Highland Captl v. Highland Captl Mgmt

Case Type:
Case Status:
22-10189 (5th Circuit, Jan 11,2023) Published
The U.S. Court of Appeals for the Fifth Circuit (1) upheld a bankruptcy court's order permitting a Reorganized Debtor to create/fund an "Indemnity Sub-Trust," in lieu of acquiring D&O insurance as allowed in a confirmed plan, without complying with 11 U.S.C. § 1127(b) and (c) (governing post-confirmation plan modifications) and § 1125 (governing plan disclosure and solicitation), and (2) held two appellants failed to properly preserve their appeal from the district court's ruling that they lacked appellate standing.
Procedural context:
First, Appellants argued the bankruptcy court's order permitting the creation and funding of an "Indemnity Sub-Trust," which the Reorganized Debtor/Appellee requested to serve as a substitute for D&O insurance provided for in the confirmed plan, amounted to an impermissible plan modification in violation of 11 U.S.C. § 1127(b) and (c) because the Reorganized Debtor did not disclose the proposal to claimholders for solicitation of their acceptance or rejection under 11 U.S.C. § 1125. The Reorganized Debtor contended that it did not seek to modify the confirmed plan, and thus did not need to comply with § 1127(b) and (c) and § 1125, as the proposed Indemnity Sub-Trust constituted one of several permissible ways in which it could implement the plan. Second, the Reorganized Debtor argued that two Appellants failed to preserve their appeal to the Fifth Circuit. The district court had held these Appellants lacked appellate standing to appeal the order approving the Indemnity Sub-Trust. The Reorganized Debtor contended Appellants' statement of issues on appeal, filed under Fed. R. App. P. 6(b)(2)(B)(i), did not preserve the standing issue. Appellants averred their statement of issues on appeal did preserve the issue and, further, their briefs directly addressed appellate standing.
Highland Capital Management, L.P.'s confirmed chapter 11 plan allowed the Reorganized Debtor to obtain directors’ and officers’ insurance coverage. According to the Reorganized Debtor's CEO, however, it had difficulty post-confirmation procuring appropriate D&O coverage to secure the obligations of the Reorganized Debtor and trusts created via the plan. Accordingly, the Reorganized Debtor moved the U.S. Bankruptcy Court for the Northern District of Texas to approve an "Indemnity Sub-Trust," funded by the Reorganized Debtor and the plan trusts, to replace D&O insurance. A former founder/officer/director of the debtor, and three entities under his control, objected to the motion, contending the Reorganized Debtor's request constituted a proposed plan modification that required solicitation, voting, and confirmation under 11 U.S.C. § 1127(b). The bankruptcy court entered an order overruling the objection and granting the Reorganized Debtor's motion, finding the creation of the Indemnity Sub-Trust (a) complied with the plan and the organizing documents for the Reorganized Debtor and the plan trusts , and (b) was a valid exercise of business judgment under 11 U.S.C. § 363(b)(1). The objecting entities appealed to the district court, which (a) held that two of the objecting entities lacked prudential standing to appeal the bankruptcy court's order, and (b) on the merits as to the third objecting entity's appeal, found the order approving the Reorganized Debtor's motion did not modify the plan as "it did not alter the parties’ rights, obligations, and expectations under the Plan." The objecting entities timely appealed to the Fifth Circuit.
King, Stewart, and Haynes

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