3rd-Party Release Constitutional, Millennium Labs Judge Says

The Delaware bankruptcy judge presiding over Millennium Labs’ Chapter 11 case ruled Tuesday that she indeed did have constitutional authority to grant liability releases in a confirmation order without creditor consent, writing that the objecting creditor’s position would “dramatically change the division of labor between the bankruptcy and district courts.”
 
U.S. Bankruptcy Judge Laurie Selber Silverstein’s ruling came in an opinion the Delaware district court requested while evaluating the appeal of lab testing company Millennium Lab Holdings II LLC’s Chapter 11 plan by creditors who argued that the U.S. Constitution did not permit the bankruptcy court to approve a plan with what are known as nonconsensual third-party releases.
 
Such releases are an uncommon form of liability release granted over the objection of creditors who would lose a claim against a third party in another venue, and in the Millennium Labs case, the Chapter 11 plan essentially prevented a group of creditors led by Voya Investment Management from bringing racketeering claims against the debtor’s departing owners based on allegations of disclosure failures and conflicts related to an earlier $1.8 billion dividend recapitalization.
 
Voya argued that Judge Silverstein’s confirmation order ran counter to the U.S. Supreme Court’s 2011 in ruling Stern v. Marshall, which limited claims that could be resolved in bankruptcy proceedings. But Judge Silverstein said she rejects Voya’s “expansive reading of Stern, which not only applies Stern outside of the narrow context in which it was made, but far beyond the holding of any court.”
 
Voya’s interpretation of Stern would upend legally accepted day-to-day functions of the bankruptcy court for decades — including approval of Section 363 sales that allow buyers to purchase assets free and clear of encumbrances or debt recharacterization and subordination — and shift them to the district court for final adjudication if there isn’t creditor consent, the opinion said.
 
“It seems at least arguable that consent could be withheld to leverage a party’s position,” the judge said.
 
What’s more, Judge Silverstein said, even if her analysis is wrong she still wouldn’t strike the nonconsensual releases from Millennium Labs’ Chapter 11 plan because Voya forfeited a challenge on Stern grounds by not bringing it up at all during the confirmation process.
 
“At no time during the confirmation hearing did Voya utter the word Stern, make any constitutional adjudicatory argument, or contend that I was limited to submitted proposed findings of fact and conclusions of law to the district court,” Judge Silverstein said. “Nor did Voya speak when I concluded my bench ruling or even after I asked whether any party had a question or clarification it needed to make on the record.”
 
The judge added that even if Voya was keeping such arguments in its “back pocket” for appellate purposes, “such gamesmanship is prohibited.”
 
The issue stems from the confirmation of Millennium Labs’ Chapter 11 plan in 2015, which cleared the way for a $250 million settlement with federal regulators on False Claims Act claims that had to be paid within weeks in order for the debtor to avoid having its Medicare billing privileges revoked and effectively collapsing.
 
But the deal could only be reached with the liability releases intact, and Voya, which was owed about $100 million, was a holdout.
 
Nonconsensual releases are typically granted in cases where the court deems them absolutely necessary to confirm a plan, and then generally only to parties deemed to have made a “substantial contribution” to a case. But Voya argued on appeal that the bankruptcy court didn’t have authority to grant them at all under Stern because the effect was tantamount to adjudicating the racketeering claims that weren’t before the bankruptcy court and weren’t under its jurisdiction.
 
On appeal, U.S. District Judge Leonard P. Stark sent the case back to the bankruptcy court for clarification on the constitutional authority issue, and Judge Silverstein wrote that even using the broadest interpretation of Stern, Voya’s arguments still fail.
 
The Stern decision, which dealt with a dispute between Anna Nicole Smith and the estate of her late husband J. Howard Marshall II and split the Supreme Court 5-4, held that a bankruptcy court couldn’t issue a final order on noncore claims based on state law that hasn’t been resolved through the proof of claim process.
 
Judge Silverstein noted that the Stern opinion said the decision “did not change all that much,” because the type of state law claims in that case are already ultimately resolved by nonbankruptcy judges under the controlling law anyway.
 
In the Millennium Labs case, Judge Silverstein wrote that Voya’s Stern-based argument doesn’t really apply for reasons that include the claims at issue being federal ones, and the releases don’t actually adjudicate the lawsuit, but act as a settlement that would give the defendants in the racketeering case an affirmative defense if it were to go before the district court.
 
Voya’s argument is using “backwards reasoning,” relying on the legal consequences of the ruling but not examining whether it was proper to enter the confirmation order in the first place, Judge Silverstein said.
 
“Stern did not hold, as Voya suggests, that regardless of which articulated (or unarticulated) core proceeding is before the court, the bankruptcy judge cannot, consistent with the Constitution, enter a final order in that proceeding if that order affects a party’s entitlement to have a debtor’s or trustee’s state law claim heard by an Article III court,” she said.
 
Judge Silverstein’s opinion is not likely to be the final word on nonconsensual third-party releases. Judge Stark is expected to rule on Voya’s appeal, and experts have said the issue may make its way to the Third Circuit or beyond.
 
Representatives for Millennium Labs and Voya did not immediately respond to requests for comment Tuesday.
 
The Millennium Labs estate parties are represented by Anthony W. Clark, Jason M. Liberi, Raquelle L. Kaye and Felicia Gerber Perlman of Skadden Arps Slate Meagher & Flom LLP, Domenic E. Pacitti of Klehr Harrison Harvey Branzburg LLP, Joshua A. Sussberg and John C. O’Quinn of Kirkland & Ellis LLP, Derek C. Abbott and Matthew R. Koch of Morris Nichols Arsht & Tunnell LLP and Michael H. Goldstein, William P. Weintraub and Gregory W. Fox of Goodwin Procter LLP.
 
The Voya parties are represented by Christopher M. Samis and L. Katherine Good of Whiteford Taylor & Preston LLP and Sheila Sadighi and Thomas E. Redburn Jr. of Lowenstein Sandler LLP.
 
The cases are In re: Millennium Lab Holdings II LLC et al., case number 1:16-cv-00110, in the U.S. District Court for the District of Delaware and case number 1:15-bk-12284 in the U.S. Bankruptcy Court for the District of Delaware.

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