CBInsolvency LLC

Thought Leadership

Delaware Bankruptcy Court Rules on Constitutional Authority for Third-Party Releases

     Because restructurings, especially schemes of arrangement, often include provisions for certain third parties to be released by other third parties without their specific consent, the enforcement of such non-consensual third party releases in cases under chapter 15 is important to the cross-border insolvency community. In CBI’s July 2017 newsletter, we called attention to a decision by the U.S. District Court for the District of Delaware on an appeal from the Bankruptcy Court’s confirmation of the chapter 11 reorganization plan of Millennium Lab Holdings II, LLC. A bondholder opposed confirmation because the reorganization plan called for non-consensual third-party releases.  Equity holders who contributed $325 million pursuant to a settlement contained in the plan were released and received injunctive protection blocking fraud and other claims asserted by the bondholder.

The District Court focused on whether the Bankruptcy Court had constitutional authority to order releases which would effectively block non-bankruptcy claims – including state law claims – by one non-debtor (the bondholder) against other non-debtors (the contributing equity holders) when it did not have authority to hear and finally determine such claims under the Supreme Court’s holding in Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).

On October 3, 2017, the Bankruptcy Court issued a 69 page opinion concluding that the focus of the analysis should be on the Bankruptcy Court’s constitutional authority to enter orders confirming plans of reorganization, not on the authority to adjudicate state law claims. [click here to read opinion] Plan confirmation is a “core proceeding” in which the Bankruptcy Court has statutory authority under Stern to make final rulings.  The Court also has constitutional authority because confirmation of a reorganization plan is not a state law claim of any type and, consequently, Stern is inapplicable.  Post-Stern Third Circuit decisions (the judicial circuit in which Delaware is located and whose decisions are binding within the Circuit) hold that “Stern does not prevent a bankruptcy judge from entering final orders in statutorily core proceedings notwithstanding the orders’ collateral impact on state law claims.”

 If the Bankruptcy Court’s decision survives further appeal, then Delaware will be no riskier a venue choice for chapter 15 than other districts for schemes of arrangement containing third-party releases.


In a cross-border insolvency matter, if an expert opinion is required, if skilled mediation or arbitration can help resolve disputes, or if cross-border insolvency is simply unfamiliar territory, CBI can help. 

We will be pleased to discuss your cross-border insolvency issues and agree on a case-specific arrangement to assist you.  Please reach out to any of us for a quick and easy assessment of how we can help you. We welcome your thoughts, comments and questions. 

By Jack Esher