COURT OF CHANCERY 

OF THE

SAM GLASSCOCK III 

VICE CHANCELLOR

STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE

34 THE CIRCLE

GEORGETOWN, DELAWARE 19947

Date Submitted: December 14, 2017 

Date Decided: January 16, 2018 

Thomas A. Uebler, Esquire 

Kerry M. Porter, Esquire 

Cooch and Taylor, P.A. 

3711 Kennett Pike, Suite 100 

Greenville, DE 19807 

Michael F. Bonkowski, Esquire 

Nicholas J. Brannick, Esquire 

Cole Schotz P.C. 

500 Delaware Avenue, Suite 1410 

Wilmington, DE 19801 

Re: Daugherty v. Highland Capital Management, Civil Action No. 

2017-0488-SG 

Dear Counsel: 

 This matter involves purported breaches of fiduciary duty and, via Count I of 

the Complaint, alleges a fraudulent transfer of funds to escape a Texas court 

judgment. Before me is a Motion to Dismiss those allegations. This Letter Opinion 

addresses only the Motion to Dismiss the fraudulent transfer claim in Count I. I have 

asked for supplemental briefing regarding the claims raised in the other counts of 

the Complaint, and will address the Motion to Dismiss those claims later, in the light 

of that briefing. 

Briefly, according to Count I of the Complaint, the Plaintiff brought an action 

against various Defendants in Texas, alleging that they had purloined his interest in 

an entity, Defendant HERA. Thereafter, the Defendants caused another entity 

Defendant to deposit, perhaps as a “litigation reserve,” an amount in escrow 
2 

sufficient to make the Plaintiff whole, should he prevail. HERA then represented to 

the Texas Court that the funds in escrow belonged to it, conditioned on a final 

judgment against HERA; should the Plaintiff obtain a verdict, the amount in escrow 

would, through HERA, then be available to the Plaintiff. Subsequently, the Plaintiff 

obtained a final judgment against HERA, but immediately thereafter, the Defendants 

caused the escrow agent to resign and return the funds to the other Defendants, 

leaving the Plaintiff unable to collect the judgment. Again, Count I alleges that the 

transfer of these funds from escrow, without value to HERA, was a fraudulent 

transfer. The Motion to Dismiss that claim is denied in part. My reasoning follows. 

 The Defendants have moved to dismiss the Complaint under Court of 

Chancery Rule 12(b)(6). When reviewing such a motion, 

(i) all well-pleaded factual allegations are accepted as true; (ii) even 

vague allegations are well-pleaded if they give the opposing party 

notice of the claim; (iii) the Court must draw all reasonable inferences 

in favor of the non-moving party; and (iv) dismissal is inappropriate 

unless the plaintiff would not be entitled to recover under any 

reasonably conceivable set of circumstances susceptible of proof.1

I need not, however, “accept conclusory allegations unsupported by specific facts or 

. . . draw unreasonable inferences in favor of the non-moving party.”2

 

1 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation 

marks omitted). 

2 Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011). 
3 

This litigation, and the precedent Texas litigation, are complicated; what 

follow are only those facts alleged as necessary to understand my decision on the 

instant motion. Plaintiff Patrick Daugherty filed the Complaint on July 5, 2017. 

Defendants Highland Capital Management, L.P. (“Highland”), Highland Employee 

Retention Assets LLC (“HERA”), Highland ERA Management LLC (“HERA 

Management”), and James Dondero (collectively the “Defendants”) moved to 

dismiss the Complaint on August 23, 2017. Daugherty was a partner and senior 

executive of Highland from 1998 until 2011, after which the parties engaged in 

litigation.3 Highland is a registered investment advisor with nearly $15 billion of 

assets under management.4 As part of his employment, Daugherty was an equity 

holder in HERA.5

According to the Plaintiff, a jury in Texas awarded him $2.6 million from 

HERA, with pre- and post-judgment interest, “as compensation for the diminution 

of value of Daugherty’s units as a result of [HERA’s] breach of the implied covenant 

of good faith and fair dealing.”6 The Texas court also struck language from the 

proposed judgment that would have extinguished the Plaintiff’s interest in HERA.7 

HERA has not paid its judgment.8 The Plaintiff alleges that Dondero, Highland, and 

 

3

 Verified Compl. (“Compl.”) ¶ 10. 

4

Id. ¶ 11. 

5

Id. ¶¶ 18–19. 

6

Id. ¶¶ 1–3. 

7

Id. ¶ 4. 

8

Id. ¶¶ 47–48. 
4 

HERA Management caused HERA to “fraudulently or otherwise wrongfully transfer 

its assets [through an escrow] to [Highland], which purportedly left [HERA] 

insolvent.”9 The Plaintiff seeks to have the Defendants return the transferred assets 

to HERA and satisfy his Texas judgment.10 

Under HERA’s operating agreement (the “Agreement”), any distribution from 

HERA to a member litigating against HERA or Highland may be “suspended and 

held in escrow by [HERA] until the final, non-appealable resolution of the 

Dispute.”11 The Plaintiff alleges that Highland placed Daugherty’s HERA interests 

of approximately $3.1 million into escrow with Abrams & Bayliss LLP 

(“Abrams”).12 The Plaintiff alleges that, under both the Agreement and according 

to Dondero’s testimony, the escrow should have been transferred to Daugherty in 

satisfaction of any final judgment in favor of Daugherty in Texas.13 On December 

1, 2016, an appellate court in Texas affirmed the trial court judgment.14 On 

December 2, 2016, the Plaintiff contends that Abrams resigned as escrow agent and 

transferred $3.1 million in Escrow assets to Highland.15 The Complaint incorporates 

a letter from Abrams to the Plaintiff explaining that Highland, which had placed the 

 

9

Id. ¶¶ 4–5, 24, 41–48. 

10 Id. ¶ 6. 

11 Id. ¶ 24. 

12 Id. ¶¶ 41–43. 

13 Id. 

14 Id. ¶ 49. 

15 Id. ¶¶ 51–52. 
5 

funds in escrow and for which Abrams acted as agent, had directed Abrams to return 

the funds to Highland, which it did.16 The Complaint alleges in conclusory fashion 

that all Defendants “caused” the funds to be returned to Highland, but the facts 

indicate that only Highland effected the transfer.17 Subsequent to the transfer, 

HERA filed an affidavit with the Texas court averring that it is insolvent.18 

The Defendants first argue that Count I is barred by analogy to the four-year 

statute of limitations in 6 Del. C. § 1309, because this claim arose when the assets 

in question were transferred from HERA to Highland on April 30, 2013.19 The claim 

in Count 1, however, accrued at the time of the transfer of funds from escrow in 

2016, and laches by analogy to the statute is no bar. The Defendants also contend20

that Count I is “barred by the doctrines of collateral estoppel and/or res judicata” due 

to the Texas rulings.21 I have reserved consideration of the issue preclusion defenses 

pending supplemental briefing. I now turn to the Defendants’ argument that the 

Plaintiff failed to properly plead a fraudulent transfer claim,22 and Dondero’s 

 

16 Id. ¶ 52. 

17 Id. ¶¶ 74–80. 

18 Id. ¶ 48. 

19 Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 30; Reply Br. in Supp. of Mot. to 

Dismiss 3. 

20 Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 18. 

21 The [**Nothing in this Letter Opinion should be construed to . . . 

22 Reply Br. in Supp. of Mot. to Dismiss 5–7. 
6 

assertion that Count I fails as to him because the Plaintiff “has not sufficiently pled 

allegations supporting a finding of alter ego as required.”23 

 I find that there is a factual issue about whether HERA had a cognizable 

interest in the amount in escrow. At this stage, drawing all reasonable inferences in 

favor of the Plaintiff, I find that it is reasonably conceivable that HERA owned the 

amount in escrow once the Plaintiff’s judgment against HERA became final; and 

that Highland caused HERA’s escrowed asset to be transferred to Highland without 

value, leaving HERA insolvent, to defeat the Plaintiff as a creditor of HERA. This 

states a claim of fraudulent transfer.24 The Motion to Dismiss Count I for failure to 

state a claim is denied. 

Separately, Dondero seeks to be dismissed with regard to Count I, noting that 

all non-conclusory allegations indicate that the transfer of the escrow was 

accomplished by a corporate entity, Highland. The Plaintiff argues that, based on 

the facts pled, Highland ERA Management was a sham entity created or maintained 

to further a fraud, and that Dondero acted as Highland ERA Management’s alter ago. 

The problem with this assertion is that nothing in Count I alleges that Higland ERA 

Management took any act with respect to removing the escrowed amount from 

HERA. The facts only reflect that Highland placed the funds in escrow, and that 

 

23 Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 35; Reply Br. in Supp. of Mot. to 

Dismiss 8–9. 

24 6 Del. C. §§ 1304–05.
7 

Highland directed Abrams to return them. Assuming that the Plaintiff has 

sufficiently alleged that Highland ERA Management is the alter ego of Dondero, it 

nonetheless has failed to allege facts indicating liability on the part of that entity for 

fraudulent transfer. Accordingly, Dondero’s Motion to be dismissed from Count I 

is granted. 

 At this pleading stage, I assume for purposes of this motion that HERA had a 

cognizable interest in the amount in escrow, that the interest was subject to a claim 

by Mr. Daugherty, and that once that claim was reduced to a judgment, the amount 

was transferred to insiders without value, leaving HERA insolvent, in a way that 

implicates the statute on fraudulent transfers.25 Of course, these are factual 

allegations subject to proof in this litigation. 

For those reasons, the Motion to Dismiss is denied as to Count I, but granted 

as to Dondero. To the extent the foregoing requires an Order to take effect, IT IS 

SO ORDERED. 

 Sincerely, 

/s/ Sam Glasscock III 

Sam Glasscock III 

 

25 Id. §§ 1304–05, 1309.