The Office of the U.S. Trustee has raised concerns over the bid protections package proposed by electric-engine developer First Mode Holdings for its stalking horse bidder, Cummins Inc., urging a Delaware bankruptcy judge to reject the debtor's request to treat expenses and fees related to the $15 million bid as priority claims.

In an objection filed on Thursday, the bankruptcy watchdog contended that portions of First Mode’s motion—specifically the request to pay up to $1 million in bid protections, including a breakup fee of $450,000 and expense reimbursements of up to $550,000—should be denied.

The U.S. Trustee argued that the bid protections would unfairly reward Cummins with the breakup fee even if the company's offer did not contribute value to the estate. Such situations could arise, for example, if the bankruptcy case were dismissed or converted into a Chapter 7 liquidation. Additionally, the U.S. Trustee maintained that none of the bid protections could qualify for super-priority administrative expense status, which would require the claims to be paid before all other unsecured claims.

“Permitting bid protections to prime other administrative expenses has no basis in the Bankruptcy Code and is inconsistent with Third Circuit precedent,” the trustee wrote in its objection.

First Mode Holdings, based in Seattle, filed for bankruptcy in December with nearly $98 million in debt after its parent company, mining giant Anglo American, ceased funding the startup and accelerated approximately $70 million of debt. First Mode specializes in developing hybrid and all-electric engines for vehicles used in industrial operations.

Anglo American has agreed to fund First Mode’s bankruptcy proceedings, including providing debtor-in-possession financing and subordinating its claims, while the company has been selling off significant assets as part of a Chapter 11 auction.

As part of its bankruptcy process, First Mode has sought court approval for an end-of-January bankruptcy auction, with Cummins' $15 million stalking-horse bid setting the price floor. The debtor also requested approval for a package of bid protections for Cummins, including a 3% breakup fee, which amounts to about $450,000, as well as up to $550,000 in expense reimbursements. Moreover, First Mode asked for these bid protections to be classified as super-priority administrative expense claims.

Under the Bankruptcy Code, super-priority administrative expense claims must be paid before other unsecured claims in a case, such as those owed to attorneys and other professionals. In its objection, the U.S. Trustee emphasized that the bid protections package does not meet the necessary criteria for super-priority status.

The U.S. Trustee's objection also detailed the conditions under which the breakup fee would become due. The fee would be triggered if First Mode or its affiliates withdrew the sale motion, filed a motion to dismiss or convert the bankruptcy case to Chapter 7, or requested the appointment of a Chapter 11 trustee or examiner. In these instances, the U.S. Trustee argued, Cummins' stalking-horse offer would not have added any value to the estate and therefore the bid protections should be denied.

“Because the stalking-horse APA awards bid protections to the stalking-horse bidder that will have contributed no value to a sale, approval of bid protections in such circumstances must be denied,” the trustee said in the objection.

The U.S. Trustee further noted that the Bankruptcy Code only permits super-priority status under limited circumstances. Specifically, it is reserved for debtor-in-possession lenders and secured lenders who require adequate protection if the value of their collateral diminishes. The trustee argued that the expense reimbursements related to the sale do not fall within these categories and therefore should not be eligible for super-priority administrative claim status under the Bankruptcy Code.

The Office of the U.S. Trustee declined to comment further on the matter. Counsel for First Mode, including Ray C. Schrock, Annemarie V. Reilly, Brian S. Rosen, Caroline Reckler, and Jeffrey T. Mispagel of Latham & Watkins LLP, and Michael R. Nestor, Kara Hammond Coyle, and Joseph M. Mulvihill of Young Conaway Stargatt & Taylor LLP, did not immediately respond to requests for comment.

The case is In re: First Mode Holdings Inc. et al., case number 1:24-bk-12794, in the U.S. Bankruptcy Court for the District of Delaware.