57 F.4th 494
5th Cir.2023Background
- Highland Capital, a hedge-fund-related manager, confirmed a Chapter 11 Plan that created a Claimant Trust, Reorganized Debtor, and Litigation Sub-Trust; the Plan required D&O insurance (or suitable alternative) as a condition precedent.
- After confirmation, Highland moved to create an Indemnity Sub-Trust funded by the Claimant Trust ($2.5M cash + $22.5M funding note) to secure indemnity obligations if other entities failed to pay claims.
- Dugaboy, NexPoint, and HCMFA (appellants) objected, arguing the Sub-Trust was a post-confirmation plan modification requiring solicitation under 11 U.S.C. §1127(b).
- The bankruptcy court approved the motion, finding the Sub-Trust fell within the Plan’s terms (reserves/indemnities) and was a valid exercise of business judgment; the district court affirmed but dismissed Dugaboy and HCMFA for lack of standing.
- On appeal to the Fifth Circuit, NexPoint retained standing (it held a claim that required Claimant Trust reserves); the Fifth Circuit dismissed the appeals of Dugaboy and HCMFA for lack of preservation and affirmed the district court’s judgment that the Order did not modify the Plan.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether creation of the Indemnity Sub-Trust was an impermissible post-confirmation plan modification under §1127(b) | The Sub-Trust altered parties’ rights/expectations by expanding indemnification, diverting up to $25M of trust assets, and going beyond a mere reserve | The Sub-Trust is a permissible implementation method of the Plan’s indemnification/reserve requirement and does not change rights, obligations, or expectations | Not a modification; Sub-Trust falls within Plan’s allowance to reserve or contribute funds for indemnification; affirmed |
| Whether the Plan contemplated creation of a separate trust (vs. a reserve) for indemnity | Plan authorized only a reserve and D&O insurance; a separate trust and trustee exceeded Plan scope | Plan left collateral/implementation details open; a Sub-Trust is one acceptable mechanism to satisfy the indemnity/reserve requirement | Creation of Sub-Trust is within the Plan’s contemplated mechanisms and does not alter bargained-for rights |
| Whether the Order expanded indemnification beneficiaries (e.g., Reorganized Debtor’s professionals/officers) and thereby harmed creditors | Order would obligate Claimant Trust to indemnify additional parties and reduce creditor recoveries | Plan already permitted the Claimant Trust to fund or contribute to the Reorganized Debtor (including for indemnification); no increased risk beyond Plan | No impermissible expansion; Plan permitted asset sharing and contributions; creditors’ recoveries not meaningfully altered |
| Appellants’ standing (HCMFA and Dugaboy) to pursue the appeal | Appellants appealed the district-court judgment affirming the Order | Highland argued equitable/constitutional mootness and lack of preservation of standing issues on appeal | HCMFA and Dugaboy lacked preserved appellate grounds; their appeals dismissed. NexPoint had prudential standing as a person aggrieved and proceeded |
Key Cases Cited
- NexPoint Advisors, L.P. v. Highland Cap. Mgmt. L.P., 48 F.4th 419 (5th Cir. 2022) (prior Fifth Circuit decision affirming the Plan except for limited exculpation)
- In re U.S. Brass Corp., 301 F.3d 296 (5th Cir. 2002) (post-confirmation modification test: whether action alters parties’ rights, obligations, or expectations under the plan)
- In re ASARCO, L.L.C., 650 F.3d 593 (5th Cir. 2011) (standard of appellate review for bankruptcy appeals)
- In re Dean, 18 F.4th 842 (5th Cir. 2021) (person-aggrieved prudential standing standard in bankruptcy appeals)
- Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009) (treatment of orders as final for purposes of appeals and related proceedings)
- Smith ex rel. McCombs v. H.D. Smith Wholesale Drug Co., 659 F.3d 503 (5th Cir. 2011) (preservation rules for issues on appeal from bankruptcy court)