In re Millennium Lab Holdings Ii, LLC

• Decision Date: 03 October 2017
• Docket Number: Case No. 15–12284 (LSS) (Jointly Administered)
• Citation: 575 B.R. 252
• Parties: IN RE: MILLENNIUM LAB HOLDINGS II, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

575 B.R. 252

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

Case No. 15–12284 (LSS) (Jointly Administered)

United States Bankruptcy Court, D. Delaware.

Filed October 3, 2017

Ryan M. Bartley, Pauline K. Morgan, Young Conaway Stargatt & Taylor, LLP, Wilmington, DE, Andrew Breidenbach, John M. DiMatteo, Holwell Shuster & Goldberg LLP, New York, NY, Wayne S. Flick, Amy C. Quartarolo, Michael J. Reiss, Latham & Watkins LLP, Los Angeles, CA, for Debtors.

OPINION

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE

On December 14, 2015, I entered an order confirming a plan of reorganization for then-debtors Millennium Lab Holdings II, LLC and certain of its affiliates ("Millennium" or "Debtors").¹ The plan provided for third party releases in favor of various non-debtor entities, including, as relevant here, certain of the Debtors' equity holders who contributed $325 million to the estate as part of a settlement contained in the plan. At the confirmation hearing, I overruled the objection filed by Voya,² which did not assent to the third party releases and found that the Debtors had met their burden of proof to show that the releases were warranted under Continental .³ Voya appealed. Now, on remand from the district court, I have been asked to "consider whether, or clarify [my] ruling that, [I, as a] Bankruptcy Court had constitutional adjudicatory authority to approve the nonconsensual release of Appellants' direct non-bankruptcy common law fraud and RICO claims against the Non–Debtor Equity Holders."⁴ I conclude that I did.⁵ In so concluding, I reject Voya's expansive reading of Stern,⁶ which not only applies Stern outside of the narrow context in which it was made, but far beyond the holding of any court, and which would, if accepted, dramatically change the division of labor between the bankruptcy and district courts.

Because I find that I had constitutional adjudicatory authority to approve, in a final order, the nonconsensual third party releases, I need not strike the nonconsensual release of Voya's claims from the confirmation order, nor make and submit to the district court additional proposed findings of fact and conclusions of law regarding the final disposition of Voya's RICO claims. Even if I am wrong, however, I still would not do so. Not only did Voya forfeit and/or waive any argument that I did not have constitutional adjudicatory authority to enter the confirmation order by not raising it at the confirmation hearing or at any time prior to entry of the order confirming the plan, Voya also independently waived its right to any trial on the merits of its RICO claims in the context of confirmation. Thus, to the extent that it is ever appropriate to have a hearing on the merits of claims being released by third parties in connection with confirmation—as opposed to, or in addition to, a hearing on the merits of the releases themselves or any settlement in which they are contained—Voya made a calculated decision not to put the merits of its RICO claims at issue during the confirmation hearing. I will not consider the merits now.

BACKGROUND ⁷

A. The Confirmation Hearing

On November 10, 2015, the Debtors filed voluntary petitions under chapter 11 of title 11 of the United States Code⁸ together with their prepackaged plan of reorganization ("Plan") and accompanying disclosure statement.⁹ The filing was the culmination of a seven-month process in which Millennium entered into multiple settlements, including a terms sheet with the United States and certain individual states, and a restructuring support agreement with both an ad hoc group of bondholders and the Non–Debtor Equity Holders. After an attempted out-of-court restructuring effort failed to gamer the required support, the Debtors filed their bankruptcy petitions.

The Plan provided for a global resolution of claims related to the Debtors' April 2014 $1,825 billion senior secured credit facility, the proceeds of which funded a $1.3 million dividend to Millennium's equity holders, paid off certain debt and provided for working capital. As part of the lender group, Voya funded $106.3 million of the loan. Under the Plan, in exchange for an Allowed Claim (that is, a claim allowed under § 502 of the Bankruptcy Code ), each lender, including Voya, received its pro rata share of: (i) a new $600 million term loan; (ii) 100% of the beneficial ownership interests of the reorganized Debtors; and (iii) any recoveries from a trust created to pursue the Debtors' retained causes of action.

On December 10, 2015, I held a combined hearing on confirmation of the Plan and the adequacy of the Disclosure Statement. Prior to that hearing, Voya filed two objections.¹⁰ Voya did not object to the overall compromise embodied in the Plan, which allowed the claims of all bondholders, brought $325 million into the estate (permitting the Debtors to reorganize and make the distributions required under the Plan) and included releases of both debtor and third party claims against the Non–Debtor Equity Holders. Instead, Voya only objected to the inclusion in the Plan of releases of claims that creditors, including Voya, might assert against the Non–Debtor Equity Holders and an accompanying bar order and injunction, As to the releases, Voya made the following arguments: (i) that I did not have subject matter jurisdiction to grant nonconsensual third party releases; (ii) that third party releases are impermissible; (iii) that the Plan must permit parties to opt-out of the releases; and, in any event, (iv) that the releases did not meet the Continental standard. To crystalize its claims against the Non–Debtor Equity Holders, the day before the confirmation hearing, Voya filed a complaint asserting RICO and common law fraud claims against those entities in the United States District Court for the District of Delaware (the "RICO Lawsuit"), which remains pending before the Honorable Gregory M. Sleet.¹¹

On December 11, 2015, I issued a bench ruling¹² confirming the Plan and addressing all of the issues raised by the parties, save one. As part of that ruling, I held that, at the very least, I had "related to jurisdiction."¹³ I made this ruling because Voya argued (relying on Combustion Engineering¹⁴ ) that I did not have subject matter jurisdiction over the RICO Lawsuit, which was fatal to my ability to grant the third party releases as to Voya. I also stated that Stern did not change my conclusion on Voya's jurisdictional argument. At no time before I ruled did Voya argue that I lacked constitutional adjudicatory authority to enter a confirmation order containing releases or to otherwise enter a final order approving the nonconsensual releases in the Plan.

As part of my Bench Ruling, I informed the parties that (i) I was not in a position to rule on the bar order provision, as it had not been the subject of argument and I had not, independently, had a chance to fully understand it; and (ii) I had not yet reviewed the proposed form of confirmation order. After some discussion, I agreed that the parties could submit further briefing on the bar order provision and continued the hearing. But, before the conclusion of the hearing, the staff attorney for the Office of the United States Trustee commented on the proposed form of order and asked me to pay particular attention to paragraph LL, which she said contained detailed proposed findings on the injunctions and releases. I then asked: "Does any other party have [a] question or clarification they need to make on the record?" ¹⁵

As reflected in the transcript, there was no response. The hearing was then recessed until December 15.

Prior to the continued hearing, the Debtors filed a letter on the docket informing me that, with the consent of Voya and all other necessary parties, the bar order provision was deleted from the Plan.¹⁶ The letter also informed me that: (i) Voya had no further objections to the Plan that had not been ruled upon; and (ii) the Office of the United States Trustee believed that the findings in paragraph LL of the proposed order regarding releases should be stricken in favor of a reference to the Bench Ruling, and the Debtors disagreed. After considering the letter, on December 14, 2015, I entered an order confirming the Plan.

B. The Appeal and the Request for Certification to the Third Circuit

That same day, Voya filed its Notice of Appeal¹⁷ together with an emergency motion requesting certification of a direct appeal to the Third Circuit¹⁸ and a motion for stay pending appeal.¹⁹ Voya argued that a direct appeal would "enable the Third Circuit to clarify two crucial legal issues that remain undetermined in this Circuit: whether nonconsensual releases of non-debtors' direct claims against other non-debtors are permissible and if so, under what circumstances."²⁰

Thereafter, Voya filed its Statement of the Issues on Appeal²¹ identifying the following questions.

1. Can Bankruptcy Courts exercise "related to" jurisdiction over a non-debtor's direct claims against other non-debtors for fraud and other willful misconduct on the basis of contractual indemnification agreements by the debtor of the other non-debtors that expressly and/or as a matter of law preclude indemnification for acts of fraud, wilfull [sic] misconduct, and violations of the Racketeer Influenced and Corrupt Organization (RICO) Act?

2. Do Bankruptcy Courts have the authority to release a non-debtor's direct claims against other non-debtors for fraud and other willful misconduct without the consent of the releasing non-debtor?

3. Assuming arguendo that Bankruptcy Courts do have authority to release a non-debtor's direct claims against other non-debtors for fraud and other willful misconduct without the consent of the releasing non-debtor, what standard of law governs the approval of such releases where no consideration is paid for the release?

4. Can services performed by a debtor's directors, officers, and employees in connection with the debtor's reorganization

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