By: Donald L Swanson
The opinion is In re Millennium Lab Holdings II, LLC, et al., 945 F.3d 126 (3d Cir. 2019). On March 18, 2020, a Petition for writ of certiorari is filed from this opinion (Supreme Court Case No. 19-1152). On May 26, 2020, the Supreme Court denies the Petition.
The opinion is now good law. So, here’s a summary.
Millennium provides laboratory-based diagnostic services.
In April 2014, Millennium enters into a $1.825 billion credit agreement with Voya. Millennium uses the proceeds to refinance certain obligations and to pay a $1.3 billion special dividend to its shareholders.
Problem & Government Settlement
In early 2015, some bad things happen to Millennium, including:
- the U.S. Department of Justice files a complaint against Millennium for violations of federal laws; and
- The Center for Medicare and Medicaid Services begins revoking Millennium’s Medicare billing privileges, which are the lifeblood of Millennium’s business.
Millennium agrees to pay government entities $256 million to settle the various government claims. But shortly thereafter, Millennium concludes that it lacks sufficient cash to pay the government settlement and to pay other creditors as well.
Negotiations With Creditors
An Ad Hoc Group of lenders forms, including Voya, to work with Millennium and its primary shareholders to, (i) restructure Millennium’s financial obligations, and (ii) pay the government settlement.
- The Ad Hoc Group raises the prospect of asserting claims against Millennium and its primary shareholders for failing to disclose the government’s investigation — and settlement negotiations thereon begin;
- Millennium notifies the government that Millennium is unable to pay the $256 million government settlement, without restructuring its other financial obligations; and
- The government sets a deadline of October 16, 2015, to get the restructure accomplished.
Settlement With Nearly All Creditors
On October 15, 2015, Millennium, its shareholders, and the Ad Hoc Group (Voya excepted) enter into a “Restructuring Agreement,” under which Millennium’s primary shareholders will:
- pay $325 million to satisfy, (i) the $256 million government settlement, and (ii) other obligations; and
- transfer 100% of their shareholder interests to Millennium’s lenders, including Voya.
In exchange, Millennium and its primary shareholders will “receive full releases” from all claims arising before the Restructuring Agreement. Further, in the event of a Chapter 11 filing, shareholders are also to receive “a bar order, an injunction and related protective provisions” to enforce the releases.
As a result, Millennium achieves a final settlement with the government—and then pays the settlement amount.
Restructuring Agreement’s Bona Fides
The Restructuring Agreement is the result of intensive negotiations. The negotiations are described by participants as “highly adversarial” and “extremely complicated,” occurring among “arm’s-length” parties represented by “sophisticated and experienced professionals.”
In the negotiations, the Ad Hoc Group demands a $375 million contribution from Millennium’s primary shareholders in exchange for a release; but the shareholders, (i) reject the suggested claims against them, and (ii) will only consider tendering their equity interests.
As deadlines and prospects of revoked Medicare billing privileges loom, (i) Millennium and its primary shareholders increase their offer to $325 million, and (ii) the Ad Hoc Group agrees to revised terms. One negotiator describes the Agreement as “the best possible deal achievable” that left nothing else “on the table.”
The release provisions for Millennium and its primary shareholders, obtained in exchange for their contributions, were (i) “heavily negotiated,” and (ii) essential to obtaining the cash contributions.
Creditor Support, And A Holdout
“Over 93% of the Prepetition Lenders by value” agree to the Restructure Agreement.
But Voya holds out. So, Millennium files Chapter 11 bankruptcy in November 2015, with a “Prepackaged Joint Plan of Reorganization” containing the Restructuring Agreement’s terms, including broad releases and the related bar order and injunction.
Plan Confirmation and Appeal
Voya objects to confirmation of the plan, insisting on the right to assert claims against Millennium and its primary shareholders that the Restructuring Agreement and plan would release.
The Bankruptcy Court overrules Voya’s objections and confirms the plan.
Voya appeals to the District Court, which remands the case to consider whether the Bankruptcy Court had constitutional authority to confirm a plan releasing Voya’s claims.
On remand, the Bankruptcy Court determines that it does have constitutional authority, and Voya appeals again. The District Court affirms again.
On further appeal, the Third Circuit affirms—and the U.S. Supreme Court denies certiorari.
Third Circuit’s Narrow Opinion
The Third Circuit’s opinion is self-described as narrow, in its reach as precedent.
The opinion begins like this:
- We are asked whether the Bankruptcy Court . . . can confirm a Chapter 11 reorganization plan containing nonconsensual third-party releases and injunctions; and
- 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. (Emphasis added).
Later, the opinion adds:
- We are not broadly sanctioning the permissibility of nonconsensual third-party releases in bankruptcy reorganization plans;
- Our precedents 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;
- 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; and
- In short, our holding today is specific and limited.
The U.S. Supreme Court denied certiorari in the In re Millennium case. That case has, (i) a confirmed plan with broad creditor support, under which insiders receive releases in exchange for contributing $325 million and giving up their equity interests, and (ii) a Circuit Court opinion that’s focused, by its terms, on “specific” and “exceptional” facts.
It will be interesting to see what precedential value courts give to the In re Millennium opinion in other cases and in other circuits.
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