In re: Millennium Lab Holdings II, LLC, et al.
MEMORANDUM OPINION re 6 motion to dismiss. Signed by Judge Leonard P. Stark on 3/17/17. (ntl)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
MILLENNIUM LAB HOLDINGS II, LLC, et al.,
Banlcr. Case No. 15-12284-LSS
OPT-OUT LENDERS, 1
Civ. No. 16-110-LPS
MILLENNIUM LAB HOLDINGS II, LLC, et al.,
TA MILLENIUM, INC., and JAMES SLATTERY,
ADDING FOOTNOTE 4,
ISSUED ON MARCH 20, 2017
Millennium Lab Holdings II, LLC, and its affiliated ~eorganized debtors (collectively, the
"Debtors"), move this Court (D .I. 6) (the "Motion to Dismiss")2 to dismiss the appeal filed by ISL Loan Trust and certain affiliated funds (collectively, "Appellants") from an order (B.D.I.
195)3 ("Confirmation Order") entered by the United States Bankruptcy Court for the District of
Delaware ("Bankruptcy Court") confirming the Debtors' Amended Prepackaged Joint Chapter
11 Plan of Reorganization (B.D.I. 182) (as amended, the "Plan"), on the basis that the appeal is
Appellants are identified in Appellants' Briefin Support of Appeal from Bankruptcy Court ·
Order Confirming Debtors'. Plan of Reorganization. (D .I. 13 at 1)
The Motion to Dismiss (D.I. 6) is joined by James Slattery (D.I. 10) as well as TA Millennium,
Inc. and TA Associates Management L.P. (D.I. 11).
The docket of the Chapter"l 1 cases, In re Millennium Lab Holdings IL LLC, et al., Case No.
15-12284-LSS (Bankr. D. Del.), is referred to herein as "B.D.I._."
equitably moot.. For the reasons stated below, the Court will deny the Motion to Dismiss without
prejudice and remand to the B~ptcy Court for further proceedings.
The appeal of the Confirmation Order concerns a matter of some controversy: the
approval of nonconsensual third-party releases (i.e., the involuntary extinguishment of a nondebtor, third-party's claim against another non-debtor, third party) as part of a chapter 11 plan of
reorganization. Here, the Plan released a non-debtor, third-party's direct, non-bankruptcy,
common law fraud and RICO claims against non-debtor equity holders. The issues on appeal
include, inter alia, (1) whether the Bankruptcy Court had subject matter jurisdiction to approve
the nonconsensual third-party releases, and (2) whether the Bankruptcy Court had constitutional
authority to permanently release.the claims post-Stern. 5
Adjudicatory Authority and Subject Matter Jurisdiction
Article III imposes a structural limitation on the' power of an Article I court to
enter final orders or judgments on state law claims without the parties' consent. As the
Supreme Court explained in Wellness Int 'l Network, Ltd. v. Sharif.
Article III, § 1, of the Constitution provides that "[t]he judicial Power of the
United States, shall be vested in one supreme Court, and in such inferior Courts as
the Congress may from time to time ordain and establish." Congress has in tum
established 94 District Courts and 13 Courts of Appeals, composed of judges who
enjoy'the protections of Article III: life tenure and pay that cannot be diminished.
Because these protections help to ensure the integrity and independence of the
Judiciary, "we have long recognized that, in general, Congress may not withdraw
In the original version of this Opinion (issued on March 17, 2017), the Court inadvertently
failed to include a citation to an insightful article that was of substantial assistance_ to the Court
as it evaluated the issues addressed here. The article is entitled On a "Related" Point:
Rethinking Whether Bankruptcy Courts Can "Order" the Involuntary Release ofNon-Debtor
Third-Party Claims, 23 Am. Bankr. Inst. L. Rev. 531 (2015), and was written by Eamonn
O'Hagan. The Court apologizes to Mr. O'Hagan for its oversight.
Stern v. Marshall, 131 S. Ct. 2594 (2011).
from" the Article III courts "any matter which, from its nature, is the subject of a
suit at the common law ...."
Congress has also authorized the appointment of bankruptcy and magistrate
judges, who do not enjoy the protections of Article III, to assist Article III courts
in their work .... Congress' efforts to align the responsibilities of non"'."Article III
judges with the boundaries set by the Constitution have not always been
successful .... [R]ecently in Stern, this Court held that Congress violated Article
III by authorizing bankruptcy judges to decide certain claims for which litigants
are constitutionally entitled to an Article III adjudication.
135 S. Ct. 1932, 1938-39 (2015) (internal citations omitted). It is clear from these recent
Supreme Court cases that parties have a constitutional right to have their common law· claims
adjudicated by an Article III court, and that right cannot be abridged by Congressional action.
Federal bankruptcy jurisdiction is a Congressional creation under 28 U.S.<:. § 1334(b),
which provides that "district courts shall have original and exclusive jurisdiction of all cases
under title 11," and original but not exclusive jurisdiction of all civil proceedings arising under
title 11, or arising in or related to cases under title 11." The authority of Bankruptcy Courts to
oversee bankruptcy matters derives from 28 U.S.C. § 157(a), which sets out that "[e]ach district
court may provide for any or all cases under title 11 and any or all proceedings arising under title
11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for
Despite the District Court's general referral of bankruptcy matters t? the Bankruptcy
Court, the extent of the Bankruptcy Court's adjudicatory authority depends on the type of
proceeding before it and is subject to the bounds of the constitutional limitations described
above. Thus, Bankruptcy Courts may "enter appropriate orders and judgments" only in "cases
under title 11" and "core proceedings arising under tit~e 11, or arising in a case under title 11." ·
28 U.S.C. § 157(b)(l). When a matter is not a "core" proceeding but rather is "related to" a
bankruptcy case, Bankruptcy Courts have authority only to "hear" the matter and submit
proposed findings of fact and conclusions of law to the Article III District Court. 28 U.S.C.
§ 157(c)(l). 6 This limitation on the power of Article I judges to enter final orders in non-core
proceedings protects a party's constitutional right to have its common law claims adjudicated by
an Article III court. An exception to this limitation applies where all of the parties to the
proceeding consent to the Bankruptcy Court's entry of final orders. See 28 U.S.C. § 157(c)(2);
Wellness, 135 S. Ct at 1942 (holding that Article III permits consent-based adjudication by
Matter Jurisdiction Over Nonconsensual Third-Party Releases
The permanent release of a non-debtor, third-party's claim against another non-debtor,
third party - whether through a chapter 11 plan or otherwise - is an exercise o_f the Bankruptcy
Court's "related to" jurisdiction. See In re Combustion Eng'g, Inc., 391 F.3d 190, 224, 233 (3d
Cir. 2005) (holding that chapter 11 plan could not permanently enjoin third-party claims because
"related to" jurisdiction did not exist over such claims); In re Congoleum Corp., 362. B.R. 167,
190-91 (Bankr. D.N.J. 2007) (stating that "first hurdle" to approval ofrelease is establishing that
court had related to jurisdiction). This is because a non:...debtor' s pre-bankruptcy claim against
another non-debtor does not "aris[e] under title 11" and does not "aris[e] in a case under title
11." 28 U.S.C. § 157(b)(l); see also In re Digital Impact, Inc., 223 B.R. 1, 11 (Bankr. N.D.
Okla. 1998) (holding that controversies are not "cases under" title 11 where parties thereto are
The District Court may then "accept, reject or modify the proposed findings of fact or ·
conclusions oflaw, receive further evidence, or recommit the matter to the bankruptcy judge
with instructions." Fed. R. Bankr. P. 9033(d). Any final order of judgment shall be entered by
the district judge after considering the bankruptcy judge's proposed findings and conclusions and
after reviewing de novo those matters to which any party has timely and specifically objected.
See 28 U.S.C. § 157(c)(l).
not debtors in bankruptcy, and that controversies did not "arise under" Code, because
"controversies contemplated [between the parties] are not limited to causes of action under the
Bankruptcy Code, such as avoidance actions'} Thus, a proceeding solely between non-debtor
parties based on non-bankruptcy law can only be heard by Bankruptcy Courts under "related to"
jurisdiction, and then only "if the outcome could alter the debtor's rights, liabilities, options, or
freedom of action (either positively or negatively) and which in any way impacts upon the
handling and administration of the bankrupt estate." Pacor, Inc. v. Higgins, 743 F.2d 984, 994
(3d Cir. 1984); see also Celotex Corp. v. Edwards, 514 U.S. 300, 307 n.5 (1995) ("Proceedings
'related to' the bankruptcy include ... suits between third parties which have an effect on the
bankruptcy estate."). As such, whether a Bankruptcy Court has "related to" subject matter
jurisdiction over the nonconsensual release of thi~d-party claims is frequently1itigated. Once
established, a common plan objection is based on the statutory edict that a Bankruptcy Court
exercising "related to" jurisdiction over non-core proceedings cannot issue final orders or
judgments but is instead limited to issuing proposed findings of fact and conclusions of law. See
28 U.S.C. § 157(c)(l).
Conversely, plan proponents frequently argue that because Congress included
"confim1ations of plans" in its list of '"core proceedings" under the statute, the nonconsensual
release of third-party claims is an exercise of the Bankruptcy Court's "arising in~' or "arising
under" jurisdiction when accomplished in the context of the plan, and therefore the Bankruptcy
Court has authority to enter a final order releasing those claims. See 28 U.S.C. § 157(b)(2). The
weakness of this argument is its treatment of a chapter 11 plan as a jurisdictional and
adjudicatory "blank check." Indeed, comis have repeatedly rejected this type of jurisdictional
and adjudicatory bootstrapping. 7
Adjudicatory Authority Post-Stern
In Stern, the Supreme Couti held it unconstitutional for Congress to give Bankruptcy
Courts - which are not established under Article III of the Constitution - final adjudicatory
authority over a bankruptcy estate's defamation counterclaim against an estate creditor,
notwithstanding that such counterclaims are among the proceedings that Congress has listed as
"core." See 131 U.S. at 2600-01 (concluding that although Bankmptcy Court had statutory
authority to enter final judgment on certain counterclaims ·pursuant to 28 U .S.C. § l 57(b)(2)(C),
it lacked constitutional authority to render final judgment). According to the Supreme Court, the
counterclaim at issue. did not fall within the naiTow "public rights" exception to Article III
requirements; 8 rather, the claim arose under state law between private parties and was, therefore,
See, e.g., Combustion Eng'g, 391 F.3d at 224-25 (explaining that even if Bankruptcy Code
§ 105(a) provides statutory authority for Bankmptcy Comito approve third-party release,
"[section] 105 does not provide an independent source of federal subject matter jurisdiction ....
'Related to' jurisdiction must therefore exist independently of any plan provision purporting to
involve or enjoin claims against non-debtors."); Digital Impact, 223 B.R. at 11 ("If proceedings
over which the Court has no independent jurisdiction could be metamorphisized into proceedings
within the Court's jurisdiction by simply including their release in the proposed plan, this court
could acquire infinite jurisdiction").
As explained by the Supreme Court, the "public rights" exception is limited "to cases in which
the claim at issue derives from a federal regulatory scheme, or in which the resolution of the
claim by an expert government agency is deemed essential to a limited regulatory objective
within the agency's authority. In other words, it is still the case that what makes a right 'public'
rather than private is that the right is integrally related to particular federal government action."
Stern, 131 S. Ct at 2613. Applied to bankruptcy, the Supreme Court held that the "public rights"
exception extended no farther than to claims that "stem from the bankruptcy itself or would
necessarily be resolved in the claims allowance process." Id. at 2618. By contrast, claims
"between two private parties" based on state common law or statutes that are not closely
intertwined with a federal regulatory program are "private" rights that must be adjudicated by an
Article III Court. See id. at 2614.
. a matter of "private right, that is, of the liability of one individual to another." Id. at 2611-12;
2614 (internal quotations omitted). That the defendant filed a proof of claim in the bankruptcy
case did not alter this conclusion because: (i) the counterclaim did not arise from the bankruptcy
itself; and (ii) it was not necessary to resolve the counterclaim as part of the process of allowing
or disallowing the creditor's proof of claim. See id. at 2611. Stern made clear the limitation on a
Bankruptcy Court's authority to enter a final order on a non-core claim for which the claimant
has a constitutional right to adjudication by an Article III court. The Supreme Court later
clarified that parties could consent to final adjudication by a non-Article III court. See Wellness,
135 S. Ct. at 1944-45.
Following Stern, it is clear that regardless of whether the Bankruptcy Court has subject
matter jurisdiction over proceedings - both core and non-core- it cannot enter a final order
releasing third-party claims unless it has constitutional authority to do so as well.
Events Leading to Chapter 11 Filing
Appellants 9 were lenders of approximately $106.3 million of aggregate principal amount
of senior secured debt issued in April 2014 pursuant to a $1.825 billion senior secured credit
faci_lity (the "Credit Facility'') which was governed by a credit agreement dated April 16, 2014
(the "Credit Agreement") among, inter alia, Debtors Millennium Lab Holdings II, LLC
("Holdings") and Millennium Health, LLC, f/k/a Millennium Laboratories, LLC ("Millennium"),
and several other lenders (the "Lenders"). (See D.l. 14 at A108, Al 128) The Credit Facility was
issued as part of a "dividend recapitalization" transaction for the benefit of what would then be
Appellants are investment funds and accounts managed by Voya Investment Management Co.
LLC and Voya Alternative Asset Management LLC.
the non-debtor stockholders of Millennium's parent company, Holdings. (D.I. 14 at A108) The
stock of Holdings was owned approximately 55% by non-debtor Millennium Lab Holdings, Inc.
("MLH"), 10 and approximately 45% by non-debtor TA Millennium, Inc. ("TA") 11 (MLH and
TA, collectively, the "Non-Debtor Equity Holders"). (Id.) Of the $1.775 billion o_fterm loan
proceeds under the Credit Facility, nearly $1.3 billion was paid out as a special dividend to· the
Non-Debtor Equity Holders. (B.D.I. 206, 12/11/15 Hr'g. Tr. at 8:9-8:13; D.I. 14 at A2386)
The Debtors are providers of laboratory-based diagnostic testing services that derive
significant revenue from Medicare and Medicaid reimbursements. (D .I. 9 at M7) As such, they
are subject to substantial regulation and oversight, including by federal and state agencies. (D.I.
14 at A107) As of early 2012, the United States Department of Justice (the "DOJ") was
conducting joint criminal and civil investigations into Millennium (the "DOJ Investigation").
(Id. at A109) In the course of the DOJ Investigation (and prior to the issuance of the Credit
Agreement), Millennium met with the DOJ "on numerous occasions" to discuss the allegations
under investigation and produced to the DOJ approximately 11 million pages of documents.
(Id.) In December 2014, the DOJ confirmed to Millennium that the DOJ would pursue daims
against Millennium. (Id.) By February 2015, the Centers for Medicare & Medicaid Services
("CMS") notified Millennium that it was revoking Millennium's Medicare billing privileges
based on billings submitted for 59 deceased patients. (Id.) On May 4, 2015, Millennium
The stock of non-debtor MLH was owned in "various amounts" by 14 different trusts. (See
B.D.I. 181, Ex. B (Guarantee Agreement)) Seven of the 14 trusts were established by
Millennium founder, Chairman and former-CEO James Slattery ("Slattery") for the benefit-of
himself and/or various members of his family; these seven trusts collectively owned
approximately 79.896% of the stock of non-debtor MLH. (Id.)_
TA is an affiliate of private equity firm TA Associates Management, L.P.
received a notification that its Medicare billing privileges would be revoked also on account of
its alleged submission of fraudulent claims for services without valid physician orders. (Id.)
On May 21, 2015, Millennium disclosed to its Lenders that it had entered into an
agreement in principle with the DOJ, CMS, and various other government entities, to settle inter
alia claims under the False Claims Act for Medicare fraud for a settlement payment of
approximately $250 million. (See D.l. 14 at A867) On October 29, 2015, Millennium sought
approval from its Lenders to restructure its debt obligations through either an out-of-court
transaction or a prepackaged plan of reorganization. (Id. at A80) Consummation of an out-ofcourt transaction was not achieved.' On November 10, 2015, the Debtors filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. Contemporaneously therewith, the
Debtors filed their Plan (B.D.I. 14) and accompanying Disclosure Statement (B.D.I. .15).
The Proposed Nonconsensual Third-Party Release and Related Provisions
The Plan provided a basis for the continuation of the Debtors' business. Relevant to this
appeal, the Plan also provided for.a $325 million contribution by the Non-Debtor Equity
Holders, specifically $178.75 million from MLH and $146.25 million from TA. Of the NonDebtor Equity Holders' $325 million contribution, $256 million would fund Millennium's
settlement of the DOJ's claims, $50 million would be paid to certain Lenders in exchange for
their early commitment to support Millennium's restructuring, and the remaining $19 million
could be used as Millennium operating capital. (D.I. 14 at A92, A94, A169-Al 70) In exchange
for the $325 million contribution, the proposed Plan provided the Non-Debtor Equity Holders
with full releases and discharges of any and all claims against them and related parties including any claims brought directly by non-Debtor lenders such as Appellants - and including
claims relating to the $1.3 billion special dividend that had been paid to the Non-Debtor Equity
Holders while the Debtors were in the midst of the DOJ Investigation. (See B.D.I. 195-1, Plan at
Art. X at H-K; D.I. 14 at A2208), The proposed Plan provided no ability for parties to "opt-out"
of the third-party releases, meaning the releases would be granted upon confirmation of the Plan
regardless of whether a creditor consented. (See Plan, Art. X at H-K) The proposed Plan also
permanently enjoined Appellants from commencing or prosecuting claims released pursuant to
the Plan against MLH, TA, or their Related Parties (as defined in the Plan). (See id.)
The Fraud Action
On December 9, 2015, prior to the plan confirmation hearing, Appellants filed a
complaint in this Court (the "Fraud Action") against MLH, TA, TA Associates Management;
L.P., and two corporate executives who are beneficiaries of the Plan's third-party releases, James
and Howard Appel ("Defendants"). (See ISL Loan Trust v. TA Associates 1Vlanagem~nt,
L.P., et al., Civ. No. 15-1138 (GMS) (D. Del.)) The complaint demands a jury trial and asserts
the following causes of action: (i) violation of RICO and conspiracy to
RICO (18 U.S.C.
§§ ~ 962(c) & (d) ), based on allegations that Defendants engaged in fraudulent billing practices,
including sending illegal reimbursement requests to Medicare and state Medicaid agencies;
(ii) fraud and deceit based on intentional misrepresentation, aiding and abetting fraud, and
conspiracy to commit fraud, based on allegations that Defendants made false and misleading
representations, for the purpose of inducing Appellants to enter into the Credit Agreement,
regarding the accuracy of Debtors' financial records, Debtors' compliance with applicable laws,
and the existence of pending investigations and litigation against the Debtors; and
(iii) restitution, based on allegations that, as a result of the fraudulent inducement, Defendants
received a benefit of more than $100 million of loans issued under the Credit Agreement, which
benefits Defendants have retained at Appellants' expense. (See Civ. No. 15-1138 (GMS), D.I. 7
(redacted complaint)) The Fraud Action is currently stayed pending the outcome of this appeal.
(See id., D.I. 11)
Appellants' Objections to Plan Confirmation
Appellants raised a litany of objections to confirmation of the Plan. In addition to various
objections regarding the content and adequacy of the Disclosure Statement, Appellants argued
that the Bankruptcy Court lacked either "arising in" or "related to" subject matter jurisdiction to
approve the nonconsensual third-party release contained in the Plan. (See B.D.I. 122 at 17-25;
B.D.I. 174 at 4-9) Appellants further asserted that, even if the Bankruptcy Court had subject'
matter jurisdiction, the proposed approval of the releases under section 105(a) 12 of the
Bankruptcy Code would contravene other sections of the Bankruptcy Code, including section ·
524(e), and hence the Bankruptcy Court lacked statutory authori~y to approve the release·
provisions. 13 (See B.D.I. 122 at 26-28) Appellants further argued that the Plan could not be
confirmed unless it permitted
to opt out of the third-party release (see id. at 29-31 ), and
even if the Plan were so amended, exceptional circumstances did not exist to justify limiting the
Section 105(a) permits Bankruptcy Courts to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code.]" 11 U.S.C.
§ 105(a). However, section 105(a) cannotbe used to craft new remedies that contravene existing
statutory provisions, Law v. Siegel, 134 S. Ct. 1188, 1194 (2014), or create substantive rights that ·
are otherwise unavailable under applicable law, In re Dairy Mart Convenience Stores, Inc., 351
F.3d 86, 92 (2d Cir. 2003).
The Bankruptcy Code provides that the discharge of a debtor's indebtedness "does not affect
the liability of any other entity on, or the property of any other entity for, such debt." 11 U.S.C.
§ 524(er Notwithstanding section 524(e), the Bankruptcy Code grants Bankruptcy Courts the
ability to enjoin non-debtors' claims against other non-debtors with respect to asbestos-related
liability~ See 11 U.S.C. § 524(g) (authorizing non-debtor releases in asbestos liability cases
when specified conditions are satisfied, including creation of trust to satisfy future. claims);
Combustion Eng'g, 391-F.3d at 236 nA8 (discussing same).
liability of a non-debtor to another non-debtor under Third Circuit law. (See id. at 31-32 (citing
In re Continental Airlines, 203 F.3d 203, 213, n. 9 (3d Cir. 2000) ("Continental II"))
In pre-confirmation briefing, Appellants' Plan objection did no more than touch upon the
Bankruptcy Court's lack of adjudicatory authority, in a section addressing its lack of subject
matter jurisdiction (and seemingly conflating those concepts):
The jurisdiction of the Bankruptcy Courts is statutorily defined_, and is confined to
the boundaries of that statutory definition. Stern v. Marshall, 131 S. Ct. 2594,
2603 (2011) (noting that Bankruptcy Courts may only "hear and enter final
judgments in all core proceedings arising under title 11, or arising in a case under
title 11 ");see also Wellness Int'! Network, Ltd. .v. Sharif, 135 S. Ct. 1932, 1945
(2015) (observing that "bankruptcy courts possess no free-floating authority to
decide claims traditionally heard by Article III courts"); 28 U.S.C. § 157(a). ,
Rather, Bankruptcy Courts may only enter final judgments on non-core matters
with the consent of the affected parties. Wellness, 135 S. Ct. at 1949. Because
the Third-Party Release would impact direct, non-bankruptcy claims held by nonDebtors against other non-Debtors and which would not trigger the Court's
jurisdiction, the Court does riot have jurisdiction to approve the Third-Party
Release without the consent of the Third Party Releasing Parties. [Appellants]
have not given such consent.
(B.D.I. 122 at 17) (emphasis added)
In response, Debtors accused Appellants of reading Stern too broadly, asserting instead
that Stern had left intact the Bankruptcy Court's constitutional authority to approve the thirdparty releases. (See B.D.I. 131 at 17) Debtors argued that courts in this jurisdiction and others
have rejected Stern challenges regarding the Bankruptcy Courts' constitutional authority,
including in connection with the consideration and approval of nonconsensual third-party
.releases in a plan. (See id. at 17-18) .Debtors argued that adjudication of the Plan is "a unitary .
omnibus civil proceeding for the reorganization of all obligations of the debtor and disposition of
all its assets" unique to bankruptcy and "not an adjudication of the various disputes it touches
upon." (See B.D.I. 131 (quoting In re Charles Street African Methodist Episcopal Church of
Boston, 499 B.R. 66, 99 (Bankr. D. Mass. 2013)) .
The foregoing is the extent of the pre-confirmation briefing on the Bankruptcy Co~' s .
adjudicatory authority. (See D.I. 174 (Appellants' supplemental plan objection, focusing on
subject matter jurisdiction and not mentioning lack of adjudicatory authority under Stern))
The Confirmation Ruling
On December 10, 2015, the Bankruptcy Court held a contested hearing to consider the
adequacy of the Disclosure Statement and confirmation of the Plan; at the hearing the
Bankruptcy Court's lack of adjudicatory authority was only briefly addressed. (See B.D.I. 190 at
33-34) The Debtors referred to the Stern argument as a "total red herring." (Id. at 33) Because
Stern addressed a Bankruptcy Court's constitutional authority to adjudicate state law claims, and
because and the Plan did not adjudicate any claims, the Debtors argued Stern's holding was
inapplic.able. (See id. 190 at 33-34) Debtors cited two cases from
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