In re Millennium Lab Holdings LLC

Third Circuit emphasizes the limitation of nonconsensual, third-party releases to ‘exceptional’ cases.

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Case Type:
Business
Case Status:
Affirmed
Citation:
No. 18-3210 (Precedential) (3rd Circuit, Dec 19,2019) Published
Tag(s):
Ruling:
The Third Circuit held the Bankruptcy Court had constitutional authority to confirm a reorganization plan containing third party releases of RICO/fraud claims by a lender against the debtor's primary shareholders who were funding the plan concluding that restructuring in the case was possible only because of the agreed-upon third release provisions in the plan. The remainder of the appeal was equitably moot in light of the substantial consummation of the plan.
Procedural context:
The Bankruptcy Court overruled a lender's objections and confirmed a plan of reorganization of Millennium Lab Holdings II, LLC and its affiliates that contained third party releases of RICO/fraud claims by a lender against the debtor's primary shareholders who were funding the plan. The lender then appealed to the District Court, arguing, among other things, that the Bankruptcy Court lacked the constitutional authority to order the releases and injunctions. The District Court remanded the case for the Bankruptcy Court to consider whether it – the Bankruptcy Court – had constitutional authority to confirm a plan releasing the lender's claims, in light of the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462 (2011), The Bankruptcy Court wrote a detailed and closely reasoned opinion explaining its conclusion that it had constitutional authority and the District Court affirmed with both Court's concluding after careful fact finding, "the deal to avoid corporate destruction would not have been possible without the third-party releases." The Third Circuit affirmed noting that its decision was specific and limited and, consistent with prior decisions, the Court was not broadly sanctioning the permissibility of nonconsensual third party releases in bankruptcy reorganization plans. Rather, under the particular facts of this case, the Bankruptcy Court’s conclusion that the release provisions were integral to the restructuring was well-reasoned and well-supported by the record and, consequently, the Bankruptcy Court was constitutionally authorized to confirm the plan in which those provisions appeared.
Facts:
After entering into the Restructuring Agreement be and among the debtor and the majority of the lender group, the parties sought to reorganize Millennium out of court with a substantial funding payment by two of Millennium's primary shareholders. However, one member of the lender group, Voya Investment Management Co. LLC, held out support claiming Millennium's two primary shareholder groups that were funding the plan had misrepresented facts to the lenders about the nature and extent of a federal investigation in to Millennium's business practices and had committed fraud/RICO violations. The plan for Millennium's restructuring contained broad releases, including ones that would bind non-consenting lenders such as Voya, in favor of Millennium and the two primary shareholder groups funding the plan. To enforce the releases, the plan also provided for a bar order and an injunction prohibiting those bound by the releases from commencing or prosecuting any actions with respect to the claims released under the plan. Voya objected to confirmation of the plan asserting it had significant legal claims against Millennium and Millennium’s equity holders, that the releases of the equity holders were unlawful, and that the Bankruptcy Court lacked subject matter jurisdiction to approve them. The Third Circuit ulimately affirmed the decision of the Bankruptcy Court confirming the Plan, noting that, under the particular facts of this case, the Bankruptcy Court’s conclusion that the release provisions were integral to the restructuring was well-reasoned and well-supported by the record and, consequently, the bankruptcy court was constitutionally authorized to confirm the plan.
Judge(s):
CHAGARES, JORDAN, and RESTREPO

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