United States: Stern Challenge To Third-Party Plan Releases Fails In Delaware

Last Updated: October 22 2018
Article by David Dykhouse

In hindsight, it seems inevitable that constitutional and other jurisdictional problems would arise when Congress, in enacting the Bankruptcy Reform Act of 1978, created impressive new powers and responsibilities for the bankruptcy courts (along with a considerable degree of independence) but denied them the status of Article III courts under the Constitution (by denying its judges lifetime tenure, as Article III requires).  And it didn't take long for the problems to arise.

Almost immediately, litigants began to challenge the constitutionality of non-Article III courts exercising some of the extensive powers that the Reform Act vested in them.  By 1982, the Supreme Court was grappling with the issues and necessarily constraining some of the bankruptcy courts' powers to conform to constitutional limits.1  Congress also was forced to deal with the mismatch of powers and status it had created by enacting a series of patches, especially to the provisions of Title 28 dealing with the bankruptcy courts.2  By the 1990s a degree of stability had been achieved, although maintained, it seemed at times, by paper clips and chewing gum.

That stability was shaken by a jurisprudential earthquake, Stern v. Marshall, 564 U.S. 462 (2011), an idiosyncratic case that upset one of the components of the structure that had been fashioned during the 1980s and 1990s by court decisions and rules and by amendments to the Bankruptcy Code and Title 28.  Soon virtually every jurisdictional principle that had previously seemed to be reasonably settled was being challenged in light of Stern

It may also have been inevitable that Stern-based constitutional challenges would get mixed up with another perpetually front-burner issue, "a matter of some controversy: the approval of nonconsensual third-party releases (i.e., the involuntary extinguishment of a non-debtor third party's claim against another non-debtor, third party) as part of a Chapter 11 plan of reorganization."3  Because Section 524(e) of the Code provides that "discharge of a debt of the debtor does not affect the liability of any other entity on . . . such debt" and for other reasons, it was an uphill struggle early on to obtain approval for non-consensual third-party releases of non-debtors in reorganization plans, but eventually several (but not all) circuits developed criteria for third-party releases that could be included in plans that would be confirmed as consistent with the Bankruptcy Code.4

Stern-based challenges to third-party releases in plans contend that only Article III courts have the constitutional authority to release a claim of one non-debtor against another non-debtor (if such a release is permissible at all over the opposition of the holders of the released claims), and, therefore, a reorganization plan containing such a release may be confirmed, if at all, only by a district court, not a bankruptcy court.  These challenges were complicated by the fact that Stern was not self-interpreting.  Courts, counsel and commentators have not developed a national consensus on the proper scope of Stern, perhaps as shape-shifting a decision as any the Supreme Court has issued in this century.

Stern-based challenges to jurisdiction and constitutional authority were asserted in the District of Delaware, venue of many important Chapter 11 cases, in the cases of Millennium Lab Holdings II, LLC and its affiliates.5  A group of creditors objected to confirmation of the debtors' plan by the bankruptcy court on the ground, among others, that Stern and its progeny deprived the court of its constitutional authority to approve the releases of four equity holders that were funding the plan.  The bankruptcy court overruled the creditors' objection, found that the releases contained in the plan satisfied the Continental criteria and confirmed the plan.

On appeal, the district court remanded the case to the bankruptcy court "to consider whether, or clarify its ruling that, the Bankruptcy Court had constitutional adjudicatory authority to approve the nonconsensual release of Appellants' direct . . . claims against the Non-Debtor Equity Holders . . . ."6  On remand, the bankruptcy court produced an extremely thorough analysis and defense of its constitutional authority to confirm a plan containing third-party releases.7

The objecting creditors appealed again, and the district court, frankly admitting that, despite its concerns and doubts expressed in the Millennium First District Court Opinion, it had been persuaded by the bankruptcy court's analysis on remand, affirmed. 

The [District] Court agrees with [the bankruptcy court's] observation regarding the real nature of this dispute: '[t]aking the position that third party releases in a plan are equivalent to [a constitutionally] impermissible adjudication of the litigation being released is, at best, a substantive argument against third party releases, not an argument that confirmation orders containing releases must [under Stern] be entered by a district court.' [citation omitted]  [The appealing creditors'] real disagreement is with the Third Circuit's precedent in [Continental] which, like many circuits, concluded that third party releases may be approved when certain standards are met.  [The appealing creditors'] constitutional arguments fail.8

The objecting creditors filed a notice of appeal to the Third Circuit on October 3.

  Footnotes

1  See, e.g., Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).  The constitutional status of the bankruptcy courts produced disputed issues throughout the early years of the Code on a range of issues.  See, e.g., Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)(whether the bankruptcy courts had the constitutional power to conduct jury trials).

2  See, e.g., Bankruptcy Amendments and Federal Judgeship Act of 1984.

3  Opt-Out Lenders v. Millennium Lab Holdings II, LLC, 2018 U.S. Dist. LEXIS 162249, at *4 (D. Del. Sept. 21, 2018)(hereinafter, "Millennium Second District Court Decision").

4  E.g., Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005); Gillman v. Continental Airlines, 203 F.3d 203 (3d Cir. 2000)(hereinafter, "Continental"); see also our November 9, 2017 blog post, Non-Consensual Third-Party Releases in Chapter 11 Plans: a Recent Decision.

5  In re Millennium Lab Holdings II, LLC et al., No. 15-12284 (LSS) (Bankr. D. Del.).

6  Opt-Out Lenders v. Millennium Lab Holdings II, LLC, 242 F. Supp. 3d 322, 340 (D. Del. 2017)(hereinafter, "Millennium First District Court Decision").

7  In re Millennium Lab Holdings II, LLC, 575 B.R. 252 (Bankr. D. Del. 2017).  The procedural history is set forth in greater detail in the Millennium Second District Court Decision.  Bankruptcy Judge Silverstein's opinion on remand defies brief summarization; a copy is attached for interested readers.

8  Millennium Second District Court Decision at *36.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions