A Delaware federal judge has ruled that bankruptcy courts have the constitutional authority to grant third-party liability releases in confirming restructuring plans without creditor consent.

The ruling from U.S. Chief Judge Leonard P. Stark of the District of Delaware upheld a Delaware bankruptcy judge's decision to grant the releases in lab testing firm Millennium Lab Holdings II's Chapter 11 proceedings, and rejected the argument that the move was unconstitutional under U.S. Supreme Court precedent.

In a 42-page opinion Sept. 21, Stark said that the decision by U.S. Bankruptcy Judge Laurie Selber Silverstein of the District of Delaware was “comprehensive and well-reasoned” in light of the Supreme Court's 2011 holding in Stern v. Marshall, which held that bankruptcy courts, as non-Article III tribunals, lack the authority under the Constitution to issue a final, binding decision on a claim based exclusively on a right assured by state law.

Stark said that Stern did not apply to the claims raised by the lender group, Voya, which had funded a $106.3 million loan as a part of a larger $1.8 billion senior secured credit facility to maintain Millennium as a going concern.

Voya had objected to the restructuring plan's inclusion of releases for claims that it might assert against the non-debtor equity holders. Voya, in an effort to solidify its claims, filed a complaint in the U.S. District Court for the District of Delaware for Racketeer Influenced and Corrupt Organization Act and common-law fraud, in a case that was stayed pending the outcome of its appeal.

Voya argued that the bankruptcy court lacked subject matter jurisdiction to approve the nonconsensual releases, which it said would impact direct claims outside of bankruptcy and beyond the court's purview.

Silverstein rejected the argument last year, in a ruling that teed up Voya's appeal to the district court. In the opinion, Silverstein said that “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 bankruptcy and district courts.”

Stark on Sept. 21 endorsed Silverstein's reasoning, saying that Stern was limited to claims based on state law that are brought in the context of traditional civil litigation. Meanwhile, it was a core function of the bankruptcy court, he said, to approve the restructuring plan, and that Silverstein had the statutory authority from Congress to do so.

Both of those findings, Stark ruled, had avoided any concerns under the Supreme Court's “narrow” holding in Stern.

John C. O'Quinn, a partner in Kirkland & Ellis' Washington, D.C., office, argued the appeal on behalf of a former equity holder in Millennium that had supported the reorganization plan. In an interview, O'Quinn said the ruling was a “clear and important” decision that clarifies Stern's scope in the context of bankruptcy proceedings.

“It supports the notion that Stern does not call into question things that the bankruptcy courts are confronted with on a regular basis,” O'Quinn said.

An attorney for Voya was not available Monday afternoon to comment.

Voya was represented by Sheila A. Sadighi, Thomas E. Redburn Jr. and Michael S. Etkin of Lowenstein Sandler and Christopher M. Samis and Katherine Good of Whiteford Taylor Preston.

The case is captioned In re Millennium Lab Holdings II.