In re Millennium Lab Holdings II, LLC.

• Decision Date: 19 December 2019
• Docket Number: No. 18-3210,18-3210
• Parties: IN RE MILLENNIUM LAB HOLDINGS II, LLC., et al., Debtors Opt-Out Lenders, Appellant
• Court: U.S. Court of Appeals — Third Circuit

945 F.3d 126

IN RE MILLENNIUM LAB HOLDINGS II, LLC., et al., Debtors

Opt-Out Lenders, Appellant

No. 18-3210

United States Court of Appeals, Third Circuit.

Argued September 12, 2019

Filed December 19, 2019

Maya Ginsburg, Thomas E. Redburn, Jr. [ARGUED], Sheila A. Sadighi, Lowenstein Sandler, One Lowenstein Drive, Roseland, NJ 07068, L. Katherine Good, Aaron H. Stulman, Christopher M. Samis, Potter Anderson & Corroon, 1313 N. Market Street, Hercules Plaza, 6^th Fl., P.O. Box 951, Wilmington, DE 19801, Counsel for Appellant

John C. O’Quinn [ARGUED], Jason M. Wilcox, Kirkland & Ellis, 1301 Pennsylvania Avenue, N.W., Washington, DC 20004, Counsel for Appellee James Slattery

Derek C. Abbott, Joseph C. Barsalona, II, Andrew R. Remming, Morris Nichols Arsht & Tunnell, 1201 Market Street – 16^th Fl., P.O. Box 1347, Wilmington, DE 19801, Gregory W. Fox, Michael H. Goldstein, William P. Weintraub, Goodwin Procter, 620 Eighth Avenue, The New York Times Building, New York, NY 10018, Counsel for Appellee TA Millennium Inc.

Ryan M. Bartley, Pauline K. Morgan, Michael R. Nestor, Young Conaway Stargatt & Taylor, 1000 N. King Street, Wilmington, DE 19801, Richard P. Bress, Latham & Watkins, 555 11^th Street, N.W. – Ste. 1000, Washington, DC 20004, Amy C. Quartarolo, Michael J. Reiss, Latham & Watkins, 355 S. Grand Avenue – Ste. 100, Los Angeles, CA 90071, Counsel for Debtor

Before: CHAGARES, JORDAN, and RESTREPO, Circuit Judges.

OPINION OF THE COURT

JORDAN, Circuit Judge.

We are asked whether the Bankruptcy Court, without running afoul of Article III of the Constitution, can confirm a Chapter 11 reorganization plan containing nonconsensual third-party releases and injunctions. On the specific, exceptional facts of this case, we hold that the Bankruptcy Court was permitted to confirm the plan because the existence of the releases and injunctions was "integral to the restructuring of the debtor-creditor relationship." Stern v. Marshall , 564 U.S. 462, 497, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (internal quotation marks and citation omitted). We further conclude that the remainder of this appeal is equitably moot, and we will therefore affirm the decision of the District Court.

I. BACKGROUND

The debtors before the Bankruptcy Court and District Court were Millennium Lab Holdings II, LLC ("Holdings"), its wholly-owned subsidiary, Millennium Health LLC, and RxAnte, LLC, a wholly-owned subsidiary of Millennium Health LLC, all of which we will refer to collectively as "Millennium." Millennium (as reorganized), along with certain of its direct and indirect pre-reorganization shareholders, specifically TA Millennium, Inc. ("TA"), TA Associates Management, L.P., and James Slattery,¹ are the Appellees in this matter.

Millennium provides laboratory-based diagnostic services. In April 2014, it entered into a $1.825 billion credit agreement with a variety of lenders, including a variety of funds and accounts managed by Voya Investment Management Co. LLC and Voya Alternative Asset Management LLC which, for convenience, we will refer to collectively as "Voya." Ultimately, Millennium used the proceeds from the 2014 credit agreement to refinance certain of its then-existing financial obligations and to pay a nearly $1.3 billion special dividend to its shareholders.

In March 2015, following a several-year investigation that dated back to at least 2012, the U.S. Department of Justice ("DOJ") filed a complaint in the United States District Court for the District of Massachusetts against Millennium, alleging violations of various laws, including the False Claims Act. Less than a month earlier, the Center for Medicare and Medicaid Services ("CMS") had notified Millennium that it would be revoking Millennium’s Medicare billing privileges, the lifeblood of Millennium’s business. In May 2015, Millennium reached an agreement in principle with the DOJ, CMS, and other government entities to pay $256 million to settle various claims against it.

Shortly thereafter, however, Millennium concluded that it lacked adequate liquidity to both service its debt obligations under the 2014 credit agreement and make the required settlement payment to the government. Millennium thus informed the 2014 credit agreement lenders of the government’s claims and the decision to settle, prompting the formation of an ad hoc group of lenders, of which Voya was a member, to begin working with Millennium and its primary shareholders, TA and Millennium Lab Holdings, Inc. ("MLH"), to negotiate a transaction that would allow the company to satisfy the settlement requirements and restructure its financial obligations. As those negotiations progressed, the ad hoc group began suggesting that there were potential claims against MLH and TA relating to the 2014 credit agreement, including a lack of disclosure regarding the government’s investigation into Millennium’s business. Millennium, MLH, TA, and the ad hoc group began discussing how to resolve those potential claims.

While negotiating with the ad hoc group, Millennium informed the government that it could not pay the $256 million settlement without restructuring its other financial obligations. The government ultimately set a deadline of October 2, 2015, "by which the Company was required to finalize a proposal supported by the prepetition lenders and the Equity Holders[.]" (App. at 2231.) That deadline was later pushed to October 16 in exchange for, among other things, a $50 million settlement deposit to be paid for by Millennium and guaranteed by MLH and TA.

On October 15, 2015, Millennium, its equity holders, and the ad hoc group – Voya excepted – entered into a restructuring support agreement (the "Restructuring Agreement" or "Agreement"), which provided for either an out-of-court restructuring or a Chapter 11 reorganization of Millennium’s business. Under the Agreement, MLH and TA agreed to pay $325 million, which would be used to reimburse Millennium for the $50 million settlement deposit, pay the remainder of the $256 million settlement, and cover certain of Millennium’s fees, costs, and working capital requirements. The Agreement also required Millennium’s equity holders, including MLH and TA, to transfer 100% of the equity interests in Millennium to the company’s lenders. Voya would receive its share of equity in the deal. In exchange, MLH, TA, and various others were to "receive full releases" for themselves and related parties regarding all claims arising from conduct that occurred before the Restructuring Agreement, including anything related to the 2014 credit agreement, and, in the case of a Chapter 11 reorganization, those individuals and entities covered by the Restructuring Agreement were to "be subject to a bar order, an injunction and related protective provisions" to enforce the releases. (App. at 518.) As a result of the Restructuring Agreement, Millennium was able to enter a final settlement with the government on October 16, 2015, which required payment of the settlement deposit in October and payment of the remainder of the settlement by December 30, 2015.

The Restructuring Agreement was reached only after intensive negotiations. Indeed, the negotiations were described by participants as "highly adversarial[,]" "extremely complicated[,]" and at "arm’s-length," and in those negotiations "the parties all were represented by sophisticated and experienced professionals." (App. at 2229-30.) MLH and TA rejected the ad hoc group’s suggestion of potential claims against them. "[P]rior to substantive negotiations commencing, it did not appear that [MLH and TA] had signaled a willingness to pay even any portion of the proposed ... settlement." (App. at 2230.) Rather, they were only "willing to consider a tender of their equity ownership of the Company in exchange for broad general releases[.]" (App. at 2230.)

From at least mid-August 2015, negotiations took place "on an almost daily basis[.]" (App. at 2231.) Before September 30, however, and despite "extensive negotiations between the Equity Holders and the Ad Hoc Group during the prior months, the Equity Holders’ last and ‘best’ offer was, in addition to turning over the Company’s equity to the Lenders, $275 million[,] and the Ad Hoc Group ... had demanded a $375 million contribution[.]" (App. at 2232-33.)

The impasse was broken during the negotiation session that occurred on September 30. That session was viewed as "do or die" for Millennium and as having "decisive implications for the lenders and the equity" because, if the October 2 deadline was not met, the government would revoke Millennium’s Medicare billing privileges. (App. at 2231-32.) In the last event, MLH and TA increased their offer to $325 million, and the ad hoc group of lenders agreed to the revised terms. According to an individual involved in the negotiations, that deal – later embodied in the Agreement – was "the best possible deal achievable" and left nothing else "on the table[.]" (App. at 2233.)

The release provisions MLH and TA obtained in exchange for their contribution, were, in short, "heavily negotiated among the Debtors, the Equity Holders and the Ad Hoc Group" and necessary to the entire agreed resolution. (App. at 2234.) They "were specifically demanded by the Equity Holders as a condition to making the[ir] contribution" and, without them, MLH and TA "would not have agreed" to the settlement. (App. at 2234.) The contribution was, of course, also necessary to induce the lenders’ support of the Agreement. Thus, as stated by both the Bankruptcy Court and District Court after careful fact finding, the deal to avoid corporate destruction would not have been possible without the third-party releases.

After entering into the Restructuring Agreement, the parties thereto initially sought to reorganize Millennium out of court, and "over 93% of the Prepetition Lenders by value" agreed to do so. (App. at 1205.) That, however, was not enough. Voya held out, and Millennium filed its petition for bankruptcy in November...