The Fifth Circuit reaffirmed the power of courts to issue so-called gatekeeping orders in a nonprecedential opinion on April 25. The bankruptcy court had entered a gatekeeping order in lieu of imposing sanctions for violating the automatic stay.

The debtor was a corporate medical practice being liquidated in chapter 7. The owner of the business had been taking the position that accounts receivable were his individual property, not property of the chapter 7 estate. He lost the argument, including two appeals to the Fifth Circuit.

Undeterred, the owner filed an adversary proceeding in bankruptcy court alleging that settlements made by the trustee with account debtors were fraudulent transfers. The owner contended that the settlements were “gifts” by the estate for lack of adequate consideration.

Naturally, the trustee moved to dismiss and won. The bankruptcy court did not sanction the owner for violating the automatic stay. Instead, the bankruptcy court entered a gatekeeping order requiring the owner to obtain court approval before suing anyone involved in the bankruptcy case. The district court affirmed.

On a second appeal, the Fifth Circuit panel quickly dispensed with the merits by saying that dismissal was proper because the owner was judicially estopped from claiming ownership of the accounts receivable.

Next, the circuit panel dealt with the owner’s contention that the gatekeeping order was an “extreme measure” of punishment and should have been sought by filing a separate adversary proceeding. The arguments were “meritless,” the panel said.

As the foundation for the gatekeeping order, the panel said,

The [Bankruptcy] Code grants bankruptcy courts significant discretionary power to manage their docket[s]. See 11 U.S.C. § 105 (giving bankruptcy courts the authority to “issue any order, process, or judgment that is necessary or appropriate to carry out” the Code’s provisions). And in exercising such authority, it is well established that “bankruptcy courts can perform a gatekeeping function.” In re Highland Cap. Mgmt., L.P., 48 F.4th 419, 439 (5th Cir. 2022).

To read ABI’s report on Highland Capital Management, click here.

The circuit panel ended the opinion by saying when gatekeeping orders are appropriate:

Considering that [the owner] continues to file procedurally improper and frivolous filings, the gatekeeping order here is an appropriate exercise of the bankruptcy court’s inherent power to interpret and enforce its orders. See 11 U.S.C. § 105.

The panel made the point that a gatekeeping order is not a permanent injunction. Rather, “it simply requires [the owner] to seek leave before bringing claims against the trustee, trustee’s counsel, and other named parties.”