In Highland Capital, the Fifth Circuit wrote one of the decade’s more important bankruptcy opinions.
While continuing to disdain nondebtor releases, the New Orleans-based appeals court will permit chapter 11 plans to contain gatekeeping provisions that allow the bankruptcy court to decide whether someone may sue participants in the bankruptcy case. See NexPoint Advisors L.P. v. Highland Capital Management, 48 F.4th 419 (5th Cir. 2022), petitions for cert. filed, Nos. 22-631 and 22-669 (Sup. Ct. Jan. 5 and 16, 2023). To read ABI’s report, click here.
Interpreting the Fifth Circuit’s opinion on remand, Chief Bankruptcy Judge Stacey G. C. Jernigan of Dallas decided that gatekeeping can protect more than the limited number of parties who are properly covered by exculpations in the Fifth Circuit. Indeed, gatekeeping can protect parties who didn’t even exist during the bankruptcy.
The Genesis of the Gatekeeping Provisions
The chapter 11 reorganization case before Judge Jernigan was litigious. The Fifth Circuit’s opinion said that the former chief executive “and other creditors began to frustrate the proceedings by objecting to settlements, appealing orders, seeking writs of mandamus, interfering with [the debtor’s] management, threatening employees, and canceling trades between [the debtor] and its clients.” Id. at 426.
The appeals court went on to quote one of the debtor’s independent directors, who said that the former CEO wanted to “burn the place down.” Id.
Anticipating that the ousted corporate officers would file suits outside of the bankruptcy court after confirmation, the chapter 11 plan contained both exculpations alongside gatekeeping.
On appeal, the Fifth Circuit ruled that the exculpations were broader than the circuit’s precedent permits.
The appeals court struck provisions in the plan providing exculpations for anyone other than the debtor, the creditors’ committee and its members for conduct within the scope of their duties, and the independent directors. In other words, the Fifth Circuit excised exculpations in favor of the debtor’s employees, the new CEO, the general partner, the trust created by the plan, the professionals for the debtor and the committee, the plan’s oversight board and “related persons.”
However, the Fifth Circuit said that “the injunction and gatekeeping provisions are sound” and that “[c]ourts have long recognized bankruptcy courts can perform a gatekeeping function.” Id. at 435, 439. The appeals court went on to “reverse only insofar as the plan exculpates certain non-debtors in violation of 11 U.S.C. § 524(e), [by] strik[ing] those few parties from the plan’s exculpation, and affirm[ing] on all remaining grounds.”
The objectors filed a motion for rehearing, asking the Fifth Circuit to say that gatekeeping may only cover parties protected by exculpations. The appeals court did not accept the objector’s invitation to limit the scope of gatekeeping, modified one sentence in the opinion and later denied a motion to stay issuance of the mandate.
The objectors filed a petition for certiorari to the Supreme Court. The debtor filed its own certiorari petition, hoping the Court will resolve the circuit split on the permissibility of nondebtor releases. No one has sought a stay pending appeal.
On Remand in Bankruptcy Court
Back before Judge Jernigan on remand, the debtor moved to modify the plan in one respect only, to define exculpated parties to be those specified by the Fifth Circuit. As they had done in the Fifth Circuit, the objectors wanted Judge Jernigan to limit gatekeeping protection to only properly exculpated parties.
In her opinion on February 27, Judge Jernigan modified the plan only by limiting the number of exculpated parties, as the debtor sought. She held “that the only thing that needs to be done in response to the Final Fifth Circuit Opinion and mandate is to change the defined term for ‘Exculpated Parties.’” Aside from the exculpations, she said that the “Fifth Circuit did not modify the Gatekeeper Provision or its applicable definition of ‘Protected Parties’ in any way.”
Citing the Fifth Circuit several times for saying that the gatekeeping provisions were “sound,” Judge Jernigan modified the plan only by defining the exculpated parties to be those specified by the Fifth Circuit. In other words, the gatekeeping provision protects a larger universe of parties, even some that may not yet exist.
In Highland Capital, the Fifth Circuit wrote one of the decade’s more important bankruptcy opinions.
While continuing to disdain nondebtor releases, the New Orleans-based appeals court will permit chapter 11 plans to contain gatekeeping provisions that allow the bankruptcy court to decide whether someone may sue participants in the bankruptcy case. See NexPoint Advisors L.P. v. Highland Capital Management, 48 F.4th 419 (5th Cir. 2022), petitions for cert. filed, Nos. 22-631 and 22-669 (Sup. Ct. Jan. 5 and 16, 2023).
Interpreting the Fifth Circuit’s opinion on remand, Chief Bankruptcy Judge Stacey G. C. Jernigan of Dallas decided that gatekeeping can protect more than the limited number of parties who are properly covered by exculpations in the Fifth Circuit. Indeed, gatekeeping can protect parties who didn’t even exist during the bankruptcy.