Gating Issue: Highland Capital Decision Cabins the Scope of Gatekeeper Injunctions

The Supreme Court has turned down a request to reinstate a bankruptcy court “Gatekeeper” injunction that shielded non-debtor parties from litigation. This injunction had been rejected by the Fifth Circuit Court of Appeals. The decision, Highland Capital Management, L.P. v. Nexpoint Advisors, L.P., shows the limits of bankruptcy court jurisdiction to enter Gatekeeper injunctions as a means of protecting non-debtors from litigation risk.

The Plan Injunction and Gatekeeper Issues

Last year, in its Purdue Pharma decision, the Supreme Court struck down a plan of reorganization that contained non-consensual third-party releases (discussed in our prior alert) on the grounds that there is no express provision in the Bankruptcy Code that authorizes such releases. The text of the decision was limited to non-consensual third-party releases in plans, leaving open questions of how the principles underlying the decision might be applied to other similar provisions that have been commonly included in confirmed plans of reorganization but that have rarely been examined by appellate courts.

Prominent among such provisions are Gatekeeper injunctions, which are injunctions that require any post-confirmation litigation regarding specified issues or parties to be brought, at least in the first instance, before the bankruptcy court. Gatekeeper injunctions can be distinguished from third-party releases even though they can have a similar effect. The Highland Capital decision was the first instance of a circuit court of appeals reviewing Gatekeeper provisions in the context of the Purdue Pharma decision.

Background

Highland Capital arose from the 2019 bankruptcy filing of an investment firm. During the course of the chapter 11 case Highland Capital’s co-founder (James Dondero), who had been ousted from management post-petition due to pressure from creditors, engaged in protracted litigation against new management and the creditors committee. During the course of the litigation Dondero was sanctioned and held in civil contempt by the bankruptcy court, and he was unable to prevent confirmation of a plan of reorganization proposed by new management. The plan attempted to curb further litigation from Dondero through several related “Protection Provision” mechanisms: an “Exculpation Provision” that purported to extinguish causes of action related to the chapter 11 case or the plan process that could be brought against new management and affiliates, the committee or their respective professionals and advisors (Protected Parties); an “Injunction Provision” that enjoined Dondero and his affiliates (Enjoined Parties) from interfering with the plan; and a Gatekeeper provision that barred Enjoined Parties from bringing actions against Protected Parties in other courts without permission from the bankruptcy court.

Dondero appealed the confirmation order, arguing that the Protection Provisions were overbroad and exceeded bankruptcy court jurisdiction. The case reached the Fifth Circuit on appeal twice, first on an appeal from the confirmation order, and then again following a remand and new bankruptcy court decision.

The Fifth Circuit Decisions

The Fifth Circuit ruled that the Exculpation Provision was improper because it effectively provided non-consensual third-party releases to third parties not entitled to such releases under the Supreme Court’s Purdue Pharma decision and pre-Purdue Pharma Fifth Circuit law. It then determined that the Gatekeeper injunction suffered from the same flaws as the Exculpation Provision such that it had to be similarly narrowed.

The Fifth Circuit panel reasoned that the venerable Barton doctrine is an exception to the Purdue Pharma prohibition of third-party releases. The Barton doctrine can be traced back to a nineteenth century Supreme Court decision and holds that the bankruptcy court can assert exclusive jurisdiction over lawsuits against a trustee or other officials appointed by the court and in charge of administering the estate. However, it determined that the Highland Capital Exculpation Provision and Gatekeeper injunction went beyond what is permitted under Barton.

Supreme Court Review

The plan proponents asked the Supreme Court to reinstate the Protective Provision injunctions pending Supreme Court review. They argued that Highland Capital would suffer irreparable injury if the Gatekeeper injunction was not kept in place. Highland’s request was denied.

Conclusions

Many reorganization plans are effectively insulated from appellate review by application of the controversial doctrine of equitable mootness (discussed in our prior alert), under which appeals from confirmation orders may be dismissed if the appellant has not obtained a stay of consummation of the plan transactions. The Fifth Circuit rejected Highland Capital’s equitable mootness argument even though the plan had been consummated, reasoning that the issues were sufficiently important to override equitable mootness concerns.

The effect of the denial of the injunction on the parties to the Highland Capital case is unclear. The Highland Capital plan of reorganization has been confirmed and gone effective. It remains to be seen whether the demise of the expansive gatekeeper provision will lead to additional litigation, or what the effect of that litigation might be. It also remains to be seen whether Highland Capital will continue to seek Supreme Court review in the absence of a stay.

The scope of the Barton doctrine will likely be explored in future litigation. There is some variation among the circuits regarding which estate professionals can be protected by gatekeeper injunctions. Still, it does not appear that even the most expansive interpretation of Barton can replace the scope of injunctions used in mass tort cases before Purdue Pharma, in which protection was given not to estate professionals for acts taken post-petition but instead to other non-debtors for pre-petition exposure.

Consequently, the more significant consequence will likely be on future plans of reorganization in other cases. One can expect that plan proponents with cases in other circuits will seek to challenge the Highland Capital decisions in the hope of obtaining a different result or possibly Supreme Court review.