In a significant ruling for corporate bankruptcy governance, the U.S. Bankruptcy Court for the Southern District of Texas has overruled the United States Trustee's objection to the exculpation of independent directors in the Instant Brands Chapter 11 case.
Judge Marvin Isgur issued a seven-page memorandum opinion on March 3, 2025, addressing the dispute over whether independent directors of a debtor-in-possession can receive exculpation protections in a Chapter 11 plan of reorganization.
The case, filed under case number 23-90716, centered on the U.S. Trustee's limited objection to Instant Brands' Chapter 11 plan. The Trustee argued that exculpation provisions for independent directors were not permitted under Fifth Circuit precedent, particularly citing the NexPoint Advisors, L.P. v. Highland Capital Management decision.
Judge Isgur disagreed with the U.S. Trustee's interpretation, finding that the Fifth Circuit's ruling in Highland Capital actually supports exculpation for independent directors serving as disinterested fiduciaries of a debtor-in-possession.
"Because the disinterested fiduciaries of a debtor-in-possession act pursuant to the same authority and perform the same functions as a bankruptcy trustee, they are afforded identical protections," Judge Isgur wrote in the opinion.
The court confirmed that Instant Brands' plan appropriately limited the exculpation to:
- Conduct performed during the administration of the Chapter 11 case
- Actions within the scope of directors' duties as management for the debtor-in-possession
- Excluding willful misconduct and gross negligence
Instant Brands and its related entities initially filed for Chapter 11 bankruptcy protection on June 12, 2023. The company's joint reorganization plan was confirmed on February 23, 2024.
The court's decision reinforces the principle that independent directors of bankrupt companies can receive liability protection similar to bankruptcy trustees when they serve in fiduciary roles managing the estate during reorganization.
No law firm was specifically mentioned in the document as representing the filing party.
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