945 F.3d 126
3rd Cir.2019Background
- Millennium Lab Holdings and subsidiaries faced DOJ and CMS enforcement actions in 2015 that threatened revocation of Medicare billing privileges and required a $256M settlement.
- Millennium lacked liquidity to both pay the government and service debt from a 2014 $1.825B credit facility; lenders and key equity holders negotiated a Restructuring Agreement.
- Major equity holders (MLH and TA) agreed to contribute $325M and transfer equity in exchange for broad, negotiated third-party releases and an injunction to enforce them; those releases were a condition to the settlement funding.
- One lender, Voya, refused to consent and later asserted RICO, fraud, and restitution claims against MLH/TA; Millennium filed a prepackaged Chapter 11 plan incorporating the Restructuring Agreement and nonconsensual releases binding nonconsenting creditors.
- The Bankruptcy Court confirmed the plan; Voya appealed arguing the releases violated Article III under Stern v. Marshall and challenged the releases under the Bankruptcy Code. The District Court remanded, the Bankruptcy Court reaffirmed, and the District Court ultimately held (1) the Bankruptcy Court had constitutional authority and (2) the remainder of the appeal was equitably moot.
- The Third Circuit affirmed: (a) plan confirmation (including nonconsensual releases) was within constitutional bounds because the releases were "integral to the restructuring of the debtor-creditor relationship," and (b) the remaining claims were equitably moot because undoing the releases would fatally scramble the substantially consummated plan and harm third parties.
Issues
| Issue | Plaintiff's Argument (Voya) | Defendant's Argument (Appellees) | Held |
|---|---|---|---|
| Whether the Bankruptcy Court had Article III authority under Stern to confirm a plan with nonconsensual third-party releases | Stern requires an Article III court to decide Voya’s state-law RICO/fraud claims because they do not stem from the bankruptcy or the claims-allowance process | The confirmation proceeding is a core bankruptcy function and the releases were integral to restructuring; Stern’s limits do not bar confirmation here | Affirmed: Bankruptcy Court had constitutional authority because the releases were integral to restructuring (Stern exception applies) |
| Whether the appeal is equitably moot so that the court should not grant the relief Voya seeks | Striking Voya’s releases would not necessarily collapse the plan and would not unjustly enrich Voya; appellate relief is appropriate | Granting relief would unravel the settlement and plan, harm many third parties, and produce an inequitable windfall to Voya | Affirmed: Appeal (other than Article III question) is equitably moot because relief would fatally scramble the substantially consummated plan and harm third parties |
| Whether the nonconsensual releases violate the Bankruptcy Code (merits) | Releases are unlawful and Voya’s claims should survive | Releases were negotiated, necessary, and fair consideration for the settlement and restructuring | Not reached on merits due to equitable mootness; courts noted strict standards for approving nonconsensual releases and found facts supported necessity and fairness here |
Key Cases Cited
- Stern v. Marshall, 564 U.S. 462 (2011) (bankruptcy courts may lack Article III authority to enter final judgment on certain state-law counterclaims; exception where matter is integral to debtor-creditor restructuring)
- Katchen v. Landy, 382 U.S. 323 (1966) (preference claims may be adjudicated in bankruptcy when resolution is necessary to allow or disallow a filed claim)
- Langenkamp v. Culp, 498 U.S. 42 (1990) (preference actions integral to claims-allowance process permit bankruptcy adjudication)
- Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) (Article III limits on non-Article III adjudication of traditional common-law claims)
- Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (distinguishing actions arising in claims-allowance process from other suits requiring Article III adjudicators)
- Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25 (2014) (procedural framework for handling Stern claims following bankruptcy-court adjudications)
- In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015) (equitable mootness doctrine applied where undoing a confirmed plan would scramble the plan and harm third-party reliance)
- In re Global Indus. Techs., Inc., 645 F.3d 201 (3d Cir. 2011) (examining fairness and necessity standards for nonconsensual releases)
- In re Continental Airlines, Inc., 203 F.3d 203 (3d Cir. 2000) (hallmarks for permissible nonconsensual releases: fairness, necessity, and specific factual findings)
- In re Semcrude, L.P., 728 F.3d 314 (3d Cir. 2013) (equitable mootness and impact of appellate relief on confirmed plans)