COURT: Highland Capital trades barbs with Dondero funds over alleged contempt of court, modifying CRO retention

24 May 2021

Highland Capital Management LP is once again embroiled in a fight with entities affiliated with co-founder James Dondero, The Charitable DAF Fund LP and CLO Holdco Ltd continue to argue that they aren’t in contempt of court for pursuing a District Court lawsuit related to James Seery, the debtor’s independent director and chief restructuring officer (CRO). The debtor argues that the two funds violated bankruptcy court orders, but the Dondero funds assert that the bankruptcy court doesn’t have the authority to put limits on litigation against Seery.

 

In April, the debtor filed a motion seeking orders finding that DAF and CLO Holdco violated two court orders and failed to comply with gatekeeper protections requiring litigants to get bankruptcy court approval from Judge Stacey Jernigan before suing protected parties, including Seery. Despite the orders, the debtors said that Dondero has not stopped his “vexatious” litigation strategy because he and entities he controls have ignored them.

 

DAF and CLO Holdco responded to the debtor’s motion by asking the court to modify a prior order from July 2020 authorizing the debtor to retain Seery as CRO. They said the bankruptcy court shouldn’t attempt to assert exclusive jurisdiction over any claims that might be brought against Seery, relating in any way to his role as an officer of the debtor. DAF and CLO Holdco also argued that Judge Jernigan should modify the order to correct the “apparent jurisdictional overreach.” 

 

On Friday (21 May), the funds filed a further response in support of modifying the CRO retention order. They said the motion raises a simple question: “Can this Court strip the district court of jurisdiction by issuing an order declaring that it has 'sole jurisdiction' over all lawsuits naming James Seery that are in any way related to his role post-petition role with the Debtor?”

 

They said there are several reasons why the answer is no, arguing that the bankruptcy court lacks that power because the district court is explicitly vested with original jurisdiction. The debtor and those who join its arguments have responded to the funds largely with “surliness, rhetoric, and procedural niceties,” according to the filing. But DAF and CLO Holdco said all arguments from the debtor are “wrongheaded” because they don’t alter the fact the bankruptcy court lacks the power to divest the district court of its original jurisdiction. “It is that simple,” DAF and CLO Holdco asserted. 

 

The two funds said they intend to assert claims against Seery, including claims that arise under the Investment Advisers Act of 1940 and the Racketeer Influenced and Corrupt Organizations Act (RICO) statute. Because the district court has original jurisdiction, the bankruptcy court order purporting to assert sole jurisdiction over these matters should be modified, DAF and CLO Holdco said, as the order is “erroneous.” 

 

DAF and CLO Holdco said the court’s order confirming the plan made an “important edit” to previous language asserting “sole and exclusive jurisdiction” over claims against Seery, noting that jurisdiction extends “only to the extent legally permissible.” The funds said that’s all they are asking for here as well. 

 

In response, the debtor filed a reply in support of its own motion for an order requiring the funds to show cause why they shouldn’t be held in civil contempt for violating court orders. The debtor noted that the orders included “gatekeeper” provisions to enjoin parties from pursuing litigation against court-approved fiduciaries without first obtaining a determination from the bankruptcy court that they seek to assert colorable claims of willful misconduct or gross negligence.

 

The debtor said, in response to the contempt motion, the funds are offering “a slew of convoluted and disingenuous arguments in an effort to shirk responsibility for their wrongful conduct.” The debtor added that DAF and CLO Holdco claim they didn’t “commence” an action against Seery because the proposed amended complaint against him wasn’t actually filed yet and they didn’t “pursue” claims against Seery because that could supposedly happen only after an action was commenced. 

 

The debtor asserted that the funds filed the motion to modify Seery’s retention with the “explicit” intent of commencing an action against him, which constitutes “pursuit” of a claim. The fact that DAF and CLO Holdco “effectively” sought that relief on an ex parte basis further proves their ill intent, the debtor said. The debtor said the funds’ “righteous indignation and pages of smoke and mirrors” can’t change the facts – they engaged in “tortured linguistic gymnastics” to arrive at unjustifiable interpretations of the bankruptcy court order and expressed a general disdain for the way the debtor presented the uncontested facts in the contempt motion.

 

Further, the debtor said the funds “cast aspersions” on the bankruptcy court’s integrity, including by claiming that the court entered orders without proper jurisdiction. But the debtor said it will easily prove through clear evidence that DAF and CLO Holdco intentionally violated court orders. 

 

Elsewhere in the case, the court has adjourned the company’s hearing on exit financing to 25 June. If approved, the debtor would enter into a commitment agreement for a USD 50m facility with a three-year maturity date. The borrowers under the facility would be the reorganized debtor, a claimant trust, and indirect Highland subsidiary Trussway Industries.

 

Additionally, the court has entered an order scheduling a 28-29 September trial on the debtor’s objection to a USD 14m administrative expense claim that has been asserted by Dondero entities Nexpoint Advisors and Highland Capital Management Fund Advisors

 

by Taylor Harrison