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Fifth Circuit Weighs In on Scope of Releases and Exculpation
The scope of releases obtainable within a Chapter 11 plan remains a hot issue, as evidenced by high-profile cases such as the Boy Scouts and Mallinckrodt. A standard and noncontroversial form of release often found in a plan involves exculpation provisions that typically hold debtor personnel, committee members and their professionals harmless for actions taking in connection with the prosecution of the bankruptcy case itself. In an important recent U.S. Court of Appeals for the Fifth Circuit decision, the court explored whether exculpation provisions protecting more than just the debtor and committee are appropriate. In the same decision, the scope of equitable mootness was considered, and limited to allow the appeal of an order confirming a substantially consummated liquidating plan that was argued (and found) to contain overly broad exculpation relief. See, Highland Capital Management v. NexPoint Advisors, No. 21-10449 (5th Cir. Aug. 19, 2022).
In October 2019, Highland Capital Management (Highland Capital) filed Chapter 11 in Delaware. The case was later transferred, at the request of the Unsecured Creditors' Committee, to the U.S. Bankruptcy Court for the Northern District of Texas.
The bankruptcy case was remarkably litigious, due in no small part to the committee's successful attempt to remove Highland Capital's co-founder, James Dondero, from his positions as both an officer and director of Highland Capital. Subsequently, Dondero, acting individually and through various entities in which he held a controlling interest, objected throughout the case to almost every action taken by the committee, Highland Capital, and the independent directors approved by the court to control Highland Capital during the bankruptcy case.
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