On remand from the district court in Millennium Lab Holdings, Bankruptcy Judge Laurie Selber Silverstein of Delaware decided that a bankruptcy court has constitutional power to enter a final order granting non-consensual, third-party releases of non-bankruptcy claims as part of a chapter 11 confirmation order.
Written with a passion suggesting it may be the most important decision of her career, Judge Silverstein’s 69-page opinion on Oct. 3 concludes that the limitations on the constitutional power of a bankruptcy court under Stern v. Marshall are altogether inapplicable to granting third-party releases because a confirmation order exclusively implicates questions of federal bankruptcy law and raises no issues under state or common law.
Ordering remand in March, District Judge Leonard P. Stark of Delaware implied, without explicitly holding, that a bankruptcy court should only make proposed findings and conclusions when granting third-party releases as part of a chapter 11 confirmation order. Sending the case back to Judge Silverstein, he told her to consider the question of constitutional power and also decide whether the appellant had waived Stern objections.
In her Oct. 3 opinion, Judge Silverstein persuasively ruled that the appellant had waived Stern objections by never raising the issue during the confirmation process. If there is another appeal, Judge Stark and even the Third Circuit could uphold confirmation just on the issue of waiver and never reach the broader Stern questions given the principle that courts should not make constitutional rulings when a case can be decided on another ground.
Consequently, Millennium Lab Holdings may leave the constitutional issue undecided at the appellate level. Until the question is starkly raised and decided, parties will proceed at their peril if they consummate plans with releases based only on the bankruptcy court’s confirmation order.
The Facts
The chapter 11 debtor, Millennium Lab Holdings II LLC, obtained a $1.825 billion senior secured credit facility and used $1.3 billion of the proceeds before bankruptcy to pay a special dividend to shareholders.
Indebted to Medicare and Medicaid for $250 million that it could not pay, Millennium filed a chapter 11 petition along with a prepackaged plan calling for the shareholders to contribute $325 million in return for releases of any claims that could be made by the lenders. The plan did not allow the lenders to opt out of the releases.
Before confirmation, a lender holding more than $100 million of the senior secured debt filed suit in district court in Delaware against the shareholders and company executives who would receive releases under the plan. The suit alleged fraud and RICO violations arising from misrepresentations inducing the lenders to enter into the credit agreement.
Over objection, Judge Silverstein confirmed the plan and approved the third-party releases. The dissenting lender appealed.
Having consummated the plan, Millennium filed a motion to dismiss the appeal on the ground of equitable mootness, because the plan had been consummated in the absence of a stay pending appeal.
District Judge Stark’s Remand
Arguably for the first time, the objecting lender contended on appeal that the bankruptcy court lacked constitutional power to enter a final order granting third-party releases. Although the bankruptcy court had clearly found “related to” jurisdiction to impose the releases, District Judge Stark concluded that the bankruptcy court had not been called on to decide whether it had power under Stern to enter a final order including the releases.
To most readers, Judge Stark’s decision in March implied, without holding, that granting the releases was beyond the bankruptcy court’s constitutional power. Among other things, Judge Stark said that the objecting lender was entitled to an Article III adjudication because the releases were “tantamount to resolution of those claims on the merits against” the lender.
Rather than rule on a constitutional issue that had not been developed in the lower court, Judge Stark remanded the case for Judge Silverstein to decide whether she had final adjudicatory authority, either as a matter of constitutional law or as a consequence of the lender’s waiver. If there were no power to make a final order, Judge Stark said that Judge Silverstein could submit proposed findings and conclusions or strike the releases from the confirmation order.
To read ABI’s discussion of Judge Stark’s opinion, click here.
Granting Releases Is a ‘Core’ Bankruptcy Power
Ruling after remand, Judge Silverstein didn’t keep the reader in suspense. On the second page of her opinion, she said there is constitutional power to grant releases in a confirmation order. To rule otherwise, she said, would go “far beyond the holding of any court” and “dramatically change the division of labor between the bankruptcy and district courts.”
Judge Silverstein found circuit court support for her conclusion. She cited post-Marathon Pipeline but pre-Stern decisions from the Seventh and District of Columbia Circuits finding constitutional power to grant third-party releases in a confirmation order.
Post-Stern, Judge Silverstein found support from two Third Circuit opinions for the proposition that a bankruptcy court can issue a final order on a core issue that has preclusive effect on a third party’s lawsuit: In re Lazy Days’ RV Center Inc., 724 F.3d 418 (3d Cir. 2013), and In re Linear Electric Co., 852 F.3d 313 (3d Cir. March 20, 2017). She emphasized a statement in Lazy Days’ that Stern is “plainly inapposite” where the debtor sought relief “based on a federal bankruptcy law provision with no common law analogue.”
More recently, Judge Silverstein cited bankruptcy court decisions from Boston and White Plains, N.Y., finding constitutional power to grant third-party releases in confirmation orders.
Adopting even the broadest interpretation of Stern, Judge Silverstein said that confirming a plan with releases “does not rule on the merits of the state law claims being released.” Therefore, she said, “Stern is inapplicable as confirmation of a plan is not a state law claim of any type.”
To the contrary, Judge Silverstein said, a bankruptcy court has final adjudicatory power because the court “is applying a federal standard” to ensure that the releases “comply with applicable provisions of the Bankruptcy Code.”
In short, there is no contravention of Stern because the bankruptcy court is making a determination on confirmation based entirely on federal bankruptcy law, where there is statutory core power under 28 U.S.C. § 157(b)(2)(L). The fact that confirmation bars a creditor’s state law claims against a third party is merely incidental.
Indeed, the incidental effect on third-party claims is the gist of the issue. Judge Silverstein pointed out the consequences of making Stern applicable to plans with third-party releases.
If there were no final adjudicatory power in the confirmation context, Judge Silverstein said that bankruptcy courts could no longer make Section 363 sale orders insulating buyers from successor liability. Similarly, bankruptcy courts would lack power, she said, to order substantive consolidation, bar annual shareholders’ meetings, recharacterize debt as equity, or subordinate claims.
On the question of the waiver of Stern objections under Wellness International, Judge Silverstein thoroughly analyzed the record to conclude that the objecting lender never raised the constitutional question during or even after the confirmation process.
Her original ruling on confirmation did not deal with final adjudicatory power because any reference to Stern was so oblique that neither the court nor the parties understood that a constitutional issue was afoot. Citing the Wellness International prohibition of sandbagging, Judge Silverstein said that the lender could not lie in the weeds and raise constitutional infirmities for the first time on appeal.
On the ground of waiver alone, Judge Silverstein found that she was entitled to enter a final order.