In re: Millenium Lab Holdings II, LLC—bankruptcy—affirmance—Jordan

When a debtor files for bankruptcy under Chapter 11, the bankruptcy court has broad power to confirm a reorganization plan that resolves the debtor’s debts and other liabilities to its creditors. The key question in this appeal was whether the bankruptcy court has the power to force the resolution of related liability—not the debtor’s liability to its creditors, but other entities’ liability to those creditors. The Third Circuit held that bankruptcy courts do possess that power: “On the specific, exceptional facts of this case, we hold that the Bankruptcy Court was permitted to confirm the plan because the existence of the releases and injunctions was integral to the restructuring of the debtor-creditor relationship.”

The facts here are complicated, but to simplify things a bit, the debtor was a corporation with shareholders. The debtor negotiated a bankruptcy settlement with some of its creditors that released its own liability as to all creditors. Nothing unusual there. But the deal also released the debtor’s shareholders’ liability to the creditors, including a creditor who didn’t consent to the deal. That is, the deal wiped out creditors’ claims against entities that weren’t bankruptcy debtors. The bankruptcy court confirmed the plan over the dissenting creditor’s objection, the district court affirmed, and yesterday the Third Circuit affirmed, too, holding that the release of non-debtor liabilities was constitutional in light of the Supreme Court’s 2011 decision in Stern v. Marshall. The court emphasized that it was not broadly sanctioning nonconsensual third-party releases in bankruptcy and that such releases must satisfy exacting standards and be approached by courts with “the utmost care.”

Joining Jordan were Chagares and Restrepo. Arguing counsel were Thomas Redburn Jr. of Lowenstein Sandler for the creditor and John O’Quinn of Kirkland & Ellis for the appellees.