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A Stern Rebuke: Bankruptcy Courts have Constitutional Authority to Confirm Plans Containing Nonconsensual Third-Party Releases

On December 19, the Court of Appeals for the Third Circuit became the first federal circuit court of appeals to hold that a bankruptcy court may confirm a plan containing nonconsensual third-party releases without exceeding the constitutional limits on its jurisdiction articulated in Stern vs. Marshall.[1]  The decision in In re Millennium Lab Holdings II, LLC [2] is notable because it rejects a new line of attack on nonconsensual releases in a jurisdiction where they are regularly permitted.[3] 

As my colleague explained in an October 2018 blog post summarizing the prior history of the case, a group of creditors opposed confirmation of Millennium’s plan because, they argued, Stern and its progeny deprived the bankruptcy court of its constitutional authority to approve nonconsensual releases of four equity holders that were funding the plan.  The rule announced in Stern was that a bankruptcy court lacks subject matter jurisdiction to enter judgment on state law counter-claims of the estate against a creditor because it is not an Article III court.[4]  The objectors in Millennium contended that this rule must apply with equal force to nonconsensual releases, i.e., that only an Article III court has constitutional authority to release the claim of one non-debtor against another non-debtor.  The Bankruptcy Court overruled the creditors’ objection, found that the releases contained in the plan satisfied the Continental criteria, and confirmed the plan. The District Court affirmed, and the objecting creditors filed a notice of appeal to the Third Circuit.

The Third Circuit began its analysis with a detailed review of the holding in Stern, noting specifically that one of the key takeaways from the decision was that “a bankruptcy court is within constitutional bounds when it resolves a matter that is integral to the restructuring of the debtor-creditor relationship.”[5]  Based on the record, the Court had little trouble concluding that the nonconsensual releases in this case were integral to Millennium’s restructuring.[6]  Nor was the Court persuaded by the objectors’ argument that bankruptcy court jurisdiction post-Stern depends on some nexus to the claims allowance process:

That argument fails primarily because it is not faithful to what Stern actually says. Had the Stern Court meant its ‘integral to the restructuring’ language to be limited to the claims-allowance process, it would not have said that a bankruptcy court may decide a matter when a ‘creditor has filed a claim, because then’ — adding its own emphasis to that word — ‘the ensuing preference action by the trustee become[s] integral to the restructuring of the debtor-creditor relationship.  That phrasing makes clear that the reason bankruptcy courts may adjudicate matters arising in the claims-allowance process is because those matters are integral to the restructuring of debtor-creditor relations, not the other way around.[7]

Finally, it is also noteworthy that the Court included a note about the care that courts must exercise when evaluating nonconsensual third-party releases.  As we have discussed previously, some commentators and judges have started to question just how “rare” and “exceptional” these seemingly ubiquitous plan provisions have become.  Practitioners should not overlook the reminder that the Court apparently felt compelled to include at the end of its discussion:

Consistent with prior decisions, we are not broadly sanctioning the permissibility of nonconsensual third-party releases in bankruptcy reorganization plans. Our precedents regarding nonconsensual third-party releases and injunctions in the bankruptcy plan context set forth exacting standards that must be satisfied if such releases and injunctions are to be permitted, and suggest that courts considering such releases do so with caution.  Although we are satisfied that both the Bankruptcy Court and District Court exercised appropriate — indeed, exemplary — caution and diligence in this instance, nothing in our opinion should be construed as reducing a court's obligation to approach the inclusion of nonconsensual third-party releases or injunctions in a plan of reorganization with the utmost care and to thoroughly explain the justification for any such inclusion.

In short, our holding today is specific and limited. It is that, under the particular facts of this case, the Bankruptcy Court’s conclusion that the release provisions were integral to the restructuring was well-reasoned and well-supported by the record. Consequently, the Bankruptcy Court was constitutionally authorized to confirm the plan in which those provisions appeared.[8]


[1] 564 U.S. 462 (2011).

[2] No. 18-3210, 2019 U.S. App. LEXIS 37939 (3d Cir. Dec. 19, 2019) (“Millennium”). 

[3] See, e.g., In re Continental Airlines, 203 F.3d 203, 214 (3d Cir. 2000) (“The hallmarks of permissible nonconsensual releases [are] fairness, necessity to the reorganization, and specific factual findings to support these conclusions.”).

[4] 564 U.S. at 469.

[5] Millennium at *17.

[6] Id. at *21 (“Indeed, the record makes abundantly clear that the release provisions — agreed to only after extensive, arm's length negotiations — were absolutely required to induce [the plan funders] to pay the funds needed to effectuate Millennium’s settlement with the government and prevent the government from revoking Millennium's Medicare billing privileges. Absent [the plan funders’] payment, the company could not have paid the government, with the result that liquidation, not reorganization, would have been Millennium's sole option. Restructuring in this case was possible only because of the release provisions.”).

[7] Id. at *22-23 citing 564 U.S. at 497.

[8] Id. at *24-25.   The Millennium decision also addresses the equitable mootness of the appeal, a more detailed discussion of which I will leave to another blogger.