STARK, U.S. District Judge:
On December 14, 2015, the Opt-Out
On October 16, 2017, Voya appealed the Remand Opinion (D.I. 1); as part of its appeal, Voya also seeks to reassert the issues it had raised in its 2016 Appeal. The Debtors have again moved to dismiss the appeal on the basis of equitable mootness (D.I. 23, 24) ("Motion to Dismiss").
The parties have fully briefed the Motion to Dismiss (D.I. 23, 24, 25, 35, 38) and the merits of the appeal of the Remand Opinion (D.I. 31, 32, 42). On My 12, 2018, the Court heard oral argument on both the Motion to Dismiss and the merits. (D.I. 52) The parties subsequently submitted supplemental briefing. (D.I. 48, 49, 50, 51)
For the reasons stated below, the Court (i) affirms the Remand Opinion with respect to the Bankruptcy Court's constitutional authority to approve the Plan releases, (ii) dismisses as equitably moot all other issues raised on appeal by Voya in connection with the Confirmation Order, and (iii) holds, in the alternative, that the Confirmation Order is affirmed.
The background of the Chapter 11 cases is set forth in detail in the Court's prior Memorandum Opinion.
The day before the plan confirmation hearing, Voya filed a civil action in this Court (the "RICO/fraud action"), which is stayed pending the outcome of this appeal.
Voya raised a litany of objections to confirmation of the Plan.
In a bench ruling on December 11, 2015, the Bankruptcy Court overruled Voya's objections to the nonconsensual third-party releases and confirmed the Plan. (See B.D.I. 206, 12/11/15 Hr'g. Tr.) Addressing Voya's subject matter jurisdiction arguments, the Bankruptcy Court held that it had, at the very least, "related to" subject matter jurisdiction over the claims based on contractual indemnification and fee advancement obligations that satisfied the Pacor
(See id. at 15:23-16:13 (emphasis added))
On the same day, Voya filed its appeal of the Confirmation Order along with a motion for stay pending appeal (B.D.I. 204) ("Stay Motion"). The Stay Motion was subsequently denied by the Bankruptcy Court. (B.D.I. 227, 232)
The Memorandum Opinion declined to rule on the motion to dismiss the appeal as equitably moot in light of the constitutional issue raised. See Millennium, 242 F.Supp.3d at 337-38. The Memorandum Opinion remanded the case to the Bankruptcy Court to consider whether, or clarify its ruling that, it had constitutional authority to approve the non-consensual release of Voya's claims, and to conduct any further proceedings the Bankruptcy Court might deem just and necessary. See id. at 340.
On remand, Judge Silverstein ordered the parties to submit supplemental briefing on the constitutional issue and on whether Voya had waived any arguments. See Millennium, 575 B.R. at 289. Following this supplemental briefing, Judge Silverstein issued the Remand Opinion. It is comprehensive and well-reasoned.
In the Remand Opinion, Judge Silverstein "reject[ed] Voya's expansive reading of Stern, which not only applies Stern outside of the narrow context in which it was made, but far beyond the holding of any court, and which would, if accepted, dramatically change the division of labor between
Stern, 131 S.Ct. at 2618 (emphasis added). In Stern, Vickie's counterclaim for tortious interference with an alleged gift failed the Disjunctive Test, as it did not "stem" from the bankruptcy itself — it did not derive from bankruptcy law and it existed without
As Judge Silverstein explained, under the "Narrow Interpretation" of Stern, a bankruptcy court lacks constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim. Id. at 268. The Narrow Interpretation finds support in the Supreme Court's own characterization of the holding and its statement: "`[w]e do not think the removal of counterclaims such as Vickie's from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute.'" See id. (quoting Stern, 131 S.Ct. at 2620). Under the "Broad Interpretation" of Stern, Judge Silverstein explained, "a bankruptcy judge cannot enter a final judgment on all state law claims, all common law causes of action or all causes of action under state law." Id. at 268-69. The Broad Interpretation finds support in the varying language used in Stern that did not consistently limit the discussion to a "Vickie-type" counterclaim. Id. Under either interpretation, it is clear that Stern was decided in the context of "a state law claim or counterclaim brought by the debtor-in-possession or trustee." Id. at 269. That is, as Judge Silverstein explained, "Stern is limited to claims based on state law that are commenced in the context of traditional civil litigation, or generically `Debtor/Trustee v. Defendant.'" Id.
Judge Silverstein concluded that the Judges in this District who have expressed a view have consistently applied the "Narrow Interpretation." Id. at 269; see also id. at 269-70 (describing Judge Walrath's view as expressed in In re Wash. Mut. Inc., 461 B.R. 200 (Bankr. D. Del. 2011), vacated in part, 2012 WL 1563880 (Bankr. D. Del. Feb. 24, 2012), as "Broadest Interpretation").
Judge Silverstein noted that the parties had pointed the Court to only two post-Stern cases addressing the constitutionality of bankruptcy judges entering final orders confirming plans containing third-party releases: Charles Street and MPM Silicones.
575 B.R. at 271.
Even under the Broadest Interpretation, the Remand Opinion concluded, the outcome
Id. at 272 (internal footnotes omitted). Judge Silverstein further noted that consideration of the factors against which a third-party release is measured compel the bankruptcy judge to examine the terms of the plan or reorganization, the outcome of the solicitation of the plan, and the necessity of the release to the success of the plan. Id. "These factors do not ask the bankruptcy judge to examine or make rulings with respect to the many claims that may be released by virtue of the third party releases. An order confirming a plan with releases, therefore, does not rule on the merits of the state law claims being released." Id.
The Remand Opinion further noted that, even if the Bankruptcy Court were to import Stern's Disjunctive Test into its analysis, those factors would be satisfied:
Id. at 275 (footnotes omitted).
The Bankruptcy Court noted that a final order on a core issue that may have a preclusive effect on a third party lawsuit does not necessarily violate Stern. See id. at 275-76. The Bankruptcy Court further determined, after a thorough review of the record and supplemental briefing, that even if it lacked constitutional authority to enter a final order confirming the Plan, Voya had forfeited the right to contest the Bankruptcy Court's authority by not raising that argument. See id. at 288-95. Finally, the Bankruptcy Court determined that, even if Voya was entitled to a hearing on the merits of the RICO/fraud action in the context of confirmation, Voya waived that right as well. See id. at 296-98.
The Court has jurisdiction over all final judgments, orders, and decrees pursuant to 28 U.S.C. § 158(a)(1). An order confirming a plan of reorganization is a final order. The Remand Opinion clarifies the basis for the Bankruptcy Court's rulings in the Confirmation Order.
In conducting its review of the issues on appeal, this Court reviews the Bankruptcy Court's findings of fact for clear error and exercises plenary review over questions of law. See Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). The Court must "break down mixed questions of law and fact, applying the appropriate standard to each component." Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992).
Voya argues that the Bankruptcy Court erred in concluding that it had constitutional authority to enter the Confirmation Order approving non-consensual third-party releases over Voya's objection. (See D.I. 31) Voya contends that the Bankruptcy Court was required to apply Stern's Article III Disjunctive Test to its RICO/fraud claims and, had it done so, it would have concluded that Voya's RICO/fraud claims do not satisfy that test. (Id. at 14-18)
Conversely, Debtors argue that the Remand Opinion properly concluded that Stern's narrow holding had no effect on the Bankruptcy Court's authority to approve such releases in the context of plan confirmation. (See D.I. 32 at 19-20) Unlike the bankruptcy court in Stern, which conducted a bench trial and ruled on the merits of a state law claim, the Bankruptcy Court here determined only that the bankruptcy-specific standards for approving nonconsensual releases in a plan were satisfied. (See id. at 2, 14-15) When claims are "integral" to core bankruptcy processes, Debtors argue, the Bankruptcy Court has constitutional authority to extinguish them. (See id. at 17) According to the Debtors, while that ruling may have impaired Voya's claims, the ruling does not adjudicate the merits of those claims. (See id.) Moreover, Debtors contend, Voya consented to the Bankruptcy Court's constitutional authority to enter a final order confirming the Plan, thus repeatedly waiving the constitutional arguments Voya raises here. (See id. at 18)
Notwithstanding any merits of the appeal, Debtors again move to dismiss the appeal as equitably moot. (D.I. 24 at 11-17) Debtors argue that the Plan has been substantially consummated since the Effective Date, effectuating a complete change of ownership and control of the successor Reorganized Debtors; substantially all transfers of property contemplated by the Plan have been completed; and other substantial
Conversely, Voya argues that the Court should strike the releases and injunction from the Plan as applied to Voya so that its RICO/fraud action may proceed here. (D.I. 35 at 4) Voya contends that the relief sought in the appeal is limited and consists solely of modifying the Plan to strike the non-consensual releases of Voya's (and only Voya's) claims against other nondebtors (and the accompanying Plan injunction), which would neither fatally scramble the Plan nor harm any third parties who have justifiably relied on these Plan provisions. (See id. at 17-19) Voya urges that these releases can be struck without any ripple effect or injury to third-parties, with the exception of the Equity Holders. (See id.) To Voya, regardless of the outcome of the appeal, the Plan, as well as the myriad transactions executed under its auspices, will remain in place, and, according to Voya, the Debtors' business will continue as it has since the Plan was confirmed. (See id. at 1-2)
As an initial matter, Debtors argue that because equitable mootness turns on whether this Court can equitably provide Voya
This Court has already declined to consider dismissal of the appeal based on the judge-made equitable mootness doctrine prior to considering the constitutionality of the Bankruptcy Court's ruling below. See Millennium, 242 F.Supp.3d 322 at 337-38. Case law addressing jurisdiction, as opposed to constitutional authority, is consistent with this approach. As Voya persuasively argues:
(D.I. 35 at 9-10)
Even if Voya's argument is incorrect, Debtors did not contest this approach prior to remand. (See Civ. No. 16-110-LPS D.I. 44, 10/7/16 Hr'g Tr. at 46:19-47:5) Thus, the Court perceives no reason to now change course on this procedural issue.
Debtors argue that Voya waived and/or forfeited the argument that the Bankruptcy Court lacked constitutional authority to approve the releases in the confirmation proceedings below. (See D.I. 32 at 52-59) On remand, the Bankruptcy Court directed the parties to brief, inter alia, whether the Bankruptcy Court's lack of authority to approve any release of Voya's RICO/ fraud claims was raised by Voya in plan confirmation briefing. The Remand Opinion contains an alternative holding that Voya both forfeited and waived any constitutional adjudicatory authority objection to the Bankruptcy Court's ability to enter a final order confirming the plan. See Millennium, 575 B.R. at 288-95.
Voya argues that it consistently maintained throughout the Chapter 11 proceedings that the merits of its RICO/fraud claims, which have been at all times pending in this Court, were not before the Bankruptcy Court and could not be decided there. (See D.I. 31 at 9-10) Voya further contends that, under Third Circuit law, a Stern argument cannot be waived. (See id. at 9) (citing In re Linear Electric Company, Inc., 852 F.3d 313, 320 n.32 (3d Cir. 2017)) Conversely, Debtors assert that Voya not only failed to raise its constitutional authority argument during the confirmation proceeding, but also affirmatively consented — on multiple occasions — to the Bankruptcy Court's authority to enter a final order on the proceeding, and went so far as to expressly disclaim the constitutional authority argument. (See D.I. 32 at 52-59)
Voya's Stern argument does appear in its confirmation briefing (see B.D.I. 122 at 17) and the Debtors responded to it (see B.D.I. 131 at 17-18). Subsequently, however, it appears that Voya indicated it was no longer pressing the argument. (See e.g.,
Because the Court is affirming the Bankruptcy Court's holding that it had constitutional authority to grant the releases contained in the Plan, the Court need not decide whether also to affirm on the Bankruptcy Court's alternate basis for its decision. Hence, other than stating that this Court is
Nonconsensual third party releases are not per se impermissible in this Circuit. In Continental, the Third Circuit reviewed case law on nonconsensual third party releases, including cases holding that such releases were per se impermissible, before stating: "[t]he hallmarks of permissible nonconsensual releases — fairness, necessity to the reorganization, and specific factual findings to support these conclusions — are all absent here," Continental II, 203 F.3d at 214. As Judge Silverstein noted in her Certification Opinion,
In the prior Memorandum Opinion, this Court stated it was persuaded by Voya's argument that the Plan's releases, which permanently extinguished Voya's RICO/ fraud claims, was tantamount to adjudication of those claims on their merits, See Millennium, 242 F.Supp.3d at 339. The Court further stated that the view that Stern's constitutional limitations on a bankruptcy judge's power should apply as much to plan confirmation as to any other bankruptcy-related proceeding was a view having much superficial appeal. See id. On remand, Judge Silverstein carefully articulated why the Court should not have been so persuaded.
Voya argues that the Bankruptcy Court erred in concluding that it had constitutional authority to release and enjoin
Conversely, Debtors argue that the only relevant proceeding before the Bankruptcy Court was plan confirmation, not each and every proceeding that may be affected by plan confirmation. (See D.I. 32 at 28) Debtors argue Stern did not address any other types of proceedings listed in § 157(b)(2) and did not address whether a bankruptcy court's ability to "hear and determine" a constitutionally core proceeding is limited by the
As the Bankruptcy Court points out, even if it were ever appropriate to import Stern's Disjunctive Test into a context other than a state law cause of action filed by a debtor or trustee, Voya does not point to anything in Stern, or cases interpreting Stern, suggesting that the pertinent action is something other than the operative proceeding before the bankruptcy judge — which, here, is plan confirmation. The Court agrees with Judge Silverstein's conclusion that "Stern did not address, either expressly or by implication, any context other than counterclaims," nor did it "announce a broad holding addressing every facet of the bankruptcy process." Millennium, 575 B.R. at 274.
Judge Silverstein reasoned in the alternative that even if the Bankruptcy Court were required to import Stern's Disjunctive Test into another context, here the "action" at issue — the plan confirmation proceeding — would satisfy the factors. See id. at 275. Even under Voya's interpretation, "on the facts of this case I would determine that the RICO Lawsuit was `necessarily [] resolved in the claims allowance process'" and that "the Plan (and/or releases) `stem[med] from the bankruptcy itself.'" Id. Voya argues these conclusions were erroneous. (See D.I. 31 at 29-30) To Voya, "[t]he only connection between the Releases and the allowance of certain claims against the estate is that they are both contained in the same Plan — because that is what the Debtors and other parties wanted (over Voya's objection)." (Id. at 31) Voya also disputes the Bankruptcy Court's conclusion that "the releases were integral
As further explained below, the Court concludes that the Bankruptcy Court was correct in holding that plan confirmation is the operative proceeding, and in holding that Stern did not require application of the Disjunctive Test in the context of plan confirmation. Therefore, it is not necessary for the Court to determine whether the Disjunctive Test would be satisfied in this case.
In the Remand Opinion, Judge Silverstein discusses In re AOV Indus., 792 F.2d 1140, 1145 (D.C. Cir. 1986), in which the D.C. Circuit approved confirmation of a plan that included nonconsensual third party releases. In AOV, the party challenging the plan relied on N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion), to argue that because the claims released by the plan were only "related" to the bankruptcy, the bankruptcy court lacked constitutional authority to confirm a plan that released those claims. The AOV court rejected this argument, holding that confirmation proceedings are "at the core of bankruptcy law," and that while a confirmation order "may have an impact on claims outside the scope of the immediate proceedings, we do not read Marathon and its progeny to prohibit all bankruptcy court decisions that may have tangential effects." AOV, 792 F.2d at 1140.
Voya distinguishes AOV on the grounds that the release there would have only "tangential effects" on the released claims, while the Plan here "directly extinguishes a third-party claim through a final judgment." (D.I. 31 at 28 n.7) This contention is unavailing. As Debtors correctly note, AOV concerned releases of claims, which presumably
The Bankruptcy Court found no support for Voya's argument that the Confirmation Order approving the Plan's release and injunction was an adjudication on the merits of Voya's claims. See Millennium, 575 B.R. at 283-85. Voya argues that entry of the Confirmation Order containing releases constitutes a final adjudication of its RICO/fraud action, and under Stern, those claims "are the `action' the Bankruptcy Court needed constitutional authority to adjudicate." Id. For support, Voya cites CoreStates
Debtors argue that Voya's view of the confirmation proceeding ignores the "fundamental difference between approval of a settlement of claims" — or approval of a plan that releases claims — "and a ruling on the merits of the claims." (D.I. 32 at 36) (internal quotation marks omitted) Prior to remand, this Court was also persuaded by Appellant's argument that the Plan's release, which permanently extinguished the RICO/fraud claims, was tantamount to resolution of those claims on the merits against Voya. See Millennium, 242 F.Supp.3d at 339. According to the Debtors, the Bankruptcy Court correctly concluded that when a bankruptcy or Article III court confirms a plan with releases, it applies bankruptcy-specific law and adjudicates only that core proceeding, not the underlying claim. See Millennium, 575 B.R. at 272 (citing 11 U.S.C. §§ 105(a), 1123(b)(6), 1129(a)(1)).
The Court agrees with Judge Silverstein's observation regarding the real nature
Prior to remand, Debtors had argued that the appeal must be dismissed as equitably moot. The Court declined to consider this contention prior to determining whether a constitutional defect in the Bankruptcy Court's decision deprived that court of the power to issue that decision. See Millennium, 242 F.Supp.3d at 337-38. Satisfied that no constitutional defect exists, the Court will consider the Motion to Dismiss.
Equitable mootness is a judgemade abstention doctrine which finds applicability in the limited context of an appeal following the confirmation of a plan of reorganization by a bankruptcy court. See In re SemCrude, 728 F.3d 314, 317 (3d Cir. 2013). "Once effective, reorganizations typically implement complex transactions requiring significant financial investment." Id. Notwithstanding an aggrieved party's statutory right to appeal, and a federal court's "virtually unflagging obligation" to exercise the jurisdiction conferred on it, Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), in some circumstances, granting the relief requested in the appeal "would disrupt the effected plan or harm third parties," SemCrude, 728 F.3d at 317. Parties seeking to dismiss an appeal as equitably moot contend that "even if the implemented plan is imperfect, granting the relief requested [in the appeal] would cause more harm than good." Id. In light of the responsibility of federal courts to exercise their jurisdictional mandate, the Third Circuit has cautioned that an appellate court must "proceed most carefully before dismissing an appeal as equitably moot." Id. at 318. "Before there is a basis to forgo jurisdiction, granting relief on appeal must be almost certain to produce a perverse outcome — chaos in the bankruptcy court from a plan in tatters and/or significant injury to third parties. Only then is equitable mootness a valid consideration." Id. at 320 (internal citations and quotation marks omitted).
In In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996) (en banc) (hereinafter, "Continental I"), the Third Circuit established five prudential factors to be considered in determining whether to dismiss an appeal of a bankruptcy order as equitably moot: "(1) whether the reorganization plan has been substantially consummated, (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of parties not before the court, (4) whether the relief requested would affect the success of the plan, and (5) the public policy of affording finality to bankruptcy judgments." More recently, to reduce uncertainty in applying Continental I's "interconnected and overlapping" factors, In re Philadelphia Newspapers, LLC, 690 F.3d 161, 168 (3d Cir. 2012), the Third Circuit collapsed these five factors into a two-step inquiry, see In re Tribune Media Co., 799 F.3d 272, 278 (3d Cir. 2015). The Court must assess: "(1) whether a confirmed plan has been substantially consummated; and (2) if so,
Debtors, as the parties seeking dismissal of the appeal on equitable mootness grounds, bear the burden of proving that, weighing these factors, dismissal is warranted. See id. Because dismissal of an appeal over which the Court has jurisdiction "should be the rare exception and not the rule," any such dismissal must "also be based on an evidentiary record, and not speculation." Id.
Substantial consummation is defined in the Bankruptcy Code to mean the:
11 U.S.C. § 1101(2). "Satisfaction of this statutory standard indicates that implementation of the plan has progressed to the point that turning back may be imprudent." SemCrude, 728 F.3d at 321.
"Whether a plan has been substantially consummated often depends ... on whether a stay has been issued." Id. at 322. Here, Voya sought from the Bankruptcy Court a stay pending appeal of the Confirmation Order; however, relief was denied, and Voya did not exhaust its remedies by seeking a stay in an appellate court. The Third Circuit has held that, "[b]ecause of the nature of bankruptcy confirmations, ... it is obligatory upon appellant ... to pursue with diligence all available remedies to obtain a stay of execution of the objectionable order ... if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from." Nordhoff Invs., Inc. v. Zenith Electronics Corp., 258 F.3d 180, 186-87 (3d Cir. 2001) (internal quotations marks and citations omitted). Debtors argue that Voya's failure to fully exhaust its opportunities for a stay pending appeal by applying for stay relief in this Court, while retaining all of the benefits of the Plan, was a strategic choice, and weighs in favor of equitable mootness and dismissal. (See D.I. 24 at 20) (citing Mac Panel Co. v. Virginia Panel Corp., 283 F.3d 622, 625 (4th Cir. 2002) ("Although [appellant] initially applied to the bankruptcy court for a stay, its request was denied, and it chose neither to appeal to the district court nor to seek an independent stay in the district court or in this court. By making that strategic choice, [appellant] allowed the reorganization plan to go into effect, taking the risks that attended such a decision.") Voya responds that its decision not to appeal the Bankruptcy Court's denial of the stay motion is irrelevant, as "the relief it seeks does not threaten the plan of reorganization's existence." (D.I. 25 at 20 n.13) (citing cases) Voya adds that the Equity Holders waived the non-appealability requirement, allowing Debtors to consummate the Plan, despite knowing of the risk that this Court or the Court of Appeals could strike the releases after the Equity Holders had made their $325 million contribution. (See D.I. 35 at 6, 13) In such circumstances, Voya insists, equity favors Voya and not dismissal of its appeal. (See id. at 6-7 n. 7 & 13)
While a plan's substantial consummation often depends on whether a stay
Nevertheless, it is agreed by both sides that the Plan is substantially consummated. (See D.I. 52, 7/12/18 Hr'g Tr. at 12:6-11; 24:7-9) The record supports this finding.
"If [the substantial consummation] threshold is satisfied, a court should continue to the next step in the analysis. It should look to whether granting relief will require undoing the plan as opposed to modifying it in a manner that does not cause its collapse." SemCrude, 728 F.3d at 321. "It should also consider the extent that a successful appeal, by altering the plan or otherwise, will harm third parties who have acted reasonably in reliance on the finality of plan confirmation." Id. (citing Continental II, 203 F.3d at 210; Continental I, 91 F.3d at 562). For the reasons stated below, the Court concludes that (i) Voya seeks to strike the Plan's releases, which would severely undermine the Plan and necessarily harm third parties; (ii) the Court cannot equitably strike the releases solely as to Voya's RICO/fraud claims while allowing Voya to keep its share of the Equity Holders' contribution; and (iii) because it is unclear what other practicable relief would permit Voya to pursue its claims against the Equity Holders, the appeal meets the criteria for equitable mootness.
The parties agree that the relevant question is not whether the Court has the legal power to excise the Plan's releases but whether it may equitably do so. (See 7/12/18 Hr'g Tr. at 7:4; 13:1-12; 15:3-15:8; 19:13-20:11; 33:24-34:6) Debtors argue that the Bankruptcy Court's findings, based on uncontroverted evidence, were clear that confirmation of the Plan, and the reorganization and preservation of the Debtors' business as a going concern, was not possible without the global settlement and $325 million settlement contribution paid by the Equity Holders in exchange for the releases granted to them under the Plan. To Debtors, then, it would be inequitable to allow Voya to keep its share of the Equity Holders' contribution yet allow claims against the Equity Holders to go forward; thus, the Court cannot equitably strike the
Debtors liken the situation here to that confronted by the Third Circuit in Tribune, which dismissed an appeal as equitably moot.
Voya asserts that if the releases were really the Plan's centerpiece, there would be a "provision allowing for a complete unwind" of the Plan in the event the releases were stricken on appeal. (See D.I. 35 at 14). But the Plan contains no such provision.
Voya has not identified any case holding that a provision should be viewed as integral to a plan only where the parties specify that, if the provision does not survive appellate scrutiny, the plan must be dissolved. Here, as the Debtors point out, such a provision likely would have been impossible, as the DOJ had leveled a "credible threat to destroy the Company" if the government was not paid $256 million by December 31, 2015, and it seems inconceivable that the parties to the Plan could ever force DOJ later to return settlement payments. (See D.I. 38 at 5-6)
Debtors argue that a successful appeal, which would result in striking the releases and unwinding the Plan, will harm third parties that have justifiably relied on the Plan, including (i) parties to the global settlement who consummated that settlement; (ii) the Debtors' unsecured creditors, who were granted recoveries otherwise unavailable absent the global settlement and Plan; (iii) the Debtors' vendors, customers, and approximately 1,200 employees, who benefit from the Reorganized Debtors operating as a going concern; and (iv) market participants and investors trading in and relying upon the securities and debt issued pursuant to the Plan. (D.I. 24 at 18) Voya counters that no legitimate third party reliance interests will be harmed if the releases are stricken, and the only parties who stand to lose anything from a successful appeal are the non-debtor tortfeasors who defrauded Voya. (D.I. 35 at 17)
The Court agrees with Debtors that the releases cannot equitably be excised as
If unwound, third parties who reasonably relied on Plan confirmation would be injured. Voya has conceded that third parties have engaged in "myriad transactions" pursuant to the Plan. (See D.I. 35 at 1; see also D.I. 25 (Keane Decl.) at ¶¶ 5-12) The revocation of the global settlement would certainly "require a sufficient redistribution of assets to destabilize the financial basis of the settlement." SemCrude, 728 F.3d at 324. The Court agrees with Debtors that third parties, most of whom are not participating in this appeal, have relied upon the global settlement and Plan confirmation and will be harmed if the Confirmation Order is reversed or vacated.
Voya argues that Tribune is distinguishable because appellants in that case sought to revoke a settlement under the applicable plan "in its entirety," whereas Voya seeks only to strike a component of the Plan. (See D.I. 35 at 16) According to Voya, "the relief sought consists solely of excising from the Plan the unlawful non-consensual releases of and injunction against Voya's (and only Voya's) RICO and state law fraud claims against other non-debtor third parties," relief which can be granted without undermining the global settlement or returning the Equity Holders' contribution. (See id. at 1) Voya argues that the Third Circuit has held, on several occasions, that appeals are not equitably moot where, as here, "a party merely seeks revival of discrete released claims that would not otherwise upset a confirmed plan." (Id. at 14)
Voya points out that the Equity Holders received a release of $1.8 billion dollars in claims in exchange for their $325 million contribution, and the RICO/fraud action asserts only $316 million in claims. Thus, were the Court to strike the release of Voya's RICO/fraud claims, the Equity Holders would still have received substantial value for their contribution under the Plan. Voya further argues that nothing in the Plan gives the Equity Holders the right to demand the return of their $325 million monetary contribution following Plan consummation if the nonconsensual releases and injunction are struck on appeal. (See id. at 5, 12-13) Indeed, Voya argues, the Plan even contemplates what should occur if the releases are stricken, as it provides $3 million of insurance to help the Equity Holders cover the costs of defending litigation brought by parties like Voya. (See id. at 13-14 citing A1722)
The Court is not persuaded that it could, as a practical matter, limit its relief solely to striking the releases relating to Voya's RICO/fraud claims. The Bankruptcy Court found those releases were central to the
It follows from the centrality of the releases to the Plan that taking the releases out of the Plan would necessarily lead to the unraveling of the Plan. Among other things, the Court would have to permit the Equity Holders to seek to reclaim their contributions made pursuant to the Plan. Voya seeks to keep its share of the settlement consideration received under the consummated Plan while also pursuing the very claims against the Equity Holders that they paid to settle. Particularly given the central importance of the releases to the Plan — and to Debtors' ongoing viability and, thus, to creditors' (including Voya's) recoveries — this would not be an equitable outcome.
Notwithstanding the Bankruptcy Court's unrefuted findings, Voya argues striking the releases is justified because the releases were unlawful, and the Equity Holders, despite paying $325 million for the releases, were never entitled to them in the first place. The Court is not persuaded by Voya's equitable arguments. (See D.I. 35 at 18) (citing Tribune, 799 F.3d at 278) Voya objected to the Plan's releases, and the Bankruptcy Court overruled the objection, in accordance with the Bankruptcy Court's application of controlling Third Circuit precedent and based upon specific findings of fact supporting the fairness of the releases and their necessity to the Debtors' reorganization.
The Court's decision is not inconsistent with cases in this circuit holding that plan releases in other contexts may be disturbed on appeal without implicating equitable mootness concerns. Unlike those cases, the uncontroverted evidentiary record here clearly establishes the central, critical nature of the challenged relief and the urgencies that required the parties to finalize negotiations and proceed to confirmation before a looming life-or-death deadline for the Debtors.
The Court is persuaded that, upon consideration of the Third Circuit's two-part inquiry, and the uncontroverted evidence, the Debtors have carried their burden of demonstrating that each factor is supported by the evidentiary record and that dismissal of this appeal is required to avoid the collapse of the Plan and harm to third parties. However, the Court is also mindful of the Third Circuit's guidance in Tribune: "[W]hen a court applies the doctrine of equitable mootness, it does so with a scalpel rather than an axe. To that end, a court may fashion whatever relief is practicable instead of declining review simply because full relief is not available." Tribune, 799 F.3d at 278 (internal quotation marks and citation omitted). The Court has carefully considered the specific relief sought on appeal and whether some form of partial or other relief may be fashioned with respect thereto. Voya ultimately seeks to pursue its RICO/fraud claims against the Equity Holders. This could only occur if the Court eliminates the Plan's releases (and injunction). Voya has not articulated how any other form of partial or other relief is available for the
As explained above, the Court is affirming the Remand Opinion with respect to the Bankruptcy Court's constitutional authority and is dismissing all other issues on appeal as equitably moot. In the alternative, were the Court to have reached contrary conclusions on constitutional authority and/or equitable mootness, the Court would also affirm the Confirmation Order by rejecting on the merits the other issues raised on appeal by Voya.
Voya argued that the Bankruptcy Court erred in determining that it had subject matter jurisdiction over Voya's RICO/fraud claims. Under the Third Circuit's decision in Pacor, the Bankruptcy Court has "related to" jurisdiction over third-party claims if the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). The Bankruptcy Court based its decision on the fact that defendants in the RICO/fraud action are indemnified under the Debtors' operational agreements.
Voya argues that the indemnification obligations do not automatically state a right to indemnification because its RICO/fraud claims are outside the scope of the indemnification obligations, as they arise in fraud and intentional conduct. Indemnification of such intentional conduct, according to Voya, would be prohibited by applicable law. Debtors respond that Voya is ignoring the Debtors' contractual obligations to advance defense costs to the indemnified released parties before any final determination on the merits and without regard to the substance of the underlying putative claims against them. See, e.g., In re Lower Bucks Hosp., 488 B.R. 303, 315-16 (E.D. Pa. 2013) (finding "related to" subject matter jurisdiction where debtor was required to assume defense costs prior to any finding of liability).
The Court agrees with Debtors. As the Bankruptcy Court stated, "to find that the indemnification obligations do not have any conceivable effect on the debtors, I need to assume that Voya will be successful in its lawsuit or any lawsuit it might bring. And
Voya's remaining arguments concern the Bankruptcy Court's statutory authority to approve the Plan releases under the Bankruptcy Code. Courts that permit releases in appropriate circumstances often look to §§ 1129(a)(1),
168 B.R. at 935. However, the Master Mortgage factors, while helpful guideposts, are not controlling; also, they are not "an exclusive list of considerations, nor are they a list of conjunctive requirements," Id.; see also In re 710 Long Ridge Road Operating Co., II, LLC, 2014 WL 886433, at *14 (Bankr. D.N.J. Mar. 5, 2014) (holding Master Mortgage guideposts are "not considered requirements for the approval of third-party releases, but ... may be instructive to the court"); In re Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005) (deciding whether to grant third party release "is not a matter of factors and prongs"). As noted above, the Third Circuit's decision in Continental II, 203 F.3d at 214, sets forth the controlling standard for approval of non-consensual releases.
Nonetheless, Voya argues "the facts of this case" do not satisfy three of the five guideposts set forth Master Mortgage: (i) identity of interest; (ii) substantial contribution by the released party; and (iii) payment of "all, or substantially all" of the affected classes' claims. (See Civ. No. 16-110 D.I. 13 at 40-51) Debtors contend that even if the Master Mortgage guideposts were requirements in the Third Circuit (they are not), and even if all of the guideposts needed to be satisfied (they do not),
Voya argues that the Bankruptcy Court erred in finding an "identity of interest" between the defendants in the RICO/fraud action and the Debtors under the Master Mortgage factors. (See Civ. No. 16-110 D.I. 13 at 46-47) In the Court's view, the Bankruptcy Court correctly found that each of the Equity Holders, like the other released parties under the Plan, were covered by the Debtors' indemnification, advancement, and defense obligations. (See 12/11/15 Hr'g Tr. at 18) Thus, claims brought against the released parties may be viewed as suits against the Debtors, or at minimum as suits that threaten to deplete the Debtors' assets, which is sufficient here to establish identity of interest. See In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070, 1079-80 (11th Cir. 2015) (finding identity of interest between debtor and released parties, who were debtor's key employees, where debtor would deplete its assets defending released parties against litigation); see also In re MAC Panel Co., 2000 WL 33673757, at *11 (Bankr. M.D.N.C. Feb. 24, 2000) (finding identity of interest exists where releasees have potential indemnification claims against debtor).
Voya counters that the causes of action it asserts for fraud and willful misconduct are not indemnifiable. However, the Bankruptcy Court found that the Debtors are obligated to advance defense costs without regard to the type or substance of Voya's claims, See 12/11/15 Hr'g Tr. at 14-15; see also Nat'l Heritage Found. Inc. v. Behrmann, 2013 WL 1390822, at *5 n.9 (E.D. Va. Apr. 3, 2013) (recognizing identity of interest may arise out of advancement obligations). Moreover, Voya's position incorrectly presumes it will prevail on each of its speculative claims. (See 12/11/15 Hr'g Tr. at 14-15)
Voya argues the Bankruptcy Court erred in finding that the Equity Holders are making a "substantial contribution" to the reorganization under the Master Mortgage factors, (See Civ. No. 16-110-LPS D.I. 13 at 47-51) The Bankruptcy Court considered the uncontroverted record and found that the Released Parties, including the defendants to the RICO/fraud complaint, contributed substantial assets to the reorganization. (See 12/11/15 Hr'g Tr. at 19) (detailing contributions of defendants, including TA, MLH, Slattery, Appel, and related parties) On appeal, Voya questions the "quantum" of contributions by Slattery and Appel; characterizes the Equity Holders' contributions as payments but "not truly a contribution" or payment of "actual assets;" and insists the Equity Holders' agreement to forego valuable legal rights (e.g., to object to the plan or settlement) was merely a "forfeiture of their equity holding." (Civ. No. 16-110-LPS D.I. 13 at 47-50) However, as Debtors correctly argue, Voya waived its argument regarding the "quantum" of contributions by Slattery and Appel by failing to raise it below and failing to provide any evidentiary basis in support. The Bankruptcy Court's finding of substantial contribution by the Equity Holders was based on the uncontroverted record and testimony of five witnesses. Voya did not cross-examine those witnesses or submit competing evidence on this point. (12/11/15 Hr'g Tr. at 21) (noting record on substantial contributions was "unrebutted" and "unrefuted") Even had Voya properly raised this argument in the Bankruptcy Court, the record provides no
Voya challenges the Bankruptcy Court's findings regarding whether there is payment of "all, or substantially all," class 2 claims. (See Civ. No. 16-110-LPS D.I. 13 at 40) Voya asserts error in the Bankruptcy Court's holding that the pertinent inquiry is "whether [Voya] received reasonable [or fair] compensation in exchange for the release." (A2401) Debtors contend that the Plan provides for "all or substantially all" affected claims to be paid as it "provides for payments to all classes of claims in excess of the liquidation value of those claims." (See Civ. No. 16-110-LPS D.I. 24 at 51-52) (citing cases and explaining "factor five is met because the nonconsenting parties [received] more than they would in a liquidation"); see also In re Condustrial, Inc., 2011 WL 3290389, at *5-6 (Bankr. D.S.C. Aug. 1, 2011) (explaining impacted class would receive payment of "all or substantially all" as "the [p]lan provide[d] for the releasing parties to receive payment in an amount in excess of any funds they would receive from an orderly liquidation of the [d]ebtor").
Here, the Bankruptcy Court found, among other things, that payments and distributions to be made to class 2 creditors under the Plan dwarfed any recoveries for class 2 claims in a wipeout liquidation. (See 12/11/15 Hr'g Tr. at 25-26) Specifically, the Court found:
These findings were not clearly erroneous. The Master Mortgage factor is satisfied.
In sum, then, Voya's arguments provide no basis to disturb the Bankruptcy Court's conclusion that the Plan releases were necessary to the reorganization and fair.
For the reasons explained above, the Court affirms the Remand Opinion with respect to the Bankruptcy Court's constitutional authority to approve the Plan's releases, and grants the Motion to Dismiss all remaining issues on appeal as equitably moot. Alternatively, the Court affirms the Confirmation Order with respect to all remaining issues raised on appeal. A separate Order will be entered.
(B.D.I. 122 at 17) (emphasis added)
(B.D.I. 232, 12/18/15 Hr'g Tr. at 14:20-15:3)
Millennium, 575 B.R. at 264-265 (footnotes omitted).
