New York and Delaware Agree: Releases Are Constitutionally Ok in Confirmation Orders

Within the space of three weeks, district judges in Delaware and New York have held that bankruptcy courts possess core jurisdiction and constitutional power to enter chapter 11 confirmation orders, including so-called non-debtor, third-party releases of non-bankruptcy claims. On September 21, Chief District Judge Leonard P. Stark of Delaware handed down Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 17-1461, 2018 BL 343110 (D. Del. Sept. 21, 2018). He held that bankruptcy courts have constitutional authority to issue non-consensual, third-party releases of non-bankruptcy claims along with confirmation of a chapter 11 plan. Chief District Judge Colleen McMahon of Manhattan reached the same legal conclusion in an October 10 opinion. Her case involved a minority shareholder appealing a confirmation order and contending that a shareholders’ agreement preluded the chapter 11 filing without his consent. Bankruptcy Judge Robert D. Drain of White Plains, N.Y., ruled earlier in the reorganization that the majority shareholders had not violated a shareholders’ agreement by filing an involuntary petition against the corporate debtor. In the course of his decision denying the minority shareholder’s motion to dismiss or abstain, Judge Drain concluded that the dispute over breach of the shareholders’ agreement was core. The minority shareholder did not appeal.

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