee on a motion for reconsideration. In a 37-page opinion, the appeals court found that, while the fee promoted competitive bidding, it also had the ”possibility to be disastrous” to EFH, should the company have to pay it.

“Once it had a complete understanding, the bankruptcy court properly weighed the various considerations and determined that the potential benefit was outweighed by the harm that would result under predictable circumstances,” Circuit Judge Joseph A. Greenaway Jr. wrote.

“In other words, the risk was so great that the fee was not necessary to preserve the value of debtors' estates. Having made such a determination, the bankruptcy court did not abuse its discretion in denying the fee in part.”

Greenaway was joined in the decision by Judge Julio M. Fuentes.

However, the panel's third member, Judge Marjorie O. Rendell, rejected the majority's reasoning. Rather than committing an error of fact, she said, the court had simply failed to consider the potential consequence of the deal failing to secure regulatory approval.

“But hindsight cannot justify nullifying a material term of the deal that was struck with all of the facts on the table,” she wrote in a six-page dissent.

“Parties to commercial transactions present the terms of the deal to the court for approval and, once approved, are entitled to rely on the court's order, which is based on a thoughtful, well-reasoned analysis,” Rendell said. “Here, that should have been the guiding principle, and the grant of reconsideration so as to nullify the previously approved fee when there was no clear error of fact or law was an abuse of discretion.”

Attorneys for both sides were not immediately available to comment on the ruling.

Howard Seife of Norton Rose Fulbright in New York argued the case on appeal for NextEra.

Mark McKane, of Kirkland & Ellis' San Francisco office, argued on behalf of EFH.

The case is captioned In re Future Energy Holding.