Fifth Circuit Reigns in Bankruptcy Court Gatekeeping in Chapter 11 Plans
Provisions in chapter 11 plans releasing non-debtors from liability for pre-bankruptcy conduct in exchange for funding for plan distributions or post-confirmation operations have long been used as a means to facilitate confirmation of plans, even after the U.S. Supreme Court ruled in 2024 in the Purdue Pharma chapter 11 cases that the Bankruptcy Code does not permit nonconsensual, third-party releases under chapter 11 plans that do not pay creditors in full. The Supreme Court's ruling, however, was limited to releases. This left open the possibility that chapter 11 plan "exculpation" clauses limiting the liability of certain non-debtor entities for actions taken in connection with a bankruptcy case may, or "gatekeeping" provisions requiring court approval before suing designated non-debtors may still be permissible.
In the wake of Purdue, the U.S. Court of Appeals for the Fifth Circuit reexamined the validity of chapter 11 plan exculpation and gatekeeping provisions in Matter of Highland Cap. Mgmt., L.P., 132 F.4th 353 (5th Cir. 2025), stayed pending petition for cert., 2025 WL 1522875 (May 29, 2025), cert. denied and stay vacated, 2025 WL 1621149 (U.S. June 9, 2025) ("Highland II"). A three-judge panel of the Fifth Circuit reversed a district court's order confirming a chapter 11 plan, ruling that the district court failed to narrow the definition of "protected parties" in an exculpation clause of an investment company's plan, which was initially approved in 2021, despite the Fifth Circuit's 2022 decision directing it to do so. According to the Fifth Circuit panel, although bankruptcy injunctions in the form of exculpation provisions are not identical to plan releases, they cannot be used to shield from liability non-debtors that are not legally entitled to releases. In addition, the Fifth Circuit emphasized that gatekeeping "is patently beyond the power of an Article I court under §105 [of the Bankruptcy Code]" if it protects anyone other than the debtor, independent directors, the creditors' committee, and committee members.
Validity of Third-Party Releases, Exculpation Clauses, and Gatekeeping Provisions
Section 524(e) of the Bankruptcy Code provides that, "[e]xcept as provided in subsection (a)(3) of this section [making the discharge injunction applicable to actions to collect against community property], discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." Even so, chapter 11 plans confirmed by bankruptcy courts in certain circuits commonly included provisions that either release or exculpate various non-debtors from certain liabilities.
Chapter 11 plan releases have provided for the relinquishment of both prepetition and postpetition claims belonging to the debtor or non-debtor third parties (e.g., creditors or shareholders) against various non-debtors.
Although it is generally accepted that a chapter 11 plan can release non-debtors from claims of other non-debtors if the release is consensual, the U.S. Supreme Court, in Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., 603 U.S. 204 (2024) ("Purdue"), threw a wrench into the chapter 11 gears when it ruled that no provision in the Bankruptcy Code other than section 524(g) (providing for the creation of a trust for the payment of asbestos personal injury claims) authorizes a chapter 11 plan to release the claims of nonconsenting creditors against non-debtor entities absent full satisfaction of such claims.
In so ruling, the majority reasoned that:
The "catchall" provision in section 1123(b)(6) of the Bankruptcy Code stating that a chapter 11 plan "may" also "include any other appropriate provision not inconsistent with the applicable provisions of this title" must be construed narrowly in light of its surrounding context and read to "embrace only objects similar in nature" to the specific examples preceding it, all of which deal with the relationship between a debtors and its creditors, rather than the "radically different" power to discharge the debts of a non-debtor without the consent of affected creditors;
The proponents of a chapter 11 plan cannot evade the Bankruptcy Code's general limitation that a discharge applies only to debtors who place "substantially all of their assets on the table" and its exclusion from discharge of debts based on "fraud" or those alleging "willful and malicious injury" simply "by rebranding the discharge a 'release'"; and
If lawmakers had intended "to reshape traditional practice so profoundly" in the Bankruptcy Code, compared to its predecessor statutes, by "extending to courts the capacious new power the plan proponents claim, one might have expected them to say so expressly somewhere" in the Bankruptcy Code itself.
The majority emphasized that nothing in its ruling should be construed to call into question consensual releases in a bankruptcy reorganization plan, and further declined to express a view on what qualifies as a consensual release, observing that those sorts of releases pose different questions and may rest on different legal grounds. Similarly the majority declined to pass upon a plan that provides for full satisfaction of claims against a non-debtor. The majority also expressly cabined its ruling to the situation before it, noting that "we hold only that the [B]ankruptcy [C]ode does not authorization a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants." Id. at 206.
Purdue, however, did not address the validity of chapter 11 plan exculpation or gatekeeping provisions, which similarly release, enjoin, or condition the prosecution of certain claims against non-debtors.
Exculpation clauses typically specify the scope of, or the standard of care (e.g., ordinary negligence, gross negligence, or willful misconduct) governing, an exculpated party's liability for conduct during the course of the bankruptcy case. See In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 721 (Bankr. S.D.N.Y. 2019) (noting that "an appropriate exculpation provision should say that it bars claims against the exculpated parties based on the negotiation, execution, and implementation of agreements and transactions that were approved by the Court"); In re Murray Metallurgical Coal Holdings, LLC, 623 B.R. 444, 501 (Bankr. S.D. Ohio 2021); see also Blixseth v. Credit Suisse, 961 F.3d 1074, 1084 (9th Cir. 2020) (distinguishing releases and exculpation clauses), cert. denied, 141 S.Ct. 1394 (2021).
Such provisions commonly insulate estate fiduciaries, including officers, directors, and employees of the debtors and the reorganized debtors, as well as advisers and professionals retained by the estate, official committees, and their members from most claims arising from their official conduct during the chapter 11 case. See, e.g., In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir. 2000); In re LATAM Airlines Grp. S.A., 2022 WL 2206829, at *50 (Bankr. S.D.N.Y. June 18, 2022); In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 720 (Bankr. S.D.N.Y. 2019)).
A gatekeeping provision in a chapter 11 plan is an injunction barring litigation against critical plan participants without the bankruptcy court's approval after the court determines that the proposed litigants have a "colorable claim" that the bankruptcy court or some other court with jurisdiction can adjudicate. Such provisions are an outgrowth of the "Barton doctrine." Named for the decision in Barton v. Barbour, 104 U.S. 126 (1881), the Barton doctrine requires that "leave of the appointing forum must be obtained by any party wishing to institute an action in a non-appointing forum against a trustee for the acts done in the trustee's official capacity and within the trustee's authority as an officer of the court." ACE Insurance Co., Ltd. v. Smith (In re BCE West, L.P.), 2006 WL 8422206, *2 (D. Ariz. Sept. 20, 2006) (quoting In re DeLorean Motor Co., 991 F.2d 1236, 1240 (6th Cir. 1993)); accord Villegas v. Schmidt, 788 F.3d 156, 159 (5th Cir. 2015) (under the Barton doctrine, the bankruptcy court may require a party to "obtain leave of the bankruptcy court before initiating an action in district court when the action is against the trustee or other bankruptcy-court-appointed officer, for acts done in the actor's official capacity"); In re Christensen, 598 B.R. 658, 665 (Bankr. D. Utah 2019) ("Barton is strictly a 'jurisdictional gatekeeping doctrine," and it strips all courts—except the bankruptcy court that appointed the trustee—of subject-matter jurisdiction to hear a lawsuit against the trustee unless the appointing court gives its permission to sue the trustee elsewhere.") (footnotes and citations omitted).
Some courts have broadened the scope of the Barton doctrine to include a variety of court-appointed fiduciaries and their agents. See Lawrence v. Goldberg, 573 F.3d 1265, 1270 (11th Cir. 2009) (applying the Barton doctrine to the trustee's lawyers and creditors who "functioned as the equivalent of court appointed officers"); In re Cir. City Stores, Inc., 557 B.R. 443, 447 (Bankr. E.D. Va. 2016) (observing that the Barton doctrine has long applied to other types of court-appointed parties in bankruptcy, including liquidating trusts, trustees, and counsel for trustees, with the purpose being to "prevent trustees from being subject to legal proceedings that interfere with their ability to administer the estate"); see generally Collier on Bankruptcy ¶ 10.01 (16th ed. 2025) (citing and discussing cases). However, the Fifth Circuit has never adopted this approach.
The Fifth Circuit addressed the validity of exculpation and gatekeeping provisions in Highland II.
Highland II
Highland Capital Management, L.P. (the "debtor") is a Texas-based investment firm cofounded by James Dondero ("Dondero"). Facing myriad unpaid judgments and liabilities arising from its management of publicly traded investment portfolios, the debtor filed for chapter 11 protection in October 2019 in the Northern District of Texas. After the bankruptcy filing, the debtor's unsecured creditors' committee (the "committee") negotiated an agreement whereby Dondero would resign as an officer and director to serve instead as an "unpaid portfolio manager," and the committee would select a board of three independent directors to govern the debtor.
Even though Dondero was no longer on the debtor's board, he proposed several chapter 11 plans (opposed by the committee and the new board), interfered with client relations, and generally disrupted the chapter 11 case. As a consequence, in 2020, the committee forced him to resign from his portfolio management role. The bankruptcy court later held Dondero in civil contempt for his behavior.
Anticipating that Dondero would continue to disrupt the debtor's reorganization, the committee and the debtor's board proposed a chapter 11 plan that included exculpation and injunction provisions designed to shield the debtor and related entities from certain liabilities.
The plan's exculpation provision permanently barred any claims against a group of "Exculpated Parties" for any conduct related to.
the filing and administration of the Chapter 11 Case; (ii) the negotiation and pursuit of the Disclosure Statement, the Plan, or the solicitation of votes for, or confirmation of, the Plan; (iii) the funding or consummation of the Plan (including the Plan Supplement) or any related agreements, instruments, or other documents, the solicitation of votes on the Plan, the offer, issuance, and Plan Distribution of any securities issued or to be issued pursuant to the Plan, including the Claimant Trust Interests, whether or not such Plan Distributions occur following the Effective Date; (iv) the implementation of the Plan; and (v) any negotiations, transactions, and documentation in connection with the foregoing clauses (i)-(iv).
The exculpation did not extend to actions by the debtor's general partner or employees predating the appointment of the new board, and it excluded liabilities arising from "acts or omissions that constitute bad faith, fraud, gross negligence, criminal misconduct, or willful misconduct."
"Exculpated Parties" included the debtor and its successor and assigns, employees, the debtor's general partner, the independent directors, the committee, committee members acting in their official capacity, professionals retained by the debtor and the committee during the chapter 11 case, and various "related parties."
The plan's injunction provision barred "Enjoined Parties" from "taking any actions to interfere with the implementation or consummation of the Plan." It also prohibited Enjoined Parties from suing, enforcing orders, or asserting rights of setoff to recover from the debtor or its property. In addition, the injunction provision include the following gatekeeping clause with respect to "Protected Parties":
[N]o Enjoined Party may commence or pursue a claim or cause of action of any kind against any Protected Party that arose or arises from or is related to the Chapter 11 Case, the negotiation of the Plan, the administration of the Plan or property to be distributed under the Plan, the wind down of the business of the Debtor or Reorganized Debtor, the administration of the Claimant Trust or the Litigation Sub-Trust, or the transactions in furtherance of the foregoing without the Bankruptcy Court (i) first determining, after notice and a hearing, that such claim or cause of action represents a colorable claim of any kind, including, but not limited to, negligence, bad faith, criminal misconduct, willful misconduct, fraud, or gross negligence against a Protected Party and (ii) specifically authorizing such Enjoined Party to bring such claim or cause of action against any such Protected Party[.]
The debtor's plan defined the "Protected Parties" as the debtor and its successors and assigns, including the reorganized debtor, direct and indirect majority-owned subsidiaries, funds managed by the debtor, employees, the independent directors, the committee, committee members acting in their official capacity, trusts established under the plan to pay creditor claims as well as their trustees, the members of a trust oversight committee acting in their official capacities, professionals retained by the debtor and the committee, and various other related entities.
The plan defined "Enjoined Parties" as all entities holding claims against or equity interests in the debtor, whether or not the entity filed a claim or voted on the plan; Dondero; any entity that appeared or filed a pleading in the bankruptcy case; and specified related entities.
Dondero and several other parties, including two entities owned or controlled by Dondero—NexPoint Asset Management, L.P. and NexPoint Advisors, L.P. (collectively, "NexPoint")—objected to the plan. The Office of the U.S. Trustee (the "UST," and together with Dondero and NexPoint, the "appellants") also objected to the plan's exculpation provision, arguing that it was an impermissible nonconsensual third-party release.
The bankruptcy court confirmed the debtor's chapter 11 plan over the objections.
On direct appeal, the Fifth Circuit reversed the plan confirmation order, but only to the extent that it exculpated certain non-debtors in violation of section 524(a), and remanded the case below. See NexPoint Advisors L.P. v. Highland Capital Mgmt., 48 F.4th 419 (5th Cir. 2022) ("Highland I"), cert. denied, 144 S. Ct. 2714 (2024), and cert. denied, 144 S. Ct. 2715 (2024), on remand, 2023 WL 2250145 (Bankr. N.D. Tex. Feb. 27, 2023). Among other things, the court of appeals held that, although the Fifth Circuit categorically bars non-debtor releases, a chapter 11 plan may give the bankruptcy court a gatekeeper function to approve or disapprove litigation against entities that would be protected by exculpations in other circuits.
The Fifth Circuit rejected the argument that exculpations could be authorized under sections 105(a), which provides that a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]," and 1123(b)(6) of the Bankruptcy Code (described above). According to the court, "in this circuit, § 105(a) provides no statutory basis for a nondebtor exculpation … [a]nd the same logic extends to § 1123(b)(6)." Id. at 437. The Fifth Circuit acknowledged the circuit split as to whether third parties may be exculpated, but emphasized that "[the Fifth Circuit] along with the Tenth Circuit hold § 524(e) categorically bars third-party exculpations absent express authority in another provision of the Bankruptcy Code."
The Fifth Circuit then ruled that the exculpation provision before it could extend only to the debtor and related entities, the unsecured creditors' committee and its members, and the debtor's independent directors "for conduct within the scope of their duties." Id. at 438. The court reiterated that conclusion on rehearing, clarifying that the gatekeeper clause in the plan's injunction provision was not fully lawful because it was overly broad.
On remand, the bankruptcy court granted the debtor's motion to alter the exculpation provision in its chapter 11 plan in accordance with the Fifth Circuit's decision in Highland I by limiting the scope of the provision to the debtor, the independent directors, the committee, and committee members. In doing so, it overruled the appellants' objection to the motion on the basis that the changes to the plan in the definition of "Exculpated Parties" should also be made to the definition of "Protected Parties" in the gatekeeper clause.
The Fifth Circuit granted the appellants' motion for a direct appeal of the bankruptcy court's remand order.
The Fifth Circuit's Ruling
A three-judge panel of the Fifth Circuit held that the bankruptcy court failed on remand to implement its ruling in Highland I properly.
Writing for the panel, Chief U.S. Circuit Court Judge Jennifer Walker Elrod explained that, by failing to make a conforming change in the definition of "Protected Parties," "the bankruptcy court exceeded its power under the Bankruptcy Code by allowing the Plan to improperly protect non-debtors from liability." Highland II, 132 F.4th at 358.
The Fifth Circuit reiterated its previous pronouncement that section 105(a) of the Bankruptcy Code does not give a bankruptcy court unlimited ability to deploy its equitable powers, but is limited to actions consistent with other provision in the Bankruptcy Code. In this case, Judge Elrod emphasized, bankruptcy injunctions that, like releases, similarly act to protect non-debtors, clearly violate section 524(e), the Supreme court's ruling in Purdue, and Fifth Circuit precedent. Id. at 358–59 (citing Purdue, 603 U.S. at 227; Bank of N.Y. Trust Co. v. Official Unsecured Creditors' Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 252 (5th Cir. 2009) ("Pacific Lumber"); In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1059, 1061–62 (5th Cir. 2012); In re Zale Corp., 62 F.3d 746 (5th Cir. 1995)).
Next, the Fifth Circuit panel explained that, although bankruptcy courts have some power to act as gatekeepers to litigation in accordance with the Barton doctrine—even if they would not have jurisdiction to adjudicate such claims or the bankruptcy case has concluded—"they nonetheless do not have unrestricted power to protect non-debtors from liability via a pre-filing injunction." Id. at 359. According to the court, gatekeeping prevents usurpation of the powers of the bankruptcy court that would prevent the court from distributing bankruptcy estate assets in accordance with statutory priorities, and protects a bankruptcy trustee from unjustified personal liability for actions taken in the trustee's official capacity. However, Judge Elrod emphasized, the Fifth Circuit has "never extended the Barton doctrine to give bankruptcy courts gatekeeping power over claims against non-debtors." Id. Gatekeeping, she explained, "is patently beyond the power of an Article I court under § 105" if it shields anyone other than the debtor, independent directors, the creditors' committee, and committee members for conduct within the scope of their duties. Id. at 362.
The Fifth Circuit ruled that the definition of "Protected Parties" in the chapter 11 plan's gatekeeper clause must, like the definition of Exculpated Parties, be limited to the debtor, the independent directors, the committee, and the committee members. It accordingly reversed the bankruptcy court's order in part and remanded the case below with a direction to amend the debtor's chapter 11 plan in accordance with its decision.
Outlook
On May 29, 2025, the U.S. Supreme Court granted the debtor's emergency motion to stay the Fifth Circuit's ruling pending the Supreme Court's decision on the debtor's anticipated petition for a writ of certiorari. However, on June 9, 2025, the Court vacated the stay and denied the debtor's petition for certiorari in a one-page order that offered no explanation for the decision.
Even before Purdue, the Fifth Circuit had rejected third-party releases and injunctions of third-party claims against non-debtors (in non-asbestos chapter 11 cases subject to section 524(g) of the Bankruptcy Code) except in instances where such injunctions channeled claims to allow recovery from separate assets, thereby avoiding discharging non-debtors. See Pacific Lumber, 584 F.3d at 252; Zale; 62 F.3d at 760). The Tenth Circuit has also prohibited such non-debtor releases or injunctions. See Landsing Diversified Props. v. First Nat'l Bank & Tr. Co. of Tulsa (In re W. Real Estate Fund, Inc.), 922 F.2d 592 (10th Cir. 1990). Given its previous views on the subject, the Fifth Circuit's decision in Highland II does not represent a sea change in this area.
