Now Updating
In re: DANIELA M. FARINA

Summarizing by Amir Shachmurove

NexPoint v. Highland Capital Management

Adhering to the categorial prohibition of nondebtor third-party releases, the Fifth Circuit now allows a workaround to protect principal participants in chapter 11 cases.

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Case Type:
Business
Case Status:
Affirmed in part and Reversed in part
Citation:
21-10449 (5th Circuit, Aug 19,2022) Published
Tag(s):
Ruling:
The Fifth Circuit declined to invoke equitable mootness, as its review would not "affect the rights of parties not before the Court or the success of the plan." The Court then rejected the Appellants' absolute priority arguments, as the junior classes in question would not receive their property interests ahead of the senior class first receiving payment in full. While the Court substantially narrowed the scope of the debtor's exculpations to the debtor, court-appointed independent directors, and the committee and its members, the Court did allow the "gatekeeping" injunction to stand.
Procedural context:
Former management timely appealed the confirmation order, objecting to the Plan’s legality and some of the bankruptcy court’s factual findings. Together with Highland Capital, Appellants moved to directly appeal the confirmation order to the Fifth Circuit, which the bankruptcy court granted. A motions panel certified and consolidated the direct appeals. Both the bankruptcy court and the motions panel declined to stay the Plan’s confirmation pending appeal. Given the Plan’s substantial consummation since its confirmation, Highland Capital moved to dismiss the appeal as equitably moot, a motion the panel ordered carried with the case.
Facts:
Highland Capital filed Chapter 11 in October 2019 in the wake of numerous large judgments. The case devolved into a litigation morass regarding its governance. Dealing with former management that operated through a "culture of litigation," controlled by a "serial litigator”, the Bankruptcy Court oversaw a corporate governance settlement in which former management was displaced by a court-appointed, independent board. After numerous unavailing attempts at plan confirmation by former management, the independent board and creditors' committee reached agreement on a mediated Plan. A significant concern of the Plan proponents was protecting the reorganized debtor, trusts, fiduciaries, and professionals from continued, vexatious litigation with Highlands' former management. To accomplish this, the Plan proponents shielded numerous parties with a broad exculpation provision, which was enforced by an injunction and a gatekeeper provision providing the bankruptcy court with the responsibility to screen any claim against the parties. The bankruptcy court confirmed the Plan over former management's objections, and the Plan took effect on August 11, 2022.
Judge(s):
Before Weiner, Graves, and Duncan, Circuit Judges. Stuart Kyle Duncan, Circuit Judge, authored the opinion.

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