In re Millennium Lab Holdings II, LLC

• Decision Date: 12 January 2016
• Docket Number: Case No. 15–12284 (LSS) (Jointly Administered)
• Citation: 543 B.R. 703
• Parties: In re: Millennium Lab Holdings II, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

543 B.R. 703

In re: Millennium Lab Holdings II, LLC, et al., Debtors.

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

United States Bankruptcy Court, D. Delaware.

Signed January 12, 2016

Ryan M. Bartley, Pauline K. Morgan, Young Conaway Stargatt & Taylor, LLP, Anthony W. Clark, Jason M. Liberi, Skadden Arps Slate Meagher & Flom LLP, Wilmington, DE, Raquelle L. Kaye, Kenneth S. Ziman, Skadden Arps Slate Meagher & Flom LLP, New York, NY, Matthew N Kriegel, Felicia Gerber Perlman, Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, IL, New York, NY, for Debtor.

MEMORANDUM OPINION

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the Opt–Out Lenders' motion pursuant to 28 U.S.C. § 158(d)(2)(A)¹ to certify this Court's order² confirming the Debtors' Prepackaged Joint Chapter 11 Plan of Reorganization of Millennium Lab Holdings II, LLC [D.I. 182] (as amended, the "Plan") directly to the United States Court of Appeals for the Third Circuit. While the Opt–Out Lenders assert multiple grounds for direct certification, the crux of their argument is that my approval of nonconsensual third party releases is contrary to at least one other decision in this district and involves a matter of "public importance," which warrants bypassing the normal appeals process. While I do not believe that any of the other criteria for direct certification are met, or any one of the other five issues raised by the Opt–Out Lenders meet the statutory criteria, I agree that the Confirmation Order involves one question of law requiring resolution of conflicting decisions. Accordingly, I must follow the mandate of the statute and certify the issue for direct appeal to the Third Circuit.

Background³

The Debtors⁴ are in the business of laboratory-based diagnostic testing. The Debtors offer various services, including urine drug testing for the presence or absence of specified substances and pharmacogenetic testing, which provides a genetic analysis of a patient's metabolism and allows clinicians to more accurately predict effective drug therapies. Medicare reimbursement is the Debtors' single, largest source of revenue.

Prepetition, the Debtors' business became subject to an investigation by the United States Attorney for the District of Massachusetts, operating as an arm of the Department of Justice (the "DOJ"). In late December 2014, the DOJ informed the Debtors that it would be pursuing claims against the company for violations of the Stark law and the Anti–Kickback Statute, and for violations of the False Claims Act. In March 2015, the DOJ filed a complaint against the company. At about the same time, the Debtors received various letters from a Medicare administrative contractor for the Centers for Medicare and Medicaid (the "CMS") threatening to revoke the Debtors' billing privileges because of certain alleged fraudulent billing practices. As a result of the DOJ's complaint and the threatened termination of billing privileges, the Debtors sought a global resolution with the government and regulatory agencies. Ultimately, the Debtors' negotiations included the DOJ, the CMS, and the United States Department of Health and Human Services Office of the Inspector General. These negotiations resulted in the execution of a Terms Sheet on May 20, 2015, with the United States as well as certain individual states (collectively, the "USA Settling Parties") to resolve the investigative and administrative matters. The Terms Sheet required an aggregate payment to the governmental entities of $256 million. The Debtors also entered into a corporate integrity agreement.

After entry into the Terms Sheet, the Debtors disclosed the terms of the proposed settlement to an ad hoc group of prepetition lenders (the "Ad Hoc Group") holding debt under the 2014 Existing Credit Agreement.⁵ Pursuant to the 2014 Existing Credit Agreement, the Debtors borrowed $1.825 billion in April 2014, the proceeds of which were primarily used to pay off certain existing debt and provide a special dividend to equity holders as well as to provide for working capital. At the same time that the Debtors informed the Ad Hoc Group of the settlement, they updated their financial forecasts, accounting for, among other things, the effect of the settlement with the USA Settling Parties, reimbursement trends for services, and the corporate integrity agreement. As a result of that process, the Debtors determined that their capacity to service their debt had diminished. Negotiations with the Ad Hoc Group led to the Restructuring Support Agreement,⁶ which resolved the issues between the Debtors, certain consenting lenders under the 2014 Existing Credit Agreement, the Debtors' equity holders, and their respective related parties.

The settlements reached in the Terms Sheet and the Restructuring Support Agreement provide the basis for the continuation of the Debtors' business. In broad terms, and as relevant to the appeal, the settlements provide for: (i) an infusion into the Debtors of $325 million from their equity holders—$178.75 million from Millennium Lab Holdings, Inc. ("MLH") and $146.25 million from TA Millennium, Inc. ("TA"); (ii) conversion of the 2014 Existing Credit Agreement into a $600 million new term loan; (iii) distribution of 100% of the beneficial ownership of the reorganized Debtors to holders of claims under the 2014 Existing Credit Agreement; (iv) the creation of two trusts—one holding the Debtors' retained claims (with recoveries inuring to the benefit of the reorganized Debtors) and one holding claims contributed by the consenting prepetition lenders (with recoveries inuring to their benefit); (v) payment of the remaining settlement amount ($206 million) to the USA Settling Parties by December 30, 2015; (vi) a 100% recovery for all creditors other than the holders of claims under the 2014 Existing Credit Agreement; and (vii) third party releases of MLH, TA, the prepetition lenders, and their Related Parties (as defined in the Plan).⁷

The Restructuring Support Agreement and the settlement agreement with the USA Settling Parties provided for an out-of-court restructuring⁸ if an affirmative vote threshold for holders of claims under the 2014 Existing Credit Agreement was met. It was not. Accordingly, on November 10, 2015, the Debtors filed their voluntary petitions together with their Offering Memorandum and Solicitation Statement for Out–of–Court Transaction and Disclosure Statement for Prepackaged Plan of Reorganization [D.I. 15] ("Disclosure Statement") and Plan. While the Debtors did not receive the requisite votes in the 2014 Existing Credit Agreement class to permit an out-of-court restructuring, this class did accept its treatment under the Plan by 93.02% in number and 93.74% in amount.

On December 10, 2014, I held a hearing with respect to the sufficiency of the Disclosure Statement as well as confirmation of the Plan. The Opt–Out Lenders (sometimes referred to as "Voya") did not object to the settlements contained in the Plan, but did object to the third party releases. They asserted (and continue to assert) that they have meritorious claims against the Debtors' former equity holders and two corporate executives that are the beneficiaries of third party releases, namely: MLH, TA, TA Associates Management, L.P., James Slattery, and Howard Appel.⁹ These claims are set forth in a complaint filed on December 9, 2015, in the United States District Court for the District of Delaware, styled ISL Loan Trust v. TA Associates Management, L.P., No.15–01138 (GMS) (D.Del. Dec. 9, 2015) (the "Complaint").¹⁰

For the reasons set forth in my bench ruling of December 11, 2015, I confirmed the Plan and overruled the Opt–Out Lenders' objection to the third party releases. On the same day, the Opt–Out Lenders filed their: (i) Notice of Appeal [D.I. 202]; (ii) Motion of the Opt–Out Lenders for Stay Pending Appeal of Order Confirming Amended Prepackaged Joint Plan of Reorganization of Millennium Lab Holdings II, LLC, et al. [D.I. 204] (the "Stay Motion"); and (iii) the Certification Motion. I, sua sponte, stayed the effect of the Confirmation Order [D.I. 209] pending the conclusion of the hearing on the Stay Motion. For the reasons set forth in my December 18, 2015, bench ruling [D.I. 232], I denied the Stay Motion and, after the Opt–Out Lenders stated no opposition to the Debtors' proposed form of order, signed an order vacating the temporary stay [D.I. 227]. The Debtors filed a notice of the occurrence of the effective date of the Plan later that day [D.I. 229]. The Opt–Out Lenders did not appeal the order denying the Stay Motion.

On December 28, 2015, the Opt–Out Lenders filed their Designation of Record and Statement of Issues on Appeal Pursuant to Fed. R. Bankr.P. 8009(a) [D.I. 246] (the "Designation"). In their Designation, the Opt–Out Lenders state the following issues on appeal (the "Issues")¹¹ :

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 constitute a

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