Two long-standing controversial areas of bankruptcy law have recently intersected in a bankruptcy case out of the District of Delaware: (1) a bankruptcy court’s adjudicative authority consistent with Article III of the Constitution, and (2) the propriety of what are referred to in bankruptcy parlance as “third-party releases.” Independently, both topics have been the subject of extensive debate by courts and commentators. Until recently in Opt-Out Lenders v. Millennium Lab Holdings II (In re Millennium Lab Holdings II), Civ. No. 16-110-LPS, 2017 WL 1032992 (D. Del. March 17, 2017), however, few courts have questioned the bankruptcy court’s constitutional authority to approve third-party releases in a Chapter 11 plan. The issues raised in the Millennium decision have caught the attention of the bankruptcy community and have potentially wide-reaching implications on the use of third-party releases and the prosecution of Chapter 11 plans. For the non-bankruptcy practitioner, this article will provide a brief introduction to the two topics of adjudicative authority and third-party releases to give context to the issues raised in Millennium. The article will then briefly summarize the Millennium decision and its potential implications to current bankruptcy practice.
Bankruptcy Court’s Authority
A bankruptcy court’s adjudicative authority is the subject of controversy because bankruptcy court judges, unlike federal district court judges, are not appointed under Article III of the Constitution. Yet, as U.S. Supreme Court precedent makes clear, Article III imposes a structural limitation on the power of an Article I court to assert the “judicial power of the United States.” Also, parties have a constitutional right to have certain claims adjudicated by an Article III judge who enjoys the Article III protections of life tenure and undiminished pay. To put the issue into perspective, some historical context is helpful.
