In re Millennium Lab Holdings II, LLC (Opt-Out Lenders v. Millennium)

In re Millennium Lab Holdings II, LLC (Opt-Out Lenders v. Millennium)

No. 18-3210, United States Court of Appeals for the Third Circuit (December 19, 2019). Before Chagares, Jordan, and Restrepo, Circuit Judges. Appeal from the U.S. District Court for the District of Delaware (Stark, J.).

Relevant Facts

• Millennium Health LLC provided laboratory-based diagnostic services. In April 2014, it entered into a $1.825 billion credit agreement with various lenders, including funds managed by Voya Investment Management Co. LLC. Millennium used the proceeds to refinance existing obligations and pay a nearly $1.3 billion special dividend to its shareholders.

• In March 2015, the U.S. Department of Justice filed a complaint against Millennium alleging violations of the False Claims Act following a multi-year investigation. The Center for Medicare and Medicaid Services also notified Millennium it would revoke its Medicare billing privileges, which were critical to its business.

• Millennium reached a $256 million settlement with the government but concluded it lacked liquidity to both service the 2014 credit agreement debt and pay the settlement. An ad hoc group of lenders (including Voya) began negotiating with Millennium and its principal shareholders—Millennium Lab Holdings, Inc. (MLH) and TA Associates Management, L.P. (TA).

• After intensive negotiations, MLH and TA agreed to contribute $325 million to fund the government settlement, cover fees and working capital, and transfer 100% of their equity. In exchange, MLH, TA, and related parties received broad third-party releases from all claims arising from pre-restructuring conduct, including claims related to the 2014 credit agreement.

• Voya refused to consent to the restructuring agreement and held out. Millennium filed for Chapter 11 bankruptcy in November 2015 and submitted a prepackaged plan reflecting the restructuring agreement terms, including nonconsensual third-party releases binding non-consenting lenders like Voya.

• Voya objected to plan confirmation, asserting it had significant claims against MLH and TA for material misrepresentations made in connection with the 2014 credit agreement, including alleged failure to disclose the pending government investigation. Voya separately filed suit asserting RICO, fraud, and related claims.

• The Bankruptcy Court confirmed the plan on December 14, 2015. On appeal, the District Court remanded for the Bankruptcy Court to address its constitutional authority under Stern v. Marshall, 564 U.S. 462 (2011). The Bankruptcy Court issued a detailed opinion concluding it had constitutional authority. The District Court affirmed and also held the remaining issues equitably moot.

Legal Issues

• Whether the Bankruptcy Court had constitutional authority under Article III and Stern v. Marshall to confirm a Chapter 11 reorganization plan containing nonconsensual third-party releases and injunctions binding a non-consenting creditor.

• Whether the remainder of Voya's appeal—challenging whether the release provisions violated the Bankruptcy Code—was equitably moot.

Positions of the Parties

• Voya (Opt-Out Lenders/Appellant) argued that under Stern v. Marshall, the Bankruptcy Court lacked constitutional authority to enter nonconsensual third-party releases because doing so effectively adjudicated Voya's state-law claims against non-debtor parties (MLH and TA) without Article III protections. Voya also contended the releases violated the Bankruptcy Code.

• The Appellees (Millennium, MLH, TA, and Slattery) argued that Stern v. Marshall was inapplicable to plan confirmation proceedings, which are a core function of bankruptcy courts. They further argued the appeal was equitably moot because the releases were central to the reorganization, excising them would unravel the plan, and it would be inequitable to allow Voya to benefit from the restructuring while pursuing the released claims.

Decision of the Court and Reasons

The Third Circuit affirmed the District Court in all respects.

On the constitutional authority question, the court held that the Bankruptcy Court was permitted to confirm the plan containing nonconsensual third-party releases because, on the specific and exceptional facts of the case, the existence of the releases and injunctions was integral to the restructuring of the debtor-creditor relationship. The court analyzed Stern v. Marshall and concluded that plan confirmation proceedings involving releases that are essential to the reorganization are distinguishable from the adjudication of state-law counterclaims at issue in Stern. The releases here were the product of intensive arm's-length negotiations, MLH and TA's $325 million contribution was conditioned on the releases, and both the Bankruptcy Court and District Court found that the deal to avoid corporate destruction would not have been possible without the third-party releases.

On equitable mootness, the court held that the remainder of the appeal—challenging whether the release provisions violated the Bankruptcy Code—was equitably moot. The releases were central to the reorganization plan, excising them would unravel the entire plan, and it would be inequitable to permit Voya to benefit from the restructuring while simultaneously pursuing claims that MLH and TA had paid $325 million to settle.