In Highland Capital, the Fifth Circuit continues making law. Last year in 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), the New Orleans-based appeals court elevated the bankruptcy court to the role of “gatekeeper” with power to bar meritless post-confirmation lawsuits.
Now, the Fifth Circuit tells us that an equity holder, wiped out on confirmation of a chapter 11 plan, lacks standing to appeal actions taken in bankruptcy court. Furthermore, the “mere possibility of harm” doesn’t confer appellate standing.
And just days ago, we reported how the bankruptcy court interpreted last year’s decision to mean that gatekeeping can protect parties not entitled to exculpation in the Fifth Circuit. In re Highland Capital Management LP, 19-34054 (Bankr. N.D. Tex. Feb. 27, 2023). To read ABI’s reports, click here and here.
The Facts Regarding Appellate Jurisdiction
The chapter 11 debtor’s litigious former chief executive used a family trust to mount many of his objections in bankruptcy court. When the debtor filed a reorganization plan, the family trust raised an objection, contending that the debtor had failed to comply with Bankruptcy Rule 2015.3, which requires the filing of “periodic financial reports of the value, operations, and profitability of each [nonpublic] entity . . . in which the estate holds a substantial or controlling interest.”
The bankruptcy court confirmed the plan anyway, extinguishing the family trust’s limited partnership interest that amounted to less than two-tenths of one percent. Two months after confirmation, the family trust filed a new motion to compel compliance with the rule. Before the bankruptcy court could rule on the motion, the plan was consummated, and the bankruptcy court denied the motion as moot.
The family trust appealed, but the district court dismissed the appeal for lack of standing to appeal. The trust appealed again, with the same result: The Fifth Circuit dismissed the appeal for lack of appellate standing.
Rules on Appellate Standing
For standing to appeal an order from the bankruptcy court, the Fifth Circuit’s nonprecedential, per curiam opinion recited the “person aggrieved test,” which is a higher standard than constitutional standing, which requires only a case or controversy.
To ensure that only those with a direct, financial interest can appeal, the person aggrieved test demands that the appellant be directly and adversely affected in a pecuniary sense by the order on appeal.
The family trust claimed to have standing under Rule 2015.3, based on the notion that the rule would help creditors understand whether they might have claims against nondebtor affiliates. To that, the Fifth Circuit said, “The mere possibility of harm, however, does not satisfy the person aggrieved standard.”
The appeals court said that the family trust, whose economic interest in the debtor had been extinguished on consummation of the plan, “cannot . . . point to any direct pecuniary harm.”
Affirming the district court, the circuit court dismissed the appeal for lack of standing.
In Highland Capital, the Fifth Circuit continues making law. Last year in 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), the New Orleans-based appeals court elevated the bankruptcy court to the role of “gatekeeper” with power to bar meritless post-confirmation lawsuits.
Now, the Fifth Circuit tells us that an equity holder, wiped out on confirmation of a chapter 11 plan, lacks standing to appeal actions taken in bankruptcy court. Furthermore, the “mere possibility of harm” doesn’t confer appellate standing.
And just days ago, we reported how the bankruptcy court interpreted last year’s decision to mean that gatekeeping can protect parties not entitled to exculpation in the Fifth Circuit. In re Highland Capital Management LP, 19-34054 (Bankr. N.D. Tex. Feb. 27, 2023).