As we explained in a previous article published in the New York Law Journal, one frequently litigated issue is whether a Chapter 11 plan can release a non-debtor’s claims against a non-debtor, third-party absent the releasing party’s consent. This type of release is known as a “non-consensual, third-party release.” The lion share of decisions have focused on the bankruptcy court’s subject matter jurisdiction over the claims and application of circuit precedent governing releases, often assuming, without deciding, that the court has constitutional authority to grant the release if warranted under the substantive case law.
The Delaware district court appeared to upend this way of thinking in Opt-Out Lenders v. Millennium Lab Holdings II, Civ. No. 16-110-LPS (D. Del. March 17, 2017). There, the court suggested in dicta that the bankruptcy court lacked constitutional authority to release a group of dissenting lenders’ RICO and common law fraud claims under the requirements of Article III of the U.S. Constitution and Stern v. Marshall, 564 U.S. 462 (2011). In the end, however, the district court remanded the case because the parties did not properly brief the issue before the bankruptcy court.
Earlier this month, the bankruptcy court issued its decision on remand holding that it had constitutional authority to grant the releases at issue. In disarming the dissenting lenders’ Stern challenge, the bankruptcy court found that granting the releases was not an “adjudication” of the lenders’ claims, but rather was a question of federal bankruptcy law governing plan confirmation. While this decision ostensibly lifts the shadow over the viability of non-consensual, third-party releases in Delaware, this reprieve may only be temporary. The dissenting lenders recently appealed the bankruptcy court’s decision, making this case an important one to watch.
Factual BackgroundPrior to Chapter 11, Millennium Lab provided laboratory-based diagnostic testing services, deriving a significant portion of its revenues from Medicare and Medicaid reimbursements. The business ran into trouble when the Department of Justice (DOJ) launched an investigation that culminated in fraud claims against Millennium. As a result, other government agencies revoked the company’s Medicare billing privileges.
Millennium eventually reached an agreement with the DOJ and other government agencies to settle the fraud claims in exchange for approximately US$250 million. Millennium then proceeded to work out a deal with its lenders. Under the deal that was reached, Millennium and certain of its affiliates commenced prepackaged Chapter 11 cases...
