In an appeal from an order of confirmation in a different case, District Judge Lee H. Rosenthal of Houston pointed out a significant feature regarding the Fifth Circuit’s opinion in NexPoint Advisors L.P. v. Highland Capital Management, 48 F.4th 419 (5th Cir. 2022), petition for cert. filed, No. 22-631 (Sup. Ct. Jan. 5, 2023): A nonseverability clause in a chapter 11 plan won’t permit a confirmation appeal from being equitably moot when the appellant is challenging overbroad exculpations.
Highland Capital had two noteworthy holdings: (1) Although the Fifth Circuit categorically bars nondebtor releases, the appeals court held that a chapter 11 plan may give the bankruptcy court a gating function to approve or disapprove the commencement of lawsuits against those who would be protected by exculpations in other circuits; and (2) overbroad exculpations and nondebtor releases don’t escape appellate review under the doctrine of equitable mootness. To read ABI’s report, click here.
The case before Judge Rosenthal was an appeal from a chapter 11 order of confirmation handed down before Highland Capital was decided. The plan included exculpations beyond those permitted by the Fifth Circuit. In Highland Capital, the appeals court allowed exculpations only for the debtor, the creditors’ committee and its members for conduct within the scope of their duties, and trustees or the equivalent.
The debtor’s former chief executive objected to the overbreadth of the exculpations in the appeal before Judge Rosenthal but was overruled when the bankruptcy court confirmed the plan. The former CEO appealed but did not seek a stay pending appeal. The plan was consummated.
Judge Rosenthal put the appeal on hold until the Fifth Circuit decided Highland Capital.
The Highland Capital decision showed that the exculpations in the appeal before Judge Rosenthal were too broad in the Fifth Circuit.
The debtor insisted that the appeal was nevertheless equitably moot given a comprehensive nonseverability clause in the plan. The plan said that the releases and exculpations were “mutually dependent and non-severable” from all of the other terms of the plan.
The former CEO cited both Highland Capital and its predecessor, In re Pacific Lumber, 584 F.3d 229 (5th Cir. 2009), for the proposition that equitable mootness does not preclude the review of third-party releases.
The debtor argued that Highland Capital was distinguishable, saying that the Fifth Circuit did not note the presence of a nonseverability provision.
Judge Rosenthal resolved the question by pulling up court records from PACER. She discovered that “the publicly available record in Highland reveals that the plan confirmed in that case also contained a non-severability clause.”
“The existence of a similar non-severability provision in the Highland record removes that basis for distinguishing the present case,” Judge Rosenthal said.
Addressing the merits in less than one page, Judge Rosenthal reversed the confirmation order and remanded with directions for the bankruptcy court to include exculpations no broader than those permitted by Highland Capital.
In an appeal from an order of confirmation in a different case, District Judge Lee H. Rosenthal of Houston pointed out a significant feature regarding the Fifth Circuit’s opinion in NexPoint Advisors L.P. v. Highland Capital Management, 48 F.4th 419 (5th Cir. 2022), petition for cert. filed, No. 22-631 (Sup. Ct. Jan. 5, 2023): A nonseverability clause in a chapter 11 plan won’t permit a confirmation appeal from being equitably moot when the appellant is challenging overbroad exculpations.
Highland Capital had two noteworthy holdings: (1) Although the Fifth Circuit categorically bars nondebtor releases, the appeals court held that a chapter 11 plan may give the bankruptcy court a gating function to approve or disapprove the commencement of lawsuits against those who would be protected by exculpations in other circuits; and (2) overbroad exculpations and nondebtor releases don’t escape appellate review under the doctrine of equitable mootness