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Non-Consensual Third Party Releases Certified Directly to the Third Circuit

In re Millennium Lab Holdings II, LLC, No. 15-12284 (LSS), 2016 WL 155500 (Bankr. D. Del. Jan. 12, 2016)

[Update – Despite the Bankruptcy Court’s ruling, the Third Circuit Court of Appeals denied the petition for direct certification in an order issued February 24, 2016.  The appeal will now head to the Delaware District Court.]

The Delaware Bankruptcy Court has granted direct certification of a hot-button issue surrounding confirmation of plans in bankruptcy to the Third Circuit Court of Appeals—namely, whether a bankruptcy court has the authority to release a non-debtor’s direct clams against other non-debtors without the consent of the releasing non-debtor.  As a basis for Her Honor’s holding, Judge Silverstein ruled that her decision to confirm the plan before the Court and approve the non-consensual third party releases therein over objection conflicted with Judge Walrath’s decision in In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011).

In this case, Millennium Lab Holdings II and its affiliates (the “Debtors”) filed a prepackaged joint plan of reorganization that contained a global settlement among various parties-in-interest and third party releases of the Debtors’ prepetition lenders and certain other related parties.  The objecting parties, the so-called “Opt-Out Lenders”, did not object to the settlement itself, but rather to the third party releases.  The Opt-Out Lenders asserted that they have meritorious claims against the Debtors’ former equity holders and two corporate executives that are beneficiaries of the third party releases.  The Opt-Out Lenders also filed a complaint in the Delaware District Court setting forth their claims.  Nonetheless, the Court confirmed the Debtors’ plan over the Opt-Out Lenders’ arguments and approved the non-consensual releases as fair and necessary to the Debtors’ reorganization, relying upon Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 303 (3d Cir. 2000) and its progeny.  The Opt-Out Lenders appealed the decision and requested direct certification to the Third Circuit on six issues.  The Court denied stay pending appeal and issued this ruling on the certification issue.

Section 158(d)(2)(A) permits direct appeal of a bankruptcy court order to the Circuit Court of Appeals if (a) the order involves (i) a question of law to which there is no controlling decision from the Circuit Court or Supreme Court; (ii) a matter of public importance; (iii) a question of law requiring resolution of conflicting decisions; or (iv) an issue such that an immediate appeal may materially advance the progress of the case; and(b)the Circuit Court authorizes the direct appeal of the order.  See 28 U.S.C. § 158(d)(2)(A).

The Court quickly concluded that five of the six issues on appeal did not satisfy the criteria for direct certification, leaving the appeal of the Court’s approval of the non-consensual third party releases.  Op. at *6-9.  The Court analyzed in some depth the Opt-Out Lenders’ arguments that, first, the confirmation order involves a question of law to which there is no controlling decision and that, second, it involves a question of law resolving conflicting decisions.  With respect to the first argument, the Court was persuaded that when considering two cases in tandem, Continental and Global Industrial, the Third Circuit has held that bankruptcy courts have the authority to approve non-consensual third party releases and that the relevant factors considered are whether the releases are fair and necessary to the reorganization.  See Continental, 203 F.3d at 214; In re Global Indus. Techs., Inc., 645 F.3d 201 (3d Cir. 2011).  Based on these cases, and the continued reliance on the “Continental hallmarks” within this jurisdiction, the Court rejected the Opt-Out Lenders’ argument that there was no controlling law on this specific issue on appeal.  Op. at *13.

Next, and importantly, the Court analyzed whether Her Honor’s decision in Millennium conflicts with any other decisions within this jurisdiction.  The Court distinguished the holdings of Spansion and Indianapolis Downs, each cited by the Opt-Out Lenders in support of the existence of a decisional split, by ruling that these cases stand only for the proposition that consensual releases are permitted.  However, the Court did find a conflict with Washington Mutual.  In WaMu, Judge Walrath held that the bankruptcy court “does not have the power to grant a third party release of a non-debtor…and any such release must be based on consent of the releasing party (by contract or the mechanism of voting in favor of the plan).”  442 B.R. at 352.  Judge Silverstein held to the contrary in Millennium and noted that Her Honor’s “interpretation of what is meant by Continental’s hallmarks…differs from that of the Washington Mutual court[,]” necessitating a direct appeal to the Third Circuit.  Op at *15.  It will now be in the Circuit Court’s hands as to whether or not it will exercise discretion to hear the appeal.  Op. at *18; see also 28 U.S.C. § 158(d)(2)(A).