Are Exculpations From Post-Petition Liability In Chapter 11 Plans Permissible? (Highland Management, at U.S. Supreme Court)

On June 9, 2025, Justice Alito rules, “denied,” on Debtor’s request for a stay pending appeal in:

Highland Capital Management, L.P. v. NexPoint Advisors, L.P., Case No. 24A1154 at U.S. Supreme Court.

That’s the second denial by the U.S. Supreme Court in the Highland Capital bankruptcy.

The first is the “Petition DENIED” ruling, back in June of 2024, when the Highland Capital Debtor presented the Question (in Case No. 22-631) of whether § 524(e) “categorically bars” a court from confirming a Chapter 11 plan that:

“releases third parties from liability . . . through their limited exculpation for negligence claims relating to the administration of the bankruptcy estate”?

Plan Exculpation in Highland Capital

The Bankruptcy Court confirms Debtor’s Highland Capital Chapter 11 plan, even though the plan exculpates the following parties:

all of Debtor’s “former, present, and future officers, directors, employees, managers, members, financial advisors, attorneys, accountants, investment bankers, consultants, professionals, advisors, shareholders, principals, partners, heirs, agents, other representatives, subsidiaries, divisions, and managing companies.”

The exculpation is for any post-petition conduct “in connection with or arising out of” such things as:

the filing and administration of the case;
the consummation, implementation, and funding of the Plan; and
any related negotiations, transactions, and documentation.

However, the exculpation does NOT include “acts or omissions that constitute bad faith, fraud, gross negligence, criminal misconduct, or willful misconduct.”

Appeal to Fifth Circuit–Exculpation Rejected in Part

On appeal, the Fifth Circuit rejects the plan’s exculpation, in part, because § 524(e):

provides, “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”; and
allows for exculpation of only the Debtor, the Official Creditor’s Committee members, and the Independent Directors.

NexPoint Advisors, L.P. v. Highland Capital Management, L.P. (In re Highland Capital Management, L.P.), 48 F.4th 419, 435 (5th Cir. 2022)

Circuit Split

There is a circuit split on this point:

the Fifth and Tenth circuits hold that § 524(e) categorically bars third-party exculpations absent express authority in another provision of the Bankruptcy Code; but
the Second, Third, Fourth, Sixth, Seventh, Ninth and Eleventh circuit allow varying degrees of limited third-party exculpations—e.g., for fairness and necessity to the reorganization.

48 F.4th at 436.

Fifth Circuit Rationale

In the Fifth Circuit, § 524(e) cannot absolve a non-debtor from post-petition negligence, absent another source of authority for a limited qualified immunity.

Here are two such sources:

§ 1103(c) allows for a limited qualified immunity to creditors’ committee members for actions within the scope of their statutory duties; and
bankruptcy trustees have limited qualified immunity, unless they act with gross negligence.

That leaves one remaining question:

Whether the plan can exculpate Debtor’s Independent Directors?

The Fifth Circuit answers, “Yes.” That’s because:

the Independent Directors were appointed to act together as Debtor’s bankruptcy trustee;
like a debtor-in-possession, the Independent Directors are entitled to all the rights and powers of a trustee (see § 1101); and
it follows that the Independent Directors are entitled to a limited qualified immunity for any actions short of gross negligence.

“In sum”:

our precedent and § 524(e) require any exculpation in a Chapter 11 reorganization plan be limited to: (i) the debtor, (ii) the creditors’ committee and its members for conduct within the scope of their duties, and (iii) the trustees within the scope of their duties; and
so, “we strike all exculpated parties from the Plan except [Debtor], the Committee and its members, and the Independent Directors.”

48 F.4th at 437-38.

Request for a Stay to Fifth Circuit

Then, Debtor asks the Fifth Circuit for a stay pending appeal. The Fifth Circuit says, “Denied” (on May 22, 2025, in Case No. 23-10534).

Request for a Stay to U.S. Supreme Court

So, on May 27, 2025, Debtor files in the U.S. Supreme Court an “Emergency Application for Stay . . . Pending the Filing and Disposition of a Petition for Writ of Certiorari.”

On May 29, 2025, Justice Alito enters this Order:

“Upon consideration of the application of counsel for the applicant, it is ordered that the mandate of the United States Court of Appeals for the Fifth Circuit, case No. 23-10534, is hereby stayed pending further order of the undersigned or of the Court.”

On May 5, 2025, Respondent files a Response; and on May 9, 2025, Debtor files a Reply.

Then, on June 9, 2025, Justice Alito issues this further Order (emphasis added):

“Upon further consideration of the application of counsel for the applicant, the response filed thereto, and the reply, it is orders that the stay heretofore entered by Justice Alito on May 29, 2025, is hereby vacated. The application for stay is, in all respects, denied.”

Conclusion

Can we derive any substantive significance from the U.S. Supreme Court’s denial of Debtor’s stay request?

As noted above, this is the Supreme Court’s second rejection of Debtor’s appeal efforts. The first came in a “Petition DENIED” ruling on Debtor’s Petition for writ of certiorari from the Fifth Circuit’s prior ruling described above.

No rationale is in the public record for either of these two Supreme Court rulings. However, such a double negative seems significant.

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