No. 3:22-cv-02170-S 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF TEXAS

In the Matter of: Highland Capital Management, L.P.,

 

Debtor.

NexPoint Advisors, L.P. and Highland Capital Management Fund Advisors, L.P.,

Appellants,

v.

Highland Capital Management, L.P., 

 

Appellee.

APPENDIX OF APPELLANTS NEXPOINT ADVISORS, L.P. AND

HIGHLAND CAPITAL MANAGEMENT FUND ADVISORS, L.P.

Appeal from the United States Bankruptcy Court for the

Northern District of Texas, Hon. Stacey G.C. Jernigan

Davor Rukavina, Esq.

Tex. Bar No. 24030781

Julian P. Vasek, Esq.

Tex. Bar No. 24070790

MUNSCH HARDT KOPF & HARR P.C.

500 N. Akard St., Ste. 3800

Dallas, TX 75201

214-855-7500

drukavina@munsch.com

jvasek@munsch.com

COUNSEL FOR APPELLANTS NEXPOINT 

ADVISORS, L.P. AND HIGHLAND CAPITAL 

MANAGEMENT FUND ADVISORS, L.P.

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 1 of 888 PageID 3305
Appellants NexPoint Advisors, L.P. and Highland Capital Management Fund 

Advisors, L.P. hereby submit their appendix under Fed. R. Bankr. P. 8018.

CONTENTS 

Tab Description Record No.

1 Bankruptcy Docket 000010 – 000027

2 Debtor’s Complaint 000028 – 000115

3 Advisors’ Answer 000116 – 000122

4 Advisors’ Administrative Expense Application 000324 – 000335

5 Debtor’s Response to Admin. Expense Application 000336 – 000354

6 Judgment 000004 – 000006

7 Findings of Fact & Conclusions of Law 000264 – 000323

8 Notice of Appeal 000001 – 000003

9 Transcript Day 1, Part 1 (April 12, 2022) 002905 – 003059

10 Transcript Day 1, Part 2 (April 12, 2022) 002482 – 002642

11 Transcript Day 2, Part 1 (April 13, 2022) 003060 – 003143

12 Transcript Day 2, Part 2 (April 12, 2022) 002643 – 002823

13 Transcript Day 3 (April 27, 2022) 002824 – 002904

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 2 of 888 PageID 3306
RESPECTFULLY SUBMITTED this 12th day of January, 2023.

MUNSCH HARDT KOPF & HARR P.C.

/s/ By: Davor Rukavina

Davor Rukavina, Esq.

Tex. Bar No. 24030781

Julian P. Vasek, Esq.

Tex. Bar No. 24070790

500 N. Akard St., Ste. 3800

Dallas, TX 75201

214-855-7500

drukavina@munsch.com

jvasek@munsch.com

COUNSEL FOR APPELLANTS 

CERTIFICATE OF SERVICE

The undersigned hereby certifies that, on January 12, 2023, a true and correct 

copy of the foregoing document (and all attachments) was served on the following 

recipients via the Court’s CM/ECF system:

Case Admin Sup txnb_appeals@txnb.uscourts.gov 

Melissa S. Hayward mhayward@haywardfirm.com, 

mholmes@haywardfirm.com 

Stacey G.C. Jernigan sgj_settings@txnb.uscourts.gov, 

anna_saucier@txnb.uscourts.gov 

Zachery Z. Annable zannable@haywardfirm.com, 

zannable@franklinhayward.com

/s/ Davor Rukavina

Davor Rukavina

4882-4200-3273v.1 019717.00001

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 3 of 888 PageID 3307
Tab 1

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 4 of 888 PageID 3308
EXHIBITS, APPEAL, FUNDS

U.S. Bankruptcy Court

Northern District of Texas (Dallas)

Adversary Proceeding #: 21−03010−sgj

Assigned to: Chief Bankruptcy Jud Stacey G Jernigan

Lead BK Case: 19−34054

Lead BK Title: Highland Capital Management, L.P.

Lead BK Chapter: 11

Demand:

Date Filed: 02/17/21

Nature[s] of Suit: 91 Declaratory judgment

02 Other (e.g. other actions that would have been brought in state court if unrelated to

bankruptcy)

72 Injunctive relief − other

Plaintiff

−−−−−−−−−−−−−−−−−−−−−−−

Highland Capital Management, L.P. represented by Zachery Z. Annable

Hayward PLLC

10501 N. Central Expressway

Suite 106

Dallas, TX 75231

(972) 755−7108

Fax : (972) 755−7108

Email: zannable@haywardfirm.com

LEAD ATTORNEY

V.

Defendant

−−−−−−−−−−−−−−−−−−−−−−−

Highland Capital Management Fund

Advisors, L.P.

K&LGates LLP

c/o Stephen G. Topetzes

1600 K Street, NW

Washington, DC 20006

represented by Thomas Daniel Berghman

Munsch Hardt Kopf & Harr PC

500 N Akard Street, Suite 3800

Dallas, TX 75201−6659

(214) 855−7554

Fax : (214) 978−4346

Email: tberghman@munsch.com

A. Lee Hogewood, III

K&L Gates LLP

4350 Lassiter at North Hills Avenue

Suite 300

Raleigh, NC 27609

(919) 743−7306

Fax : (919) 516−2006

Email: lee.hogewood@klgates.com

Davor Rukavina

Munsch, Hardt, Kopf & Harr

500 N. Akard Street, Ste 3800

Dallas, TX 75201−6659

000010

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(214)855−7587

Fax : 214−978−5359

Email: drukavina@munsch.com

Julian Preston Vasek

Munsch Hardt Kopf & Harr P.C.

500 N. Akard Street

Suite 3800

Dallas, TX 75201

214−855−7500

Fax : 214−855−7584

Email: jvasek@munsch.com

Defendant

−−−−−−−−−−−−−−−−−−−−−−−

NexPoint Advisors, L.P.

K&L Gates LLP

c/o Stephen G. Topetzes

1600 K Street, NW

Washington, DC 20006

represented by Thomas Daniel Berghman

(See above for address)

A. Lee Hogewood, III

(See above for address)

Davor Rukavina

(See above for address)

Julian Preston Vasek

(See above for address)

Filing Date Docket Text

02/17/2021

 1 Adversary case 21−03010. Complaint by Highland Capital Management, L.P. against

Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P.. Fee Amount

$350 (Attachments: # 1 Exhibit A # 2 Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E

# 6 Exhibit F # 7 Exhibit G # 8 Exhibit H # 9 Exhibit I # 10 Exhibit J # 11 Adversary

Cover Sheet). Nature(s) of suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions

that would have been brought in state court if unrelated to bankruptcy)). 72 (Injunctive

relief − other). (Annable, Zachery)

02/17/2021

 Receipt of filing fee for Complaint(21−03010−sgj) [cmp,cmp] ( 350.00). Receipt

number 28496915, amount $ 350.00 (re: Doc# 1). (U.S. Treasury)

02/17/2021

 2 Motion to compel Adoption and Implementation of a Plan for the Transition of Services

by February 28, 2021. (Debtor's Emergency Motion for a Mandatory Injunction Requiring

the Advisors to Adopt and Implement a Plan for the Transition of Services by February 28,

2021) filed by Plaintiff Highland Capital Management, L.P. (Annable, Zachery)

02/17/2021

 3 Brief in support filed by Plaintiff Highland Capital Management, L.P. (RE: related

document(s)2 Motion to compel Adoption and Implementation of a Plan for the Transition

of Services by February 28, 2021. (Debtor's Emergency Motion for a Mandatory Injunction

Requiring the Advisors to Adopt and Implement a Plan for the Transition of Service).

(Annable, Zachery)

02/17/2021 4 Declaration re: (Declaration of Mr. James P. Seery, Jr. in Support of Debtor's

Emergency Motion for a Mandatory Injunction Requiring the Advisors to Adopt and

Implement a Plan for the Transition of Services by February 28, 2021) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)2 Motion to compel

Adoption and Implementation of a Plan for the Transition of Services by February 28,

2021. (Debtor's Emergency Motion for a Mandatory Injunction Requiring the Advisors to

Adopt and Implement a Plan for the Transition of Service). (Attachments: # 1 Exhibit A # 2

Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6 Exhibit F # 7 Exhibit G # 8 Exhibit

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H # 9 Exhibit I # 10 Exhibit J) (Annable, Zachery)

02/17/2021

 5 Motion for expedited hearing(related documents 2 Motion to compel) filed by Plaintiff

Highland Capital Management, L.P. (Annable, Zachery)

02/17/2021

 6 Notice of hearing filed by Plaintiff Highland Capital Management, L.P. (RE: related

document(s)2 Motion to compel filed by Plaintiff Highland Capital Management, L.P.).

Hearing to be held on 2/23/2021 at 09:30 AM Dallas Judge Jernigan Ctrm for 2, (Annable,

Zachery)

02/18/2021

 7 Summons issued on Highland Capital Management Fund Advisors, L.P. Answer Due

3/22/2021; NexPoint Advisors, L.P. Answer Due 3/22/2021 (Edmond, Michael)

02/18/2021

 8 Scheduling order setting deadlines. Discovery and all exhibits except impeachment

documents: 45 days prior to Docket Call, pre−trial order: 7 calendar days prior to Docket

Call, proposed findings of fact and conclusions of law: 7 days prior to first scheduled

docket call (RE: related document(s)1 Complaint filed by Plaintiff Highland Capital

Management, L.P.). Trial Docket Call date set for 7/12/2021 at 01:30 PM at Dallas Judge

Jernigan Ctrm. Trial will be held during the week of 7/19/2021., Entered on 2/18/2021

(Edmond, Michael)

02/18/2021

 9 Notice of Appearance and Request for Notice by A. Lee Hogewood III filed by

Defendants Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P..

(Hogewood, A.)

02/18/2021

 10 Witness and Exhibit List filed by Plaintiff Highland Capital Management, L.P. (RE:

related document(s)2 Motion to compel Adoption and Implementation of a Plan for the

Transition of Services by February 28, 2021. (Debtor's Emergency Motion for a Mandatory

Injunction Requiring the Advisors to Adopt and Implement a Plan for the Transition of

Service). (Attachments: # 1 Exhibit 1 # 2 Exhibit 2 # 3 Exhibit 3 # 4 Exhibit 4 # 5 Exhibit 5

# 6 Exhibit 6 # 7 Exhibit 7 # 8 Exhibit 8 # 9 Exhibit 9 # 10 Exhibit 10 # 11 Exhibit 11 # 12

Exhibit 12 # 13 Exhibit 13 # 14 Exhibit 14 # 15 Exhibit 15 # 16 Exhibit 16) (Annable,

Zachery)

02/18/2021

 11 Order granting motion for expedited hearing (Related Doc# 5)(document set for

hearing: 2 Motion to compel) Hearing to be held on 2/23/2021 at 09:30 AM Dallas Judge

Jernigan Ctrm for 2, Entered on 2/18/2021. (Okafor, M.)

02/19/2021 12 Certificate of service re: Documents Served on February 17, 2021 Filed by Claims

Agent Kurtzman Carson Consultants LLC (related document(s)1 Adversary case

21−03010. Complaint by Highland Capital Management, L.P. against Highland Capital

Management Fund Advisors, L.P., NexPoint Advisors, L.P.. Fee Amount $350

(Attachments: # 1 Exhibit A # 2 Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6

Exhibit F # 7 Exhibit G # 8 Exhibit H # 9 Exhibit I # 10 Exhibit J # 11 Adversary Cover

Sheet). Nature(s) of suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions that

would have been brought in state court if unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff Highland Capital Management, L.P., 2 Motion to compel Adoption

and Implementation of a Plan for the Transition of Services by February 28, 2021.

(Debtor's Emergency Motion for a Mandatory Injunction Requiring the Advisors to Adopt

and Implement a Plan for the Transition of Services by February 28, 2021) filed by

Plaintiff Highland Capital Management, L.P. filed by Plaintiff Highland Capital

Management, L.P., 3 Brief in support filed by Plaintiff Highland Capital Management, L.P.

(RE: related document(s)2 Motion to compel Adoption and Implementation of a Plan for

the Transition of Services by February 28, 2021. (Debtor's Emergency Motion for a

Mandatory Injunction Requiring the Advisors to Adopt and Implement a Plan for the

Transition of Service). filed by Plaintiff Highland Capital Management, L.P., 4 Declaration

re: (Declaration of Mr. James P. Seery, Jr. in Support of Debtor's Emergency Motion for a

Mandatory Injunction Requiring the Advisors to Adopt and Implement a Plan for the

Transition of Services by February 28, 2021) filed by Plaintiff Highland Capital

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Management, L.P. (RE: related document(s)2 Motion to compel Adoption and

Implementation of a Plan for the Transition of Services by February 28, 2021. (Debtor's

Emergency Motion for a Mandatory Injunction Requiring the Advisors to Adopt and

Implement a Plan for the Transition of Service). (Attachments: # 1 Exhibit A # 2 Exhibit B

# 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6 Exhibit F # 7 Exhibit G # 8 Exhibit H # 9

Exhibit I # 10 Exhibit J) filed by Plaintiff Highland Capital Management, L.P., 5 Motion

for expedited hearing(related documents 2 Motion to compel) filed by Plaintiff Highland

Capital Management, L.P. filed by Plaintiff Highland Capital Management, L.P., 6 Notice

of hearing filed by Plaintiff Highland Capital Management, L.P. (RE: related document(s)2

Motion to compel filed by Plaintiff Highland Capital Management, L.P.). Hearing to be

held on 2/23/2021 at 09:30 AM Dallas Judge Jernigan Ctrm for 2, filed by Plaintiff

Highland Capital Management, L.P.). (Kass, Albert)

02/20/2021

 13 Amended Notice of hearing filed by Plaintiff Highland Capital Management, L.P. (RE:

related document(s)2 Motion to compel filed by Plaintiff Highland Capital Management,

L.P.). Hearing to be held on 2/23/2021 at 09:00 AM Dallas Judge Jernigan Ctrm for 2,

(Annable, Zachery)

02/20/2021

 14 BNC certificate of mailing − PDF document. (RE: related document(s)11 Order

granting motion for expedited hearing (Related Doc5)(document set for hearing: 2 Motion

to compel) Hearing to be held on 2/23/2021 at 09:30 AM Dallas Judge Jernigan Ctrm for 2,

Entered on 2/18/2021. (Okafor, M.)) No. of Notices: 1. Notice Date 02/20/2021. (Admin.)

02/21/2021

 15 Notice to take deposition of James P. Seery Jr. filed by Defendants Highland Capital

Management Fund Advisors, L.P., NexPoint Advisors, L.P.. (Vasek, Julian)

02/21/2021

 16 Notice to take deposition of Dustin Norris filed by Plaintiff Highland Capital

Management, L.P.. (Annable, Zachery)

02/21/2021

 17 Notice to take deposition of James Dondero filed by Plaintiff Highland Capital

Management, L.P.. (Annable, Zachery)

02/21/2021

 18 Witness and Exhibit List filed by Defendants Highland Capital Management Fund

Advisors, L.P., NexPoint Advisors, L.P. (RE: related document(s)2 Motion to compel

Adoption and Implementation of a Plan for the Transition of Services by February 28,

2021. (Debtor's Emergency Motion for a Mandatory Injunction Requiring the Advisors to

Adopt and Implement a Plan for the Transition of Service). (Attachments: # 1 Exhibit A # 2

Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6 Exhibit F # 7 Exhibit G # 8 Exhibit

H # 9 Exhibit I # 10 Exhibit J # 11 Exhibit K # 12 Exhibit L # 13 Exhibit M # 14 Exhibit N)

(Vasek, Julian)

02/22/2021

 19 Amended Witness and Exhibit List filed by Plaintiff Highland Capital Management,

L.P. (RE: related document(s)10 List (witness/exhibit/generic)). (Attachments: # 1 Exhibit

17 # 2 Exhibit 18 # 3 Exhibit 19 # 4 Exhibit 20 # 5 Exhibit 21) (Annable, Zachery)

02/22/2021

 20 Objection to (related document(s): 2 Motion to compel Adoption and Implementation

of a Plan for the Transition of Services by February 28, 2021. (Debtor's Emergency Motion

for a Mandatory Injunction Requiring the Advisors to Adopt and Implement a Plan for the

Transition of Service filed by Plaintiff Highland Capital Management, L.P.) filed by

Defendants Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P..

(Rukavina, Davor)

02/23/2021

 21 Request for transcript regarding a hearing held on 2/23/2021. The requested

turn−around time is hourly. (Edmond, Michael)

02/23/2021 22 Certificate of service re: 1) Debtor's Witness and Exhibit List with Respect to

Evidentiary Hearing to be Held on February 23, 2021; and 2) Order Granting Debtor's

Motion for Expedited Hearing on it's Emergency Motion for a Mandatory Injunction

Requiring the Advisors to Implement a Plan for the Transition of Services by February 28,

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2021 Filed by Claims Agent Kurtzman Carson Consultants LLC (related document(s)10

Witness and Exhibit List filed by Plaintiff Highland Capital Management, L.P. (RE: related

document(s)2 Motion to compel Adoption and Implementation of a Plan for the Transition

of Services by February 28, 2021. (Debtor's Emergency Motion for a Mandatory Injunction

Requiring the Advisors to Adopt and Implement a Plan for the Transition of Service).

(Attachments: # 1 Exhibit 1 # 2 Exhibit 2 # 3 Exhibit 3 # 4 Exhibit 4 # 5 Exhibit 5 # 6

Exhibit 6 # 7 Exhibit 7 # 8 Exhibit 8 # 9 Exhibit 9 # 10 Exhibit 10 # 11 Exhibit 11 # 12

Exhibit 12 # 13 Exhibit 13 # 14 Exhibit 14 # 15 Exhibit 15 # 16 Exhibit 16) filed by

Plaintiff Highland Capital Management, L.P., 11 Order granting motion for expedited

hearing (Related Doc5)(document set for hearing: 2 Motion to compel) Hearing to be held

on 2/23/2021 at 09:30 AM Dallas Judge Jernigan Ctrm for 2, Entered on 2/18/2021.

(Okafor, M.)). (Kass, Albert)

02/23/2021

 23 Hearing held on 2/23/2021. (RE: related document(s)2 Motion to compel Adoption

and Implementation of a Plan for the Transition of Services by February 28, 2021,

(Debtor's Emergency Motion for a Mandatory Injunction Requiring the Advisors to Adopt

and Implement a Plan for the Transition of Services by February 28, 2021) filed by

Plaintiff Highland Capital Management, L.P. filed by Plaintiff Highland Capital

Management, L.P.) (Appearances: J. Morris and J. Pomeranz for Debtor; L. Hogewood and

D. Rukavina for Advisors; J. Wilson and B. Assink for J. Dondero; M. Clemente for UCC.

Evidentiary hearing. Motion moot, as a result of evidence and findings that court made on

the record. Mr. Morris to upload an order consistent with the courts ruling.) (Edmond,

Michael) (Entered: 02/24/2021)

02/23/2021

 27 Court admitted exhibits date of hearing February 23, 2021 (RE: related document(s)2

Motion to compel Adoption and Implementation of a Plan for the Transition of Services by

February 28, 2021. (Debtor's Emergency Motion for a Mandatory Injunction Requiring the

Advisors to Adopt and Implement a Plan for the Transition of Services by February 28,

2021) filed by Plaintiff Highland Capital Management, L.P.) (COURT ADMITTED

PLAINTIFF'S EXHIBIT'S #1 THROUGH #21 ADMITTED BY JOHN MORRIS THAT

APPEAR AT DOC. #10 & #19 AND DEFENDANT EXHIBIT'S #A THROUGH #N

THAT APPEAR AT DOC. #18 & EXHIBIT #0 (TO BE SUPPLEMENTED IN) BY

DAVOR RUKAVINA) (Edmond, Michael) (Entered: 02/25/2021)

02/24/2021

 24 Support/supplemental documentLetter to Court Regarding Proposed Order filed by

Defendants Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P.

(RE: related document(s) 23 Hearing held). (Rukavina, Davor)

02/24/2021

 25 Order dismissing motion to compel as moot. (related document # 2) Entered on

2/24/2021. (Bradden, T.)

02/25/2021

 26 Transcript regarding Hearing Held 02/23/2021 (239 pgs.) RE: Motion for Mandatory

Injunction. THIS TRANSCRIPT WILL BE MADE ELECTRONICALLY AVAILABLE

TO THE GENERAL PUBLIC 90 DAYS AFTER THE DATE OF FILING. TRANSCRIPT

RELEASE DATE IS 05/26/2021. Until that time the transcript may be viewed at the

Clerk's Office or a copy may be obtained from the official court transcriber. Court

Reporter/Transcriber Kathy Rehling, kathyrehlingtranscripts@gmail.com, Telephone

number 972−786−3063. (RE: related document(s) 23 Hearing held on 2/23/2021. (RE:

related document(s)2 Motion to compel Adoption and Implementation of a Plan for the

Transition of Services by February 28, 2021, (Debtor's Emergency Motion for a Mandatory

Injunction Requiring the Advisors to Adopt and Implement a Plan for the Transition of

Services by February 28, 2021) filed by Plaintiff Highland Capital Management, L.P. filed

by Plaintiff Highland Capital Management, L.P.) (Appearances: J. Morris and J. Pomeranz

for Debtor; L. Hogewood and D. Rukavina for Advisors; J. Wilson and B. Assink for J.

Dondero; M. Clemente for UCC. Evidentiary hearing. Motion moot, as a result of evidence

and findings that court made on the record. Mr. Morris to upload an order consistent with

the courts ruling.)). Transcript to be made available to the public on 05/26/2021. (Rehling,

Kathy)

02/25/2021

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 28 Certificate of service re: Documents Served on or Before February 23, 2021 Filed by

Claims Agent Kurtzman Carson Consultants LLC (related document(s)13 Amended Notice

of hearing filed by Plaintiff Highland Capital Management, L.P. (RE: related document(s)2

Motion to compel filed by Plaintiff Highland Capital Management, L.P.). Hearing to be

held on 2/23/2021 at 09:00 AM Dallas Judge Jernigan Ctrm for 2, filed by Plaintiff

Highland Capital Management, L.P., 16 Notice to take deposition of Dustin Norris filed by

Plaintiff Highland Capital Management, L.P.. filed by Plaintiff Highland Capital

Management, L.P., 17 Notice to take deposition of James Dondero filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.,

19 Amended Witness and Exhibit List filed by Plaintiff Highland Capital Management,

L.P. (RE: related document(s)10 List (witness/exhibit/generic)). (Attachments: # 1 Exhibit

17 # 2 Exhibit 18 # 3 Exhibit 19 # 4 Exhibit 20 # 5 Exhibit 21) filed by Plaintiff Highland

Capital Management, L.P.). (Kass, Albert)

02/27/2021

 29 BNC certificate of mailing − PDF document. (RE: related document(s)25 Order

dismissing motion to compel as moot. (related document 2) Entered on 2/24/2021.

(Bradden, T.)) No. of Notices: 1. Notice Date 02/27/2021. (Admin.)

03/01/2021

 30 Certificate of service re: Order Filed by Claims Agent Kurtzman Carson Consultants

LLC (related document(s)25 Order dismissing motion to compel as moot. (related

document 2) Entered on 2/24/2021. (Bradden, T.)). (Kass, Albert)

03/10/2021

 31 Notice of Appearance and Request for Notice by Paige Holden Montgomery filed by

Interested Party Committee of Unsecured Creditors. (Montgomery, Paige)

03/10/2021

 32 Notice of Appearance and Request for Notice by Juliana Hoffman filed by Interested

Party Committee of Unsecured Creditors. (Hoffman, Juliana)

03/22/2021

 33 Answer to complaint filed by Highland Capital Management Fund Advisors, L.P.,

NexPoint Advisors, L.P.. (Rukavina, Davor)

07/12/2021

 34 Hearing held on 7/12/2021. (RE: related document(s)1 Adversary case 21−03010.

Complaint by Highland Capital Management, L.P. against Highland Capital Management

Fund Advisors, L.P., NexPoint Advisors, L.P., Nature(s) of suit: 91 (Declaratory

judgment). 02 (Other (e.g. other actions that would have been brought in state court if

unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff Highland Capital

Management, L.P.) (Appearances: D. Rukavina. Nonevidentiary TDC. Matter is being

consolidated with Defendants trial in September on its asserted administrative claims.

Counsel should submit an agreed order to this effect.) (Edmond, Michael) (Entered:

07/13/2021)

07/14/2021

 35 PDF with attached Audio File. Court Date & Time [07/12/2021 01:37:35 PM]. File

Size [ 1287 KB ]. Run Time [ 00:05:29 ]. (admin).

08/04/2021

 36 Stipulation by Highland Capital Management, L.P. and Highland Capital Management

Fund Advisors, L.P., and NexPoint Advisors, L.P.. filed by Plaintiff Highland Capital

Management, L.P. (RE: related document(s)8 Standing scheduling order in an adversary

proceeding). (Annable, Zachery)

08/06/2021

 37 Order approving stipulation (A) amending schedule and (B) consolidating and

resolving certain matters (RE: related document(s)2607 Stipulation filed by Debtor

Highland Capital Management, L.P. (RE: related document(s) 36 Stipulation and 1

Complaint filed by Plaintiff Highland Capital Management, L.P.). Trial date set for

12/7/2021 at 09:30 AM at Dallas Judge Jernigan Ctrm. Entered on 8/6/2021 (Okafor, M.)

08/06/2021 38 Certificate of service re: Stipulation (A) Amending Scheduling Order and (B)

Consolidating and Resolving Certain Matters Filed by Claims Agent Kurtzman Carson

Consultants LLC (related document(s)36 Stipulation by Highland Capital Management,

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L.P. and Highland Capital Management Fund Advisors, L.P., and NexPoint Advisors, L.P..

filed by Plaintiff Highland Capital Management, L.P. (RE: related document(s)8 Standing

scheduling order in an adversary proceeding). filed by Plaintiff Highland Capital

Management, L.P.). (Kass, Albert)

08/08/2021

 39 BNC certificate of mailing − PDF document. (RE: related document(s)37 Order

approving stipulation (A) amending schedule and (B) consolidating and resolving certain

matters (RE: related document(s)2607 Stipulation filed by Debtor Highland Capital

Management, L.P. (RE: related document(s) 36 Stipulation and 1 Complaint filed by

Plaintiff Highland Capital Management, L.P.). Trial date set for 12/7/2021 at 09:30 AM at

Dallas Judge Jernigan Ctrm. Entered on 8/6/2021 (Okafor, M.)) No. of Notices: 1. Notice

Date 08/08/2021. (Admin.)

08/11/2021

 40 Certificate of service re: Order Approving Stipulation (A) Amending Scheduling Order

and (B) Consolidating and Resolving Certain Matters Filed by Claims Agent Kurtzman

Carson Consultants LLC (related document(s)37 Order approving stipulation (A) amending

schedule and (B) consolidating and resolving certain matters (RE: related document(s)2607

Stipulation filed by Debtor Highland Capital Management, L.P. (RE: related document(s)

36 Stipulation and 1 Complaint filed by Plaintiff Highland Capital Management, L.P.).

Trial date set for 12/7/2021 at 09:30 AM at Dallas Judge Jernigan Ctrm. Entered on

8/6/2021 (Okafor, M.)). (Kass, Albert)

10/05/2021

 41 Notice to take deposition of Highland Capital Management Fund Advisors, L.P. filed

by Plaintiff Highland Capital Management, L.P.. (Annable, Zachery)

10/11/2021

 42 Certificate of service re: Highlands Notice of Rule 30(b)(6) Deposition to Highland

Capital Management Fund Advisors, L.P. Filed by Claims Agent Kurtzman Carson

Consultants LLC (related document(s)41 Notice to take deposition of Highland Capital

Management Fund Advisors, L.P. filed by Plaintiff Highland Capital Management, L.P..

filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

11/01/2021

 43 Notice of Reservation of Rights Regarding Application for Allowance of

Administrative Expense Claim filed by Defendants Highland Capital Management Fund

Advisors, L.P., NexPoint Advisors, L.P.. (Vasek, Julian)

12/09/2021

 44 Notice of Trial hearing filed by Defendants Highland Capital Management Fund

Advisors, L.P., NexPoint Advisors, L.P.. Trial date set for 2/8/2022 at 09:30 AM at at

https://us−courts.webex.com/meet/jerniga. (Vasek, Julian)

12/15/2021

 45 Stipulation by Highland Capital Management, L.P. and Highland Capital Management

Fund Advisors, L.P. and NexPoint Advisors, L.P.. filed by Plaintiff Highland Capital

Management, L.P. (RE: related document(s)37 Order to set hearing). (Annable, Zachery)

12/17/2021

 46 Order approving stipulation regarding second amended scheduling order (RE: related

document(s)1 Complaint filed by Plaintiff Highland Capital Management, L.P., 45

Stipulation filed by Plaintiff Highland Capital Management, L.P.). Trial Docket Call date

set for 2/8−9/2022 at 09:30 AM Dallas Judge Jernigan Ctrm. Entered on 12/17/2021

(Okafor, Marcey)

12/19/2021

 47 BNC certificate of mailing − PDF document. (RE: related document(s)46 Order

approving stipulation regarding second amended scheduling order (RE: related

document(s)1 Complaint filed by Plaintiff Highland Capital Management, L.P., 45

Stipulation filed by Plaintiff Highland Capital Management, L.P.). Trial Docket Call date

set for 2/8−9/2022 at 09:30 AM Dallas Judge Jernigan Ctrm. Entered on 12/17/2021) No.

of Notices: 2. Notice Date 12/19/2021. (Admin.)

12/20/2021 48 Certificate of service re: Stipulation Regarding Second Amended Scheduling Order

Filed by Claims Agent Kurtzman Carson Consultants LLC (related document(s)45

Stipulation by Highland Capital Management, L.P. and Highland Capital Management

000016

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Fund Advisors, L.P. and NexPoint Advisors, L.P.. filed by Plaintiff Highland Capital

Management, L.P. (RE: related document(s)37 Order to set hearing). filed by Plaintiff

Highland Capital Management, L.P.). (Kass, Albert)

12/22/2021

 49 Reply to Debtors Objection to Application for Administrative Claim of Highland

Capital Management Fund Advisors, L.P. and NexPoint Advisors, L.P. filed by Defendants

Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P.. (Vasek,

Julian) Modified text on 12/23/2021 (Okafor, Marcey).

12/22/2021

 50 Certificate of service re: Order Approving Stipulation Regarding Second Amended

Scheduling Order Filed by Claims Agent Kurtzman Carson Consultants LLC (related

document(s)46 Order approving stipulation regarding second amended scheduling order

(RE: related document(s)1 Complaint filed by Plaintiff Highland Capital Management,

L.P., 45 Stipulation filed by Plaintiff Highland Capital Management, L.P.). Trial Docket

Call date set for 2/8−9/2022 at 09:30 AM Dallas Judge Jernigan Ctrm. Entered on

12/17/2021). (Kass, Albert)

12/27/2021

 51 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

12/28/2021

 52 Certificate of service re: Plaintiff's Notice of Service of a Subpoena to Frank

Waterhouse Filed by Claims Agent Kurtzman Carson Consultants LLC (related

document(s)51 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital

Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

01/04/2022

 53 Notice to take deposition of Highland Capital Management Fund Advisors, L.P. filed

by Plaintiff Highland Capital Management, L.P.. (Annable, Zachery)

01/04/2022

 54 Notice to take deposition of NexPoint Advisors, L.P. filed by Plaintiff Highland

Capital Management, L.P.. (Annable, Zachery)

01/04/2022

 55 Notice to take deposition of Dustin Norris filed by Plaintiff Highland Capital

Management, L.P.. (Annable, Zachery)

01/05/2022

 56 Response opposed to (related document(s): 49 Notice (generic) filed by Defendant

Highland Capital Management Fund Advisors, L.P., Defendant NexPoint Advisors, L.P.)

filed by Plaintiff Highland Capital Management, L.P.. (Annable, Zachery)

01/06/2022

 57 Certificate of service re: 1) Highland's Amended Notice of Rule 30(b)(6) Deposition to

(A) Highland Capital Management Fund Advisors, L.P. and (B) NexPoint Advisors, L.P.;

2) Highland's Amended Notice of Rule 30(b)(6) Deposition to (A) Highland Capital

Management Fund Advisors, L.P. and (B) NexPoint Advisors, L.P.; and 3) Highland's

Notice of Deposition to Dustin Norris Filed by Claims Agent Kurtzman Carson

Consultants LLC (related document(s)53 Notice to take deposition of Highland Capital

Management Fund Advisors, L.P. filed by Plaintiff Highland Capital Management, L.P..

filed by Plaintiff Highland Capital Management, L.P., 54 Notice to take deposition of

NexPoint Advisors, L.P. filed by Plaintiff Highland Capital Management, L.P.. filed by

Plaintiff Highland Capital Management, L.P., 55 Notice to take deposition of Dustin Norris

filed by Plaintiff Highland Capital Management, L.P.. filed by Plaintiff Highland Capital

Management, L.P.). (Kass, Albert)

01/07/2022

 58 Certificate of service re: Highland Capital Management, L.P.'s Reply in Further

Support of Debtor's Objection to Application for Administrative Claims of Highland

Capital Management Fund Advisors, L.P. and NexPoint Advisors, L.P. Filed by Claims

Agent Kurtzman Carson Consultants LLC (related document(s)56 Response opposed to

(related document(s): 49 Notice (generic) filed by Defendant Highland Capital

Management Fund Advisors, L.P., Defendant NexPoint Advisors, L.P.) filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management,

L.P.). (Kass, Albert)

000017

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01/31/2022

 59 Joint Motion to continue hearing on (related documents 1 Complaint, 45 Stipulation)

filed by Defendants Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P., Plaintiff Highland Capital Management, L.P. (Attachments: # 1 Proposed

Order) (Rukavina, Davor)

02/01/2022

 60 Agreed Amended Scheduling Order granting motion to continue trial (related

document # 59) (related documents Complaint, Stipulation) Trial date set for 4/12/2022 at

09:30 AM at Dallas Judge Jernigan Ctrm. Entered on 2/1/2022. (Okafor, Marcey)

02/03/2022

 61 BNC certificate of mailing − PDF document. (RE: related document(s)60 Agreed

Amended Scheduling Order granting motion to continue trial (related document 59)

(related documents Complaint, Stipulation) Trial date set for 4/12/2022 at 09:30 AM at

Dallas Judge Jernigan Ctrm. Entered on 2/1/2022.) No. of Notices: 2. Notice Date

02/03/2022. (Admin.)

02/04/2022

 62 Certificate of service re: Agreed Amended Scheduling Order Filed by Claims Agent

Kurtzman Carson Consultants LLC (related document(s)60 Agreed Amended Scheduling

Order granting motion to continue trial (related document 59) (related documents

Complaint, Stipulation) Trial date set for 4/12/2022 at 09:30 AM at Dallas Judge Jernigan

Ctrm. Entered on 2/1/2022.). (Kass, Albert)

02/26/2022

 63 Notice to take deposition of Dustin Norris filed by Plaintiff Highland Capital

Management, L.P.. (Annable, Zachery)

02/26/2022

 64 Notice to take deposition of Highland Capital Management Fund Advisors, L.P. and

NexPoint Advisors, L.P. filed by Plaintiff Highland Capital Management, L.P.. (Annable,

Zachery)

02/26/2022

 65 Notice to take deposition of Dennis J. Sauter, Jr. filed by Plaintiff Highland Capital

Management, L.P.. (Annable, Zachery)

03/02/2022

 66 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

03/03/2022

 67 Certificate of service re: 1) Highland's Amended Notice of Deposition to Dustin

Norris; 2) Highland's Second Amended Notice of Rule 30(b)(6) Deposition to (A)

Highland Capital Management Fund Advisors, L.P. and (B) NexPoint Advisors, L.P.; and

3) Highland's Amended Notice of Deposition to Dennis J. Sauter, Jr. Filed by Claims

Agent Kurtzman Carson Consultants LLC (related document(s)63 Notice to take deposition

of Dustin Norris filed by Plaintiff Highland Capital Management, L.P.. filed by Plaintiff

Highland Capital Management, L.P., 64 Notice to take deposition of Highland Capital

Management Fund Advisors, L.P. and NexPoint Advisors, L.P. filed by Plaintiff Highland

Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P., 65

Notice to take deposition of Dennis J. Sauter, Jr. filed by Plaintiff Highland Capital

Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

03/07/2022

 68 Certificate of service re: Plaintiff's Amended Notice of Service of a Subpoena to Frank

Waterhouse Filed by Claims Agent Kurtzman Carson Consultants LLC (related

document(s)66 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital

Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

03/15/2022

 69 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

03/15/2022

 70 Subpoena on Highland Capital Management Fund Advisors, L.P. filed by Plaintiff

Highland Capital Management, L.P.. (Annable, Zachery)

03/15/2022

000018

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 71 Subpoena on NexPoint Advisors, L.P. filed by Plaintiff Highland Capital Management,

L.P.. (Annable, Zachery)

03/16/2022

 72 Certificate of service re: 1) Plaintiffs Second Amended Notice of Service of a

Subpoena to Frank Waterhouse; 2) Plaintiff's Notice of Service of Trial Subpoena to

Highland Capital Management Fund Advisors, L.P.; and 3) Plaintiff's Notice of Service of

Trial Subpoena to NexPoint Advisors, L.P. Filed by Claims Agent Kurtzman Carson

Consultants LLC (related document(s)69 Subpoena on Frank Waterhouse filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.,

70 Subpoena on Highland Capital Management Fund Advisors, L.P. filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.,

71 Subpoena on NexPoint Advisors, L.P. filed by Plaintiff Highland Capital Management,

L.P.. filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

03/22/2022

 73 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

03/24/2022

 74 Certificate of service re: Plaintiffs Third Amended Notice of Service of a Subpoena to

Frank Waterhouse Filed by Claims Agent Kurtzman Carson Consultants LLC (related

document(s)73 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital

Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

04/01/2022

 75 Subpoena on NexPoint Advisors, L.P. filed by Plaintiff Highland Capital Management,

L.P.. (Annable, Zachery)

04/01/2022

 76 Subpoena on Highland Capital Management Fund Advisors, L.P. filed by Plaintiff

Highland Capital Management, L.P.. (Annable, Zachery)

04/01/2022

 77 Subpoena on James Dondero filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

04/01/2022

 78 Subpoena on Dustin Norris filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

04/01/2022

 79 Subpoena on The Retail Board filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

04/01/2022 80 (REDACTED EXHIBITS ADDED 04/18/2022); Witness and Exhibit List

(Reorganized Debtor's Witness and Exhibit List with Respect to Trial to Be Held on April

12−13, 2022) filed by Plaintiff Highland Capital Management, L.P. (RE: related

document(s)1 Complaint). (Attachments: # 1 Exhibit 1 # 2 Exhibit 2 # 3 Exhibit 3 # 4

Exhibit 4 # 5 Exhibit 5 # 6 Exhibit 6 # 7 Exhibit 7 # 8 Exhibit 8 # 9 Exhibit 9 # 10 Exhibit

10 # 11 Exhibit 11 # 12 Exhibit 12 # 13 Exhibit 13 # 14 Exhibit 14 # 15 Exhibit 15 # 16

Exhibit 16 # 17 Exhibit 17 # 18 Exhibit 18 # 19 Exhibit 19 # 20 Exhibit 20 # 21 Exhibit 21

# 22 Exhibit 22 # 23 Exhibit 23 # 24 Exhibit 24 # 25 Exhibit 25 # 26 Exhibit 26 # 27

Exhibit 27 # 28 Exhibit 28 # 29 Exhibit 29 # 30 Exhibit 30 # 31 Exhibit 31 # 32 Exhibit 32

# 33 Exhibit 33 # 34 Exhibit 34 # 35 Exhibit 35 # 36 Exhibit 36 # 37 Exhibit 37 # 38

Exhibit 38 # 39 Exhibit 39 # 40 Exhibit 40 # 41 Exhibit 41 # 42 Exhibit 42 # 43 Exhibit 43

# 44 Exhibit 44 # 45 Exhibit 45 # 46 Exhibit 46 # 47 Exhibit 47 # 48 Exhibit 48 # 49

Exhibit 49 # 50 Exhibit 50 # 51 Exhibit 51 # 52 Exhibit 52 # 53 Exhibit 53 # 54 Exhibit 54

# 55 Exhibit 55 # 56 Exhibit 56 # 57 Exhibit 57 # 58 Exhibit 58 # 59 Exhibit 59 # 60

Exhibit 60 # 61 Exhibit 61 # 62 Exhibit 62 # 63 Exhibit 63 # 64 Exhibit 64 # 65 Exhibit 65

# 66 Exhibit 66 # 67 Exhibit 67 # 68 Exhibit 68 # 69 Exhibit 69 # 70 Exhibit 70 # 71

Exhibit 71 # 72 Exhibit 72 # 73 Exhibit 73 # 74 Exhibit 74 # 75 Exhibit 75 # 76 Exhibit 76

# 77 Exhibit 77 # 78 Exhibit 78 # 79 Exhibit 79 # 80 Exhibit 80 # 81 Exhibit 81 # 82

Exhibit 82 # 83 Exhibit 83 # 84 Exhibit 84 # 85 Exhibit 85 # 86 Exhibit 86 # 87 Exhibit 87

# 88 Exhibit 88 # 89 Exhibit 89 # 90 Exhibit 90 # 91 Exhibit 91 # 92 Exhibit 92 # 93

Exhibit 93 # 94 Exhibit 94 # 95 Exhibit 95 # 96 Exhibit 96 # 97 Exhibit 97 # 98 Exhibit 98

# 99 Exhibit 99 # 100 Exhibit 100 # 101 Exhibit 101 # 102 Exhibit 102 # 103 Exhibit 103 #

000019

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104 Exhibit 104 # 105 Exhibit 105 # 106 Exhibit 106 # 107 Exhibit 107 # 108 Exhibit 108

# 109 Exhibit 109 # 110 Exhibit 110 # 111 Exhibit 111 # 112 Exhibit 112 # 113 Exhibit

113 # 114 Exhibit 114 # 115 Exhibit 115 # 116 Exhibit 116 # 117 Exhibit 117 # 118

Exhibit 118 # 119 Exhibit 119 # 120 Exhibit 120 # 121 Exhibit 121 # 122 Exhibit 122 #

123 Exhibit 123 # 124 Exhibit 124 # 125 Exhibit 125 # 126 Exhibit 126 # 127 Exhibit 127

# 128 Exhibit 128 # 129 Exhibit 129 # 130 Exhibit 130 # 131 Exhibit 131 # 132 Exhibit

132 # 133 Exhibit 133 # 134 Exhibit 134 # 135 Exhibit 135 # 136 Exhibit 136 # 137

Exhibit 137 # 138 Exhibit 138 # 139 Exhibit 139 # 140 Exhibit 140 # 141 Exhibit 141 #

142 Exhibit 142 # 143 Exhibit 143 # 144 Exhibit 144 # 145 Exhibit 145 # 146 Exhibit 146

# 147 Exhibit 147 # 148 Exhibit 148 # 149 Exhibit 149 # 150 Exhibit 150 # 151 Exhibit

151 # 152 Exhibit 152 # 153 Exhibit 153 # 154 Exhibit 154 # 155 Exhibit 155 # 156

Exhibit 156 # 157 Exhibit 157 # 158 Exhibit 158 # 159 Exhibit 159) (Annable, Zachery)

Additional attachment(s) added on 4/18/2022 (Okafor, Marcey).

04/01/2022

 81 Witness and Exhibit List / Advisors' Trial Witness and Exhibit List filed by Defendants

Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P. (RE: related

document(s)1 Complaint). (Berghman, Thomas)

04/05/2022

 82 Objection to (related document(s): 80 List (witness/exhibit/generic) filed by Plaintiff

Highland Capital Management, L.P.) filed by Defendants Highland Capital Management

Fund Advisors, L.P., NexPoint Advisors, L.P.. (Berghman, Thomas)

04/05/2022

 83 Objection to (related document(s): 81 List (witness/exhibit/generic) filed by Defendant

Highland Capital Management Fund Advisors, L.P., Defendant NexPoint Advisors,

L.P.)(Reorganized Debtor's Objections to Advisors' Trial Witness and Exhibit List) filed by

Plaintiff Highland Capital Management, L.P.. (Annable, Zachery)

04/06/2022

 84 Certificate of service re: Subpoena to Appear and Testify at a Hearing or Trial in a

Bankruptcy Case (or Adversary Proceeding) (Affidavit of Service) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)78 Subpoena). (Annable,

Zachery)

04/06/2022

 85 Certificate of service re: Subpoena to Appear and Testify at a Hearing or Trial in a

Bankruptcy Case (or Adversary Proceeding) (Affidavit of Service) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)77 Subpoena). (Annable,

Zachery)

04/06/2022

 86 Certificate of service re: Subpoena to Appear and Testify at a Hearing or Trial in a

Bankruptcy Case (or Adversary Proceeding) (Affidavit of Service) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)76 Subpoena). (Annable,

Zachery)

04/06/2022

 87 Certificate of service re: Subpoena to Appear and Testify at a Hearing or Trial in a

Bankruptcy Case (or Adversary Proceeding) (Affidavit of Service) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)76 Subpoena). (Annable,

Zachery)

04/06/2022

 88 Certificate of service re: Subpoena to Appear and Testify at a Hearing or Trial in a

Bankruptcy Case (or Adversary Proceeding) (Affidavit of Service) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)75 Subpoena). (Annable,

Zachery)

04/06/2022

 89 Certificate of service re: Subpoena to Appear and Testify at a Hearing or Trial in a

Bankruptcy Case (or Adversary Proceeding) (Affidavit of Service) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)75 Subpoena). (Annable,

Zachery)

04/06/2022

 90 Brief in opposition filed by Defendants Highland Capital Management Fund Advisors,

L.P., NexPoint Advisors, L.P. (RE: related document(s)1 Complaint). (Rukavina, Davor)

000020

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04/06/2022

 91 Proposed findings of fact and conclusions of law filed by Plaintiff Highland Capital

Management, L.P. (RE: related document(s)1 Complaint). (Annable, Zachery)

04/06/2022

 92 Proposed pre−trial order filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

04/07/2022

 93 Certificate of service re: Documents Served on April 1, 2022 Filed by Claims Agent

Kurtzman Carson Consultants LLC (related document(s)75 Subpoena on NexPoint

Advisors, L.P. filed by Plaintiff Highland Capital Management, L.P.. filed by Plaintiff

Highland Capital Management, L.P., 76 Subpoena on Highland Capital Management Fund

Advisors, L.P. filed by Plaintiff Highland Capital Management, L.P.. filed by Plaintiff

Highland Capital Management, L.P., 77 Subpoena on James Dondero filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.,

78 Subpoena on Dustin Norris filed by Plaintiff Highland Capital Management, L.P.. filed

by Plaintiff Highland Capital Management, L.P., 79 Subpoena on The Retail Board filed by

Plaintiff Highland Capital Management, L.P.. filed by Plaintiff Highland Capital

Management, L.P., 80 Witness and Exhibit List (Reorganized Debtor's Witness and Exhibit

List with Respect to Trial to Be Held on April 12−13, 2022) filed by Plaintiff Highland

Capital Management, L.P. (RE: related document(s)1 Complaint). (Attachments: # 1

Exhibit 1 # 2 Exhibit 2 # 3 Exhibit 3 # 4 Exhibit 4 # 5 Exhibit 5 # 6 Exhibit 6 # 7 Exhibit 7

# 8 Exhibit 8 # 9 Exhibit 9 # 10 Exhibit 10 # 11 Exhibit 11 # 12 Exhibit 12 # 13 Exhibit 13

# 14 Exhibit 14 # 15 Exhibit 15 # 16 Exhibit 16 # 17 Exhibit 17 # 18 Exhibit 18 # 19

Exhibit 19 # 20 Exhibit 20 # 21 Exhibit 21 # 22 Exhibit 22 # 23 Exhibit 23 # 24 Exhibit 24

# 25 Exhibit 25 # 26 Exhibit 26 # 27 Exhibit 27 # 28 Exhibit 28 # 29 Exhibit 29 # 30

Exhibit 30 # 31 Exhibit 31 # 32 Exhibit 32 # 33 Exhibit 33 # 34 Exhibit 34 # 35 Exhibit 35

# 36 Exhibit 36 # 37 Exhibit 37 # 38 Exhibit 38 # 39 Exhibit 39 # 40 Exhibit 40 # 41

Exhibit 41 # 42 Exhibit 42 # 43 Exhibit 43 # 44 Exhibit 44 # 45 Exhibit 45 # 46 Exhibit 46

# 47 Exhibit 47 # 48 Exhibit 48 # 49 Exhibit 49 # 50 Exhibit 50 # 51 Exhibit 51 # 52

Exhibit 52 # 53 Exhibit 53 # 54 Exhibit 54 # 55 Exhibit 55 # 56 Exhibit 56 # 57 Exhibit 57

# 58 Exhibit 58 # 59 Exhibit 59 # 60 Exhibit 60 # 61 Exhibit 61 # 62 Exhibit 62 # 63

Exhibit 63 # 64 Exhibit 64 # 65 Exhibit 65 # 66 Exhibit 66 # 67 Exhibit 67 # 68 Exhibit 68

# 69 Exhibit 69 # 70 Exhibit 70 # 71 Exhibit 71 # 72 Exhibit 72 # 73 Exhibit 73 # 74

Exhibit 74 # 75 Exhibit 75 # 76 Exhibit 76 # 77 Exhibit 77 # 78 Exhibit 78 # 79 Exhibit 79

# 80 Exhibit 80 # 81 Exhibit 81 # 82 Exhibit 82 # 83 Exhibit 83 # 84 Exhibit 84 # 85

Exhibit 85 # 86 Exhibit 86 # 87 Exhibit 87 # 88 Exhibit 88 # 89 Exhibit 89 # 90 Exhibit 90

# 91 Exhibit 91 # 92 Exhibit 92 # 93 Exhibit 93 # 94 Exhibit 94 # 95 Exhibit 95 # 96

Exhibit 96 # 97 Exhibit 97 # 98 Exhibit 98 # 99 Exhibit 99 # 100 Exhibit 100 # 101 Exhibit

101 # 102 Exhibit 102 # 103 Exhibit 103 # 104 Exhibit 104 # 105 Exhibit 105 # 106

Exhibit 106 # 107 Exhibit 107 # 108 Exhibit 108 # 109 Exhibit 109 # 110 Exhibit 110 #

111 Exhibit 111 # 112 Exhibit 112 # 113 Exhibit 113 # 114 Exhibit 114 # 115 Exhibit 115

# 116 Exhibit 116 # 117 Exhibit 117 # 118 Exhibit 118 # 119 Exhibit 119 # 120 Exhibit

120 # 121 Exhibit 121 # 122 Exhibit 122 # 123 Exhibit 123 # 124 Exhibit 124 # 125

Exhibit 125 # 126 Exhibit 126 # 127 Exhibit 127 # 128 Exhibit 128 # 129 Exhibit 129 #

130 Exhibit 130 # 131 Exhibit 131 # 132 Exhibit 132 # 133 Exhibit 133 # 134 Exhibit 134

# 135 Exhibit 135 # 136 Exhibit 136 # 137 Exhibit 137 # 138 Exhibit 138 # 139 Exhibit

139 # 140 Exhibit 140 # 141 Exhibit 141 # 142 Exhibit 142 # 143 Exhibit 143 # 144

Exhibit 144 # 145 Exhibit 145 # 146 Exhibit 146 # 147 Exhibit 147 # 148 Exhibit 148 #

149 Exhibit 149 # 150 Exhibit 150 # 151 Exhibit 151 # 152 Exhibit 152 # 153 Exhibit 153

# 154 Exhibit 154 # 155 Exhibit 155 # 156 Exhibit 156 # 157 Exhibit 157 # 158 Exhibit

158 # 159 Exhibit 159) filed by Plaintiff Highland Capital Management, L.P.). (Kass,

Albert)

04/07/2022

 94 Certificate of service re: Reorganized Debtor's Objections to Advisors' Trial Witness

and Exhibit List Filed by Claims Agent Kurtzman Carson Consultants LLC (related

document(s)83 Objection to (related document(s): 81 List (witness/exhibit/generic) filed by

Defendant Highland Capital Management Fund Advisors, L.P., Defendant NexPoint

Advisors, L.P.)(Reorganized Debtor's Objections to Advisors' Trial Witness and Exhibit

List) filed by Plaintiff Highland Capital Management, L.P.. filed by Plaintiff Highland

Capital Management, L.P.). (Kass, Albert)

000021

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04/08/2022

 95 Subpoena on Frank Waterhouse filed by Plaintiff Highland Capital Management, L.P..

(Annable, Zachery)

04/08/2022

 96 Joint Pre−Trial order (RE: related document(s)1 Complaint filed by Plaintiff Highland

Capital Management, L.P.). Entered on 4/8/2022 (Okafor, Marcey)

04/08/2022

 97 Motion to redact/restrict Emergency Redact (related document(s):80) (Fee Amount

$26) filed by Plaintiff Highland Capital Management, L.P. (Attachments: # 1 Exhibit 31

(Redacted) # 2 Exhibit 32 (Redacted) # 3 Exhibit 34 (Redacted) # 4 Exhibit 36 (Redacted)

# 5 Exhibit 37 (Redacted) # 6 Exhibit 38 (Redacted) # 7 Exhibit 39 (Redacted) # 8 Exhibit

40 (Redacted) # 9 Exhibit 49 (Redacted) # 10 Exhibit 76 (Redacted) # 11 Exhibit 86

(Redacted) # 12 Exhibit 142 (Redacted)) (Annable, Zachery)

04/08/2022

 Receipt of filing fee for Motion to Redact/Restrict From Public View( 21−03010−sgj)

[motion,mredact] ( 26.00). Receipt number A29454882, amount $ 26.00 (re: Doc# 97).

(U.S. Treasury)

04/08/2022

 98 Support/supplemental document − OBJECTIONS TO TRIAL SUBPOENAS DUCES

TECUM filed by Defendants Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P. (RE: related document(s)75 Subpoena, 76 Subpoena). (Berghman, Thomas)

04/08/2022

 99 Certificate of service re: re 1) Highland's Proposed Findings of Fact and Conclusions of

Law; and 2) Joint Pretrial Order Filed by Claims Agent Kurtzman Carson Consultants LLC

(related document(s)91 Proposed findings of fact and conclusions of law filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)1 Complaint). filed by

Plaintiff Highland Capital Management, L.P., 92 Proposed pre−trial order filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.).

(Kass, Albert)

04/10/2022

 100 BNC certificate of mailing − PDF document. (RE: related document(s)96 Joint

Pre−Trial order (RE: related document(s)1 Complaint filed by Plaintiff Highland Capital

Management, L.P.). Entered on 4/8/2022) No. of Notices: 2. Notice Date 04/10/2022.

(Admin.)

04/11/2022

 101 Objection to (related document(s): 98 Support/supplemental document filed by

Defendant Highland Capital Management Fund Advisors, L.P., Defendant NexPoint

Advisors, L.P.)(Highland's Response to Objections to Trial Subpoenas Duces Tecum) filed

by Plaintiff Highland Capital Management, L.P.. (Annable, Zachery)

04/11/2022

 102 Declaration re: (Declaration of John A. Morris in Support of Highland's Response to

Objections to Trial Subpoenas Duces Tecum) filed by Plaintiff Highland Capital

Management, L.P. (RE: related document(s)101 Objection). (Attachments: # 1 Exhibit 1 # 2

Exhibit 2 # 3 Exhibit 3 # 4 Exhibit 4 # 5 Exhibit 5) (Annable, Zachery)

04/12/2022

 103 Certificate of service re: 1) Plaintiff's Notice of Service of a Trial Subpoena to Frank

Waterhouse ; 2) Joint Pretrial Order; and 3) Reorganized Debtor's Emergency Motion to

Redact Certain Exhibits Attached to Reorganized Debtor's Witness and Exhibit List with

Respect to Trial to be Held on April 12 − 13, 2022 Filed by Claims Agent Kurtzman Carson

Consultants LLC (related document(s)95 Subpoena on Frank Waterhouse filed by Plaintiff

Highland Capital Management, L.P.. filed by Plaintiff Highland Capital Management, L.P.,

96 Joint Pre−Trial order (RE: related document(s)1 Complaint filed by Plaintiff Highland

Capital Management, L.P.). Entered on 4/8/2022, 97 Motion to redact/restrict Emergency

Redact (related document(s):80) (Fee Amount $26) filed by Plaintiff Highland Capital

Management, L.P. (Attachments: # 1 Exhibit 31 (Redacted) # 2 Exhibit 32 (Redacted) # 3

Exhibit 34 (Redacted) # 4 Exhibit 36 (Redacted) # 5 Exhibit 37 (Redacted) # 6 Exhibit 38

(Redacted) # 7 Exhibit 39 (Redacted) # 8 Exhibit 40 (Redacted) # 9 Exhibit 49 (Redacted) #

10 Exhibit 76 (Redacted) # 11 Exhibit 86 (Redacted) # 12 Exhibit 142 (Redacted)) filed by

Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

000022

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04/12/2022

 104 Certificate of service re: 1) Highland's Response to Objections to Trial Subpoenas

Duces Tecum; and 2) Declaration of John A. Morris in Support of Highland's Response to

Objections to Trial Subpoenas Duces Tecum Filed by Claims Agent Kurtzman Carson

Consultants LLC (related document(s)101 Objection to (related document(s): 98

Support/supplemental document filed by Defendant Highland Capital Management Fund

Advisors, L.P., Defendant NexPoint Advisors, L.P.)(Highland's Response to Objections to

Trial Subpoenas Duces Tecum) filed by Plaintiff Highland Capital Management, L.P.. filed

by Plaintiff Highland Capital Management, L.P., 102 Declaration re: (Declaration of John

A. Morris in Support of Highland's Response to Objections to Trial Subpoenas Duces

Tecum) filed by Plaintiff Highland Capital Management, L.P. (RE: related document(s)101

Objection). (Attachments: # 1 Exhibit 1 # 2 Exhibit 2 # 3 Exhibit 3 # 4 Exhibit 4 # 5 Exhibit

5) filed by Plaintiff Highland Capital Management, L.P.). (Kass, Albert)

04/12/2022

 105 Hearing continued (RE: related document(s)1 Adversary case 21−03010. Complaint

by Highland Capital Management, L.P. against Highland Capital Management Fund

Advisors, L.P., NexPoint Advisors, L.P., Nature(s) of suit: 91 (Declaratory judgment). 02

(Other (e.g. other actions that would have been brought in state court if unrelated to

bankruptcy)). 72 (Injunctive relief − other), filed by Plaintiff Highland Capital

Management, L.P.) Continued Hearing to be held on 4/13/2022 at 09:30 AM Dallas Judge

Jernigan Ctrm for 1, (Edmond, Michael) (Entered: 04/13/2022)

04/12/2022

 106 Request for transcript regarding a hearing held on 4/12/2022. The requested

turn−around time is hourly. (Edmond, Michael) (Entered: 04/13/2022)

04/12/2022

 115 Court admitted exhibits date of hearing April 12, 2022 (RE: related document(s)1

Adversary case 21−03010. Complaint by Highland Capital Management, L.P. against

Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P., Nature(s) of

suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions that would have been brought

in state court if unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff

Highland Capital Management, L.P.) (COURT ADMITTED ALL OF

PLAINTIFF'S/DEBTOR EXHIBITS #1 THROUGH #161 BY JOHN MORRIS & COURT

ADMITTED DEFENDANT'S/HCM FUND ADVISORS, L.P. AND NEXPOINT

ADVISORS, L.P., EXHIBITS #A, #B, #C, #D, #E, #F, #G, #H, #I, #J, #K, #M, #N, #O, #P,

#Q, #R, #S, #T, #U, #V, #W, #X, #Y, #AA, #BB, #CC & #EE BY DAVOR RUKAVINA)

(Edmond, Michael) (Entered: 04/15/2022)

04/13/2022

 107 Request for transcript regarding a hearing held on 4/12/2022. The requested

turn−around time is hourly (Bergreen, J.)

04/13/2022

 108 Request for transcript regarding a hearing held on 4/13/2022. The requested

turn−around time is hourly. (Edmond, Michael)

04/13/2022

 109 Hearing held on 4/13/2022. (RE: related document(s)1 Adversary case 21−03010.

Complaint by Highland Capital Management, L.P. against Highland Capital Management

Fund Advisors, L.P., NexPoint Advisors, L.P., Adversary Cover Sheet). Nature(s) of suit:

91 (Declaratory judgment). 02 (Other (e.g. other actions that would have been brought in

state court if unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff

Highland Capital Management, L.P.) (Appearances: J. Morris, H. Winograd, and G. Demo

for Reorganized Debtor; D. Rukavina and T. Berghman for HCMFA and NPA. Evidentiary

hearing. Evidence closed. Court will schedule closing arguments (WebEx only) in one−two

week time frame. Court room deputy will reach out to parties regarding same.) (Edmond,

Michael) (Entered: 04/14/2022)

04/14/2022 110 Transcript regarding Hearing Held 04/12/2022 (155 pages) RE: Trial Day 1 (9:38 am

to 2:19 pm segment). THIS TRANSCRIPT WILL BE MADE ELECTRONICALLY

AVAILABLE TO THE GENERAL PUBLIC 90 DAYS AFTER THE DATE OF FILING.

TRANSCRIPT RELEASE DATE IS 07/13/2022. Until that time the transcript may be

viewed at the Clerk's Office or a copy may be obtained from the official court transcriber.

Court Reporter/Transcriber Kathy Rehling, kathyrehlingtranscripts@gmail.com, Telephone

number 972−783−3063. (RE: related document(s) 105 Hearing continued (RE: related

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document(s)1 Adversary case 21−03010. Complaint by Highland Capital Management, L.P.

against Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P.,

Nature(s) of suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions that would have

been brought in state court if unrelated to bankruptcy)). 72 (Injunctive relief − other), filed

by Plaintiff Highland Capital Management, L.P.) Continued Hearing to be held on

4/13/2022 at 09:30 AM Dallas Judge Jernigan Ctrm for 1,). Transcript to be made available

to the public on 07/13/2022. (Rehling, Kathy)

04/14/2022

 111 PDF with attached Audio File. Court Date & Time [04/12/2022 08:44:21 AM].

File Size [ 124265 KB ]. Run Time [ 08:52:34 ]. (admin).

04/14/2022

 112 PDF with attached Audio File. Court Date & Time [04/13/2022 08:49:27 AM].

File Size [ 25764 KB ]. Run Time [ 01:50:11 ]. (admin).

04/15/2022

 113 Transcript regarding Hearing Held 04/12/2022 RE: hearing. THIS TRANSCRIPT

WILL BE MADE ELECTRONICALLY AVAILABLE TO THE GENERAL PUBLIC 90

DAYS AFTER THE DATE OF FILING. TRANSCRIPT RELEASE DATE IS 07/14/2022.

Until that time the transcript may be viewed at the Clerk's Office or a copy may be obtained

from the official court transcriber. Court Reporter/Transcriber Acorn Transcripts, LLC,

Telephone number 1−800−750−5747. (RE: related document(s) 105 Hearing continued

(RE: related document(s)1 Adversary case 21−03010. Complaint by Highland Capital

Management, L.P. against Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P., Nature(s) of suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions

that would have been brought in state court if unrelated to bankruptcy)). 72 (Injunctive

relief − other), filed by Plaintiff Highland Capital Management, L.P.) Continued Hearing to

be held on 4/13/2022 at 09:30 AM Dallas Judge Jernigan Ctrm for 1,). Transcript to be

made available to the public on 07/14/2022. (Gardelli, Nancy)

04/15/2022

 114 Transcript regarding Hearing Held 04/13/2022 RE: Hearing. THIS TRANSCRIPT

WILL BE MADE ELECTRONICALLY AVAILABLE TO THE GENERAL PUBLIC 90

DAYS AFTER THE DATE OF FILING. TRANSCRIPT RELEASE DATE IS 07/14/2022.

Until that time the transcript may be viewed at the Clerk's Office or a copy may be obtained

from the official court transcriber. Court Reporter/Transcriber Acorn Transcripts, LLC,

Telephone number 1−800−750−5747. (RE: related document(s) 109 Hearing held on

4/13/2022. (RE: related document(s)1 Adversary case 21−03010. Complaint by Highland

Capital Management, L.P. against Highland Capital Management Fund Advisors, L.P.,

NexPoint Advisors, L.P., Adversary Cover Sheet). Nature(s) of suit: 91 (Declaratory

judgment). 02 (Other (e.g. other actions that would have been brought in state court if

unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff Highland Capital

Management, L.P.) (Appearances: J. Morris, H. Winograd, and G. Demo for Reorganized

Debtor; D. Rukavina and T. Berghman for HCMFA and NPA. Evidentiary hearing.

Evidence closed. Court will schedule closing arguments (WebEx only) in one−two week

time frame. Court room deputy will reach out to parties regarding same.)). Transcript to be

made available to the public on 07/14/2022. (Gardelli, Nancy)

04/18/2022 116 Transcript regarding Hearing Held 04/13/22 RE: Trial PM Session. THIS

TRANSCRIPT WILL BE MADE ELECTRONICALLY AVAILABLE TO THE

GENERAL PUBLIC 90 DAYS AFTER THE DATE OF FILING. TRANSCRIPT

RELEASE DATE IS 07/18/2022. Until that time the transcript may be viewed at the Clerk's

Office or a copy may be obtained from the official court transcriber. Court

Reporter/Transcriber Liberty Transcripts/Dipti Patel, Telephone number 847−848−4907.

(RE: related document(s) 109 Hearing held on 4/13/2022. (RE: related document(s)1

Adversary case 21−03010. Complaint by Highland Capital Management, L.P. against

Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P., Adversary

Cover Sheet). Nature(s) of suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions that

would have been brought in state court if unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff Highland Capital Management, L.P.) (Appearances: J. Morris, H.

Winograd, and G. Demo for Reorganized Debtor; D. Rukavina and T. Berghman for

HCMFA and NPA. Evidentiary hearing. Evidence closed. Court will schedule closing

arguments (WebEx only) in one−two week time frame. Court room deputy will reach out to

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parties regarding same.)). Transcript to be made available to the public on 07/18/2022.

(Patel, Dipti)

04/18/2022

 117 Amended Witness and Exhibit List (Reorganized Debtor's Amended Witness and

Exhibit List with Respect to Trial to Be Held on April 12−13, 2022) filed by Plaintiff

Highland Capital Management, L.P. (RE: related document(s)80 List

(witness/exhibit/generic)). (Attachments: # 1 Exhibit 160 # 2 Exhibit 161) (Annable,

Zachery)

04/18/2022

 118 Order Granting Emergency Motion to Redact Certain Exhibits (Related Doc # 97)

Entered on 4/18/2022. (Okafor, Marcey)

04/19/2022

 119 Trial/Closing arguments set (RE: related document(s)1 Adversary case 21−03010.

Complaint by Highland Capital Management, L.P. against Highland Capital Management

Fund Advisors, L.P., NexPoint Advisors, L.P.. Fee Amount $350 (Attachments: # 1 Exhibit

A # 2 Exhibit B # 3 Exhibit C # 4 Exhibit D # 5 Exhibit E # 6 Exhibit F # 7 Exhibit G # 8

Exhibit H # 9 Exhibit I # 10 Exhibit J # 11 Adversary Cover Sheet). Nature(s) of suit: 91

(Declaratory judgment). 02 (Other (e.g. other actions that would have been brought in state

court if unrelated to bankruptcy)). 72 (Injunctive relief − other). filed by Plaintiff Highland

Capital Management, L.P.) Trial date set for 4/27/2022 at 01:30 PM at at

https://us−courts.webex.com/meet/jerniga. Parties should appear via Webex. (Ellison, T.)

04/20/2022

 120 Certificate of service re: 1) Reorganized Debtor's Amended Witness and Exhibit List

with Respect to Trial to be Held on April 12 − 13, 2022; and 2) Order Granting Emergency

Motion to Redact Certain Exhibits Attached to Reorganized Debtor's Witness and Exhibit

List with Respect to Trial to be Held on April 12 − 13, 2022 Filed by Claims Agent

Kurtzman Carson Consultants LLC (related document(s)117 Amended Witness and Exhibit

List (Reorganized Debtor's Amended Witness and Exhibit List with Respect to Trial to Be

Held on April 12−13, 2022) filed by Plaintiff Highland Capital Management, L.P. (RE:

related document(s)80 List (witness/exhibit/generic)). (Attachments: # 1 Exhibit 160 # 2

Exhibit 161) filed by Plaintiff Highland Capital Management, L.P., 118 Order Granting

Emergency Motion to Redact Certain Exhibits (Related Doc 97) Entered on 4/18/2022.).

(Kass, Albert)

04/27/2022

 121 Hearing held on 4/27/2022. (RE: related document(s)1 Adversary case 21−03010.

Complaint by Highland Capital Management, L.P. against Highland Capital Management

Fund Advisors, L.P., NexPoint Advisors, L.P., Adversary Cover Sheet). Nature(s) of suit:

91 (Declaratory judgment). 02 (Other (e.g. other actions that would have been brought in

state court if unrelated to bankruptcy)). 72 (Injunctive relief − other), filed by Plaintiff

Highland Capital Management, L.P.) (Appearances: J. Morris for Reorganized Debtor; D.

Rukavina for HCMFA and NexPoint Advisors. Nonevidentiary hearing (closing

arguments). Court took matter under advisement.) (Edmond, Michael) (Entered:

04/28/2022)

05/04/2022

 123 Request for transcript regarding a hearing held on 4/27/2022. The requested

turn−around time is hourly (Smith, Caitlynne) (Entered: 05/25/2022)

05/09/2022 122 Transcript regarding Hearing Held 4/27/2022 RE: Closing Arguments. THIS

TRANSCRIPT WILL BE MADE ELECTRONICALLY AVAILABLE TO THE

GENERAL PUBLIC 90 DAYS AFTER THE DATE OF FILING. TRANSCRIPT

RELEASE DATE IS 08/8/2022. Until that time the transcript may be viewed at the Clerk's

Office or a copy may be obtained from the official court transcriber. Court

Reporter/Transcriber Dipti Patel/Liberty Transcripts, Telephone number 847−848−4907.

(RE: related document(s) 121 Hearing held on 4/27/2022. (RE: related document(s)1

Adversary case 21−03010. Complaint by Highland Capital Management, L.P. against

Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P., Adversary

Cover Sheet). Nature(s) of suit: 91 (Declaratory judgment). 02 (Other (e.g. other actions that

would have been brought in state court if unrelated to bankruptcy)). 72 (Injunctive relief −

other), filed by Plaintiff Highland Capital Management, L.P.) (Appearances: J. Morris for

Reorganized Debtor; D. Rukavina for HCMFA and NexPoint Advisors. Nonevidentiary

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hearing (closing arguments). Court took matter under advisement.)). Transcript to be made

available to the public on 08/8/2022. (Patel, Dipti)

08/30/2022

 124 Findings of fact and conclusions of law in support of judgment: (A) granting breach of

contract claims asserted by the Reorganized Debtor; and (B) denying Defendants' requests

for allowance of administrative expense claims (RE: related document(s)1 Complaint filed

by Plaintiff Highland Capital Management, L.P.). Entered on 8/30/2022 (Okafor, Marcey)

09/01/2022

 125 BNC certificate of mailing − PDF document. (RE: related document(s)124 Findings of

fact and conclusions of law in support of judgment: (A) granting breach of contract claims

asserted by the Reorganized Debtor; and (B) denying Defendants' requests for allowance of

administrative expense claims (RE: related document(s)1 Complaint filed by Plaintiff

Highland Capital Management, L.P.). Entered on 8/30/2022) No. of Notices: 2. Notice Date

09/01/2022. (Admin.)

09/14/2022 126 Judgment (final). Entered on 9/14/2022 (Okafor, Marcey)

09/16/2022

 127 BNC certificate of mailing − PDF document. (RE: related document(s)126 Judgment

(final). Entered on 9/14/2022) No. of Notices: 2. Notice Date 09/16/2022. (Admin.)

09/20/2022

 128 Notice of appeal . Fee Amount $298 filed by Defendants Highland Capital

Management Fund Advisors, L.P., NexPoint Advisors, L.P. (RE: related document(s)126

Judgment). Appellant Designation due by 10/4/2022. (Rukavina, Davor)

09/20/2022

 Receipt of filing fee for Notice of appeal( 21−03010−sgj) [appeal,ntcapl] ( 298.00).

Receipt number A29832129, amount $ 298.00 (re: Doc# 128). (U.S. Treasury)

09/30/2022

 130 Notice of docketing notice of appeal. Civil Action Number: 3:22−cv−02170−S. (RE:

related document(s)128 Notice of appeal . Fee Amount $298 filed by Defendants Highland

Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P. (RE: related

document(s)126 Judgment). Appellant Designation due by 10/4/2022.) (Whitaker,

Sheniqua)

09/30/2022

 131 Certificate of mailing regarding appeal (RE: related document(s)128 Notice of appeal .

filed by Defendants Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P. (RE: related document(s)126 Judgment). Appellant Designation due by

10/4/2022.) (Attachments: # 1 Service List) (Whitaker, Sheniqua)

09/30/2022

 132 Notice regarding the record for a bankruptcy appeal to the U.S. District Court. (RE:

related document(s)128 Notice of appeal . filed by Defendants Highland Capital

Management Fund Advisors, L.P., NexPoint Advisors, L.P. (RE: related document(s)126

Judgment). (Whitaker, Sheniqua)

10/02/2022

 133 Statement of issues on appeal, filed by Defendants Highland Capital Management

Fund Advisors, L.P., NexPoint Advisors, L.P. (RE: related document(s)128 Notice of

appeal). (Rukavina, Davor)

10/02/2022

 134 Appellant designation of contents for inclusion in record on appeal filed by

Defendants Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P.

(RE: related document(s)128 Notice of appeal). Appellee designation due by 10/17/2022.

(Rukavina, Davor)

10/02/2022

 135 BNC certificate of mailing. (RE: related document(s)132 Notice regarding the record

for a bankruptcy appeal to the U.S. District Court. (RE: related document(s)128 Notice of

appeal . filed by Defendants Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P. (RE: related document(s)126 Judgment).) No. of Notices: 0. Notice Date

10/02/2022. (Admin.)

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10/04/2022

 136 Clerk's correspondence requesting amended designation from attorney for debtor.

(RE: related document(s)134 Appellant designation of contents for inclusion in record on

appeal filed by Defendants Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P. (RE: related document(s)128 Notice of appeal). Appellee designation due by

10/17/2022.) Responses due by 10/7/2022. (Blanco, J.)

10/04/2022

 137 Amended appellant designation of contents for inclusion in record on appeal filed by

Defendants Highland Capital Management Fund Advisors, L.P., NexPoint Advisors, L.P.

(RE: related document(s)134 Appellant designation). (Rukavina, Davor)

10/07/2022

 138 Motion to stay pending appeal (Agreed Motion) (related documents 126 Judgment)

filed by Defendants Highland Capital Management Fund Advisors, L.P., NexPoint

Advisors, L.P. (Attachments: # 1 Proposed Order) (Rukavina, Davor)

10/07/2022

 139 Support/supplemental document Supersedeas Bond filed by Defendant NexPoint

Advisors, L.P. (RE: related document(s)126 Judgment). (Rukavina, Davor)

10/07/2022

 140 Support/supplemental document Supersedeas Bond filed by Defendant Highland

Capital Management Fund Advisors, L.P. (RE: related document(s)126 Judgment).

(Rukavina, Davor)

10/11/2022

 141 Agreed Order conditionally staying judgment pending appeal (related document #

138) Entered on 10/11/2022. (Okafor, Marcey)

10/13/2022

 142 Receipt of court papers − supersedeas bond Nexpoint Advisors receipt #D307 (RE:

related document(s)141 Agreed Order conditionally staying judgment pending appeal

(related document 138) Entered on 10/11/2022.) (Ecker, C.)

10/13/2022

 143 Receipt of court papers − supersedeas Bond Highland Capital Management Fund

Advisors, L.P. receipt #D308 (RE: related document(s)141 Agreed Order conditionally

staying judgment pending appeal (related document 138) Entered on 10/11/2022.) (Ecker,

C.)

10/13/2022

 144 BNC certificate of mailing − PDF document. (RE: related document(s)141 Agreed

Order conditionally staying judgment pending appeal (related document 138) Entered on

10/11/2022.) No. of Notices: 2. Notice Date 10/13/2022. (Admin.)

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DOCS_NY:42310.8 36027/002

PACHULSKI STANG ZIEHL & JONES LLP 

Jeffrey N. Pomerantz (CA Bar No.143717) (admitted pro hac vice) 

Ira D. Kharasch (CA Bar No. 109084) (admitted pro hac vice) 

John A. Morris (NY Bar No. 2405397) (admitted pro hac vice) 

Gregory V. Demo (NY Bar No. 5371992) (admitted pro hac vice) 

Hayley R. Winograd (NY Bar No. 5612569) (admitted pro hac vice) 

10100 Santa Monica Blvd., 13th Floor 

Los Angeles, CA 90067 

Telephone: (310) 277-6910 

Facsimile: (310) 201-0760 

HAYWARD PLLC 

Melissa S. Hayward 

Texas Bar No. 24044908 

MHayward@HaywardFirm.com 

Zachery Z. Annable 

Texas Bar No. 24053075 

ZAnnable@HaywardFirm.com 

10501 N. Central Expy, Ste. 106 

Dallas, Texas 75231 

Tel: (972) 755-7100 

Fax: (972) 755-7110 

Counsel for Highland Capital Management, L.P. 

IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

In re: 

HIGHLAND CAPITAL MANAGEMENT, L.P.,1

Debtor. 

§ 

§ 

§ 

§ 

§ 

§ 

Chapter 11 

Case No. 19-34054-sgj11 

HIGHLAND CAPITAL MANAGEMENT, L.P., 

 Plaintiff, 

vs. 

HIGHLAND CAPITAL MANAGEMENT FUND 

ADVISORS, L.P., AND NEXPOINT ADVISORS, 

L.P., 

 Defendants. 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

Adversary Proceeding No. 

_____________________ 

1

 The Debtor’s last four digits of its taxpayer identification number are (6725). The headquarters and service 

address for the above-captioned Debtor is 300 Crescent Court, Suite 700, Dallas, TX 75201. 

Case 21-03010-sgj Doc 1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc Main

Document Page 1 of 17

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DOCS_NY:42310.8 36027/002

PLAINTIFF HIGHLAND CAPITAL MANAGEMENT, L.P.’S 

VERIFIED ORIGINAL COMPLAINT FOR DAMAGES 

AND FOR DECLARATORY AND INJUNCTIVE RELIEF 

Plaintiff Highland Capital Management, L.P., the above-captioned debtor and debtor-inpossession (“Plaintiff” or the “Debtor”), by its undersigned counsel, files this Verified Original

Complaint for Damages and for Declaratory and Injunctive Relief (the “Complaint”) against 

defendants Highland Capital Management Fund Advisors, L.P. (“HCMFA”) and NexPoint 

Advisors, L.P. (“NPA,” and together with HCMFA, the “Defendants” or the “Advisors”), 

seeking damages and declaratory and injunctive relief pursuant to sections 105(a), 362, 542, and 

1107 of title 11 of the United States Code (the “Bankruptcy Code”) and Rules 7001(7) and 7065 

of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). In support of its 

Complaint, the Debtor alleges upon knowledge of its own actions and upon information and 

belief as to other matters as follows: 

PRELIMINARY STATEMENT2

1. The Advisors serve as the investment manager, either directly or indirectly, to a 

number of investment vehicles (collectively, the “Funds”) regulated pursuant to the Securities 

Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. 

Certain of the Funds are publicly traded and have thousands of retail investors who are at risk 

due to the Advisors’ deleterious conduct. 

2. The Advisors are owned and controlled by James Dondero. Pursuant to certain 

Shared Services Agreements, the Debtor has historically provided back-office and middle-office 

services that enable the Advisors to manage the Funds. Although the Debtor is paid for these 

2

 Capitalized terms not specifically defined in this Preliminary Statement shall have the meanings ascribed to them 

below. 

Case 21-03010-sgj Doc 1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc Main

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3 

DOCS_NY:42310.8 36027/002

services, providing the services requires the Debtor to maintain a full staff, the cost of which has 

historically caused substantial net losses to the Debtor. 

3. Each of the Shared Services Agreements gives either party the unilateral right to 

terminate the respective Shared Services Agreement by providing prior written notice. On 

November 30, 2020, the Debtor provided written notice of its intent to terminate the Shared 

Services Agreements effective as of January 31, 2021. 

4. The Termination Notices could not have come as a surprise to the Advisors 

because the Debtor was in bankruptcy and had been pursuing an “asset monetization” plan of 

reorganization that would leave it with a substantially scaled-down work force since at least 

August 2020. With that in mind, the Debtor began developing a plan pursuant to which the 

shared services would be transitioned to an entity that would be created, owned, and operated by 

certain of the Debtor’s employees who were expected to be terminated as part of the 

implementation of the Debtor’s Plan. 

5. At the same time, the Debtor continued to provide the services required under the 

Shared Services Agreements – despite the Advisors being in substantial arrears with an 

outstanding amount due to the Debtor in excess of $3 million – and otherwise continued in its 

attempts to transition those services in a smooth and orderly manner. Indeed, in order to give the 

Advisors more time to engage and complete the transition, the Debtor has extended the 

termination date on two occasions, with the current termination deadline being February 19, 

2021.3

3

 Although the Shared Services Agreement will terminate on February 19, 2021, the Debtor is willing to further 

extend the termination dates of the Shared Services Agreements through February 28, 2021, solely to prevent 

catastrophic harm to the retail investors in the Funds, but the Debtor will be unable to extend the termination date 

any further as the Debtor is expected to reduce its workforce at the end of February and will have insufficient 

personnel thereafter to perform under the Shared Services Agreements. 

Case 21-03010-sgj Doc 1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc Main

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DOCS_NY:42310.8 36027/002

6. Regrettably, as described in more detail below, and notwithstanding the Debtor’s 

best efforts to aid in the transition of services, the Advisors have willfully failed and refused to 

adopt and effectuate a transition plan, choosing instead to spend the last months threatening the 

Debtor and certain of its employees and seeking to deflect responsibility for their own wrongful 

conduct. 

7. The status quo is untenable. The Debtor has the contractual right to terminate the 

Shared Services Agreements and has exercised that right. Pursuant to the Debtor’s Plan, there 

will shortly be a substantial reduction in the Debtor’s work force and the Debtor will be unable 

to provide services to the Advisors. The Advisors’ failure to work with the Debtor or to 

otherwise develop a transition plan of their own has put thousands of retail investors at risk. 

8. The Debtor is faced with an awful choice. It can either (a) exercise its rights to 

terminate the Shared Services Agreements to the detriment of the Funds and their investors, and 

be sucked into more litigation because of Mr. Dondero’s conduct, or (b) attempt to provide 

services to the Advisors under the Shared Services Agreements at substantial losses and risk 

material delays in the implementation of the Debtor’s Plan. 

9. Therefore, in addition to seeking damages and declaratory relief, the Debtor is 

filing a separate emergency motion for a mandatory injunction compelling the Advisors to adopt 

and implement a transition plan by February 28, 2021, when the Debtor is expected to 

substantially reduce its workforce. In the absence of such a mandate, the Funds (together with 

their thousands of investors) and the Debtor will be irreparably harmed. 

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JURISDICTION AND VENUE 

10. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. 

§§ 157 and § 1334(b). This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 

157(b)(2)(A) and (O). 

11. Venue is proper in this judicial district pursuant to 28 U.S.C. § 1409. 

12. This adversary proceeding is commenced pursuant to Bankruptcy Rules 7001 and 

7065, Bankruptcy Code sections 105(a) and 362, 28 U.S.C. §§ 2201 and 2202, and applicable 

Delaware law. 

THE PARTIES

13. The Debtor is a limited liability partnership formed under the laws of Delaware 

with a business address at 300 Crescent Court, Suite 700, Dallas, Texas 75201. 

14. Upon information and belief, HCMFA is a limited partnership with offices 

located in Dallas, Texas. 

15. Upon information and belief, NPA is a limited partnership with offices located in 

Dallas, Texas. 

CASE BACKGROUND 

16. On October 16, 2019 (the “Petition Date”), the Debtor filed a voluntary petition 

for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the 

District of Delaware (the “Delaware Court”), Case No. 19-12239 (CSS) (the “Highland 

Bankruptcy Case”). 

17. On October 29, 2019, the U.S. Trustee in the Delaware Court appointed an 

Official Committee of Unsecured Creditors with the following members: (a) Redeemer 

Committee of Highland Crusader Fund, (b) Meta-e Discovery, (c) UBS Securities LLC and UBS 

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AG London Branch, and (d) Acis Capital Management, L.P. and Acis Capital Management GP 

LLC. 

18. On December 4, 2019, the Delaware Court entered an order transferring venue of 

the Highland Bankruptcy Case to this Court [Docket No. 186].4

19. The Debtor has continued to operate and manage its business as a debtor-inpossession pursuant to Bankruptcy Code sections 1107(a) and 1108. No trustee or examiner has 

been appointed in this chapter 11 case. 

20. On November 24, 2020, the Debtor filed the Fifth Amended Plan of 

Reorganization of Highland Capital Management, L.P. [Docket No. 1472] (the “Plan”). 

21. On February 2 and 3, 2021, the Court conducted a confirmation hearing with 

respect to the Plan. [Docket No. 1808]. 

22. On February 8, 2021, the Court rendered an opinion in which it approved the 

Plan. [Docket No. 1924]. 

STATEMENT OF FACTS 

A. The Debtor Has the Contractual Right to Terminate the Shared 

Services Agreements, and It Timely Exercised that Right 

23. The Debtor is party to the Shared Services Agreements pursuant to which it has a 

contractual right of termination upon written notice. 

The Debtor’s Shared Services Agreement with HCMFA 

24. The Debtor and HCMFA are parties to that certain Second Amended and Restated 

Shared Services Agreement, effective as of February 8, 2013 (the “HCMFA Shared Services 

Agreement”), a copy of which is attached hereto as Exhibit A. 

4

 All docket numbers refer to the main docket for the Highland Bankruptcy Case maintained by this Court. 

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25. Pursuant to section 2.01 of the HCMFA Shared Services Agreement and Annex A 

affixed thereto, the Debtor provides certain services to HCMFA that enable HCMFA to manage 

the Funds. 

26. The HCMFA Shared Services Agreement was for a one-year term, subject to 

automatic one-year renewals “unless sooner terminated under Section 7.02.” 

27. Section 7.02 of the Shared Services Agreement provides that “[e]ither Party may 

terminate this Agreement, with or without cause, upon at least 60 days advance written notice at 

any time prior to the expiration of the Term.” 

28. On November 30, 2020, the Debtor provided written notice to HCMFA that it 

intended to terminate the HCMFA Shared Services Agreement as of January 31, 2021 (the 

“HCMFA Termination Notice”). A copy of the HCMFA Termination Notice is attached hereto 

as Exhibit B. 

The Debtor’s Shared Services Agreement with NPA 

29. The Debtor and NPA are parties to that certain Amended and Restated Shared 

Services Agreement, effective as of January 1, 2018 (the “NPA Shared Services Agreement” and 

together with the HCMFA Shared Services Agreement, the “Shared Services Agreements”), a 

copy of which is attached hereto as Exhibit C. 

30. Pursuant to Article II of the NPA Shared Services Agreement, the Debtor 

provides certain services to NPA that enable NPA to manage the Funds. 

31. The NPA Shared Services Agreement did not have a fixed term. Instead, section 

7.01 provided that “[e]ither Party may terminate this Agreement at any time upon at least thirty 

(30) days’ written notice to the other.” 

32. On November 30, 2020, the Debtor provided written notice to NPA that it 

intended to terminate the NPA Shared Services Agreement as of January 31, 2021 (the “NPA 

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Termination Notice” and together with the HCMFA Termination Notice, the “Termination 

Notices”). A copy of the NPA Termination Notice is attached hereto as Exhibit D. 

B. Prior to Providing the Termination Notices, the Debtor Worked 

on a Transition Plan, but the Advisors Failed to Engage or Pay for 

Services Rendered 

33. On August 12, 2020, after considering its strategic options, the Debtor filed an 

“asset monetization” plan of reorganization pursuant to which, in general, the Debtor proposed to 

reduce staff, reject certain contracts, and monetize its assets consistent with maximizing value 

for all stakeholders. [Docket No. 944]. 

34. Thus, at least as of that time, all stakeholders – including the Advisors – were on 

notice that the Debtor intended to continue operations on a scaled-down basis with the goal being 

an orderly monetization of assets.5

35. Consistent with that intent, the Debtor began formulating a plan for the transition 

of services provided under the Shared Services Agreements. 

36. Specifically, beginning in the summer of 2020, the Debtor attempted to negotiate 

for the orderly transition of services with James Dondero, the individual who owns and controls 

each of the Advisors. 

37. The Debtor’s proposal contemplated the transition of services to the Advisors 

from the Debtor to an entity that would be created, owned, and operated by certain of the 

Debtor’s employees (“NewCo”) who were expected to be terminated as part of the Debtor’s asset 

monetization plan. 

5

 Furthermore, on November 13, 2020, the Debtor filed its Third Amended Plan of Reorganization of Highland 

Capital Management [Docket No. 1383] (the “Third Amended Plan”). In its Third Amended Plan (and subsequent 

plans), the Debtor explicitly stated that it did not intend to continue providing services under the Shared Service 

Agreements precisely because they are money losers. Third Amended Plan, Art. IV.A (“[I]t is currently anticipated 

that neither the Reorganized Debtor nor the Claimant Trust will assume or assume and assign the contracts between 

the Debtor and certain Related Entities pursuant to which the Debtor provides shared services and sub-advisory 

services to those Related Entities. The Debtor believes that the continued provision of the services under such 

contracts will not be cost effective.”) 

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38. With Mr. Dondero in control, the Advisors never provided any constructive 

response to the Debtor’s proposal. Indeed, Mr. Dondero specifically informed the Debtor that he 

intended to make the transition difficult for the apparent purpose of creating leverage in plan 

negotiations. 

39. In addition to failing to engage in any process designed to provide for the orderly 

transition of services, the Advisors also failed to pay the Debtor for the services provided under 

the Shared Services Agreement. 

40. Since the Petition Date, each of the Advisors has failed to meet certain of its 

payment obligations under the Shared Services Agreements. For the period between the Petition 

Date and January 31, 2021, (a) HCMFA owes the Debtor $2,121,276 for services rendered under 

the HCMFA Shared Services Agreement, and (b) NPA owes the Debtor $932,977 for services 

rendered under the NPA Shared Services Agreement. These amounts exclude amounts owed for 

services provided prior to the Petition Date. 

41. The Debtor loses significant money providing services under the Shared Services 

Agreements, which is why it publicly stated its intention in the Third Amended Plan (and each 

subsequent amendment and modification to the Plan) not to assume or assume and assign them. 

While that is bad enough, the Advisors failure to pay for services previously rendered is a blatant 

breach of the Agreements. 

C. The Debtor Offers to Extend the Termination Date to Avoid a 

Catastrophe and Attempts to Engage the Funds’ Board to Aid in 

the Adoption of a Transition Plan 

42. Instead of engaging in the process, the Advisors and certain of their employees 

were more focused on threatening the Debtor and its employees, all in a transparent effort to 

deflect responsibility for their own obstinate and wrongful conduct. 

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43. With the January 31, 2021 termination date fast approaching, and with the 

Advisors continuing to fail to work cooperatively on a transition plan, the Debtor took the 

initiative and offered to extend the termination date by two weeks (i) in order to avoid 

catastrophic consequences for the Funds and their investors that would result from an abrupt 

termination, and (ii) in the hope that the Advisors would use the extended time to finally and 

constructively engage. 

44. Thus, on January 29, 2021, the parties executed an agreement extending the 

termination date to February 14, 2021 in exchange for the Advisors paying in advance for 

services to be rendered by the Debtor during that two-week period. A copy of the January 29, 

2021, agreement is attached hereto as Exhibit E. 

45. During the two-week period, the Debtor and its employees and professionals 

made every effort to bring the issue of the transition of services to a resolution. Among other 

things, the Debtor continued to refine the proposal for the transition of services to NewCo. 

46. The Debtor also attempted to get the attention of the Funds’ Boards because it 

was concerned that the Boards were either uninformed, not engaged, or were under the influence 

and control of Mr. Dondero. 

47. Among other communications, James P. Seery, Jr., the Debtor’s Chief Executive 

Officer, sent formal written communications to the Board of Directors for the Funds on January 

27, 2021, February 8, 2021, and February 12, 2021.6

 Copies of Mr. Seery’s letters are attached 

hereto as Exhibits F, G and H, respectively. 

48. Despite the efforts of certain of the Advisors’ professionals, and despite the 

Debtor’s willingness to make all reasonable concessions on a transition agreement, Mr. Dondero 

6

 Mr. Seery’s formal correspondence was in addition to his informal correspondence and communications with the 

Funds’ Board and the substantial communications between counsel to the Debtor, the Advisors, and the Funds. 

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and the Advisors have refused to “say yes” or to otherwise take steps to formulate a transition 

plan for the protection of the Funds and their investors. 

49. Faced with an untenable situation, the Debtor again agreed to extend the 

termination date, this time to February 19, 2021. See Exhibit I. 

50. Finally, on February 16, 2021, the Debtor made its last attempt to reach an 

agreement before being forced to take alternative actions to protect itself, the Funds, and 

investors, by sending the Advisors a proposed term sheet (the “Term Sheet”) that provided a 

reasonable transition plan. A copy of the Term Sheet is attached as Exhibit J. The Advisors 

refused to agree to the terms thereunder. 

51. Given that the Court will soon enter an order confirming the Debtor’s Plan, and 

the reduction in the Debtor’s work force will follow soon thereafter, the Debtor will be unable to 

provide services to the Advisors much longer. The Advisors’ failure to agree on or formulate a 

transition plan is creating catastrophic risk for the Funds and their investors. The Advisors’ 

failure to plan for a transition is also creating material risk to the Debtor. 

FIRST CLAIM FOR RELIEF 

(For Declaratory Relief: -- 11 U.S.C. § 105(a) and Fed. R. Bankr. P. 7001) 

52. The Debtor repeats and realleges each of the allegations in each of the foregoing 

paragraphs as though fully set forth herein. 

53. A bona fide, actual, present dispute exists between the Debtor and the Advisors 

concerning their respective rights and obligations under the Shared Services Agreements. 

54. A judgment declaring the parties’ respective rights and obligations will resolve 

their disputes. 

55. Pursuant to Bankruptcy Rule 7001, the Debtor specifically seeks declarations that: 

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x Each of the Advisors is owned and controlled by Mr. Dondero; 

x The Debtor has the contractual right to terminate the HCMFA Shared 

Services Agreement on 60 days’ written notice; 

x The Debtor properly exercised its right to terminate the HCMFA Shared 

Services Agreement by providing at least 60 days’ written notice; 

x The Debtor’s obligation to provide services to HCMFA under the 

HCMFA Shared Services Agreement (or otherwise) will terminate on 

February 19, 2021; 

x The Debtor has the contractual right to terminate the NPA Shared Services 

Agreement on 30 days’ written notice; 

x The Debtor properly exercised its right to terminate the NPA Shared 

Services Agreement by providing at least 30 days’ written notice; and 

x The Debtor’s obligation to provide services to NPA under the NPA Shared 

Services Agreement (or otherwise) will terminate on February 19, 2021. 

SECOND CLAIM FOR RELIEF 

(Breach of Contract) 

56. The Debtor repeats and realleges each of the allegations in each of the foregoing 

paragraphs as though fully set forth herein. 

57. The Shared Services Agreements are valid and binding contracts. 

58. The Debtor has fully performed all obligations under the Shared Services 

Agreements. 

59. The Advisors have breached the Shared Services Agreements by failing to pay for 

certain services rendered by the Debtor to the Advisors under the Shared Services Agreements. 

60. The Advisors have failed to pay the Debtor all amounts due and owing under the 

Shared Services Agreements despite the Debtor’s demands. 

61. The Advisors’ breach of the Shared Services Agreements has damaged the Debtor 

in an amount to be determined at trial. 

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THIRD CLAIM FOR RELIEF 

(For Injunctive Relief -- 11 U.S.C. § 105(a) and Fed. R. Bankr. P. 7065) 

62. The Debtor repeats and realleges the allegations in each of the foregoing 

paragraphs as though fully set forth herein. 

63. Pursuant to Bankruptcy Code section 105(a) and Bankruptcy Rule 7065, the 

Debtor seeks a mandatory injunction directing the Advisors to adopt and implement a plan for 

the orderly transition of services currently provided under the Shared Services Agreements from 

the Debtor to NewCo or any other entity of the Advisors’ choosing. 

64. Bankruptcy Code section 105(a) authorizes the Court to issue “any order, process 

or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. 

§105(a). 

65. Bankruptcy Rule 7065 incorporates by reference Rule 65 of the Federal Rules of 

Civil Procedure and authorizes the Court to issue injunctive relief in adversary proceedings. 

66. The Debtor will succeed on the merits of its claims for (a) a declaratory judgment 

that it has the contractual right to terminate each of the Shared Services Agreements, that it 

properly exercised those rights, and that, effective February 19, 2021, it has no further legal or 

equitable obligation to provide any services to the Advisors; (b) damages for breach of contract; 

and (c) for a mandatory injunction requiring the Advisors to adopt and implement a plan for the 

orderly transition of shared services. 

67. The Advisors’ failure to adopt and implement a transition plan is untenable 

because – as the Advisors have known for months – the Debtor will soon be unable to provide 

services under the Shared Services Agreements, and such willful misconduct and gross 

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negligence will cause irreparable harm to the Funds and their investors and to the Debtor and its 

estate. 

68. Given that (a) the Advisors were on notice since at least August 2020, that the 

Debtor was unlikely to provide services under the Shared Services Agreement for an extended 

period of time; (b) the Debtor has been pursuing a transition plan since the summer of 2020; (c) 

the Third Amended Plan filed on November 13, 2020 (and each subsequent version of the Plan), 

expressly stated that the Debtor would not assume or assume and assign the Shared Services 

Agreements; (d) the Debtor timely provided notice of termination of the Shared Services 

Agreements on November 30, 2020; (e) upon information and belief, the Advisors (and not the 

Debtor) owe contractual and other duties to the Funds, the entities most at risk; and (f) the 

Debtor has acted in good faith by, among other things, twice extending the anticipated 

termination date, the balance of the equities strongly favors the Debtor. 

69. Finally, the public interest virtually requires that the Advisors be directed to adopt 

and implement a transition plan. In the absence of a mandatory injunction, thousands of retail 

investors are likely to suffer catastrophic losses, and there will likely be substantial market 

disruptions with unforeseeable consequences. 

70. Based on the foregoing, the Debtor requests that the Court direct the Advisors to 

adopt and implement a plan for the orderly transition of services currently provided under the 

Shared Services Agreements from the Debtor to NewCo, or any other entity of the Advisors’ 

choosing, by February 28, 2021. 

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PRAYER 

WHEREFORE, the Debtor prays for judgment as follows: 

x On the First Cause of Action, a judgment declaring that: (i) each of the 

Advisors is owned and controlled by Mr. Dondero; (ii) the Debtor has the 

contractual right to terminate the HCMFA Shared Services Agreement on 

60 days’ written notice; (iii) the Debtor properly exercised its right to 

terminate the HCMFA Shared Services Agreement by providing at least 

60 days’ written notice; (iv) the Debtor’s obligation to provide services to 

HCMFA under the HCMFA Shared Services Agreement (or otherwise) 

will terminate on February 19, 2021; (v) the Debtor has the contractual 

right to terminate the NPA Shared Services Agreement on 30 days’ 

written notice; (vi) the Debtor properly exercised its right to terminate the 

NPA Shared Services Agreement by providing at least 30 days’ written 

notice; and (vii) the Debtor’s obligation to provide services to NPA under 

the NPA Shared Services Agreement (or otherwise) will terminate on 

February 19, 2021. 

x On the Second Cause of Action, damages in an amount to be determined 

at trial arising from the Advisors’ breach of the Shared Services 

Agreements; 

x On the Third Cause of Action, a mandatory injunction directing the 

Advisors to adopt and implement a plan for the orderly transition of 

services currently provided under the Shared Services Agreements from 

the Debtor to NewCo, or any other entity of the Advisors’ choosing, by 

February 28, 2021; and 

x For such other and further relief as this Court deems just and proper. 

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Dated: February 17, 2021. PACHULSKI STANG ZIEHL & JONES LLP 

Jeffrey N. Pomerantz (CA Bar No.143717) 

Ira D. Kharasch (CA Bar No. 109084) 

John A. Morris (NY Bar No. 2405397) 

Gregory V. Demo (NY Bar No. 5371992) 

Hayley R. Winograd (NY Bar No. 5612569) 

10100 Santa Monica Blvd., 13th Floor 

Los Angeles, CA 90067 

Telephone: (310) 277-6910 

Facsimile: (310) 201-0760 

E-mail: jpomerantz@pszjlaw.com 

 ikharasch@pszjlaw.com 

 jmorris@pszjlaw.com 

 gdemo@pszjlaw.com 

 hwinograd@pszjlaw.com 

-andHAYWARD PLLC 

/s/ Zachery Z. Annable 

Melissa S. Hayward 

Texas Bar No. 24044908 

MHayward@HaywardFirm.com 

Zachery Z. Annable 

Texas Bar No. 24053075 

ZAnnable@HaywardFirm.com 

10501 N. Central Expy, Ste. 106 

Dallas, Texas 75231 

Tel: (972) 755-7100 

Fax: (972) 755-7110 

Counsel for Plaintiff Highland Capital Management, L.P.

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VERIFICATION 

 I have read the foregoing VERIFIED COMPLAINT FOR INJUNCTIVE RELIEF and 

know its contents. 

j I am a party to this action. The matters stated in it are true of my own knowledge 

except as to those matters which are stated on information and belief, and as to 

those matters I believe them to be true. 

:

I am the Chief Executive Officer and Chief Restructuring Officer of Highland 

Capital Management, L.P., the Plaintiff in this action, and am authorized to make 

this verification for and on behalf of the Plaintiff, and I make this verification for 

that reason. I have read the foregoing document(s). I am informed and believe 

and on that ground allege that the matters stated in it are true. 

j I am one of the attorneys of record for ____________________, a party to this 

action. Such party is absent from the county in which I have my office, and I 

make this verification for and on behalf of that party for that reason. I have read 

the foregoing document(s). I am informed and believe and on that ground allege 

that the matters stated in it are true. 

I certify and declare under penalty of perjury under the laws of the United States that the 

foregoing is true and correct as of this 17th day of February 2021. 

 /s/ James P. Seery, Jr.

 James P. Seery, Jr. 

 

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EXHIBIT A

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SECOND AMENDED AND RESTATED

SHARED SERVICES AGREEMENT

THIS SECOND AMENDED AND RESTATED SHARED SERVICES AGREEMENT (this

“Agreement”) is entered into to be effective as of 8th day of February, 2013 (the “Effective Date”) by and

among Highland Capital Management, L.P., a Delaware limited partnership (“HCMLP”), and Highland

Capital Management Fund Advisors, L.P., formerly known as Pyxis Capital, L.P., a Delaware limited

partnership (“HCMFA”), and any affiliate of HCMFA that becomes a party hereto. Each of the

signatories hereto is individually a “Party” and collectively the “Parties”.

RECITALS

A. During the Term, HCMLP will provide to HCMFA certain services as more fully

described herein and the Parties desire to allocate the costs incurred for such services and assets among

them in accordance with the terms and conditions in this Agreement.

AGREEMENT

In consideration of the foregoing recitals and the mutual covenants and conditions contained

herein, the Parties agree, intending to be legally bound, as follows:

ARTICLE I

DEFINITIONS

“Actual Cost” means, with respect to any period hereunder, one hundred percent (100%) of the

actual costs and expenses caused by, incurred or otherwise arising from or relating to (i) the Shared

Services and (ii) the Shared Assets, in each case during such period.

“Affiliate” means a Person that directly, or indirectly through one or more intermediaries,

controls, or is controlled by, or is under common control with, a specified Person. The term “control”

(including, with correlative meanings, the terms “controlled by” and “under common control with”)

means the possession of the power to direct the management and policies of the referenced Person,

whether through ownership interests, by contract or otherwise.

“Agreement” has the meaning set forth in the preamble.

“Allocation Percentage” has the meaning set forth in Section 4.01.

“Applicable Margin” shall mean an additional amount equal to 5% of all costs allocated by

Service Provider to the other parties hereto under Article IV; provided that the parties may agree on a

different margin percentage as to any item or items to the extent the above margin percentage, together

with the allocated cost of such item or service, would not reflect an arm’s length value of the particular

service or item allocated.

“Change” has the meaning set forth in Section 2.02(a).

“Change Request” has the meaning set forth in Section 2.02(b).

“Code” means the Internal Revenue Code of 1986, as amended, and the related regulations and

published interpretations.

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2

“Effective Date” has the meaning set forth in the preamble.

“Governmental Entity” means any government or any regulatory agency, bureau, board,

commission, court, department, official, political subdivision, tribunal or other instrumentality of any

government, whether federal, state or local, domestic or foreign.

“Liabilities” means any cost, liability, indebtedness, obligation, co-obligation, commitment,

expense, claim, deficiency, guaranty or endorsement of or by any Person of any nature (whether direct or

indirect, known or unknown, absolute or contingent, liquidated or unliquidated, due or to become due,

accrued or unaccrued, matured or unmatured).

“Loss” means any cost, damage, disbursement, expense, liability, loss, obligation, penalty or

settlement, including interest or other carrying costs, legal, accounting and other professional fees and

expenses incurred in the investigation, collection, prosecution and defense of claims and amounts paid in

settlement, that may be imposed on or otherwise incurred or suffered by the referenced Person; provided,

however, that the term “Loss” will not be deemed to include any special, exemplary or punitive damages,

except to the extent such damages are incurred as a result of third party claims.

“New Shared Service” has the meaning set forth in Section 2.03.

“Party” or “Parties” has the meaning set forth in the preamble.

“Person” means an association, a corporation, an individual, a partnership, a limited liability

company, a trust or any other entity or organization, including a Governmental Entity.

“Quarterly Report” has the meaning set forth in Section 5.01.

“Recipient” means HCMFA and any of HCMFA’s direct or indirect Subsidiaries or managed

funds or accounts in their capacity as a recipient of the Shared Services and/or Shared Assets.

“Service Provider” means any of HCMLP and its direct or indirect Subsidiaries in its capacity as

a provider of Shared Services or Shared Assets.

“Service Standards” has the meaning set forth in Section 6.01.

“Shared Assets” shall have the meaning set forth in Section 3.02.

“Shared Services” shall have the meaning set forth in Section 2.01.

“Subsidiary” means, with respect to any Person, any Person in which such Person has a direct or

indirect equity ownership interest in excess of 50%.

“Tax” or “Taxes” means: (i) all state and local sales, use, value-added, gross receipts, foreign,

privilege, utility, infrastructure maintenance, property, federal excise and similar levies, duties and other

similar tax-like charges lawfully levied by a duly constituted taxing authority against or upon the Shared

Services and the Shared Assets; and (ii) tax-related surcharges or fees that are related to the Shared

Services and the Shared Assets identified and authorized by applicable tariffs.

“Term” has the meaning set forth in Section 7.01.

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Exhibit A Page 3 of 14

000047

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 43 of 888 PageID 3347 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 24 of 222 PageID 92
3

ARTICLE II

SHARED SERVICES

Section 2.01 Services. During the Term, Service Provider will provide Recipient with Shared

Services, including without limitation, all of the (i) finance and accounting services, (ii) human resources

services, (iii) marketing services, (iv) legal services, (v) corporate services, (vi) information technology

services, and (vii) operations services; each as requested by HCMFA and as described more fully on

Annex A attached hereto, the “Shared Services”), it being understood that personnel providing Shared

Services may be deemed to be employees of HCMFA to the extent necessary for purposes of the

Investment Advisers Act of 1940, as amended.

Section 2.02 Changes to the Shared Services.

(a) During the Term, the Parties may agree to modify the terms and conditions of a

Service Provider’s performance of any Shared Service in order to reflect new procedures, processes or

other methods of providing such Shared Service, including modifying the applicable fees for such Shared

Service to reflect the then current fair market value of such service (a “Change”). The Parties will

negotiate in good faith the terms upon which a Service Provider would be willing to provide such New

Shared Service to Recipient.

(b) The Party requesting a Change will deliver a description of the Change requested

(a “Change Request”) and no Party receiving a Change Request may unreasonably withhold, condition or

delay its consent to the proposed Change.

(c) Notwithstanding any provision of this Agreement to the contrary, a Service

Provider may make: (i) Changes to the process of performing a particular Shared Service that do not

adversely affect the benefits to Recipient of Service Provider’s provision or quality of such Shared

Service in any material respect or increase Recipient’s cost for such Shared Service; (ii) emergency

Changes on a temporary and short-term basis; and/or (iii) Changes to a particular Shared Service in order

to comply with applicable law or regulatory requirements, in each case without obtaining the prior

consent of Recipient. A Service Provider will notify Recipient in writing of any such Change as follows:

in the case of clauses (i) and (iii) above, prior to the implementation of such Change, and, in the case of

clause (ii) above, as soon as reasonably practicable thereafter.

Section 2.03 New Shared Services. The Parties may, from time to time during the Term of

this Agreement, negotiate in good faith for Shared Services not otherwise specifically listed in Section

2.01 (a “New Shared Service”). Any agreement between the Parties on the terms for a New Shared

Service must be in accordance with the provisions of Article IV and Article V hereof, will be deemed to

be an amendment to this Agreement and such New Shared Service will then be a “Shared Service” for all

purposes of this Agreement.

Section 2.04 Subcontractors. Nothing in this Agreement will prevent Service Provider from,

with the consent of Recipient, using subcontractors, hired with due care, to perform all or any part of a

Shared Service hereunder. A Service Provider will remain fully responsible for the performance of its

obligations under this Agreement in accordance with its terms, including any obligations it performs

through subcontractors, and a Service Provider will be solely responsible for payments due to its

subcontractors.

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Exhibit A Page 4 of 14

000048

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 44 of 888 PageID 3348 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 25 of 222 PageID 93
4

ARTICLE III

SHARED ASSETS

Section 3.01 Shared IP Rights. Each Service Provider hereby grants to Recipient a nonexclusive right and license to use the intellectual property and other rights granted or licensed, directly or

indirectly, to such Service Provider (the “Shared IP Rights”) pursuant to third party intellectual property

Agreements (“Third Party IP Agreements”), provided that the rights granted to Recipient hereunder are

subject to the terms and conditions of the applicable Third Party IP Agreement, and that such rights shall

terminate, as applicable, upon the expiration or termination of the applicable Third Party IP Agreement.

Recipient shall be licensed to use the Shared IP Rights only for so long as it remains an Affiliate of

HCMLP. In consideration of the foregoing licenses, Recipient agrees to take such further reasonable

actions as a Service Provider deems to be necessary or desirable to comply with its obligations under the

Third Party IP Agreements.

Section 3.02 Other Shared Assets. Subject to Section 3.01, each Service Provider hereby

grants Recipient the right, license or permission, as applicable, to use and access the benefits under the

agreements, contracts and licenses that such Service Provider will purchase, acquire, become a party or

beneficiary to or license on behalf of Recipient (the “Future Shared Assets” and collectively with the

Shared IP Rights, the “Shared Assets”).

ARTICLE IV

COST ALLOCATION

Section 4.01 Actual Cost Allocation Formula. The Actual Cost of any item relating to any

Shared Services or Shared Assets shall be allocated based on the Allocation Percentage. For purposes of

this Agreement, “Allocation Percentage” means:

(a) To the extent 100% of such item is demonstrably attributable to HCMFA, 100%

of the Actual Cost of such item shall be allocated to HCMFA as agreed by HCMFA;

(b) To the extent a specific percentage of use of such item can be determined (e.g.,

70% for HCMLP and 30% for HCMFA), that specific percentage of the Actual Cost of such item will be

allocated to HCMLP or HCMFA, as applicable and as agreed by HCMFA; and

(c) All other portions of the Actual Cost of any item that cannot be allocated

pursuant to clause (a) or (b) above shall be allocated between HCMLP and HCMFA in such proportion as

is agreed in good faith between the parties.

Section 4.02 Non-Cash Cost Allocation. The actual, fully burdened cost of any item relating

to any Shared Services or Shared Assets that does not result in a direct, out of pocket cash expense may

be allocated to HCMLP and HCMFA for financial statement purposes only, as agreed by HCMFA,

without any corresponding cash reimbursement required, in accordance with generally accepted

accounting principles, based on the Allocation Percentage principles described in Section 4.01 hereof.

ARTICLE V

PAYMENT OF COST AND REVENUE SHARE; TAXES

Section 5.01 Quarterly Statements. Within thirty (30) days following the end of each calendar

qaurter during the Term (or at such time as may be otherwise agreed by the parties), each Service

Provider shall furnish the other Parties hereto with a written statement with respect to the Actual Cost

paid by it in respect of Shared Services and Shared Assets provided by it, in each case, during such

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Exhibit A Page 5 of 14

000049

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 45 of 888 PageID 3349 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 26 of 222 PageID 94
5

period, setting forth (i) the cost allocation in accordance with Article IV hereof together with the

Applicable Margin on such allocated amounts, and (ii) any amounts paid pursuant to Section 5.02 hereof,

together with such other data and information necessary to complete the items described in Section 5.03

hereof (hereinafter referred to as the “Quarterly Report”).

Section 5.02 Settlement Payments. At any time during the Term, any Party may make

payment of the amounts that are allocable to such Party together with the Applicable Margin related

thereto, regardless of whether an invoice pursuant to Section 5.03 hereof has been issued with respect to

such amounts.

Section 5.03 Determination and Payment of Cost and Revenue Share.

(a) Within ten (10) days of the submission of the Quarterly Report described in

Section 5.02 hereof (or at such other time as may be agreed by the parties), the Parties shall (i) agree on

the cost share of each of the Parties and Applicable Margin as calculated pursuant to the provisions of this

Agreement; and (ii) prepare and issue invoices for the cost share and Applicable Margin payments that

are payable by any of the Parties.

(b) Within ten (10) days of preparation of the agreement and the issuance of the

invoice described in Section 5.03(a) (or at such other time as may be agreed by the parties), the Parties

shall promptly make payment of the amounts that are set forth on such cost allocation invoice.

Notwithstanding anything in this Agreement to the contrary, provision of the Shared Services shall

commence from the Effective Date, but no fees shall be payable from Recipient or otherwise accrue with

respect to such services provided during the month of December 2011.

Section 5.04 Taxes.

(a) Recipient is responsible for and will pay all Taxes applicable to the Shared

Services and the Shared Assets provided to Recipient, provided, that such payments by Recipient to

Service Provider will be made in the most tax-efficient manner and provided further, that Service

Provider will not be subject to any liability for Taxes applicable to the Shared Services and the Shared

Assets as a result of such payment by Recipient. Service Provider will collect such Tax from Recipient in

the same manner it collects such Taxes from other customers in the ordinary course of Service Provider’s

business, but in no event prior to the time it invoices Recipient for the Shared Services and Shared Assets,

costs for which such Taxes are levied. Recipient may provide Service Provider with a certificate

evidencing its exemption from payment of or liability for such Taxes.

(b) Service Provider will reimburse Recipient for any Taxes collected from Recipient

and refunded to Service Provider. In the event a Tax is assessed against Service Provider that is solely the

responsibility of Recipient and Recipient desires to protest such assessment, Recipient will submit to

Service Provider a statement of the issues and arguments requesting that Service Provider grant Recipient

the authority to prosecute the protest in Service Provider’s name. Service Provider’s authorization will

not be unreasonably withheld. Recipient will finance, manage, control and determine the strategy for

such protest while keeping Service Provider reasonably informed of the proceedings. However, the

authorization will be periodically reviewed by Service Provider to determine any adverse impact on

Service Provider, and Service Provider will have the right to reasonably withdraw such authority at any

time. Upon notice by Service Provider that it is so withdrawing such authority, Recipient will

expeditiously terminate all proceedings. Any adverse consequences suffered by Recipient as a result of

the withdrawal will be submitted to arbitration pursuant to Section 9.14. Any contest for Taxes brought

by Recipient may not result in any lien attaching to any property or rights of Service Provider or

otherwise jeopardize Service Provider’s interests or rights in any of its property. Recipient agrees to

Case 21-03010-sgj Doc 1-1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit A Page 6 of 14

000050

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 46 of 888 PageID 3350 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 27 of 222 PageID 95
6

indemnify Service Provider for all Losses that Service Provider incurs as a result of any such contest by

Recipient.

(c) The provisions of this Section 5.04 will govern the treatment of all Taxes arising

as a result of or in connection with this Agreement notwithstanding any other Article of this Agreement to

the contrary.

ARTICLE VI

SERVICE PROVIDER RESPONSIBILITIES

Section 6.01 Service Provider General Obligations. Service Provider will provide the Shared

Services and the Shared Assets to Recipient on a non-discriminatory basis and will provide the Shared

Services and the Shared Assets in the same manner as if it were providing such services and assets on its

own account (the “Service Standards”). Service Provider will conduct its duties hereunder in a lawful

manner in compliance with applicable laws, statutes, rules and regulations and in accordance with the

Service Standards, including, for avoidance of doubt, laws and regulations relating to privacy of customer

information.

Section 6.02 Books and Records; Access to Information. Service Provider will keep and

maintain books and records on behalf of Recipient in accordance with past practices and internal control

procedures. Recipient will have the right, at any time and from time to time upon reasonable prior notice

to Service Provider, to inspect and copy (at its expense) during normal business hours at the offices of

Service Provider the books and records relating to the Shared Services and Shared Assets, with respect to

Service Provider’s performance of its obligations hereunder. This inspection right will include the ability

of Recipient’s financial auditors to review such books and records in the ordinary course of performing

standard financial auditing services for Recipient (but subject to Service Provider imposing reasonable

access restrictions to Service Provider’s and its Affiliates’ proprietary information and such financial

auditors executing appropriate confidentiality agreements reasonably acceptable to Service Provider).

Service Provider will promptly respond to any reasonable requests for information or access. For the

avoidance of doubt, all books and records kept and maintained by Service Provider on behalf of Recipient

shall be the property of Recipient, and Service Provider will surrender promptly to Recipient any of such

books or records upon Recipient’s request (provided that Service Provider may retain a copy of such

books or records) and shall make all such books and records available for inspection and use by the

Securities and Exchange Commission or any person retained by Recipient at all reasonable times. Such

records shall be maintained by Service Provider for the periods and in the places required by laws and

regulations applicable to Recipient.

Section 6.03 Return of Property and Equipment. Upon expiration or termination of this

Agreement, Service Provider will be obligated to return to Recipient, as soon as is reasonably practicable,

any equipment or other property or materials of Recipient that is in Service Provider’s control or

possession.

ARTICLE VII

TERM AND TERMINATION

Section 7.01 Term. The term of this Agreement will commence as of the Effective Date and

will continue in full force and effect until the first anniversary of the Effective Date (the “Term”), unless

terminated earlier in accordance with Section 9.02. The Term shall automatically renew for successive

one year periods unless sooner terminated under Section 7.02.

Case 21-03010-sgj Doc 1-1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit A Page 7 of 14

000051

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 47 of 888 PageID 3351 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 28 of 222 PageID 96
7

Section 7.02 Termination. Either Party may terminate this Agreement, with or without cause,

upon at least 60 days advance written notice at any time prior to the expiration of the Term.

ARTICLE VIII

LIMITED WARRANTY

Section 8.01 Limited Warranty. Service Provider will perform the Shared Services hereunder

in accordance with the Service Standards. Except as specifically provided in this Agreement, Service

Provider makes no express or implied representations, warranties or guarantees relating to its performance

of the Shared Services and the granting of the Shared Assets under this Agreement, including any

warranty of merchantability, fitness, quality, non-infringement of third party rights, suitability or

adequacy of the Shared Services and the Shared Assets for any purpose or use or purpose. Service

Provider will (to the extent possible and subject to Service Provider’s contractual obligations) pass

through the benefits of any express warranties received from third parties relating to any Shared Service

and Shared Asset, and will (at Recipient’s expense) assist Recipient with any warranty claims related

thereto.

ARTICLE IX

MISCELLANEOUS

Section 9.01 No Partnership or Joint Venture; Independent Contractor. Nothing contained in

this Agreement will constitute or be construed to be or create a partnership or joint venture between or

among HCMLP or HCMFA or their respective successors or assigns. The Parties understand and agree

that, with the exception of the procurement by Service Provider of licenses or other rights on behalf of

Recipient pursuant to Section 3.01, this Agreement does not make any of them an agent or legal

representative of the other for any purpose whatsoever. With the exception of the procurement by Service

Provider of licenses or other rights on behalf of Recipient pursuant to Section 3.01, no Party is granted, by

this Agreement or otherwise, any right or authority to assume or create any obligation or responsibilities,

express or implied, on behalf of or in the name of any other Party, or to bind any other Party in any

manner whatsoever. The Parties expressly acknowledge that Service Provider is an independent

contractor with respect to Recipient in all respects, including with respect to the provision of the Shared

Services.

Section 9.02 Amendments; Waivers. Except as expressly provided herein, this Agreement

may be amended only by agreement in writing of all Parties. No waiver of any provision nor consent to

any exception to the terms of this Agreement or any agreement contemplated hereby will be effective

unless in writing and signed by all of the Parties affected and then only to the specific purpose, extent and

instance so provided. No failure on the part of any Party to exercise or delay in exercising any right

hereunder will be deemed a waiver thereof, nor will any single or partial exercise preclude any further or

other exercise of such or any other right.

Section 9.03 Schedules and Exhibits; Integration. Each Schedule and Exhibit delivered

pursuant to the terms of this Agreement must be in writing and will constitute a part of this Agreement,

although schedules need not be attached to each copy of this Agreement. This Agreement, together with

such Schedules and Exhibits constitutes the entire agreement among the Parties pertaining to the subject

matter hereof and supersedes all prior agreements and understandings of the Parties in connection

therewith.

Section 9.04 Further Assurances. Each Party will take such actions as any other Party may

reasonably request or as may be necessary or appropriate to consummate or implement the transactions

contemplated by this Agreement or to evidence such events or matters.

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Exhibit A Page 8 of 14

000052

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 48 of 888 PageID 3352 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 29 of 222 PageID 97
8

Section 9.05 Governing Law. This Agreement and the legal relations between the Parties will

be governed by and construed in accordance with the laws of the State of Texas applicable to contracts

made and performed in such State and without regard to conflicts of law doctrines unless certain matters

are preempted by federal law.

Section 9.06 Assignment. Except as otherwise provided hereunder, neither this Agreement

nor any rights or obligations hereunder are assignable by one Party without the express prior written

consent of the other Parties.

Section 9.07 Headings. The descriptive headings of the Articles, Sections and subsections of

this Agreement are for convenience only and do not constitute a part of this Agreement.

Section 9.08 Counterparts. This Agreement and any amendment hereto or any other

agreement delivered pursuant hereto may be executed in one or more counterparts and by different Parties

in separate counterparts. All counterparts will constitute one and the same agreement and will become

effective when one or more counterparts have been signed by each Party and delivered to the other

Parties.

Section 9.09 Successors and Assigns; No Third Party Beneficiaries. This Agreement is

binding upon and will inure to the benefit of each Party and its successors or assigns, and nothing in this

Agreement, express or implied, is intended to confer upon any other Person or Governmental Entity any

rights or remedies of any nature whatsoever under or by reason of this Agreement.

Section 9.10 Notices. All notices, demands and other communications to be given or

delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to

have been given: (i)immediately when personally delivered; (ii) when received by first class mail, return

receipt requested; (iii) one day after being sent for overnight delivery by Federal Express or other

overnight delivery service; or (iv) when receipt is acknowledged, either electronically or otherwise, if sent

by facsimile, telecopy or other electronic transmission device. Notices, demands and communications to

the other Parties will, unless another address is specified by such Parties in writing, be sent to the

addresses indicated below:

If to HCMLP, addressed to:

Highland Capital Management, L.P.

300 Crescent Court, Suite 700

Dallas, Texas 75201

Attention: General Counsel

Fax: (972) 628-4147

If to HCMFA, addressed to:

Highland Capital Management Fund Advisors, L.P.

300 Crescent Court, Suite 700

Dallas, Texas 75201

Attention: General Counsel

Fax: (972) 628-4147

Section 9.11 Expenses. Except as otherwise provided herein, the Parties will each pay their

own expenses incident to the negotiation, preparation and performance of this Agreement, including the

fees, expenses and disbursements of their respective investment bankers, accountants and counsel.

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Exhibit A Page 9 of 14

000053

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 49 of 888 PageID 3353 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 30 of 222 PageID 98
9

Section 9.12 Waiver. No failure on the part of any Party to exercise or delay in exercising any

right hereunder will be deemed a waiver thereof, nor will any single or partial exercise preclude any

further or other exercise of such or any other right.

Section 9.13 Severability. If any provision of this Agreement is held to be unenforceable for

any reason, it will be adjusted rather than voided, if possible, to achieve the intent of the Parties. All

other provisions of this Agreement will be deemed valid and enforceable to the extent possible.

Section 9.14 Arbitration; Jurisdiction. Notwithstanding anything contained in this Agreement

or the Annexes hereto to the contrary, in the event there is an unresolved legal dispute between the parties

and/or any of their respective officers, directors, partners, employees, agents, affiliates or other

representatives that involves legal rights or remedies arising from this Agreement, the parties agree to

submit their dispute to binding arbitration under the authority of the Federal Arbitration Act; provided,

however, that either party or such applicable affiliate thereof may pursue a temporary restraining order

and/or preliminary injunctive relief in connection with confidentiality covenants or agreements binding

on the other party, with related expedited discovery for the parties, in a court of law, and, thereafter,

require arbitration of all issues of final relief. The Arbitration will be conducted by the American

Arbitration Association, or another, mutually agreeable arbitration service. The arbitrator(s) shall be duly

licensed to practice law in the State of Texas. The discovery process shall be limited to the following:

Each side shall be permitted no more than (i) two party depositions of six hours each. Each deposition is

to be taken pursuant to the Texas Rules of Civil Procedure; (ii) one non-party deposition of six hours; (iii)

twenty-five interrogatories; (iv) twenty-five requests for admission; (v) ten requests for production. In

response, the producing party shall not be obligated to produce in excess of 5,000 total pages of

documents. The total pages of documents shall include electronic documents; (vi) one request for

disclosure pursuant to the Texas Rules of Civil Procedure. Any discovery not specifically provided for in

this paragraph, whether to parties or non-parties, shall not be permitted. The arbitrator(s) shall be

required to state in a written opinion all facts and conclusions of law relied upon to support any decision

rendered. No arbitrator will have authority to render a decision that contains an outcome determinative

error of state or federal law, or to fashion a cause of action or remedy not otherwise provided for under

applicable state or federal law. Any dispute over whether the arbitrator(s) has failed to comply with the

foregoing will be resolved by summary judgment in a court of law. In all other respects, the arbitration

process will be conducted in accordance with the American Arbitration Association’s dispute resolution

rules or other mutually agreeable, arbitration service rules. The party initiating arbitration shall pay all

arbitration costs and arbitrator’s fees, subject to a final arbitration award on who should bear costs and

fees. All proceedings shall be conducted in Dallas, Texas, or another mutually agreeable site. Each party

shall bear its own attorneys fees, costs and expenses, including any costs of experts, witnesses and/or

travel, subject to a final arbitration award on who should bear costs and fees. The duty to arbitrate

described above shall survive the termination of this Agreement. Except as otherwise provided above, the

parties hereby waive trial in a court of law or by jury. All other rights, remedies, statutes of limitation and

defenses applicable to claims asserted in a court of law will apply in the arbitration.

Section 9.15 General Rules of Construction. For all purposes of this Agreement and the

Exhibits and Schedules delivered pursuant to this Agreement: (i) the terms defined in Article I have the

meanings assigned to them in Article I and include the plural as well as the singular; (ii) all accounting

terms not otherwise defined herein have the meanings assigned under GAAP; (iii) all references in this

Agreement to designated “Articles,” “Sections” and other subdivisions are to the designated Articles,

Sections and other subdivisions of the body of this Agreement; (iv) pronouns of either gender or neuter

will include, as appropriate, the other pronoun forms; (v) the words “herein,”“hereof” and “hereunder”

and other words of similar import refer to this Agreement as a whole and not to any particular Article,

Section or other subdivision; (vi) “or” is not exclusive; (vii) “including” and “includes” will be deemed to

be followed by “but not limited to” and “but is not limited to, “respectively; (viii) any definition of or

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Exhibit A Page 10 of 14

000054

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 50 of 888 PageID 3354 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 31 of 222 PageID 99
10

reference to any law, agreement, instrument or other document herein will be construed as referring to

such law, agreement, instrument or other document as from time to time amended, supplemented or

otherwise modified; and (ix) any definition of or reference to any statute will be construed as referring

also to any rules and regulations promulgated thereunder.

Case 21-03010-sgj Doc 1-1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit A Page 11 of 14

000055

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 51 of 888 PageID 3355 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 32 of 222 PageID 100
Case 21-03010-sgj Doc 1-1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit A Page 12 of 14

000056

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 52 of 888 PageID 3356 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 33 of 222 PageID 101
Annex A

Shared Services

Compliance

General compliance

Compliance systems

Facilities

Equipment

General Overhead

Office Supplies

Rent & Parking

Finance & Accounting

Book keeping

Cash management

Cash forecasting

Credit facility reporting

Financial reporting

Accounts payable

Accounts receivable

Expense reimbursement

Vendor management

HR

Drinks/snacks

Lunches

Recruiting

IT

General support & maintenance (OMS, development, support)

Telecom (cell, phones, broadband)

WSO

Legal

Corporate secretarial services

Document review and preparation

Litigation support

Management of outside counsel

Marketing and PR

Public relations

Tax

Tax audit support

Tax planning

Tax prep and filing

Investments

Investment research on an ad hoc basis as requested by HCMFA

Case 21-03010-sgj Doc 1-1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit A Page 13 of 14

000057

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 53 of 888 PageID 3357 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 34 of 222 PageID 102
13

Valuation Committee

Trading

Trading desk services

Operations

Trade settlement

Case 21-03010-sgj Doc 1-1 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit A Page 14 of 14

000058

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 54 of 888 PageID 3358 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 35 of 222 PageID 103
EXHIBIT B

Case 21-03010-sgj Doc 1-2 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit B Page 1 of 2

000059

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 55 of 888 PageID 3359 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 36 of 222 PageID 104
DOCS_NY:41549.2 36027/002

November 30, 2020 

Highland Capital Management Fund Advisors, L.P. 

300 Crescent Court, Suite 700 

Dallas, Texas 75201 

Attention: General Counsel 

RE: Termination of Second Amended and Restated Shared Services Agreement,

effective as of February 8, 2013, by and among Highland Capital 

Management, L.P. (“HCMLP”), and Highland Capital Management Fund 

Advisors, L.P. (the “Agreement”). 

To Whom It May Concern: 

As set forth in Section 7.02 of the Agreement, the Agreement is terminable at will upon at least 

60 days advance written notice. 

By this letter, HCMLP is notifying you that it is terminating the Agreement. Such termination 

will be effective January 31, 2021. HCMLP reserves the right to rescind this notice of 

termination. 

Please feel free to contact me with any questions. 

Sincerely, 

HIGHLAND CAPITAL MANAGEMENT, L.P. 

/s/ James P. Seery, Jr. 

James P. Seery, Jr. 

Chief Executive Officer 

Chief Restructuring Officer 

Case 21-03010-sgj Doc 1-2 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit B Page 2 of 2

000060

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 56 of 888 PageID 3360 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 37 of 222 PageID 105
EXHIBIT C

Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 1 of 20

000061

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 57 of 888 PageID 3361 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 38 of 222 PageID 106
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 2 of 20

000062

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 58 of 888 PageID 3362 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 39 of 222 PageID 107
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 3 of 20

000063

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 59 of 888 PageID 3363 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 40 of 222 PageID 108
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 4 of 20

000064

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 60 of 888 PageID 3364 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 41 of 222 PageID 109
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 5 of 20

000065

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 61 of 888 PageID 3365 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 42 of 222 PageID 110
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 6 of 20

000066

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 62 of 888 PageID 3366 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 43 of 222 PageID 111
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 7 of 20

000067

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 63 of 888 PageID 3367 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 44 of 222 PageID 112
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 8 of 20

000068

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 64 of 888 PageID 3368 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 45 of 222 PageID 113
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 9 of 20

000069

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 65 of 888 PageID 3369 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 46 of 222 PageID 114
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 10 of 20

000070

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 66 of 888 PageID 3370 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 47 of 222 PageID 115
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 11 of 20

000071

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 67 of 888 PageID 3371 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 48 of 222 PageID 116
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 12 of 20

000072

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 68 of 888 PageID 3372 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 49 of 222 PageID 117
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 13 of 20

000073

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 69 of 888 PageID 3373 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 50 of 222 PageID 118
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 14 of 20

000074

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 70 of 888 PageID 3374 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 51 of 222 PageID 119
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 15 of 20

000075

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 71 of 888 PageID 3375 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 52 of 222 PageID 120
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 16 of 20

000076

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 72 of 888 PageID 3376 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 53 of 222 PageID 121
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 17 of 20

000077

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 73 of 888 PageID 3377 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 54 of 222 PageID 122
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 18 of 20

000078

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 74 of 888 PageID 3378 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 55 of 222 PageID 123
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 19 of 20

000079

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 75 of 888 PageID 3379 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 56 of 222 PageID 124
Case 21-03010-sgj Doc 1-3 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit C Page 20 of 20

000080

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 76 of 888 PageID 3380 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 57 of 222 PageID 125
EXHIBIT D

Case 21-03010-sgj Doc 1-4 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit D Page 1 of 2

000081

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 77 of 888 PageID 3381 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 58 of 222 PageID 126
DOCS_NY:41547.2 36027/002

November 30, 2020 

NexPoint Advisors, L.P. 

200 Crescent Court, Suite 700 

Dallas, Texas 75201 

RE: Termination of Amended and Restated Shared Services Agreement, dated 

January 1, 2018, and among Highland Capital Management, L.P. 

(“HCMLP”), and NexPoint Advisors, L.P. (the “Agreement”). 

To Whom It May Concern: 

As set forth in Section 7.01 of the Agreement, the Agreement is terminable at will upon at least 

30 days advance written notice. 

By this letter, HCMLP is notifying you that it is terminating the Agreement. Such termination 

will be effective January 31, 2021. HCMLP reserves the right to rescind this notice of 

termination. 

Please feel free to contact me with any questions. 

Sincerely, 

HIGHLAND CAPITAL MANAGEMENT, L.P. 

/s/ James P. Seery, Jr. 

James P. Seery, Jr. 

Chief Executive Officer 

Chief Restructuring Officer 

Case 21-03010-sgj Doc 1-4 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit D Page 2 of 2

000082

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 78 of 888 PageID 3382 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 59 of 222 PageID 127
EXHIBIT E

Case 21-03010-sgj Doc 1-5 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit E Page 1 of 3

000083

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 79 of 888 PageID 3383 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 60 of 222 PageID 128
Execution Version

Highland Capital Management LP

300 Crescent Court, Suite 700

Dallas, Texas 75201

NexPoint Advisors, L.P.

300 Crescent Court, Suite 700

Dallas, Texas 75201

Highland Capital Management Fund Advisors, L.P.

300 Crescent Court, Suite 700

Dallas, Texas 75201

January 30, 2021

Ladies and Gentlemen:

This letter agreement (the “Letter Agreement”) is entered into by and among Highland Capital 

Management LP (“HCMLP”), NexPoint Advisors, L.P. (“NPA”), and Highland Capital 

Management Fund Advisors, L.P. (“HCMFA”).

Reference is made to the following agreements (as amended to date, the “NPA Services 

Agreements”):

1. Amended and Restated Shared Services Agreement dated effective as of January 1, 2018 

by and between NPA and HCMLP

2. Payroll Expense Reimbursement Agreement dated as of May 1, 2018 by and between 

NPA and HCMLP (as amended by Amendment Number One December 14, 2018)

Reference is made to the following agreements (as amended to date, the “HCMFA Services 

Agreements” and together with the NPA Services Agreements, the “Services Agreements”):

1. Second Amended and Restated Shared Services Agreement dated effective as of 

February 8, 2013 by and between HCMFA and HCMLP 

2. Payroll Expense Reimbursement Agreement dated as of May 1, 2018 by and between 

HCMFA and HCMLP (as amended by Amendment Number One December 14, 2018)

Pursuant to termination notices delivered by HCMLP to each of NPA and HCMFA, each of the 

Services Agreements is scheduled to terminate in accordance with its terms on January 31, 2021.

NPA hereby represents and warrants to HCMLP that it has paid to HCMLP in cash, by wire 

transfer on the date of this Letter Agreement, an amount equal to $210,000. HCMFA hereby 

represents and warrants to HCMLP that it has paid to HCMLP in cash, by wire transfer on the 

date of this Letter Agreement, an amount equal to $360,241 (together with the payment from 

NPA referenced in the prior sentence, the “Pre-Paid Fees”). 

ActiveUS 185052458v.2

Case 21-03010-sgj Doc 1-5 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit E Page 2 of 3

000084

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 80 of 888 PageID 3384 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 61 of 222 PageID 129
Subject to and in reliance upon the payments by NPA and HCMFA of the Pre-Paid Fees, 

HCMLP hereby agrees to continue the term of each of the Services Agreements for an additional

period of 14 calendar days, with the first of such calendar days being February 1, 2021 (the “

Extension Period”). Thereafter, the undersigned parties, HCMLP, NPA, and HCFMA agree and 

acknowledge that each of the NPA Services Agreement and the HCMFA Services Agreement 

will terminate automatically and without any further action or notice.

The Pre-Paid Fees to HCMLP are exclusive of any additional expenses incurred under the terms 

of the Services Agreement during the Extension Period, which will be billed in arrears to NPA 

and/or HCMFA as applicable. 

Except as explicitly referenced in this Letter Agreement, the terms of the Services Agreements 

shall remain in effect during the Extension Period. Each party to this Letter Agreement reserves 

all rights it has, or may have, including all rights to pursue and defend any claims and/or causes 

of action, with respect to any matter, agreement, or understanding not explicitly addressed in this

Letter Agreement. This Letter Agreement shall be governed by, and construed in accordance 

with, the laws of the State of Texas, The undersigned parties unconditionally and irrevocably 

consent to the exclusive jurisdiction of the exclusive jurisdiction of the United States Bankruptcy

Court for the Northern District of Texas, Dallas Division (which court, for purposes of this Letter

Agreement, is the only court of competent jurisdiction) and waive any objection with respect 

thereto, for the purpose of any action, suit or proceeding arising out of or relating to this Letter 

Agreement or the matters contemplated hereby. 

Sincerely,

Highland Capital Management LP 

___________________________

By: James P. Seery, Jr.

Its: Chief Executive Officer

Agreed and Accepted:

NexPoint Advisors, L.P.

___________________________

By:

Its: 

Highland Capital Management Fund Advisors, L.P.

___________________________

By:

Its: 

2

ActiveUS 185052458v.2

Case 21-03010-sgj Doc 1-5 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit E Page 3 of 3

000085

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 81 of 888 PageID 3385 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 62 of 222 PageID 130
EXHIBIT F

Case 21-03010-sgj Doc 1-6 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit F Page 1 of 3

000086

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 82 of 888 PageID 3386 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 63 of 222 PageID 131
1

From: James Seery <jpseeryjr@gmail.com>

Sent: Wednesday, January 27, 2021 2:47 PM

To: Ethan Powell

Cc: Thomas Surgent

Subject: Response to KL Gates Letter Dated January 27, 2021

Mr. Powell:

I write to respond briefly to your counsel’s letter to me dated today. I will not be communicating with your counsel.

Initially, as I stated on the phone to you prior to your termination of my call, either the Funds’ Board is unaware of the actions

taken by the Funds in court over the past week or the Board is complicit in those actions. In my opinion, the Funds’ CCO

perjured himself multiple times yesterday, and the advisors and the Funds fabricated a false claim that HCMLP breached the

Advisors Act with respect to HCMLP’s management of certain CLOs. Based on our prior dealings, I would not have expected the

Funds and their Boards to participate in such a false narrative in the Bankruptcy Court and hope that it was a case of counsel

and the CCO hiding their tactics from the Board. We can address these issues at a later time.

With respect to the KL Gates letter, as the Board is aware, HCMLP has been pursuing a plan of reorganization that calls for

termination of the shared service agreements with the Funds and their advisors for months. HCMLP has given timely notice of

termination of the shared service agreements. As the Boards are further aware, for the past several months, HCMLP has

attempted to work on a transition of HCMLP employees to a Dondero controlled entity that could work with the Funds to

provide the services previously provided by HCMLP. And as I specifically told the Funds’ Board, that arrangement is dependent

on cooperation from Mr. Dondero as the person in complete control of the advisors. Since Mr. Dondero is also the portfolio

manager of the adviosrs, HCMLP assumes that the Board have been in regular communication with him about the transition,

especially since the termination notices were sent. KL Gates is correct that the shared service agreements and all services

thereunder terminate on January 31, 2021 (the “Termination Date”).

For the past several months, Mr. Dondero has refused to permit the negotiation of a transition arrangement on behalf of

advisors. In the past few weeks, HCMLP and its advisors have been attempting to work with Brian Collins and JP Sevilla (senior

HCMLP employees) to construct a transition arrangement based on the terms HCMLP has been proposing for months. Those

soon to be former HCMLP employees would form their own company (with other former HCMLP employees) to provide the

services to the advisors, the Funds, and others. We believe that arrangement is potentially close to agreement and will be

documented in a term sheet that will need to be executed prior to the end of the day on the Termination Date. If the term

sheet is agreed to, properly executed, and its conditions precedent are met, it will govern the respective parties’ arrangement

and the provision of services while final documents incorporating the agreement are drafted during the first two weeks of

February.

A key condition precedent is for the advisors and their related entities to pay all postͲpetition amounts due to HCMLP. (HCMLP

has already commenced actions to collect certain other amounts due to it from those related entities.). The total postͲpetition

amount owed is approximately $5.5 million.

HCMLP encourages the Board to reach out to Messrs. Collins and Sevilla to gain an understanding of the terms of the potential

transition arrangement, the counterparties ‘willingness to execute the term sheet, and the counterparties’ ability to timely

make the required payment.

I will not address the remainder of the KL Gates letter. By declining to address the letter, HCMLP does not agree with it, save

for the recognition that termination of the shared service agreements has been properly given and that the agreements and

services thereunder terminate on the Termination Date. HCMLP reserves all its rights and claims.

Case 21-03010-sgj Doc 1-6 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit F Page 2 of 3

000087

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 83 of 888 PageID 3387 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 64 of 222 PageID 132
2

Best. Jim

Jim Seery

631Ͳ804Ͳ2049

jpseeryjr@gmail.com

Case 21-03010-sgj Doc 1-6 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit F Page 3 of 3

000088

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 84 of 888 PageID 3388 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 65 of 222 PageID 133
EXHIBIT G

Case 21-03010-sgj Doc 1-7 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit G Page 1 of 4

000089

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 85 of 888 PageID 3389 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 66 of 222 PageID 134
 1" = "1" "ActiveUS 185190916v.5" "" ActiveUS 185190916v.5

By Email and FedEx

Board of Trustees of Highland Funds

c/o Stacy Louizos, Esq.

Blank Rome LLP

1271 Avenue of the Americas

New York, NY 10020

slouizos@blankrome.com

Ethan Powell, Trustee: ethanpowell@impactshares.org

John Honis, Trustee: Jhonis@RandAdvisors.com

Dr. Bob Froehlich, Trustee: drbobf@gmail.com

Bryan Ward, Trustee: bward2299@gmail.com

Ed Constantino, Trustee: enconstantino@gmail.com

February 8, 2021

Dear Members of the Board of Trustees:

I write regarding the transition of the Shared Services (as defined below) provided by

Highland Capital Management LP (“HCMLP”) to NexPoint Advisors, L.P. and Highland

Capital Management Fund Advisors, L.P. (the “Fund Advisers”), which serve as

investment advisers to the investment companies registered under the Investment

Company Act of 1940 that are overseen by the Board (collectively, the “Funds”). 

As you are aware, HCMLP provides certain back- and middle-office services,

administrative, infrastructure, and other services to the Fund Advisers under Shared

Service Agreements between HCMLP and the Fund Advisers (the “Shared Service

Agreements”). These services include office space and facilities, personnel

sharing/human resources, information technology, trade desk services, compliance/risk

personnel, administrative, tax, document negotiation, valuation, and reporting services

as described more fully in the Shared Service Agreements (collectively, the “Shared

Services”).

As the Board is also aware, HCMLP gave the required advance notice of termination of

its services under the Shared Service Agreements more than two months ago, and has

extended that notice for an additional two weeks, solely to accommodate the Fund

Advisers’ need for additional time to transition services. Accordingly, February 14, 2021

is now the extended termination date of the Shared Services Agreements and related

Payroll Expense Reimbursement Agreements that form the basis of the services

provided by HCMLP to the Fund Advisers. 

As of today, the Fund Advisers have not confirmed that they are prepared to fully service

the Funds without interruption following the termination. As discussed below, HCMLP is

in bankruptcy, has diminishing resources, and is subject to a creditor’s committee and

plan of reorganization that does not contemplate HCMLP continuing to provide services

to the Fund Advisers after February 14, 2021. As a result, we are once again providing

the Board with notice that it must exercise its oversight responsibility over the Funds to

assure that there is a replacement service provider by February 15, 2021.

Case 21-03010-sgj Doc 1-7 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit G Page 2 of 4

000090

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 86 of 888 PageID 3390 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 67 of 222 PageID 135
Board of Trustees 

February 8, 2021

Page 2

 1" = "1" "ActiveUS 185190916v.5" "" ActiveUS 185190916v.5

Both before and after notice of termination was given, HCMLP has endeavored in good

faith to negotiate an appropriate transition of the shared services to a newly-formed

company (“NewCo”) that will be owned and operated by the very same employees that

oversee the provision of the shared services now (following their termination by HCMLP,

that is). 

Our interest in transitioning this business and these employees is not simply a desire, it

is part and parcel of the reorganization and Chapter 11 restructuring plan for HCMLP

that was approved by the federal bankruptcy court this morning.

Unfortunately, our negotiations with the Fund Advisers to bring this matter to a

conclusion, while ongoing, have not resulted in an agreement. And indeed, the Fund

Advisers’ conduct at times has been counterproductive to the transition of these

services, requiring multiple instances of court intervention to prevent harm to HCMLP or

the estate. 

HCMLP recognizes the potential consequences of a material disruption in the Fund

Advisers’ services to the Funds and their investors, and therefore has at all times sought

to ensure uninterrupted service to the Fund Advisers. Most recently we offered to

extend the termination date for an additional 14 days, despite not having been paid by

the Fund Advisers for our services for months prior to the extension. To be clear,

however, HCMLP is a debtor in bankruptcy and is winding down its operations and

employees. At some point shortly after February 14, HCMLP will no longer have the

resources to provide these services to the Fund Advisers. Moreover, the bankruptcy

creates uncertainty about future employment status for the HCMLP employees providing

services to the Fund Advisers, creating risk to our future ability to provide these services,

which we understand are necessary to the Funds.

We remain committed to attempting to transition the Shared Services to NewCo or any

other successor servicer selected by the Board and/or the Fund Advisers. We continue

to actively negotiate a binding term sheet that would ensure a smooth and successful

transition. We cannot complete this negotiation without the Fund Advisers’ participation

and agreement. For this reason, we reiterate that the Trustees must (i) make clear to

the Fund Advisers their shared commitment to that transition, and (ii) specifically

articulate to us their plan to ensure the Funds do not fail in the event the Fund Advisers

do not agree to a plan of transition.

Without waiver to our claims against the Fund Advisers, including the Fund Advisers’ 

material default in payments to HCMLP, in the interests of facilitating an orderly

transition by February 15, HCMLP is also prepared to make the web and e-mail domains

and data relevant to the shared services available to NewCo at the time of transition. 

In closing, HCMLP has acted in good faith at all times to effectuate the orderly transition

of the Shared Services. Now that we face the loss of budget and personnel needed to

provide these services, I think we can agree that the interests of the Funds and their

shareholders are not served by the Fund Advisers’ refusal to bring this matter to closure

by the February 14 termination date. The solution is at hand and we see no reason why,

Case 21-03010-sgj Doc 1-7 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit G Page 3 of 4

000091

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 87 of 888 PageID 3391 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 68 of 222 PageID 136
Board of Trustees 

February 8, 2021

Page 3

 1" = "1" "ActiveUS 185190916v.5" "" ActiveUS 185190916v.5

with your commitment, the transition cannot be completed in an orderly fashion in

advance of that termination.

Sincerely,

HIGHLAND CAPITAL MANAGEMENT, L.P.

James P. Seery, Jr.

Chief Executive Officer/Chief Restructuring Officer

Case 21-03010-sgj Doc 1-7 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit G Page 4 of 4

000092

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 88 of 888 PageID 3392 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 69 of 222 PageID 137
EXHIBIT H

Case 21-03010-sgj Doc 1-8 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit H Page 1 of 4

000093

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 89 of 888 PageID 3393 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 70 of 222 PageID 138
 4096" = "1" "ActiveUS 185229688v.4" "" 

By Email 

Board of Trustees of Highland Funds

c/o Stacy Louizos, Esq.

Blank Rome LLP

1271 Avenue of the Americas

New York, NY 10020

slouizos@blankrome.com

Ethan Powell, Trustee: ethanpowell@impactshares.org

John Honis, Trustee: Jhonis@RandAdvisors.com

Dr. Bob Froehlich, Trustee: drbobf@gmail.com

Bryan Ward, Trustee: bward2299@gmail.com

Ed Constantino, Trustee: enconstantino@gmail.com

February 12, 2021

Dear Members of the Boards of Trustees/Directors:

I write further to my letter of February 8, 2021 regarding the termination or transition of 

the shared services provided by Highland Capital Management LP (“HCMLP”) to 

NexPoint Advisors, L.P. and Highland Capital Management Fund Advisors, L.P. (the 

“Fund Advisers”), which serve as investment advisers to the investment companies 

registered under the Investment Company Act of 1940 that are overseen by the Board 

(collectively, the “Funds”). 

Specifically, I am writing to be sure that the current status from our perspective is clear to

you as HCMLP seeks to resolve this matter: 

Negotiation of Term Sheet to Transition Services to an Alternative Service Provider

In my February 8th letter, I indicated that our negotiations with the Fund Advisers are 

ongoing, but an agreement remains beyond our collective grasp. HCMLP believes that 

we are at a point where there are no open material business issues. Our most recent draft 

of the Term Sheet to the Fund Advisers provides the Fund Advisers with access to all 

necessary information, systems, and data. 

Specifically, under the Term Sheet, in exchange for the agreed upon fees, HCMLP will 

agree to:

(i) provide access for employees and personnel of the Fund Advisers and their 

subsidiaries to and use of the offices, and facilities of HCMLP in a manner consistent 

with customary access and use by employees and shared personnel (of the newco) of the 

Fund Advisers and their subsidiaries, 

(ii) provide employees and personnel of the Fund Advisers with access to and use 

of the systems and resources of HCMLP as set forth on an extensive schedule of vendor 

agreements, software platforms, IT services, trading systems, administrative systems, and

Case 21-03010-sgj Doc 1-8 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit H Page 2 of 4

000094

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 90 of 888 PageID 3394 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 71 of 222 PageID 139
Board of Trustees / Directors

February 12, 2021

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other resources, in each case as agreed by the parties, and 

(iii) transfer to the Fund Advisers all of HCMLP’s rights title and interest in the 

domain names required by the Fund Advisers. In turn, the cost of the leased space and 

other Shared Resources will be shared by the parties as agreed on the detailed schedule 

on an item-by-item basis, but generally reflecting a split of 60% payable by the Fund 

Advisers and 40% payable by HCMLP (except with respect to rent where the split is 75%

payable by the Fund Advisers and 25% payable by HCMLP). 

By way of background, after pushing to commence these negotiations since last summer, 

we finally got some engagement from the Fund Advisers and provided the revised draft 

Term Sheet to counsel for the Fund Advisers on January 28th. We have since collectively

revised the draft several times, including sending a draft on February 2nd and most 

recently providing the current draft yesterday. We are prepared to execute the current 

draft of the revised Term Sheet today. 

We write to share this information with the Independent Trustees/Directors of the Funds 

because HCMLP believes it cannot provide these services beyond February 19, 2021. It 

is for you and your counsel to assess whether the Board should take steps to assure that 

services to the Funds will be maintained beyond this date. Of course, our position is that

it is your fiduciary duty to meet that obligation. We are confident we have met our 

obligations and are prepared to take steps to underscore that position. 

February 19th Deadline

As you know, last November HCMLP provided the Fund Advisers with the requisite two

-month notice under the Shared Services Agreements. The Fund Advisers did not 

arrange for an alternative service provider during this period, even though this issue has 

been on the table since last summer. 

Nonetheless, in the interest of reaching a good faith resolution, HCMLP extended the 

termination of the shared services from January 31st to February 14th to provide 

additional time for the Fund Advisers to transition. We have now agreed to further 

extended the termination deadline an additional working week, to February 19th, 

conditioned on payment. But we have reached the point where our obligations to the 

Estate means that this is a firm deadline. After February 19th, HCMLP will not be in a 

position to continue to provide services to the Fund Advisers. This will result in the 

cessation of services that have been provided to the Fund Advisers, including, without 

limitation, pricing, striking of daily net asset values, compliance support, trading systems,

email, and other IT functions. These services may be required for Funds’ shareholders to

purchase and sell shares of the Funds unless you have arranged alternative services from 

a successor provider. 

HCMLP stands ready to cooperate to transition necessary data and files to a successor 

services provider identified by the Funds and/or the Fund Advisers. 

Case 21-03010-sgj Doc 1-8 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit H Page 3 of 4

000095

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 91 of 888 PageID 3395 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 72 of 222 PageID 140
Board of Trustees / Directors

February 12, 2021

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Fund Board Involvement

In my February 8th letter, I requested on behalf of HCMLP that the Board (i) make clear 

to the Fund Advisers their shared commitment to that transition, and (ii) specifically 

articulate to us their plan to ensure the Funds do not fail in the event the Fund Advisers 

do not agree to a plan of transition. 

We await a written position on these issues. 

Sincerely,

HIGHLAND CAPITAL MANAGEMENT, L.P.

James P. Seery, Jr.

Chief Executive psst Officer/Chief Restructuring Officer

. Seery, Jr.

ecutive ec Officer/Ch

Case 21-03010-sgj Doc 1-8 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit H Page 4 of 4

000096

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 92 of 888 PageID 3396 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 73 of 222 PageID 141
EXHIBIT I

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Exhibit I Page 1 of 3

000097

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 93 of 888 PageID 3397 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 74 of 222 PageID 142
Case 21-03010-sgj Doc 1-9 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit I Page 2 of 3

000098

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 94 of 888 PageID 3398 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 75 of 222 PageID 143
Case 21-03010-sgj Doc 1-9 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit I Page 3 of 3

000099

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 95 of 888 PageID 3399 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 76 of 222 PageID 144
EXHIBIT J 

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Exhibit J Page 1 of 14

000100

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 96 of 888 PageID 3400 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 77 of 222 PageID 145
Execution Version 

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CONFIDENTIAL BINDING TERM SHEET 

This Confidential Binding Term Sheet (including the Schedules attached hereto, this “Term 

Sheet”) is entered into effective as of February 12, 2021 (the “Effective Date”) by and among Highland 

Capital Management, LP (“HCMLP”) and the following parties (collectively, the “NexPoint Parties”): 

NexPoint Advisors, L.P. (“NPA”), and Highland Capital Management Fund Advisors, L.P. (“HCMFA”). 

The NexPoint Parties and HCMLP collectively are referred to as the “Parties” and each of them 

as a “Party”. 

PREAMBLE 

WHEREAS, HCMLP and the NexPoint Parties were parties to certain Shared Services 

Agreements and Payroll Expense Reimbursement Agreement pursuant to which HCMLP provided 

certain personnel and services to the NexPoint Parties in consideration of payments by the NexPoint 

Parties for such shared services (the “Shared Services Agreements”).

WHEREAS, termination notices for such Shared Services Agreements were delivered to the 

NexPoint Parties in accordance with the terms of such Shared Services Agreements. 

WHEREAS, the Parties have been engaged in discussions and negotiations prior to and since the 

delivery of such termination notices with respect to the potential extension of shared services by HCMLP 

to the NexPoint Parties. 

WHEREAS, HCMLP, NPA, and HCMFA have entered into a Letter Agreement dated January 

31, 2021 which extends the Shared Services Agreements applicable to NPA and HCMFA, which 

otherwise would have expired on January 31, 2021, for a 14-day period beginning on February 1, 2021. 

WHEREAS, HCMLP, NPA, and HCMFA have entered into a Second Letter Agreement dated 

February 11, 2021 which extends the Shared Services Agreements applicable to NPA and HCMFA, 

which otherwise would have expired pursuant to the first Letter Agreement on February 14, 2021, for five 

days through February 19, 2021. 

WHEREAS, certain employees of HCMLP intend to form a new company (“Newco”) to provide 

services similar to those provided under the Shared Service Agreements to the NexPoint Parties and other 

third parties. 

WHEREAS, the Parties wish to enter into a binding term sheet pursuant to which HCMLP will 

provide certain access and resources to the NexPoint Parties in consideration of payments and other 

agreements of the NexPoint Parties. 

NOW, THEREFORE, in consideration of the covenants and agreements set forth in this Term 

Sheet and other good and valuable consideration, the receipt and sufficiency of which are hereby 

acknowledged, the Parties agree as follows: 

I. RESOURCES AND PAYMENTS 

Section 1.1 Payment of Past Due Amounts. The NexPoint Parties will pay to HCMLP an 

amount equal to $3,054,253 (the “Past Due Payment Amounts”) in immediately available funds as 

follows: (i) $1,000,000 will be paid on the Effective Date and (ii) the balance shall be paid in fourteen 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 2 of 14

000101

Case 3:22-cv-02170-S Document 6-1 Filed 01/12/23 Page 97 of 888 PageID 3401 Case 3:22-cv-02170-S Document 2-2 Filed 11/22/22 Page 78 of 222 PageID 146
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equal monthly installments on the first business day of each month following the Effective Date. The 

payment of the Past Due Payment Amounts will offset dollar for dollar amounts owed by the NexPoint 

Parties to HCMLP after the filing of HCMLP’s bankruptcy petition on October 19, 2019, under the 

Shared Services Agreements. 

Section 1.2 Access to Premises; Office Space. 

(a) Until the expiration of the current term of the HCMLP lease for 200 and 300 Crescent 

Court, Dallas, Texas 75201 (the “Premises”) (April 30, 2022) (the “Lease”), employees and personnel of 

the NexPoint Parties and their subsidiaries and affiliates shall be afforded by HCMLP access to and use of 

the offices, and facilities of HCMLP located at the Premises in a manner consistent with customary access 

and use of employees and shared personnel of the NexPoint Parties and their subsidiaries and affiliates, 

and subject to any restrictions and conditions applicable under the Lease. Parties will work in good faith 

to enter a sublease for no less than 75% of the Premises to NexPoint Parties at the lease-rate set forth on 

Schedule A to this Term Sheet. 

(b) In consideration of the access and use of the offices and facilities by employees and 

personnel of the NexPoint Parties as set forth in Section 1.2(a), the NexPoint Parties shall make prompt 

payments in cash, by wire transfer, to HCMLP or its designee in such amounts and at such times as are 

set forth on Schedule A to this Term Sheet. 

(c) For the avoidance of doubt the access and limited use of the offices and facilities by 

employees and personnel of the NexPoint Parties as set forth in Section 1.2(a) shall not include sharing of 

any HCMLP information (with all such information being deemed confidential and for the exclusive use 

by and benefit of HCMLP employees and/or personnel) other than shared spaces such as conference 

rooms, reception areas, restrooms, and dining areas. The parties acknowledge that there will be certain 

areas subject to the exclusive use and control of either HCMLP or the NexPoint Parties as will be agreed 

to in the Definitive Agreement or in the sublease, which may be entered into prior to the Definitive 

Agreement. HCMLP information shall include all files, data, communications, and documents that are 

maintained and utilized by personnel of HCMLP and/or its general partner that are not necessary for the 

business of the NexPoint Parties, including without limitation all files, data, communications, and 

documents relating to the bankruptcy of HCMLP, the management and affairs of HCMLP, personnel 

matters of HCMLP, disputes to which HCMLP is a party, communications with counsel to HCMLP and 

other outside advisors, and communications with the members of the board of the general partner of 

HCMLP. Correspondingly, the parties agree that NexPoint Parties will continue to have, and HCMLP 

will not interfere with, access to certain Shared Resources as defined below. Further, HCMLP shall use 

reasonable efforts to avoid using or accessing any NexPoint Parties’ privileged (i.e., between any 

NexPoint Party and its outside or external counsel) e-mails and privileged information housed on certain 

Shared Resources, except as necessary to satisfy HCMLP’s regulatory or legal requirements

(d) HCMLP shall have no obligation to renew or extend the Lease beyond April 30, 2022. 

(e) The NexPoint Parties shall, and shall ensure that their employees and personnel, comply 

with and fulfill any obligations or responsibilities applicable to employees or personnel of HCMLP under 

the Lease and other documents and policies governing the use of the offices and facilities hereunder 

(including, but not limited to, the restriction against the access of any and all HCMLP information). 

(f) The Parties acknowledge and agree that one or more of the Parties may engage Newco to 

provide back-office services to such Party or Parties pursuant to a services agreement (or equivalent 

agreement or arrangement) between such Party or Parties and Newco. To the extent a Party enters into 

any such agreement or arrangement with Newco, the Parties shall cooperate to provide Newco personnel 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 3 of 14

000102

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with reasonable access to the facilities and resources set forth in Schedule A to the extent reasonably 

necessary for Newco to perform its services to such Party. 

Section 1.3 Access to Certain Shared Resources. 

(a) HCMLP shall provide employees and personnel of the NexPoint Parties with access to 

and use of the systems and resources of HCMLP set forth on Schedule A to this Term Sheet (the “Shared 

Resources”) during the periods set forth on Schedule A. Correspondingly, the parties agree that NexPoint 

Parties will continue to have, and HCMLP will not interfere with, access to certain necessary Shared 

Resources. For the avoidance of doubt, the parties agree that NexPoint Parties will have access to the 

same books and records as available under the applicable Shared Services Agreements. Further, to the 

extent permitted by the terms and agreements governing the Shared Resource, HCMLP agrees that 

NexPoint Parties shall have the right to share or sublicense such Shared Resource at NexPoint Parties’ 

discretion. 

(b) In consideration of the provision of Shared Resources by HCMLP to employees and 

personnel of the NexPoint Parties as set forth in Section 1.3(a), the NexPoint Parties shall make prompt 

payments in cash, by wire transfer, to HCMLP or its designee in such amounts and at such times as are 

set forth on Schedule A to this Term Sheet. The NexPoint Parties shall pay all initial one-time payments 

set forth on Schedule A to HCMLP as a single lump sum within 30 days after the date of this Term Sheet. 

Thereafter, the NexPoint Parties shall make all monthly payments (or other periodic payments) set forth 

on Schedule A to HCMLP on or before the first day of the calendar month (or other period) to which such 

payment relates. All payment obligations of the NexPoint Parties under this Term Sheet shall be joint and 

not several. Except with respect to such payment obligations, the obligations and liabilities of the 

NexPoint Parties hereunder shall be several and not joint. 

(c) Each such Shared Resource shall be renewed only to the extent necessary to remain 

available to employees and personnel of the NexPoint Parties and HCMLP for such parties to perform 

their duties consistent with past practices during such periods set forth on Schedule A. Thereafter, no 

Party to this Term Sheet shall be responsible for extension or renewal of any such Shared Resource or to 

provide access to any such Shared Resource with any other Party. The aggregate cost of any renewal 

(even if such renewal extends beyond the term provided in Schedule A) shall be borne 60% by the 

NexPoint Parties and 40% by HCMLP. The NexPoint Parties shall promptly pay their portion of such 

renewal costs to HCMLP or its designee at the request of HCMLP at least five (5) Business Days (as 

defined below) before the date such renewal payment is required to be made to the applicable vendor, and 

assuming timely receipt of such portion, HCMLP shall timely make the full renewal payment to the 

applicable vendor. For purposes of this Term Sheet, “Business Day” shall mean a day on which the New 

York Stock Exchange is open for regular trading. The parties hereby agree to discuss the renewal of such 

Shared Resource prior to renewal and agree that to the extent the one of the parties determines that a 

Shared Resource no longer necessary for one or both of the parties to operate, then either (i) such vendor 

contract shall not be renewed, or (ii) if renewed, such vendor contract shall be renewed and paid solely by 

the party that needs the contract to operate. 

(d) The NexPoint Parties shall, and shall ensure that their employees and personnel, comply 

with and fulfill any obligations or responsibilities applicable to employees or personnel of HCMLP under 

the policies governing the use of the Shared Resources hereunder. 

Section 1.4 Unexpected Costs; Repairs. In the event it is necessary for the Parties to incur 

any costs (e.g., in the case of breakdowns or repairs) for the continued functionality of the Shared 

Services at their existing levels, such additional expenditures shall be (i) approved by HCMLP and NPA, 

and (ii) borne 60% by the NexPoint Parties and 40% by HCMLP. 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 4 of 14

000103

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Section 1.5 Failure to Pay; Cure Period. In the event a NexPoint Party fails to satisfy any 

payments such NexPoint Party is obligated to make pursuant to this Term Sheet and such NexPoint Party 

fails to cure such failure to make prompt payment within five (5) Business Days of receipt of notice of 

such failure from HCMLP, HCMLP shall have the right to terminate access to all Shared Resources and 

all respective agreements in connection with such Shared Resources with respect to all of the NexPoint 

Parties. HCMLP further agrees that in the event that HCMLP fails to make any payment to a landlord or 

Shared Resource vendor required to be made hereunder, the NexPoint Parties shall have the right to make 

the payments necessary to retain such leased property, service or Shared Resource and deduct such the 

amount of such payments from future payments due to HCMLP under the Term Sheet. If the amounts 

paid by the NexPoint Parties exceed what would otherwise be due to HCMLP from such NexPoint 

Parties, the NexPoint Parties may pursue recovery from HCMLP for such excess amount.

II. OTHER AGREEMENTS OF THE PARTIES 

Section 2.1 Certain Benefit Plan Matters. 

(a) On or before February 19, 2021, HCMLP and NPA shall enter into a mutually acceptable 

Assignment and Assumption Agreement, pursuant to which HCMLP agrees to assign to NPA, and NPA 

agrees to assume, effective as of January 1, 2021, all of the rights and obligations of HCMLP as the 

“Primary Plan Sponsor” of the Highland 401(k) Plan, as amended and restated effective January 1, 2016 

(as amended to date). 

(b) HCMLP and NPA shall use reasonable best efforts to enter into a mutually acceptable 

Assignment and Assumption Agreement (or equivalent agreement), pursuant to which HCMLP agrees to 

assign to NPA or its designee, and NPA or its designee agrees to assume all of the rights and obligations 

of HCMLP as the sponsor of Highland’s defined benefit plan (as amended to date). 

(c) To the extent permitted under applicable law (including without limitation the Employee 

Retirement Income Security Act of 1974) the parties agree to enter into an arrangement with respect to 

employee benefit plan (including, without limitation, health, medical, dental, and other similar plans) 

whereby, as soon as reasonably practicable, NPA shall admit and maintain each employee of HCMLP and 

its sole limited partner of the Claimant Trust as a participant of each employee benefit plan (including, 

without limitation, health, medical, dental, and other similar plans) maintained by or on behalf of NPA for 

employees of NPA and/or the NexPoint Parties, on the same terms and subject to the same conditions as 

such employees of NPA and/or the NexPoint Parties. The parties agree that the actual costs of such 

employee benefit plans attributable to HCMLP employees shall be borne by HCMLP. 

Section 2.2 Transfers of Property to NPA. 

(a) As soon as reasonably practicable following the execution of this Term Sheet, HCMLP 

shall transfer to NPA or its designee, all of HCMLP’s rights title and interest, if any, in the domain names 

set forth on Schedule C to this Term Sheet (the “Domain Names”), and, to the extent possible, all 

telephone numbers currently utilized exclusively by the NexPoint Parties. The NexPoint Parties shall 

provide a list of such telephone numbers to HCMP as soon as practicable following the execution of this 

Term Sheet and HCMLP and the NexPoint Parties shall meet and confer in good faith to confirm that 

such telephone numbers are exclusively used by the NexPoint Parties. 

(b) If the NexPoint Parties (i) make all payments required by this Term Sheet (and any other 

Definitive Agreement that supersedes this Term Sheet), (ii) fulfill all of their obligations under this Term 

Sheet (and any other Definitive Agreement that supersedes this Term Sheet), and (iii) are not in breach of 

any material provision of this Term Sheet, any other Definitive Agreement that supersedes this Term 

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000104

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Sheet, and/or any material provision of any other agreement between HCMLP and a NexPoint Party in 

each case through the full term of this Term Sheet (and any other Definitive Agreement that supersedes 

this Term Sheet) provided that in the event of any such breach the breaching NexPoint Party has notice 

thereof and a reasonable opportunity to cure (not to exceed 30 calendar days) if such breach is curable 

(collectively, the “NexPoint Conditions”), then upon the expiration of the term of this Term Sheet (or any 

other Definitive Agreement that supersedes this Term Sheet), HCMLP shall transfer to NPA or its 

designee, all of HCMLP’s rights, title, and interest, if any, (1) in the furniture and fixtures and office 

supplies and equipment located on or used exclusively in connection with the operations at the Premises; 

(2) Flexential; (3) Evoque; and (4) the home offices or remote working spaces of its employees and 

personnel. 

Section 2.3 Employee Matters. 

(a) Each the following shall terminate on February 20, 2021, in accordance with its terms: (i) 

that certain Payroll Reimbursement Agreement, dated May 1, 2018, by and between HCMFA and NPA, 

as subsequently amended on December 14, 2018, and (ii) (i) that certain Payroll Reimbursement 

Agreement, dated May 1, 2018, by and between HCMFA and HCMLP, as subsequently amended on 

December 14, 2018. 

(b) HCMLP agrees that (i) the NexPoint Parties or an entity formed by current or former 

HCMLP employees to provide services to the NexPoint Parties (the “Potential Employers”) may, in each 

case in their sole and absolute discretion, make offers of employment to any HCMLP employee and (ii) 

HCMLP will not enforce any non-compete or similar agreement if any HCMLP employee accepts an 

offer of employment with a Potential Employer. For the avoidance of doubt, nothing herein will prevent 

HCMLP from continuing to employ an HCMLP employee or require HCMLP to terminate an HCMLP 

employee if a Potential Employer makes an offer of employment. 

Section 2.4 Limited Liability. 

(a) HCMLP shall not be liable to any person or entity, including any third party, for any 

action, inaction, or conduct of any NexPoint Party or that of such NexPoint Party’s or its affiliates’ 

employees, personnel, officers, directors, managers, members, representatives, agents, principals, owners, 

or partners (collectively, “Agents”) in connection with use by the NexPoint Parties or their Agents of 

HCMLP’s offices, facilities, and/or the shared resources under this Term Sheet. 

(b) The NexPoint Parties shall indemnify and hold harmless HCMLP from and against any 

and all costs and expenses (including advancing of reasonable attorneys’ fees) of HCMLP or its affiliates 

or any of their Agents (including, without limitation, costs and expenses of any disputes, legal actions, 

examinations, investigations, and other legal or regulatory costs or expenses), related to or arising out of 

any action, inaction, or conduct by the NexPoint Parties or their Agents in connection with use by the 

NexPoint Parties of HCMLP’s offices, facilities, and/or the shared resources under this Term Sheet.

(c) No Party shall be liable to any other Party or to any other person or entity for the failure 

to provide services, access, or resources hereunder if such failure results from an event beyond the 

reasonable control of the Party obligated to provide such services, access, or resources. 

III. BINDING TERM SHEET; DEFINITIVE AGREEMENTS 

Section 3.1 Binding Agreement. The Parties agree that this Term Sheet constitutes the legal, 

valid and binding obligation of each Party, enforceable against each Party in accordance with its terms. 

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000105

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Section 3.2 Entire Current Understanding and Agreement. This Term Sheet constitutes the 

entire current understanding and agreement by and among the Parties hereto with respect to the subject 

matter hereof and supersedes any and all prior or contemporaneous negotiations, term sheets, covenants, 

agreements, undertakings and understandings (written or oral) and courses of conduct and dealing by or 

among the Parties with respect to the matters expressly set forth herein. 

Section 3.3 Term Sheet Controls. Any express terms and conditions set forth in this Term 

Sheet shall control any conflict or inconsistency with, and amend and supersede, the terms and conditions 

of any and all other agreements between or among the Parties, except to the extent that (x) another 

agreement is amended and/or restated or entered into after the Effective Date with the prior written 

consent of each of HCMLP and NPA and (y) such other agreement states that it shall control in the event 

of any conflict or inconsistency between such other agreement. 

Section 3.4 Definitive Agreement. The Parties agree that a definitive agreement among the 

Parties that supersedes this Term Sheet (a “Definitive Agreement”) will be necessary, desirable and/or 

appropriate to implement the terms and conditions set forth in this Term Sheet. Accordingly, the Parties 

agree to negotiate in good faith any additional terms and conditions relating to the matters herein in a 

manner to fully implement, and in a manner consistent with, the terms and conditions set forth in this 

Term Sheet, except to the extent that the Parties mutually shall otherwise agree in writing. Nevertheless, 

until any such Definitive Agreement is effective, this Term Sheet shall remain in full force and effect. 

Section 3.5 Efforts, Authorizations and Consents; Cooperation; No Ulterior Actions. 

(a) Efforts. Each Party shall proceed diligently and in good faith, and agrees to use all 

reasonable best efforts to do, and cause to be done, all things necessary, desirable and/or appropriate to, as 

promptly as practicable and in accordance with the terms and timeline set forth herein, consummate the 

transactions contemplated by this Term Sheet, and shall direct and cause its affiliates and its affiliates’ 

officers and employees to so proceed and to so act. 

(b) Authorizations and Consents. Each Party shall use reasonable best efforts to obtain all 

authorizations, consents, registrations, orders and approvals that may be or become necessary, desirable 

and/or appropriate for such Party’s execution and delivery of, and the performance of such Party’s 

obligations pursuant to, this Term Sheet, and each Party agrees to cooperate fully and promptly with a 

requesting Party in its seeking to obtain all such authorizations, consents, registrations, orders and 

approvals. 

(c) Cooperation. Each Party agrees to cooperate fully and promptly with the other Parties to 

consummate the Definitive Agreement in accordance with the terms and timeline contemplated herein 

and shall direct and use its reasonable best efforts to cause Persons under its control to so cooperate. 

(d) Indirect Actions. Each Party acknowledges and agrees that he will not, on or after the 

Effective Date, avoid or seek to avoid, the economic and other rights, powers, privileges or interests of 

the other Parties set forth in this Term Sheet. Each Party shall not, and each Party shall cause Persons 

under his control not to, do indirectly that which cannot be done directly under this Term Sheet. 

Section 3.6 Further Assurances. At any time and from time to time, at the request of any 

Party and without further consideration, the other Parties shall execute and deliver such instruments and 

take such action as such Party may reasonably determine is necessary, desirable and/or appropriate to 

carry out the actions contemplated by this Term Sheet. 

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000106

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Section 3.7 NexPoint Parties Representative. For convenience of administration, all of the 

NexPoint Parties hereby appoint NPA as their sole representative for purposes of all actions, consents, 

notices, and communications hereunder to or from the NexPoint Parties. HCMLP may rely upon any 

action by NPA or communication to or from NPA to serve as an action of, or communication to or from, 

and to bind, all of the NexPoint Parties. 

IV. MISCELLANEOUS OTHER PROVISIONS 

Section 4.1 Term. This Term Sheet shall terminate without further action of any Party on 

April 30, 2022 (unless otherwise agreed in writing by HCMLP and NPA). Any payments required to be 

made by a Party hereunder shall for periods through April 30, 2022 shall survive termination of this Term 

Sheet. In addition, the following sections shall survive termination of this Term Sheet indefinitely: 

Sections 2.3 (Limited Liability), 4.4 (Notices) 4.7 (Governing Law; Submission to Jurisdiction; Service of 

Process), 4.9 (No Third-Party Beneficiaries). 

Section 4.2 Amendment. This Term Sheet shall be binding upon the Parties and may not be 

modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by 

each of HCMLP and NPA. 

Section 4.3 Waiver of Rights. No delay or omission by any Party in exercising any right 

under this Term Sheet shall operate as a waiver of that or any other right. A waiver or consent given by 

any Party hereto on any one occasion shall be effective only in that instance and shall not be construed as 

a ban or waiver of any right on any other occasion. 

Section 4.4 Notices. All notices, requests, demands, claims, and other communications 

hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder 

shall be deemed duly delivered: (a) four (4) Business Days after it is sent by registered or certified mail, 

return receipt requested, postage prepaid; (b) one (1) Business Day after it is sent for next Business Day 

delivery via a reputable nationwide overnight courier service; (c) when sent, if e-mailed on a Business 

Day; (d) the next Business Day following the day on which the e-mail is sent if e-mailed on a day that is 

not a Business Day; (e) when receipt is acknowledged, if facsimiled on a Business Day; and (f) the next 

Business Day following the day on which receipt is acknowledged if facsimiled on a day that is not a

Business Day, in each case to the intended recipient as set forth below: 

If to HCMLP: 

James P. Seery, Jr. 

c/o Highland Capital Management, LP 

300 Crescent Court 

Dallas, Texas 75201 

Email: jpseeryjr@gmail.com 

With copies to: 

Pachulski Stang Ziehl & Jones LLP 

780 3rd Ave #34 

New York, NY 10017 

Attention: Gregory V. Demo 

Email: GDemo@pszjlaw.com 

and 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 8 of 14

000107

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8

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DOCS_NY:42334.2

Wilmer Cutler Pickering Hale and Dorr LLP 

60 State Street 

Boston, MA 02109 

Attention: Timothy F. Silva 

Email: timothy.silva@wilmerhale.com 

If to the NexPoint Parties: 

D.C. Sauter 

300 Crescent Court, Suite 700 

Dallas, Texas 75201 

Email: DSauter@NexPointadvisors.com 

With a copy to: 

K&L Gates LLP 

4350 Lassiter at North Hills Avenue 

Suite 300 

P.O. Box 17047 

Raleigh, North Carolina 27619 

Attention: A. Lee Hogewood III 

Email: lee.hogewood@klgates.com 

Any Party may give any notice, request, demand, claim, or other communication hereunder using any 

other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary

mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be 

deemed to have been duly given unless and until it actually is received by the Party for whom it is 

intended. Any Party may change the address to which notices, requests, demands, claims, and other 

communications hereunder are to be delivered by giving the other Parties notice in the manner herein set 

forth. 

Section 4.5 Reservation of Rights. For the avoidance of doubt, each Party reserves all rights 

it has, or may have, including all rights to pursue and defend any claims and/or causes of action, with 

respect to any matter, agreement, or understanding not explicitly addressed in this Term Sheet. The 

Parties expressly reserve all rights with respect to amounts asserted in connection with the NexPoint 

Parties’ administrative claim, including, without limitation the NexPoint Parties’ right to amend such 

claim to assert additional or lesser amounts, including with respect to the Past Due Payment Amounts (but 

excluding the amounts payable for access and the Shares Services hereunder), the rights of HCMLP to 

object to such claim as well as all rights and defenses in connection with all pending and potential 

Adversary Proceedings between the Parties. All such claims and defenses are expressly preserved for 

future resolution by the court. 

Section 4.6 Successors and Assigns; Survival. This Term Sheet shall be binding upon and 

inure to the benefit of the Parties hereto and their respective heirs, executors, administrators, successors 

and permitted assigns. No NexPoint Party may assign its rights or obligations hereunder without the prior 

written consent of HCMLP. HCMLP may not assign its rights or obligations hereunder without the prior 

written consent of NPA. 

Section 4.7 Voluntary Assent; Review of Term Sheet; Independent Counsel; Construction. 

Each Party acknowledges and agrees that no promises or agreements of any kind have been made to or 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 9 of 14

000108

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9

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DOCS_NY:42334.2

with him by the other or by any person or entity whatsoever to cause him to sign this Term Sheet other 

than those set forth in this Term Sheet, and that such Party fully understands the meaning and intent of 

this Term Sheet. Each Party further states and represents that it is sophisticated, has carefully read this 

Term Sheet, understands its contents, and freely and voluntarily assents to all of its terms and conditions. 

Each Party further states and represents that he has been represented by independent legal counsel of its 

own choosing with respect to the negotiation and preparation of this Term Sheet. The Parties have 

participated jointly in the negotiation and drafting of this Term Sheet. In the event any ambiguity or 

question of intent or interpretation arises, this Term Sheet shall be construed as if drafted jointly by 

HCMLP and the NexPoint Parties, and no presumption or burden of proof shall arise favoring or 

disfavoring any Party by virtue of the authorship of any provision of this Term Sheet. 

Section 4.8 Governing Law; Submission to Jurisdiction; Service of Process. This Term 

Sheet shall be interpreted and construed in accordance with the laws of the State of Texas, without regard 

to conflict of laws provisions. Each Party hereby irrevocably submits to and acknowledges and 

recognizes the exclusive jurisdiction of the United States Bankruptcy Court for the Northern District of 

Texas, Dallas Division (which court, for purposes of this Term Sheet, is the only court of competent 

jurisdiction), over any suit, action or other proceeding arising out of, under or in connection with this 

Term Sheet or its subject matter. Each Party irrevocably consents to service of process in any action or 

proceeding arising out of or relating to this Term Sheet in the manner provided for notices in Section 4.4. 

Nothing in this Term Sheet shall affect the right of any Party to serve process in any other manner 

permitted by law. 

Section 4.9 Severability; Remedies Cumulative. The provisions of this Term Sheet shall be 

deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or 

enforceability of the other provisions of this Term Sheet. If any provision of this Term Sheet, or the 

application thereof to any Person or any circumstance, is found by a court or other regulatory authority of 

competent jurisdiction to be invalid or unenforceable, (a) the Parties shall negotiate in good faith to 

modify this Term Sheet so as to give effect to the original intent of the Parties of such invalid or 

unenforceable provision to the fullest extent permitted by law, and (b) the remainder of this Term Sheet 

and the application of such provision to other Persons or circumstances shall not be affected by such 

invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or 

enforceability of such provision, or the application thereof, in any other jurisdiction. The rights and 

remedies of the Parties to this Term Sheet are cumulative and not alternative, and each Party shall have 

the right in any particular circumstance to enforce any provision of this Term Sheet without regard to the 

availability of a remedy under any other provision of this Term Sheet. 

Section 4.10 No Third-Party Beneficiaries. 

(a) It is the explicit intention of the Parties that no Person other than the Parties — and, for 

the avoidance of doubt, no employee or officer of any Party or any of its affiliates or any of a Party’s or 

its affiliates’ owners, officers or employees and no client or investor in any product managed or 

sponsored by any Party — is or shall be entitled to bring any action to enforce any provision of this Term 

Sheet against any Party or otherwise, and that the covenants, undertakings and agreements set forth in this 

Term Sheet are for the sole benefit of, and shall be enforceable only by the Parties (and their respective 

successors and permitted assigns), and they shall not be construed as conferring, and are not intended to 

confer, any rights on any other person or entity whatsoever. 

(b) No investors and no creditors of any Party shall have any right or entitlement to enforce 

any of the provisions of this Term Sheet or to require any Party to discharge its obligations hereunder. 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 10 of 14

000109

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10

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DOCS_NY:42334.2

Section 4.11 Headings. The headings of the Sections and sub-Sections of this Term Sheet are 

for convenience of reference only, and are not to be considered in construing the terms and provisions of 

this Term Sheet. 

Section 4.12 Construction. The definitions of terms herein shall apply equally to the singular 

and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the 

corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” 

shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to 

have the same meaning and effect as the word “shall.” Unless otherwise indicated: (i) the words 

“herein,” “hereof” and “hereunder,” and words of similar import when used in this Term Sheet, shall be 

construed to refer this Term Sheet in its entirety and not to any particular provision hereof and (ii) all 

references in this Term Sheet to Exhibits, Schedules, Articles, Sections, paragraphs and sentences shall be 

construed to refer to Exhibits and Sections to, and Articles, Sections, paragraphs and sentences of, this 

Term Sheet. References to statues shall mean such statutes as amended. 

Section 4.13 Payments. All payments and distributions required to be made pursuant this 

Term Sheet shall be made in cash and/or other immediately available funds to one (1) or more accounts as 

directed by the person or entity to whom such amounts are due. 

Section 4.14 Counterparts and Electronic Signatures. This Term Sheet may be executed in 

two (2) or more counterparts, each of which shall be deemed an original but all of which together shall 

constitute one (1) and the same instrument. This Term Sheet may be executed by facsimile and/or 

electronically by any one (1) or more of the Parties. 

[Remainder of page intentionally left blank; signature page follows] 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 11 of 14

000110

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ActiveUS 185044344v.7 

DOCS_NY:42334.2

IN WITNESS WHEREOF, the Parties have executed this Term Sheet effective as of the date first 

written above. 

HIGHLAND CAPITAL MANAGEMENT, LP

By: 

Name: 

Title: 

NEXPOINT ADVISORS, L.P.

By: 

Name: 

Title: 

HIGHLAND CAPITAL MANAGEMENT 

FUND ADVISORS, L.P.

By: 

Name: 

Title: 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 12 of 14

000111

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B-1 

ActiveUS 185044344v.7 

DOCS_NY:42334.2

Schedule A 

Schedule of Shared Resources and Payments 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 13 of 14

000112

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B-2 

ActiveUS 185044344v.7 

DOCS_NY:42334.2

Schedule B 

Domain Names 

Case 21-03010-sgj Doc 1-10 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc

Exhibit J Page 14 of 14

000113

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B1040 (FORM 1040) (12/15) 

ADVERSARY PROCEEDING COVER SHEET

(Instructions on Reverse) 

ADVERSARY PROCEEDING NUMBER

(Court Use Only)

PLAINTIFFS DEFENDANTS

ATTORNEYS (Firm Name, Address, and Telephone No.) ATTORNEYS (If Known)

PARTY (Check One Box Only)

Ƒ'HEWRU Ƒ86 Trustee/Bankruptcy Admin

Ƒ&UHGLWRU Ƒ2WKHU

Ƒ7UXVWHH

PARTY (Check One Box Only)

ƑDebtor ƑU.S. Trustee/Bankruptcy Admin

ƑCreditor ƑOther

ƑTrustee

CAUSE OF ACTION (WRITE A BRIEF STATEMENT OF CAUSE OF ACTION, INCLUDING ALL U.S. STATUTES INVOLVED)

NATURE OF SUIT

(Number up to five (5) boxes starting with lead cause of action as 1, first alternative cause as 2, second alternative cause as 3, etc.)

FRBP 7001(1) – Recovery of Money/Property 

Ƒ11-Recovery of money/property - §542 turnover of property

Ƒ12-Recovery of money/property - §547 preference

Ƒ13-Recovery of money/property - §548 fraudulent transfer 

Ƒ14-Recovery of money/property - other

FRBP 7001(2) – Validity, Priority or Extent of Lien 

Ƒ21-Validity, priority or extent of lien or other interest in property

FRBP 7001(3) – Approval of Sale of Property

Ƒ31-Approval of sale of property of estate and of a co-owner - §363(h)

FRBP 7001(4) – Objection/Revocation of Discharge

Ƒ41-Objection / revocation of discharge - §727(c),(d),(e)

FRBP 7001(5) – Revocation of Confirmation

Ƒ51-Revocation of confirmation

FRBP 7001(6) – Dischargeability

Ƒ66-Dischargeability - §523(a)(1),(14),(14A) priority tax claims

Ƒ62-Dischargeability - §523(a)(2), false pretenses, false representation, 

actual fraud

Ƒ67-Dischargeability - §523(a)(4), fraud as fiduciary, embezzlement, larceny

(continued next column)

FRBP 7001(6) – Dischargeability (continued)

Ƒ61-Dischargeability - §523(a)(5), domestic support

Ƒ68-Dischargeability - §523(a)(6), willful and malicious injury

Ƒ63-Dischargeability - §523(a)(8), student loan

Ƒ64-Dischargeability - §523(a)(15), divorce or separation obligation 

 (other than domestic support)

Ƒ65-Dischargeability - other

FRBP 7001(7) – Injunctive Relief

Ƒ 71-Injunctive relief – imposition of stay

Ƒ 72-Injunctive relief – other

FRBP 7001(8) Subordination of Claim or Interest

Ƒ 81-Subordination of claim or interest

FRBP 7001(9) Declaratory Judgment

Ƒ 91-Declaratory judgment

FRBP 7001(10) Determination of Removed Action

Ƒ 01-Determination of removed claim or cause

Other

Ƒ SS-SIPA Case – 15 U.S.C. §§78aaa et.seq.

Ƒ 02-Other (e.g. other actions that would have been brought in state court 

if unrelated to bankruptcy case)

ƑCheck if this case involves a substantive issue of state law ƑCheck if this is asserted to be a class action under FRCP 23

Ƒ&KHFNLIDMXU\trial is demanded in complaint Demand $

Other Relief Sought

Highland Capital Management, L.P. Highland Capital Management Fund Advisors, L.P.,

and NexPoint Advisors, L.P.

Hayward PLLC

10501 N. Central Expressway, Suite 106

Dallas, Texas 75231 Tel.: (972) 755-7100

Count 1: Declaratory relief pursuant to 11 U.S.C. 105(a) and Fed. R. Bankr. P. 7001; Count 2:

Breach of contract; Count 3: Injunctive relief pursuant to 11 U.S.C. 105(a) and Fed. R. Bankr. P.

7065

1

2

3

Damages in an amount to be determined at trial

Declaratory relief and injunctive relief 

Case 21-03010-sgj Doc 1-11 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc 

Adversary Cover Sheet Page 1 of 2

000114

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B1040 (FORM 1040) (12/15) 

BANKRUPTCY CASE IN WHICH THIS ADVERSARY PROCEEDING ARISES

NAME OF DEBTOR BANKRUPTCY CASE NO.

DISTRICT IN WHICH CASE IS PENDING DIVISION OFFICE NAME OF JUDGE

RELATED ADVERSARY PROCEEDING (IF ANY)

PLAINTIFF DEFENDANT ADVERSARY 

PROCEEDING NO.

DISTRICT IN WHICH ADVERSARY IS PENDING DIVISION OFFICE NAME OF JUDGE

SIGNATURE OF ATTORNEY (OR PLAINTIFF)

DATE PRINT NAME OF ATTORNEY (OR PLAINTIFF)

INSTRUCTIONS

The filing of a bankruptcy case creates an “estate” under the jurisdiction of the bankruptcy court which consists of 

all of the property of the debtor, wherever that property is located. Because the bankruptcy estate is so extensive and the 

jurisdiction of the court so broad, there may be lawsuits over the property or property rights of the estate. There also may be 

lawsuits concerning the debtor’s discharge. If such a lawsuit is filed in a bankruptcy court, it is called an adversary 

proceeding.

A party filing an adversary proceeding must also must complete and file Form 1040, the Adversary Proceeding 

Cover Sheet, unless the party files the adversary proceeding electronically through the court’s Case Management/Electronic 

Case Filing system (CM/ECF). (CM/ECF captures the information on Form 1040 as part of the filing process.) When 

completed, the cover sheet summarizes basic information on the adversary proceeding. The clerk of court needs the 

information to process the adversary proceeding and prepare required statistical reports on court activity.

The cover sheet and the information contained on it do not replace or supplement the filing and service of pleadings 

or other papers as required by law, the Bankruptcy Rules, or the local rules of court. The cover sheet, which is largely selfexplanatory, must be completed by the plaintiff’s attorney (or by the plaintiff if the plaintiff is not represented by an 

attorney). A separate cover sheet must be submitted to the clerk for each complaint filed.

Plaintiffs and Defendants. Give the names of the plaintiffs and defendants exactly as they appear on the complaint. 

Attorneys. Give the names and addresses of the attorneys, if known.

Party. Check the most appropriate box in the first column for the plaintiffs and the second column for the defendants.

Demand. Enter the dollar amount being demanded in the complaint.

Signature. This cover sheet must be signed by the attorney of record in the box on the second page of the form. If the 

plaintiff is represented by a law firm, a member of the firm must sign. If the plaintiff is pro se, that is, not represented by an 

attorney, the plaintiff must sign.

Highland Capital Management, L.P. 19-34054-sgj11

Northern District of Texas Dallas Division Stacey G. C. Jernigan

SIGNATURE OF ATTORNEY (OR P

February 17, 2021 Zachery Z. Annable

Case 21-03010-sgj Doc 1-11 Filed 02/17/21 Entered 02/17/21 08:05:38 Desc 

Adversary Cover Sheet Page 2 of 2

000115

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Tab 4

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 1 

K&L GATES LLP

Artoush Varshosaz (TX Bar No. 24066234)

1717 Main Street, Suite 2800

Dallas, TX 75201

Tel: (214) 939-5659

artoush.varshosaz@klgates.com 

Stephen G. Topetzes (pro hac vice) 

1601 K Street, NW

Washington, DC 20006-1600

Tel: (202) 778-9328

stephen.topetzes@klgates.com 

A. Lee Hogewood, III (pro hac vice) 

4350 Lassiter at North Hills Ave., Suite 300

Raleigh, NC 27609

Tel: (919) 743-7306

Lee.hogewood@klgates.com

Counsel for Highland Capital Management Fund 

Advisors, L.P. and NexPoint Advisors, L.P.

Davor Rukavina, Esq.

Texas Bar No. 24030781

Julian P. Vasek, Esq.

Texas Bar No. 24070790

MUNSCH HARDT KOPF & HARR, P.C.

3800 Ross Tower

500 N. Akard Street

Dallas, Texas 75202-2790

Telephone: (214) 855-7500

Facsimile: (214) 978-4375

drukavina@munsch.com

jvasek@munsch.com 

Counsel for Highland Capital Management Fund 

Advisors, L.P. and NexPoint Advisors, L.P. 

.

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re:

HIGHLAND CAPITAL MANAGEMENT, L.P.,

Debtor. 

§

§

§

§

§

§

Chapter 11 

Case No. 19-34054-sgj11

APPLICATION FOR ALLOWANCE OF 

ADMINISTRATIVE EXPENSE CLAIM

TO THE HONORABLE STACEY G.C. JERNIGAN, U.S. BANKRUPTCY JUDGE:

COME NOW Highland Capital Management Fund Advisors, L.P. (“HCMFA”) and 

NexPoint Advisors, L.P. (“NexPoint,” and with HCMFA, the “Advisors”), creditors and parties in 

interest in the above-captioned bankruptcy case (the “Bankruptcy Case”), and file this their 

Application for Allowance of Administrative Expense Claim (the “Application”), respectfully 

stating as follows:

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 2 

I. JURISDICTION AND VENUE

1. The Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 

1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). 

2. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. 

II. BACKGROUND

A. SHARED SERVICES AGREEMENTS

3. On or about February 8, 2013, HCMFA entered into that certain Second Amended 

and Restated Shared Services Agreement (each such agreement, a “SSA”) with Highland Capital 

Management, L.P. (the “Debtor”). On or about the same date, NexPoint also entered into a SSA 

with the Debtor. 

4. Under the SSAs, the Debtor agreed to provide the Advisors with certain services, 

including “all of the (i) finance and accounting services, (ii) human resources services, (iii) 

marketing services, (iv) legal services, (v) corporate services, (vi) information technology services, 

and (vii) operations services ....” 

5. The SSAs contain the following detailed cost allocation provisions: 

The Actual Cost of any item relating to any Shared Services or Shared Assets shall 

be allocated based on the Allocation Percentage. For purposes of this Agreement, 

“Allocation Percentage” means:

(a) To the extent 100% of such item is demonstrably attributable to HCMFA, 100% 

of the Actual Cost of such item shall be allocated to HCMFA as agreed by HCMFA;

(b) To the extent a specific percentage of use of such item can be determined (e.g., 

70% for HCMLP and 30% for HCMFA), that specific percentage of the Actual 

Cost of such item will be allocated to HCMLP or HCMFA, as applicable and as 

agreed by HCMFA; and

(c) All other portions of the Actual Cost of any item that cannot be allocated 

pursuant to clause (a) or (b) above shall be allocated between HCMLP and HCMFA 

in such proportion as is agreed in good faith between the parties. 

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 3 

6. “‘Actual Cost’ means, with respect to any period [under the SSA], one hundred 

percent (100%) of the actual costs and expenses caused by, incurred or otherwise arising from or 

relating to (i) the Shared Services and (ii) the Shared Assets, in each case during such period.”

7. In the event a party wishes to make changes to the shared services under the SSA, 

“The parties will negotiate in good faith the terms upon which a Service Provider would be willing 

to provide such New Shared Services to [the Advisors].” 

B. PAYROLL REIMBURSEMENT AGREEMENTS

8. On or about May 1, 2018, HCMFA entered into that certain Payroll Reimbursement 

Agreement (each such agreement a “PRA”) with the Debtor. On or about the same date, NexPoint 

also entered into a PRA with the Debtor. 

9. Under the PRAs, the Debtor is entitled to seek reimbursement from the Advisors 

“for the cost of certain employees who are dual employees of [the Debtor and the Advisors] and 

who provide advice to registered investment companies advised by [the Advisors] under the 

direction and supervision of [the Debtor] ....” 

10. The amount of such reimbursement is based on an actual cost allocation formula as 

follows: “The Actual Cost of any Dual Employee relating to the investment advisory services 

provided to a Fund shall be allocated based on the Allocation Percentage. For purposes of this 

Agreement, “Allocation Percentage” means the Parties’ good faith determination of the percentage 

of each Dual Employee’s aggregate hours worked during a quarter that were spent on” certain 

matters set forth in the PRA. 

11. “‘Actual Cost’ means, with respect to any period [under the PRA], the actual costs 

and expenses caused by, incurred or otherwise arising from or relating to each Dual Employee, in 

each case during such period. Absent any changes to employee reimbursement, as set forth in 

Section 2.02, such costs and expenses are equal to $252,000 per month.” 

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 4 

12. Section 2.02 provides the mechanism to modify employee reimbursement and also 

provides, “The Parties will negotiate in good faith the terms of such modification.” 

C. BANKRUPTCY FILING AND SUBSEQUENT EVENTS 

13. On October 16, 2019 (the “Petition Date”), the Debtor filed a voluntary petition for 

relief under Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 101 et seq.) in the United States 

Bankruptcy Court for the District of Delaware, thereby initiating the Bankruptcy Case. On or 

about December 4, 2019, the Bankruptcy Case was transferred to this Court. 

14. On January 9, 2020, the Bankruptcy Court entered its Order Approving Settlement 

with Official Committee of Unsecured Creditors Regarding Governance of the Debtor and 

Procedures for Operations in the Ordinary Course (Dkt. No. 339, the “Settlement Order”). 

15. In connection with the Settlement Order, an independent board (the “Board”) was 

appointed to manage the Debtor’s general partner, Strand Advisors, Inc. (“Strand”). Its members 

are John S. Dubel, James P. Seery, Jr., and Russel F. Nelms. Several months later, the Board, with 

court approval, appointed Mr. Seery as the Debtor’s CEO and CRO. 

16. As the Bankruptcy Case progressed, the Court expressed concerns about the 

Debtor’s employees providing certain services to the non-debtor Advisors. As a result, beginning 

around July 2020, Mr. Seery directed the Debtor to cease providing services to the Advisors as 

otherwise contemplated under the SSAs and the PRAs. 

17. Nevertheless, the Advisors continued to pay for those services under the SSAs and 

the PRAs consistent with historical practice, despite the fact that the Debtor is not providing all 

the required services in return. For example, upon information and belief, the Debtor has booked 

net income from the SSAs of approximately $10 million since the Petition Date. Given that the 

SSAs represent actual-cost sharing agreements, said net revenue represents Advisor overpayments 

under the SSAs—the purpose of the SSAs is not to make a profit. At the same time, the Advisors 

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 5 

have incurred significant additional expense obtaining services elsewhere that the Debtor was 

required to provide under the SSAs. 

18. There have also been similar overpayments under the PRAs. There is a schedule 

attached to the PRAs of investment professionals whose compensation would be reimbursed by 

the Advisors. But this schedule is incredibly outdated. It includes many individuals, for example, 

who departed the Debtor before the Petition Date or during the Bankruptcy Case. As a result, the 

Advisors estimate that, since the Petition Date, they have overpaid under the PRA’s more than $9 

million. 

19. The Advisors have brought these issues to Mr. Seery’s attention, and in accordance 

with the Debtor's obligations under the SSAs and the PRAs, the Advisors expect Mr. Seery to 

negotiate in good faith. Discovery will be necessary to determine the precise amount of the 

overpayments under the SSAs and PRAs. 

III. ARGUMENTS AND AUTHORITIES

20. Administrative expenses generally include “the actual, necessary costs and 

expenses of preserving the estate ....” 11 U.S.C. § 503(b)(1)(a). However, the list of 

administrative expense claims set forth in section 503(b) is not exclusive or exhaustive. In re 

Imperial Bev. Group, LLC, 457 B.R. 490, 500 (Bankr. N.D. Tex. 2011) (citing various cases for 

the proposition that “the administrative expenses listed in the subsections of § 503(b)—preceded 

by ‘including’—are not exclusive”); 11 U.S.C. § 102(3) (“In this title ... ‘includes’ and ‘including’ 

are not limiting ....”).

21. Post-petition, pre-rejection performance under an executory contract gives rise to 

an administrative expense claim. See NLRB v. Bildisco & Bildisco, 465 U.S. 513, 531 (1984) 

(superseded by statute on other grounds) (“If the debtor-in-possession elects to continue to receive 

benefits from the other party to an executory contract pending a decision to reject or assume the 

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 6 

contract, the debtor-in-possession is obligated to pay for the reasonable value of those services 

....”); In re MCS/Tex. Direct, Inc., 02-40229-DML-11, 2004 Bankr. LEXIS 379, *11-12 (Bankr. 

N.D. Tex. March 30, 2004) (“Even if the contract is rejected, the contract party is entitled to 

payment for postpetition value received by a debtor.”). 

22. Similarly, a post-petition, pre-rejection breach of contract gives rise to an 

administrative expense claim. See In re United Trucking Serv., 851 F.2d 159, 162 (6th Cir. 1988) 

(“the damages under the breached lease covenant, to the extent that they occurred post-petition, 

provided benefits to the bankrupt estate and were property accorded priority under § 503”);

Shapiro v. Meridian Auto. Sys. (Del.) (In re Lorro, Inc.), 391 B.R. 760, 766 (Bankr. E.D. Mich. 

2008) (“the term ‘administrative expense’ has been construed to include claims based on tort, 

trademark infringement, patent infringement, and breach of contract”) (citing, inter alia, Reading 

Co. v. Brown, 391 U.S. 471 (1968)). 

23. Here, under the SSAs and the RPAs, the Advisors have paid for services they did 

not receive and for salaries of employees who no longer exist. The Debtor, on the other hand, 

collected the Advisors’ payments without providing anything in exchange or incurring any actual 

costs. While the Advisors continued to perform under the SSAs and the RPAs, the Debtor 

breached its obligations under those same agreements. Accordingly, the Advisors are entitled to 

an administrative expense claim for the total overpayments, which, upon information and belief, 

total approximately $14 million. Because the accounting information related to such costs and 

expenses are within the exclusive control of the Debtor, discovery will be necessary to determine 

the precise amount of the overpayments under the SSAs and PRAs. 

IV. PRAYER

WHEREFORE, PREMISES CONSIDERED, the Funds and Advisors respectfully request 

that the Court enter an order granting this Application, awarding them an administrative expense 

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APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIM Page 7 

claim in an amount to be determined at trial (which is expected to be approximately $14 million), 

and providing them such other and further relief to which they show themselves to be entitled, at 

law or in equity. 

 RESPECTFULLY SUBMITTED this 24th day of January, 2021. 

MUNSCH HARDT KOPF & HARR, P.C.

/s/ Davor Rukavina 

Davor Rukavina, Esq. 

Texas Bar No. 24030781 

Julian P. Vasek, Esq. 

Texas Bar No. 24070790 

3800 Ross Tower 

500 N. Akard Street 

Dallas, Texas 75202-2790 

Telephone: (214) 855-7500 

Facsimile: (214) 978-4375 

drukavina@munsch.com

jvasek@munsch.com 

K&L GATES LLP

Artoush Varshosaz (TX Bar No. 24066234) 

1717 Main Street, Suite 2800 

Dallas, TX 75201 

Tel: (214) 939-5659 

artoush.varshosaz@klgates.com

Stephen G. Topetzes (pro hac vice) 

1601 K Street, NW 

Washington, DC 20006-1600 

Tel: (202) 778-9328 

stephen.topetzes@klgates.com

A. Lee Hogewood, III (pro hac vice) 

4350 Lassiter at North Hills Ave., Suite 300 

Raleigh, NC 27609 

Tel: (919) 743-7306 

Lee.hogewood@klgates.com

Counsel for Highland Capital Management 

Fund Advisors, L.P. and NexPoint Advisors, 

L.P.

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CERTIFICATE OF SERVICE

The undersigned hereby certifies that a true and correct copy of this document was served 

(A) electronically by the Court’s CM/ECF system on all parties entitled to such notice on January 

24, 2021; and (B) by first class U.S. mail, postage prepaid, on the attached service list on January 

25, 2021. 

/s/ Davor Rukavina

Davor Rukavina, Esq. 

4830-9050-2873v.2 019717.00001

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Abernathy, Roeder, Boyd & Hullett, P.C.

Chad Timmons, Larry R. Boyd, Emily M. Hahn

1700 Redbud Blvd, Ste. 300

McKinney, TX 75069

Alston & Bird LLP

Jared Slade

Chase Tower

2200 Ross Avenue

Dallas, TX 75201

Alston & Bird LLP

Jonathan T. Edwards

One Atlantic Center

1201 West Peachtree Street

Atlanta, GA 30309

Ashby & Geddes, P.A.

William P. Bowden, Esq., Michael D. 

DeBaecke, Esq.

500 Delaware Avenue, 8th Floor

PO Box 1150

Wilmington, DE 19899-1150

Baker & Mckenzie LLP

Debra A. Dandeneau

452 Fifth Ave

New York, NY 10018

Baker & Mckenzie LLP

Michelle Hartmann

1900 North Pearl

Suite 1500

Dallas, TX 75201

Barnes & Thornburg LLP

Thomas G. Haskins, Jr.

2121 North Pearl Street, Suite 700

Dallas, TX 75201

BBVA

Michael Doran

8080 North Central Expressway

Suite 1500

Dallas, TX 75206

Blank Rome LLP

John E. Lucian, Josef W. Mintz

1201 N. Market Street, Suite 800

Wilmington, DE 19801

Bonds Ellis Eppich Schafer Jones LLP

D. Michael Lynn, John Y. Bonds, III, Bryan C. 

Assink

420 Throckmorton Street, Suite 1000

Fort Worth, TX 76102

Buchalter, A Professional Corporation

Shawn M. Christianson, Esq.

55 Second Street, 17th Floor

San Francisco, CA 94105-3493

Butler Snow LLP

Martin A. Sosland and Candice M. Carson

2911 Turtle Creek Blvd.

Suite 1400

Dallas, TX 75219

Carlyon Cica Chtd.

Candace C. Carlyon, Esq., Tracy M. Osteen, 

Esq.

265 E. Warm Springs Road, Suite 107

Las Vegas, NV 89119

Chipman, Brown, Cicero & Cole, LLP

Mark L. Desgrosseilliers

Hercules Plaza

1313 North Market Street, Suite 5400

Wilmington, DE 19801

Cole, Schotz, Meisel, Forman & Leonard, 

P.A.

Michael D. Warner, Esq.

301 Commerce Street, Suite 1700

Fort Worth, TX 76102

Condon Tobin Sladek Thornton PLLC

J. Seth Moore

8080 Park Lane, Suite 700

Dallas, TX 75231

Cross & Simon LLC

Michael L. Vild, Esquire

1105 N. Market Street, Suite 901

Wilmington, DE 19801

Dentons US LLP

Lauren Macksoud, Esq.

1221 Avenue of the Americas

New York, NY 10020-1089

Dentons US LLP

Patrick C. Maxcy, Esq.

233 South Wacker Drive

Suite 5900

Chicago, IL 60606-6361

Frontier State Bank

Attn: Steve Elliot

5100 South I-35 Service Road

Oklahoma City, OK 73129

Frost Brown Todd LLC

Mark A. Platt

100 Crescent Court, Suite 350

Dallas, TX 75201

Gibson, Dunn & Crutcher LLP

Marshall R. King, Esq., Michael A. Rosenthal, 

Esq. & Alan Moskowitz, Esq.

200 Park Avenue

New York, NY 10066

Gibson, Dunn & Crutcher LLP

Matthew G. Bouslog, Esq.

3161 Michelson Drive

Irvine, CA 92612

Hayward & Associates PLLC

Melissa S. Hayward, Zachery Z. Annable

10501 N. Central Expy, Ste. 106

Dallas, TX 75231

Heller, Draper & Horn, L.L.C.

Douglas S. Draper, Leslie A. Collins, Greta M. 

Brouphy

650 Poydras Street, Suite 2500

New Orleans, LA 70130

Highland Capital Management

300 Crescent Court

Suite 700

Dallas, TX 75201

Hunter Mountain Investment Trust

c/o Rand Advisors LLC

John Honis

87 Railroad Place Ste 403

Saratoga Springs, NY 12866

Internal Revenue Service

Attn Susanne Larson

31 Hopkins Plz Rm 1150

Baltimore, MD 21201

Internal Revenue Service

Centralized Insolvency Operation

PO Box 7346

Philadelphia, PA 19101-7346

Internal Revenue Service

Centralized Insolvency Operation

2970 Market St

Philadelphia, PA 19104

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Jackson Walker L.L.P.

Michael S. Held

2323 Ross Avenue, Suite 600

Dallas, TX 75201

Jefferies LLC

Director of Compliance

520 Madison Avenue, 16th Floor

Re Prime Brokerage Services

New York, NY 10022

Jefferies LLC

Office of the General Counsel

520 Madison Avenue, 16th Floor

Re Prime Brokerage Services

New York, NY 10022

Jenner & Block LLP

Marc B. Hankin, Richard Levin

919 Third Avenue

New York, NY 10022-3908

Jones Day

Amanda Rush

2727 N. Harwood Street

Dallas, TX 75201

Jones Walker LLP

Joseph E. Bain, Amy K. Anderson

811 Main Street, Suite 2900

Houston, TX 77002

K&L Gates LLP

Artoush Varshosaz

1717 Main Street, Suite 2800

Dallas, TX 75201

K&L Gates LLP

James A. Wright III

1 Lincoln Street

Boston, MA 02110

K&L Gates LLP

Stephen G. Topetzes

1601 K Street, NW

Washington, DC 20006-1600

Kane Russell Coleman Logan PC

John J. Kane

901 Main Street, Suite 5200

Dallas, TX 75242-1699

KeyBank National Association

as Administrative Agent

225 Franklin Street, 18th Floor

Boston, MA 02110

KeyBank National Association

as Agent

127 Public Square

Cleveland, OH 44114

King & Spalding LLP

Paul R. Bessette

500 West 2nd St., Suite 1800

Austin, TX 78701-4684

Kurtzman Carson Consultants

Joe Morrow

222 N. Pacific Coast Hwy Ste 300

El Segundo, CA 90245

Kurtzman Steady, LLC

Jeffrey Kurtzman, Esq.

401 S. 2nd Street, Suite 200

Philadelphia, PA 19147

Latham & Watkins LLP

Asif Attarwala

330 N. Wabash Avenue, Ste. 2800

Chicago, IL 60611

Latham & Watkins LLP

Jeffrey E. Bjork

355 South Grand Avenue, Ste. 100

Los Angeles, CA 90071

Linebarger Goggan Blair & Sampson LLP

Elizabeth Weller, Laurie A. Spindler

2777 N. Stemmons Freeway

Suite 1000

Dallas, TX 75207

Loewinsohn Flegle Deary Simon LLP

Daniel P. Winikka

12377 Merit Drive, Suite 900

Dallas, TX 75251

Lynn Pinker Cox & Hurst, L.L.P.

Michael K. Hurst, Esq.

2100 Ross Avenue, Ste 2700

Dallas, TX 75201

Mark K. Okada

300 Crescent Court

Suite 700

Dallas, TX 75201

Morris, Nichols, Arsht & Tunnell LLP

Curtis S. Miller, Kevin M. Coen

1201 North Market Street, Suite 1600

Wilmington, DE 19801

Morrison Cohen LLP

Joseph T. Moldovan, Esq. & Sally Siconolfi, 

Esq.

909 Third Avenue

New York, NY 10022

NexBank

John Danilowicz

2515 McKinney Ave

Ste 1100

Dallas, TX 75201

Nixon Peabody LLP

Louis J. Cisz, III, Esq.

One Embarcadero Center, 32nd Floor

San Francisco, CA 94111

Office of General Counsel

Securities & Exchange Commission

100 F St NE

Washington, DC 20554

Office of the Attorney General

Ken Paxton

300 W. 15th Street

Austin, TX 78701

Office of the Attorney General

Main Justice Building, Room 5111

10th & Constitution Avenue, N.W.

Washington, DC 20530

Office of the United States Attorney

Erin Nealy Cox, Esq

1100 Commerce Street, 3rd Floor

Dallas, TX 75202

Office of the United States Trustee

Lisa L. Lambert, Esq

1100 Commerce Street, Room 976

Earle Cabell Federal Building

Dallas, TX 75242

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Pachulski Stang Ziehl & Jones LLP

John A. Morris and Gregory V. Demo

780 Third Avenue, 34th Floor

New York, NY 10017-2024

Pachulski Stang Ziehl & Jones LLP

Richard M. Pachulski, Jeffrey N. Pomerantz, 

Ira D. Kharasch, James E. O’Neill

919 North Market Street

17th Floor

Wilmington, DE 19801

Pachulski Stang Ziehl & Jones LLP

Richard M. Pachulski, Jeffrey N. Pomerantz, 

Ira D. Kharasch, James E. O’Neill

10100 Santa Monica Blvd, 13th Floor

Los Angeles, CA 90067

Pension Benefit Guaranty Corporation

Michael I. Baird

Office of the General Counsel

1200 K Street, N.W.

Washington, DC 20005-4026

Perdue, Brandon, Fielder, Collins & Mott, 

L.L.P.

Linda D. Reece

1919 S. Shiloh Rd., Suite 310

Garland, TX 75042

Potter Anderson & Corroon LLP

Jeremy W. Ryan, Esq., R. Stephen McNeill, 

Esq. & D. Ryan Slaugh, Esq.

1313 North Market Street, 6th Floor

Wilmington, DE 19801

Prime Brokerage Services

Jefferies LLC

520 Madison Avenue

New York, NY 10022

Richards, Layton & Finger PA

Michael J. Merchant, Sarah E. Silveira

One Rodney Square

920 North King Street

Wilmington, DE 19801

Rochelle McCullough, LLP

E. P. Keiffer

325 North St. Paul Street, Suite 4500

Dallas, TX 75201

Ross & Smith, PC

Judith W. Ross, Frances A. Smith, Eric 

Soderlund

700 North Pearl Street, Suite 1610

Dallas, TX 75201

Schulte Roth & Zabel LLP

David J. Karp, James V. Williams III

919 Third Avenue

New York, NY 10022

Securities & Exchange Commission

Andrew Calamari, Regional Director

New York Regional Office

Brookfield Place, Suite 400

200 Vesey Street

New York, NY 10281

Securities & Exchange Commission

Sharon Binger, Regional Director

Philadelphia Regional Office

One Penn Center, Suite 520

1617 JFK Boulevard

Philadelphia, PA 19103

Sidley Austin LLP

Matthew Clemente, Alyssa Russell, Elliot A. 

Bromagen

One South Dearborn Street

Chicago, IL 60603

Sidley Austin LLP

Penny P. Reid, Paige Holden Montgomery, 

Charles M. Person, Juliana Hoffman

2021 McKinney Avenue Suite 2000

Dallas, TX 75201

Spencer Fane LLP

Jason P. Kathman

5700 Granite Parkway, Suite 650

Plano, TX 75024

State Comptroller of Public Accounts

Revenue Accounting DivisionBankruptcy Section

PO Box 13258

Austin, TX 78711

State of Delaware

Division of Corporations - Franchise Tax

401 Federal Street

PO Box 898

Dover, DE 19903

Strand Advisors, Inc.

300 Crescent Court

Suite 700

Dallas, TX 75201

Sullivan Hazeltine Allinson LLC

William A. Hazeltine, Esq.

901 North Market Street, Suite 1300

Wilmington, DE 19801

Texas Attorney Generals Office

Bankruptcy-Collections Division

PO Box 12548

Austin, TX 78711-2548

The Dugaboy Investment Trust

300 Crescent Court

Suite 700

Dallas, TX 75201

The Mark and Pamela Okada Family Trust -

Exempt Trust #1

300 Crescent Court

Suite 700

Dallas, TX 75201

The Mark and Pamela Okada Family Trust -

Exempt Trust #2

300 Crescent Court

Suite 700

Dallas, TX 75201

U.S. Department of Justice, Tax Division

David G. Adams

717 N. Harwood St., Suite 400

Dallas, TX 75201

United States Attorney General

U.S. Department of Justice

William Barr, Esquire

950 Pennsylvania Avenue, NW

Room 4400

Washington, DC 20530-0001

US Department of the Treasury

Office of General Counsel

1500 Pennsylvania Avenue, NW

Washington, DC 20220

Winstead PC

Rakhee V. Patel, Phillip Lamberson

2728 N. Harwood Street, Suite 500

Dallas, TX 75201

Winston & Strawn LLP

Attn: David Neier

200 Park Avenue

New York, NY 10166-4193

Winston & Strawn LLP

Attn: Katherine A. Preston

800 Capitol Street, Suite 2400

Houston, TX 77002

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Winston & Strawn LLP

Attn: Thomas M. Melsheimer; Natalie L. 

Arbaugh

2121 N. Pearl Street, Suite 900

Dallas, TX 75201

Young Conaway Stargatt & Taylor, LLP

Michael R. Nestor, Edmon L. Morton, Sean M. 

Beach, Esq., Jaclyn C. Weissgerber, Esq.

Rodney Square

1000 North King Street

Wilmington, DE 19801

Zillah A. Frampton

Bankruptcy Administrator

Delaware Division of Revenue

Carvel State Office Building, 8th Floor

820 N. French Street

Wilmington, DE 19801

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PACHULSKI STANG ZIEHL & JONES LLP 

Jeffrey N. Pomerantz (CA Bar No.143717) (admitted pro hac vice) 

Ira D. Kharasch (CA Bar No. 109084) (admitted pro hac vice) 

John A. Morris (NY Bar No. 266326) (admitted pro hac vice)

Gregory V. Demo (NY Bar No. 5371992) (admitted pro hac vice) 

Hayley R. Winograd (NY Bar No. 5612569) (admitted pro hac vice) 

10100 Santa Monica Blvd., 13th Floor 

Los Angeles, CA 90067 

Telephone: (310) 277-6910 

Facsimile: (310) 201-0760 

HAYWARD PLLC 

Melissa S. Hayward 

Texas Bar No. 24044908 

MHayward@HaywardFirm.com 

Zachery Z. Annable 

Texas Bar No. 24053075 

ZAnnable@HaywardFirm.com 

10501 N. Central Expy, Ste. 106 

Dallas, Texas 75231 

Tel: (972) 755-7100 

Fax: (972) 755-7110 

Counsel for the Debtor and Debtor-in-Possession 

IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

In re: 

HIGHLAND CAPITAL MANAGEMENT, L.P.,1

Debtor. 

) 

) 

) 

) 

) 

) 

) 

Chapter 11 

Case No. 19-34054-sgj11 

DEBTOR’S OBJECTION TO APPLICATION FOR 

ADMINISTRATIVE CLAIM OF HIGHLAND CAPITAL MANAGEMENT 

FUND ADVISORS, L.P. AND NEXPOINT ADVISORS, L.P. 

1

 The Debtor’s last four digits of its taxpayer identification number are (6725). The headquarters and service address 

for the above-captioned Debtor is 300 Crescent Court, Suite 700, Dallas, TX 75201. 

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TABLE OF CONTENTS 

Page 

I. PRELIMINARY STATEMENT ....................................................................................... 1 

II. JURISDICTION ................................................................................................................ 3 

III. BACKGROUND ............................................................................................................... 3 

IV. OBJECTIONS.................................................................................................................. 10 

A. The Advisors Waived Any Alleged Breaches, Defaults and Claims 

Relating to the Purported Deficient Services and Overcharges and the 

Prior Payments Made By the Advisors Under the Agreements .......................... 10 

B. The Voluntary Payment Rule Effectively Bars Any Administrative Claim ........ 13 

V. RESERVATION OF RIGHTS ........................................................................................ 13 

VI. CONCLUSION ................................................................................................................ 14 

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TABLE OF AUTHORITIES 

Page No. 

CASES

BMG Direct Mktg. v. Peake, 

178 S.W.3d 763 (Tex. 2005) ................................................................................................. 13

EM Bldg. Contrs. Servs., LLC v. Byrd Bldg. Servs., LLC, 

2020 Tex. App. LEXIS 6342 (Tex. App. Aug. 11, 2020) .................................................... 11 

In re National Steel Corp., 

316 B.R. 287 (Bankr. N.D. Ill. 2004) ................................................................................... 12 

Miga v. Jensen, 

299 S.W.3d 98 (Tex. 2009) ............................................................................................... 2, 13

Motor Vehicle Bd. of Tex. Dep't of Transp. v. El Paso Indep. Auto. Dealers Ass'n, 

Inc., 

1 S.W.3d 108 (Tex. 1999) ..................................................................................................... 11 

Nat’l Steel Corp., 

316 B.R. 307 (Bankr. N.D. Ill. 2004) ................................................................................... 13 

Rex Performance Prods., LLC v. Tate, 

2020 Tex. App. LEXIS 10465 (Tex. App. Dec. 31, 2020) ................................................... 11 

Shields Limited Partnership v. Bradberry, 

526 S.W.3d 471 (Tex. 2017) ................................................................................................. 12

Sojitz Energy Venture, Inc. v. Union Oil Co., 

394 F. Supp. 3d 687 (S.D. Tex. 2019) .................................................................................... 8 

Straus v. Kirby Court Corp., 

909 S.W.2d 105 (Tex. App. 1995) ........................................................................................ 12 

Sun Expl. & Prod. Co. v. Benton, 

728 S.W.2d 35 (Tex. 1987) ................................................................................................... 11 

Tenneco Inc. v. Enter. Prods. Co., 

925 S.W.2d 640 (Tex. 1996) ................................................................................................. 12

Ulico Cas. Co. v. Allied Pilots Ass'n, 

262 S.W.3d 773 (Tex. 2008) ................................................................................................. 11

United States Bank, N.A. v. Kobernick, 

454 Fed. Appx. 307 (5th Cir. Dec. 16, 2011) ....................................................................... 12 

STATUTES

11 U.S.C. § 1107(a) ...................................................................................................................... 4 

11 U.S.C. § 1108 ........................................................................................................................... 4 

11 U.S.C. § 362(d) ...................................................................................................................... 12 

11 U.S.C. § 365(d)(2) ................................................................................................................. 12 

28 U.S.C. § 1334 ........................................................................................................................... 3 

28 U.S.C. § 1408 ........................................................................................................................... 3 

28 U.S.C. § 1409 ........................................................................................................................... 3 

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28 U.S.C. § 157 ............................................................................................................................. 3 

28 U.S.C. § 157(b)(1) ................................................................................................................... 3 

28 U.S.C. § 157(b)(2) ................................................................................................................... 3 

RULES

Fed. R. Bankr. P. 7008 .................................................................................................................. 3 

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Highland Capital Management, L.P. (the “Debtor”), by and through its undersigned 

counsel, hereby files this objection (this “Objection”) to the Application for Allowance of 

Administrative Expense Claim [Docket No. 1826] (the “Application”) filed by Highland Capital 

Management Fund Advisors, L.P. (“HCMFA”) and NexPoint Advisors, L.P. (“NexPoint,” and 

with HCMFA, the “Claimants” or “Advisors”).1 In support of this Objection, the Debtor 

represents as follows: 

I. PRELIMINARY STATEMENT 

1. The Application should be summarily denied on several grounds. The Claimants 

are owned and controlled by Mr. James Dondero (“Mr. Dondero”).2

 As alleged in the pending 

Complaints (as defined below) filed by the Debtor against Mr. Dondero, HCMFA, NexPoint, and 

certain other entities owned and/or controlled by Mr. Dondero (collectively, the “Dondero 

Entities”), Mr. Dondero and the Dondero Entities have been actively interfering with and impeding 

the Debtor’s business and its reorganization under the confirmed Plan and have engaged in a 

coordinated litigation campaign to harass the Debtor and deplete its resources,3

 in each case to the 

substantial prejudice of the Debtor’s estate and its stakeholders. The Application is another 

improper attempt by Dondero-controlled entities to obstruct the Debtor’s reorganization and harass 

the estate. The Debtor performed under the applicable Agreements, and the Advisors know that. 

1

 Capitalized terms not defined herein have the meanings ascribed to them below or in the Application. 

2

 The Advisors objected to the Debtor’s Plan (as defined below) [Docket No. 1670]. In the Confirmation Order 

(defined below) confirming the Plan, the Court found that the Advisors were controlled by Mr. Dondero. Confirmation 

Order, ¶ 19. 

3

 Confirmation Order, ¶¶ 77-78. 

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2. After remaining silent for more than six months4

 while the Debtor allegedly failed 

to provide services and grossly overcharged the Advisors under the parties’ Agreements, and 

having no prepetition claims against the Debtor, the Advisors seek to manufacture a purported 

administrative expense priority claim by creating “facts” and rewriting the Agreements, which 

have been terminated by the Debtor. There will be no credible dispute that NexPoint and HCMFA 

stood by idly without ever (i) declaring a default under the Agreements; (ii) notifying the Debtor 

of any problem with the Debtor’s services or billings; (iii) withholding payments under the 

Agreements (until notice of the termination of the Agreements); or (iv) seeking judicial relief 

regarding such matters. In fact, as described below, the Advisors wrote five separate letters to the 

Debtor in late 2020 and complained about a litany of items but made only one generalized 

comment about the services being provided. In short, the Advisors waived any right to dispute the 

sufficiency of the Debtor’s services or the amounts payable to the Debtor under the Agreements. 

3. Independently, the Advisors’ purported overpayments to the Debtor are barred 

from recovery under the voluntary payment rule under Texas common law. As explained by the 

Texas Supreme Court, “[t]he voluntary payment rule precludes a party from ‘pay[ing] out his 

money, leading the other party to act as though the matter were closed, and then be in the position 

to change his mind and invoke the aid of the courts to get it back.’”5

4. Accordingly, the Application should be denied by the Court.6

 

4

 The Advisors allege that in July 2020, “Mr. Seery directed the Debtor to cease providing services to the Advisors as 

otherwise contemplated under the” applicable agreements (Application, ¶ 16) yet the Advisors sought no relief at any 

time and only filed the Application on January 24, 2021, on the eve of the Debtor’s confirmation hearing. 

5 Miga v. Jensen, 299 S.W.3d 98, 103 (Tex. 2009). 

6

 In the event that the Court does not resolve this matter on the pleadings, the Debtor expects to propound discovery 

on the Advisors, and reserves all rights with respect thereto and any other claims, causes of action, setoffs, 

recoupments, and rights of the Debtor against the Advisors. 

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II. JURISDICTION 

5. The Court has jurisdiction to consider and determine this matter pursuant to 28 

U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2). 

Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. 

6. The Debtor confirms its consent, pursuant to Rule 7008 of the Federal Rules of 

Bankruptcy Procedure, to the entry of a final order. 

III. BACKGROUND 

7. On October 16, 2019 (the “Petition Date”), the Debtor filed a voluntary petition for 

relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the 

Bankruptcy Court for the District of Delaware, Case No. 19-12239 (CSS) (the “Delaware Court”). 

8. On October 29, 2019, the Official Committee of Unsecured Creditors (the 

“Committee”) was appointed by the United States Trustee in the Delaware Court. 

9. On December 4, 2019, the Delaware Court entered an order transferring venue of 

the Debtor’s bankruptcy case to this Court [Docket No. 186].7

 

10. On February 22, 2021, this Court entered the Order Confirming the Fifth Amended 

Plan of Reorganization of Highland Capital Management, L.P. (as Modified) and (ii) Granting 

Related Relief [Docket No. 1943] (the “Confirmation Order”), which confirmed the Fifth Amended 

Plan of Reorganization of Highland Capital Management, L.P. (as Modified) [Docket No. 1808] 

(as amended, the “Plan”).8

7

 All docket numbers refer to the docket maintained by this Court. 

8

 The confirmed Plan included certain amendments filed on February 1, 2021. See Debtor’s Notice of Filing of Plan 

Supplement to the Fifth Amended Plan of Reorganization of Highland Capital Management, L.P. (as Modified), Ex. 

B [Docket No. 1875]. 

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11. The Debtor has continued in the possession of its property and has continued to 

operate and manage its business as a debtor-in-possession pursuant to sections 1107(a) and 1108 

of the Bankruptcy Code. No trustee or examiner has been appointed in this chapter 11 case. 

12. Each of the Advisors is owned and controlled, directly or indirectly, by Mr. 

Dondero. 

13. The Debtor and NexPoint were parties to a Shared Services Agreement (“NexPoint 

SSA”) and a Payroll Reimbursement Agreement (“NexPoint PRA” and together with the NexPoint 

SSA, the “NexPoint Agreements”), each as amended or amended and restated from time to time.9 

14. Likewise, the Debtor and HCMFA were parties to a Shared Services Agreement 

(“HCMFA SSA”) and a Payroll Reimbursement Agreement (“HCMFA PRA” and together with 

the HCMFA SSA, the “HCMFA Agreements”), each as amended or amended and restated from 

time to time. The NexPoint Agreements and the HCMFA Agreements (collectively, the 

“Agreements”) were terminated by the Debtor in accordance with their terms. 

15. Neither of the Advisors has a prepetition claim against the Debtor. HCMFA’s 

proofs of claim (Claim Nos. 95 and 119) were expunged with HCMFA’s consent [Docket No. 

1233]. Similarly, NexPoint’s proofs of claim (Claim Nos. 104 and 108) were also consensually 

expunged [Docket No. 1233]. 

16. At the Debtor’s request, Mr. Dondero resigned on or around October 9, 2020. Less 

than a week after his ouster, Mr. Dondero and the Advisors he owns and controls initiated their 

campaign against the Debtor. Thus, on October 16, 2020, the Advisors wrote to the Debtor and 

raised three issues, contending that: 

9

 The Advisors assert that the Debtor and NexPoint entered into the applicable SSA on February 8, 2013, the same 

day the Debtor and HCMFA entered into a SSA. Application ¶3. This assertion is wrong as the Debtor and NexPoint 

entered into that certain Amended and Restated Shared Services Agreement effective as of January 1, 2018. 

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x the Debtor had allegedly refused to permit its “employees to work on certain 

[unidentified] matters that jointly affect HCMLP and the Advisors” and that allegedly 

caused the Advisors to unnecessarily incur third-party costs;10

x if the Debtor terminated employees at the end of the year, the Debtor “will no longer 

be able to carry out its duties and responsibilities under the Agreements” (the 

“Prospective Complaint”); and 

x the Debtor’s contemplated sale of certain assets held in CLOs could result in the loss 

of value, and the Advisors asked that no such assets be sold without their prior consent. 

Morris Dec. Ex. A.11

17. On November 24, 2020, the Advisors again wrote to the Debtor, this time only to 

reiterate their complaints about the Debtor’s sale of CLO assets and their demand that all such 

sales cease in the absence of the Advisors’ prior consent. In this letter, the Advisors registered no 

complaints about the services the Debtor was providing or the amounts being charged or paid 

under the Agreements. Morris Dec. Ex. B. 

18. The Advisors were clearly focused on the Debtor’s sale of CLO assets because on 

December 8, 2020, the Advisors and other Dondero-related entities filed their Motion for Order 

Imposing Temporary Restrictions on Debtor’s Ability, as Portfolio Manager, to Initiate Sales by 

Non-Debtor CLO Vehicles [Docket No. 1528] (the “Advisors’ CLO Motion”). Morris Dec. Ex. 

C. The Advisors’ CLO Motion was filed on an emergency basis [Docket No. 1523] (Morris Dec. 

Ex. D), but was later denied as “frivolous.” Notably, while the Advisors’ CLO Motion proves that 

the Advisors know how to seek judicial relief (on an emergency basis, no less), the Advisors 

10 The Advisors have never identified any particular “matters that jointly affect[ed] HCMLP and the Advisors” and 

caused the Advisors to unnecessarily incur third-party costs. Upon information and belief, the “matters” referred to 

in the October Letter are those related to the CLO issues and other Estate-Adverse Services, none of which are 

“services” the Debtor was ever obligated to provide. See infra n. 12. 

11 Citations marked “Morris Dec. Ex. __” refer to the Declaration of John A. Morris in Support of Debtor’s Objection 

to Application for Administrative Claim of Highland Capital Management Fund Advisors, L.P. and NexPoint 

Advisors, L.P. filed contemporaneously with this Objection. 

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registered no complaints in the Advisors’ CLO Motion or at the hearing about the services the 

Debtor was providing or the amounts being charged or paid under the Agreements. 

19. Unchastened, on December 22, 2020, the Advisors renewed their complaints about 

the Debtor’s CLO sales. Morris Dec. Ex. E. The Advisors also renewed their Prospective 

Complaint, contending that the anticipated termination of employees on January 31, 2021 “will 

result in a loss of the employees that [sic] have traditionally serviced the CLOs.” Other than the 

renewal of their Prospective Complaint, the Advisors registered no complaints in their December 

22, 2020, letter about the services the Debtor was providing or the amounts being charged or paid 

under the Agreements. 

20. The next day, the Advisors sent the Debtor another letter, this one focused 

exclusively on the issue of the Debtor’s management of the CLOs. In their December 23, 2020, 

letter, the Advisors gave notice to the Debtor that they “had no choice but to initiate HCMLP’s 

removal as fund manager” for cause. Morris Dec. Ex. F. The Advisors registered no complaints 

in their December 23, 2020 letter about the services the Debtor was providing or the amounts being 

charged or paid under the Agreements. 

21. Finally, on December 31, 2020, the Advisors again wrote to the Debtor, this time 

for the sole purpose of registering complaints about the Debtor’s decision to evict Mr. Dondero 

from the Debtor’s offices. Morris Dec. Ex. G. Other than as specifically related to Mr. Dondero, 

the Advisors registered no complaints in their December 31, 2020, letter about the services the 

Debtor was providing or the amounts being charged or paid under the Agreements. 

22. As a result of this continued harassment and incessant interference, their failure to 

pay, collectively, tens of millions of dollars due and owing under a series of demand notes and 

other notes which were in default, and for other reasons, beginning in December 2020, the Debtor 

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filed a number of complaints (the “Complaints”) against Mr. Dondero (Adv. Proc. No. 20-03190, 

filed on December 7, 2020; Adv. Proc. No. 21-03003, filed on January 22, 2021); HCMFA, 

NexPoint, and certain other affiliated defendants (Adv. Proc. No. 21-03000, filed on January 6, 

2021); HCMFA (Adv. Proc. No. 21-03004, filed on January 22, 2021); and NexPoint (Adv. Proc. 

No. 21-03005, filed on January 22, 2021), among others. 

23. As set forth in the Complaints (as applicable), the Debtor has substantial claims 

against Mr. Dondero, the Advisors and the other affiliated entities for, inter alia, interference with 

the Debtor’s business and operations (including threatening to have the Debtor removed as the 

portfolio manager of certain collateralized loan obligation vehicles) and for failing to pay amounts 

due and owing to the Debtor under certain promissory notes. Such parties’ continued disruptive 

behavior caused the Debtor to notify Mr. Dondero in December 2020 that he would be evicted and 

all services provided by the Debtor to him would be terminated. 

24. The Application was filed on January 24, 2021, obviously as retaliation for the 

Debtor’s filing of the Complaints and refusal to surrender to the Advisors’ demands concerning 

the CLOs. The Application has no merit as the Debtor fulfilled its obligations under the applicable 

Agreements. Assuming for the sake of argument that the Debtor failed to fully perform, the 

Advisors plainly waived (or should otherwise be estopped from asserting) their right to complain 

and are otherwise barred under Texas law from recovering anything, and any claim would be 

subject to substantial setoffs. 

25. During the chapter 11 case and prior to the termination of the Agreements, the 

Debtor performed the services required under the Agreements. The Debtor anticipates that if the 

Advisors ever specifically identify any alleged service deficiencies or overcharges, they will likely 

be predicated upon incredible factual assertions or absurd or other untenable contortions of the 

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Agreements’ provisions.12 Not surprisingly, the Advisors do not identify a single service that the 

Debtor failed to provide, and instead make only the generalized and uncorroborated assertion that 

they continued to make payments “despite the fact that the Debtor [was] not providing all the 

required services in return.” Application ¶ 17.

26. The Advisors also try to belatedly manufacture a “breach” under the Payroll 

Reimbursement Agreements by asserting that certain unidentified employees did not provide 

services for some unidentified periods of time. Specifically, the Advisors observe that there “is a 

schedule attached to the PRAs of investment professionals whose compensation would be 

reimbursed by the Advisors” that is “incredibly outdated,” and complain that the list includes 

“many individuals . . . who departed the Debtor before or during the Bankruptcy Case.” 

Application ¶ 18. The Advisors’ complaints in this regard serve only to prove that (a) the Advisors 

did not care about these matters as long as Mr. Dondero was in control of both the Advisors and 

the Debtor (i.e., at all relevant times since the Agreements were executed until no later than January 

9, 2020); (b) until Mr. Dondero ceased to control both the Advisors and the Debtor, the relationship 

was not an arms’-length relationship, and (c) the Advisors were apparently obtaining the services 

they bargained for even if such services were not being provided by specified individuals, because 

there is no allegation (and there will be no evidence) that the Advisors ever sought an adjustment 

12 For example, in or after July 2020, the Debtor’s new CEO reminded the Debtor’s personnel that they should not 

provide legal services to the Advisors and other third parties that could be adverse to the bankruptcy estate (“EstateAdverse Services”), especially in light of the Court’s particularized concerns. Order on Motion for Clarification of 

Ruling [DE # 914] and Joinders thereto [DE ## 915 and 927] [Docket No. 935 at 10] (“This could escalate to 

problematic territory in a hurry. The court trusts the Debtor’s independent directors and new CEO are scrutinizing 

the issue of in-house lawyers potentially advising both the Debtor and Highland Non-Debtor Entity targets.”) 

(emphasis in original). To the extent that the Advisors may assert the Debtor’s services under the Agreements were 

deficient because the Debtor refused to provide any Estate-Adverse Services, such assertion is patently illogical and 

unsupportable. It would be an absurd construction of the Agreements to have contemplated and required the Debtor 

to provide the Advisors with Estate-Adverse Services. See Sojitz Energy Venture, Inc. v. Union Oil Co., 394 F. Supp. 

3d 687, 701 (S.D. Tex. 2019) (“We will not construe contracts to produce an absurd result when a reasonable 

alternative construction exists.”). 

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in the payments or even suggested to the Debtor that they were overpaying for departed employees. 

Moreover, as the Advisors’ litany of letters proves, to the extent the Advisors ever registered a 

concern about particular employees, it was only as part of the Prospective Complaint.

27. Tellingly, during the chapter 11 case, the Advisors did not, for instance, file an 

emergency motion to compel the Debtor to assume or reject the Agreements, file a motion for 

relief from the automatic stay to terminate the Agreements, or seek any other relief with respect to 

the Agreements. Nor did the Advisors declare any breach or other problem with the Debtor’s 

services and billings or the Advisors’ payments under the Agreements. Furthermore, neither in 

their objections to Plan confirmation nor any other filing prior to the January 24, 2021, Application 

did the Advisors disclose their alleged multi-million dollar administrative claim. 

28. It was only after the chapter 11 case became contentious and the Debtor began 

gaining traction with its asset monetization plan that the Claimants filed the Application and 

notified the Debtor, the Court, and the estate’s other stakeholders of their purported administrative 

claim in an effort to create an “asset” that could be used by Mr. Dondero in his fruitless pursuit of 

a “pot plan.” Indeed, at all times post-petition and prior to the Debtor’s notice of termination of 

the Agreements, the Advisors continued to pay the Debtor for the applicable fees and charges 

under the Agreements, without complaint or objection. 

29. Finally, assuming for the sake of argument only that the Advisors had a viable 

claim, the Debtor is entitled to offsets and has other claims against the Advisors, with respect to 

which the Debtor reserves all rights. Among other things, the Advisors owe approximately $2.56 

million under the Agreements, as well as approximately $2.22 million in unpaid expense 

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reimbursements. And HCMFA and NexPoint owe more than $7.68 million13 and $23 million,14

respectively, under various promissory notes owed to the Debtor. 

IV. OBJECTIONS 

A. The Advisors Waived Any Alleged Breaches, Defaults and Claims Relating to the 

Purported Deficient Services and Overcharges and the Prior Payments Made By 

the Advisors Under the Agreements 

30. The Advisors waited more than six months to declare that the Debtor allegedly 

provided deficient services and overcharged the Advisors under the Agreements (“Agreement 

Claims”). The Agreement Claims were made after the Debtor terminated the Agreements in 

accordance with their terms. Moreover, the Agreement Claims were asserted as part of a 

disingenuous plan proposal which asserted the claims for the first time and then unsuccessfully 

tried to convince the Debtor and its creditors that a plan waiving the Agreement Claims provided 

the estate with $14 million more value than the Debtor’s Plan. As explained above, in response to 

such developments and as part of Mr. Dondero’s pervasive scheme to disrupt the Debtor’s business 

and obstruct and delay the Debtor’s reorganization under the confirmed Plan, the Advisors are 

attempting to invent ex post facto a multi-million dollar administrative claim against the estate. 

But the Advisors’ belated complaints are barred as a matter of law. 

31. The undisputed facts prove that the Advisors waived any Agreement Claims under 

applicable Texas law. See Rex Performance Prods., LLC v. Tate, 2020 Tex. App. LEXIS 10465, 

at *19 (Tex. App. Dec. 31, 2020) “Waiver is defined as ‘an intentional relinquishment of a known 

right or intentional conduct inconsistent with claiming that right.’” Id. (quoting Sun Expl. & Prod.

Co. v. Benton, 728 S.W.2d 35, 37 (Tex. 1987). The elements of waiver include: (1) an existing 

13 As asserted in the Debtor’s Complaint against HCMFA in Adv. Proc. No. 21-03004. 

14 As asserted in the Debtor’s Complaint against NexPoint in Adv. Proc. No. 21-03005. 

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right, benefit, or advantage held by a party; (2) the party’s actual knowledge of its existence; and 

(3) the party’s actual intent to relinquish the right or intentional conduct inconsistent with the right. 

Ulico Cas. Co. v. Allied Pilots Ass'n, 262 S.W.3d 773, 778 (Tex. 2008). Being largely a matter of 

intent, waiver is ordinarily a question of fact, but when the surrounding facts and circumstances 

are undisputed, the question becomes one of law. Motor Vehicle Bd. of Tex. Dep't of Transp. v. El 

Paso Indep. Auto. Dealers Ass'n, Inc., 1 S.W.3d 108, 111 (Tex. 1999).”). 

32. As discussed above, the Advisors were evidently so unconcerned with any 

purported Agreement Claims that, inter alia, they (a) continued to pay the Debtor all amounts due 

without protest or even a reservation of rights (“Unconditional Payments”), (b) failed to declare a 

default or put the Debtor on notice of any deficiency with the Debtor’s services and billings and 

the Advisors’ payments under the Agreements (“Contractual Notice Actions”), despite sending a 

litany of letters in late 2020 detailing other purported concerns, and (c) failed to seek judicial relief 

of any kind (e.g., a motion to compel the Debtor to assume or reject the Agreements or a motion 

for relief from stay to terminate the Agreements (“Bankruptcy Court Actions”), despite having 

filed the Advisors’ CLO Motion on an emergency basis. See, e.g., EM Bldg. Contrs. Servs., LLC 

v. Byrd Bldg. Servs., LLC, 2020 Tex. App. LEXIS 6342, *40 (Tex. App. Aug. 11, 2020) (“Silence 

or inaction, for so long a period as to show an intention to yield the known right, is . . . enough to 

prove waiver”) (quoting Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 643 (Tex. 1996)); In 

re National Steel Corp., 316 B.R. 287, 307 (Bankr. N.D. Ill. 2004) (“[I]t is most significant that 

the Creditor failed to take timely action to seek appropriate relief during the term of the executory 

Contract. Specifically, the Creditor failed to come before the Court to seek relief from the 

automatic stay under 11 U.S.C. § 362(d). Nor did the Creditor seek to compel National Steel to 

assume or reject the Contract pursuant to § 365(d)(2) [footnote omitted]. Instead of availing itself 

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of the procedures set forth in the Bankruptcy Code to compel National Steel’s decision to assume 

or reject the Contract, the Creditor paid National Steel the higher price pursuant to the Amended 

Price Proposal and chose to ‘reserve its rights.’”). In short, the Advisors waived any right to 

dispute the sufficiency of the Debtor’s services or the amounts payable to the Debtor under the 

Agreements.

33. The Advisors cannot avoid the consequences of their inaction by relying on socalled “non-waiver provisions” in the Agreements.15 Texas law provides that ostensible “nonwaiver provisions” can themselves be waived by the parties. See, e.g., United States Bank, N.A. 

v. Kobernick, 454 Fed. Appx. 307, 315 (5th Cir. Dec. 16, 2011) (bank’s actions were inconsistent 

with preserving contractual right to declare a certain default and thus, the bank had waived said 

right, notwithstanding non-waiver clause (citing Straus v. Kirby Court Corp., 909 S.W.2d 105, 

108 (Tex. App. 1995) and other cases)).16 

34. Here, the Advisors’ monthly Unconditional Payments, failure to take any 

Contractual Notice Actions, and failure to take any Bankruptcy Court Actions relating to the 

Agreements prove that the Advisors waived any Agreement Claims, notwithstanding any nonwaiver clauses in the Agreements. 

35. Any purported Agreement Claims of the Advisors were viewed and treated as nonissues by the Advisors during the chapter 11 case, and were thus not preserved for purposes of the 

Application or otherwise. 

15 For example, the Payroll Reimbursement Agreement entered into as of May 1, 2018, by and among the Debtor and 

HCMFA, provides in section 6.02: “No failure on the part of any Party to exercise or delay in exercising any right 

hereunder will be deemed a waiver thereof ....” 

16 The Debtor is cognizant of the Texas Supreme Court’s opinion in Shields Limited Partnership v. Bradberry, 526 

S.W.3d 471 (Tex. 2017), wherein the court stated that “as a general proposition, nonwaiver provisions are binding and 

enforceable.” Id. at 481. However, the Shields court also stated: “To the extent there has been any doubt up to this 

time, we affirm that a party’s rights under a nonwaiver provision may indeed be waived expressly or impliedly.” Id. 

at 482-83. 

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B. The Voluntary Payment Rule Effectively Bars Any Administrative Claim 

36. Separately, the “voluntary payment rule” under applicable Texas law precludes the 

Advisors from recovering any alleged contractual overpayments under the guise of an 

administrative claim. As explained above, the Advisors voluntarily and intentionally made 

postpetition payments under the Agreements to the Debtor. “The voluntary payment rule 

precludes a party from ‘pay[ing] out his money, leading the other party to act as though the matter 

were closed, and then be in the position to change his mind and invoke the aid of the courts to get 

it back.’” Miga v. Jensen, 299 S.W.3d 98, 103 (Tex. 2009); accord, BMG Direct Mktg. v. Peake, 

178 S.W.3d 763 (Tex. 2005) (applying the principle to prevent the recovery of a “late fee” paid by 

a customer who later claimed it was unlawful); see also Nat’l Steel Corp., 316 B.R. at 307-08 

(“Nor is it disputed that the Creditor made the payment voluntarily, notwithstanding the fact that 

it announced the reservation of its rights to later ‘evaluate the situation.’ Despite the Creditor’s 

fervent denials that it agreed to the price increase and that such an increase was inappropriate under 

the Contract, the Creditor made an affirmative, voluntary decision to pay the price increase .... 

The Court finds that the requirements of the voluntary payment doctrine [under Michigan law, 

which is similar to Texas law] have been met and that, accordingly, the Creditor cannot recover 

any portion of the payment at issue made to National Steel.”). 

V. RESERVATION OF RIGHTS 

37. The Debtor reserves all rights relating to NexPoint, HCMFA and/or the 

Agreements, including, without limitation, any claims, causes of action, setoffs, recoupments and 

other rights of the Debtor against the Advisors. 

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VI. CONCLUSION 

The Advisors’ Application for an administrative claim is part and parcel of the Advisors’ 

and Mr. Dondero’s broad strategy to subvert and hinder the Debtor’s reorganization to the 

substantial detriment of the estate and its stakeholders. For the reasons set forth herein, the Debtor 

respectfully requests that the Court (i) deny the Application, (ii) disallow any asserted 

administrative claim of the Advisors, and (iii) grant such other and further relief as the Court deems 

just and proper. 

 

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Dated: May 5, 2021. PACHULSKI STANG ZIEHL & JONES LLP 

Jeffrey N. Pomerantz (CA Bar No.143717) (pro hac vice) 

Ira D. Kharasch (CA Bar No. 109084) (pro hac vice) 

John A. Morris (NY Bar No. 266326) (pro hac vice) 

Gregory V. Demo (NY Bar No. 5371992) (pro hac vice) 

Hayley R. Winograd (NY Bar No. 5612569) (pro hac vice) 

10100 Santa Monica Boulevard, 13th Floor 

Los Angeles, CA 90067 

Telephone: (310) 277-6910 

Facsimile: (310) 201-0760 

Email: jpomerantz@pszjlaw.com 

 ikharasch@pszjlaw.com 

 jmorris@pszjlaw.com 

 gdemo@pszjlaw.com 

 hwinograd@pszjlaw.com 

 

-andHAYWARD PLLC 

/s/ Zachery Z. Annable 

Melissa S. Hayward 

Texas Bar No. 24044908 

MHayward@HaywardFirm.com 

Zachery Z. Annable 

Texas Bar No. 24053075 

ZAnnable@HaywardFirm.com 

10501 N. Central Expy, Ste. 106 

Dallas, Texas 75231 

Tel: (972) 755-7100 

Fax: (972) 755-7110 

Counsel for the Debtor and Debtor-in-Possession

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DOCS_NY:46437.2 36027/003

IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

In re: 

HIGHLAND CAPITAL MANAGEMENT, L.P.,1

Reorganized Debtor. 

§ 

§ 

§ 

§ 

§ 

§ 

Chapter 11 

Case No. 19-34054-sgj11 

HIGHLAND CAPITAL MANAGEMENT, L.P., 

 Plaintiff, 

vs. 

HIGHLAND CAPITAL MANAGEMENT FUND 

ADVISORS, L.P., AND NEXPOINT ADVISORS, 

L.P., 

 Defendants. 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

Adversary Proceeding No. 

21-03010-sgj 

JUDGMENT 

1

 The Reorganized Debtor’s last four digits of its taxpayer identification number are (8357). The headquarters and 

service address for the above-captioned Reorganized Debtor is 100 Crescent Court, Suite 1850, Dallas, TX 75201. 

Signed September 13, 2022

______________________________________________________________________

The following constitutes the ruling of the court and has the force and effect therein described.

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This matter having come before the Court following the consolidation of (a) certain breach 

of contract claims asserted by Highland Capital Management, L.P. (“Highland” or “Plaintiff”) 

against Highland Capital Management Fund Advisors, L.P. (“HCMFA”) and NexPoint Advisors, 

L.P. (“NexPoint” and together with HCFMA, the “Defendants,” and Plaintiff and Defendants 

together, the “Parties”) in the above-referenced adversary proceeding (the “Adversary 

Proceeding”), with (b) the administrative expense claims asserted by HCMFA and NexPoint 

against Highland in the Application for Allowance of Administrative Claim [Main Docket No. 

1826];2 and the Court having held an evidentiary hearing on April 12 and 13, 2022 (the “Trial”) 

and considered (a) Defendants’ arguments and contentions set forth in the Advisors’ Trial Brief

[AP Docket No. 90]; (b) Plaintiff’s arguments and contentions set forth in Highland’s Proposed 

Findings of Fact and Conclusions of Law [AP Docket No. 91]; (c) the Joint Pretrial Order [AP 

Docket No. 96] filed by the Parties; (d) the exhibits admitted into evidence during the Trial [AP 

Docket No. 115]; (e) the credibility of the witnesses who testified during the Trial; (f) the 

arguments presented by counsel during closing arguments held on April 27, 2022; and (g) all prior 

proceedings arising in or concerning the claims asserted in the Adversary Proceeding, and for the 

reasons set forth in the Findings of Fact and Conclusions of Law in Support of Judgment: (A) 

Granting Breach of Contract Claims Asserted by the Reorganized Debtor; and (B) Denying 

Defendants’ Request for Allowance of Administrative Expense Claims [AP Docket No. 124] (the 

“Findings”) issued by the Court on August 30, 2022; the Court hereby enters the following final 

judgment (the “Final Judgment”). 

IT IS ORDERED, ADJUDGED, AND DECREED as follows: 

2 See Stipulation (A) Amending Scheduling Order and (B) Consolidating and Resolving Certain Matters, Adv. Pro. 

No. 21-03010-sgj, Docket No. 36 (references to the docket maintained in the Adversary Proceeding are hereafter 

referred to as “AP Docket No. __”). 

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1. HCMFA owes Highland the aggregate sum of $1,756,000, and Highland shall have 

a money judgment against HCMFA in that amount. 

2. NexPoint owes Highland the aggregate sum of $840,000, and Highland shall have 

a money judgment against NexPoint in that amount. 

3. All relief requested by the Defendants in the Application for Allowance of 

Administrative Claim [Main Docket No. 1826], including with respect to (i) all alleged 

overpayments and (2) all alleged breaches of contract by Highland, is denied and all claims that 

were asserted or could have been asserted therein are dismissed with prejudice. 

4. The amounts set forth to be paid in this Final Judgment shall bear interest, pursuant 

to 28 U.S.C. § 1961, from the date of the entry of this Final Judgment, at a rate of 3.48 percent. 

Interest shall be computed daily to the date of payment, except as provided in 28 U.S.C. § 2516(b) 

and 31 U.S.C. § 1304(b), and shall be compounded annually. 

### END OF JUDGMENT ### 

 

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1 

 

IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

In re: 

HIGHLAND CAPITAL MANAGEMENT, L.P., 

Reorganized Debtor. 

§ 

§ 

§ 

§ 

§ 

§ 

Chapter 11 

Case No. 19-34054-sgj11 

HIGHLAND CAPITAL MANAGEMENT, L.P., 

 Plaintiff, 

vs. 

HIGHLAND CAPITAL MANAGEMENT FUND 

ADVISORS, L.P. AND NEXPOINT ADVISORS, L.P., 

 Defendants. 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

Adversary Proceeding No. 

21-03010-sgj 

FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF A JUDGMENT: 

(A) GRANTING BREACH OF CONTRACT CLAIMS ASSERTED BY THE 

REORGANIZED DEBTOR; AND (B) DENYING DEFENDANTS’ REQUESTS FOR 

ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIMS 

Signed August 30, 2022

______________________________________________________________________

The following constitutes the ruling of the court and has the force and effect therein described.

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I. INTRODUCTION 

The above-referenced adversary proceeding (“Adversary Proceeding”) is related to the 

Chapter 11 bankruptcy case of Highland Capital Management, L.P. (the “Debtor” or “Highland”), 

which was filed on October 16, 2019 (the “Petition Date”). Highland is now a Reorganized Debtor 

(sometimes referred to as such, herein). It obtained confirmation of a plan on February 22, 2021. 

The plan went effective on August 11, 2021. On direct appeal to the Fifth Circuit, Highland’s 

confirmation order was affirmed in substantial part, on August 19, 2022. 

A few days before confirmation of its plan, Highland filed the complaint (“the Complaint”) 

initiating this Adversary Proceeding.1

 The defendants in the Adversary Proceeding are two very 

significant non-debtor entities within the massive Highland complex of companies: one known 

as Highland Capital Management Fund Advisors, L.P. (“HCMFA”) and the other known as 

NexPoint Advisors, L.P. (“NexPoint” or sometimes “NPA”). These two companies are sometimes 

collectively referred to as the “Advisors” or “Defendants.” It is undisputed that, at all relevant 

times, the Advisors have been controlled by James Dondero (“Mr. Dondero”), the co-founder and 

former CEO of the Debtor.2

 Early during the Highland bankruptcy case (on January 9, 2020), Mr. 

Dondero’s tenure as CEO of Highland was terminated, and three new independent directors (the 

“Independent Board”) were appointed to manage the affairs of the Debtor, pursuant to a settlement 

1

 Plaintiff Highland Capital Management, L.P.’s Verified Original Complaint for Damages and for Declaratory and 

Injunctive Relief, filed February 17, 2021, DE # 1 in the AP. Note: all references herein to “DE # ___” shall refer to 

the docket entry number at which a pleading appears in the docket maintained in the Highland main bankruptcy case. 

All references to “DE # ___ in the AP” refer to the docket entry number at which a pleading appears in the docket 

maintained in this Adversary Proceeding. 

2

 Joint Pretrial Order, DE # 92 in the AP at p. 9, ¶ 35. See also Tr. Transcript 4/13/22, Part 2 of 2 [DE # 116], at 

14:19-20. 

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between the Debtor and Official Committee of Unsecured Creditors (“UCC”), approved by the 

bankruptcy court.3

The Adversary Proceeding involves Highland’s breach of contract allegations against the 

two Advisors arising under four different agreements: (a) two Shared Services Agreements (one 

between Highland and each of the two Advisors); and (b) two Payroll Reimbursement Agreements 

(again, one between Highland and each of the two Advisors).4

 As later further explained, the 

Advisors are “registered investment advisors” who manage approximately $11 billion of assets for 

numerous clients, including retail investors (the retail investor funds constitute about $3 billion of 

the $11 billion of assets under management). 5 Pursuant to the two Shared Services Agreements, 

Highland provided the “back-office” and “middle-office” services (i.e., accounting, legal, 

regulatory compliance, human resources, information technology, etc.) that enabled the Advisors 

to operate as a business. And pursuant to the two Payroll Reimbursement Agreements, Highland 

provided “front-office” advisory services (i.e., investment advisory personnel) that enabled the 

Advisors to provide investment services to the funds under their management. To be clear, 

Highland maintained a full staff of actual employees and essentially contracted out to the Advisors 

3

 The settlement between the Debtor and UCC is sometimes referred to by the parties as the “corporate governance 

settlement,” and it was entered into to avert the likely appointment of a Chapter 11 trustee. 4

 The Debtor originally asserted three claims in the Complaint: Count One, seeking declaratory relief, as to the parties’ 

respective rights and obligations under the two Shared Services Agreements; Count Two for Breach of Contract under 

the two Shared Services Agreements; and Count Three, seeking injunctive relief requiring the Advisors to cooperate 

in an orderly transition of services away from the Debtor, under the Shared Services Agreement. DE # 1 in the AP. 

On February 24, 2021, following an evidentiary hearing, the bankruptcy court entered an order resolving the claims 

for declaratory and injunctive relief (Counts One and Three) of Highland’s Complaint. Subsequently, on August 4, 

2021, the parties entered into a stipulation that the claims for declaratory and injunctive relief were finally resolved 

by the prior order. DE # 36 in the AP. Thus, the only claims remaining from Highland’s Complaint to be considered 

are those for breaches of contract (Count Two). Notably, the parties’ Joint Pretrial Order expanded Highland’s Count 

Two to include breaches of the Payroll Reimbursement Agreements and not simply breaches of the Shared Services 

Agreements. DE # 92 in the AP, ¶¶ 15, 69, 71, 73, 74, 75, 76, 78, 79, 80, 81 & 85. 

5

 Tr. Transcript 4/13/22, Part 2 of 2 [DE # 116], at 106:13-16. 

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for the necessary services, so that the Advisors could manage funds for their clients. The Advisors 

themselves had relatively few employees. 

The Shared Services Agreements, later more fully defined, will sometimes collectively be 

referred to herein as the “SSAs,” and the Payroll Reimbursement Agreements, also more fully 

defined herein, will sometimes be referred to as the “PRAs.” The cash flow streams from the SSAs 

and PRAs were a significant source of revenue and liquidity for Highland. And, of course, the 

Advisors, themselves, earned significant fees from the contracts that they had with their clients to 

manage the $11 billion of assets (the Advisors’ revenue numbers are not in evidence). 

Highland asserts that breaches of contract occurred due to the Advisors’ failure—late 

during Highland’s bankruptcy case, when things had become very contentious between Highland 

and Mr. Dondero—to pay amounts due and owing under the four agreements (specifically, after 

Highland had given notice on November 30, 2020, of Highland’s intent to terminate the SSAs, in 

60 days, in connection with its chapter 11 plan).6

 Highland asserts that the Advisors thereafter 

failed to pay some $2,747,000 due and owing under the four agreements, in late 2020 and early 

2021. 

Meanwhile, shortly before the filing of the Adversary Proceeding, on January 24, 2021, 

the Advisors filed their Application for Allowance of Administrative Claim in the underlying 

bankruptcy case.7

 On May 5, 2021, Highland filed its Objection to Application for Administrative 

Claim of Highland Capital Management Fund Advisors, L.P. and NexPoint Advisors, L.P.8

Contrary to Highland’s position that the Advisors owe Highland money for unpaid services that 

6

 Highland planned to reduce its workforce in February 2021, in connection with confirmation of its plan, and 

anticipated it would have insufficient personnel to perform under the agreements thereafter. 7

 DE # 1826. 

8

 DE # 2274. 

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Highland provided, the Application asserted claims back against Highland for: (1) alleged postpetition overpayments by the Advisors to Highland under the PRAs, throughout the bankruptcy 

case (under a theory that the fees payable to Highland under the PRAs were tied to the headcount 

of employees providing services, and Highland allegedly improperly charged the Advisors the 

same fixed, monthly amount under the PRAs, over time, as employee headcount at Highland 

dwindled); (2) alleged post-petition breaches of the SSAs by Highland, for allegedly failing to 

provide certain legal and compliance services contemplated under the SSAs—causing the 

Advisors to have to hire their own employees to provide such services; and (3) alleged post-petition 

overpayments by the Advisors to Highland under the SSAs for the services that Highland allegedly 

failed to provide. The Advisors have asserted up to $14 million in administrative expense claims 

against Highland. 

On August 6, 2021, the parties stipulated that the contested matter created by the Advisors’ 

Application for Allowance of Administrative Claim (and Highland’s objection thereto) should be 

consolidated with the Debtor’s breach of contract claims within this Adversary Proceeding.9

 All 

consolidated, competing claims of the parties were tried before the bankruptcy court on April 12 

and April 13, 2022, with closing arguments heard on April 27, 2022 (the “Trial”). The court heard 

from six witnesses and admitted nearly 200 exhibits. 

For the reasons set forth below, the bankruptcy court has determined that the Advisors have 

failed to meet their burden of proving: (i) that they made any “overpayments” under the PRAs; (ii) 

that Highland breached the SSAs; or (iii) that the Advisors “overpaid” under the SSAs. The court 

also has determined that, even if the Advisors had met their burden of proving that they “overpaid” 

9

 Stipulation (A) Amending Scheduling Order and (B) Consolidating and Resolving Certain Matters, DE # 36 in the 

AP. 

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under the PRAs, the Advisors claims were waived. The Advisors’ claims for “overpayments” 

under the SSAs were likewise waived. No administrative expense claims will be allowed. 

The bankruptcy court has further determined that Highland has met its burden of proving 

its breach of contract claims against the Advisors for failure to pay certain amounts due under both 

the SSAs and PRAs in late 2020 and early 2021. 

Accordingly, the bankruptcy court denies the request for allowed administrative expense 

claims by the Advisors. Further, the bankruptcy court grants the relief requested by Highland 

under its claims for breach of contract in this Adversary Proceeding. Highland is entitled to the 

damages set forth at the end of this document. 

Set forth below are the court’s Findings of Fact and Conclusions of Law, pursuant to Fed. 

R. Bankr. Proc. 7052. Any Finding of Fact that should be more appropriately characterized as a 

Conclusion of Law should be deemed as such, and vice versa. 

II. FINDINGS OF FACT 

The Defendant/Advisor known as HCMFA was formed on or around February 2, 2009, 

and was previously known as Pyxis Capital, L.P. (“Pyxis”).10 The Defendant/Advisor known as 

NexPoint was formed on or around March 20, 2012. It is undisputed that, at all relevant times, 

both Defendants (i.e., the Advisors) were controlled by Mr. Dondero.11

The Advisors are registered investment advisors under the Investment Advisers Act of 

1940. They serve as the investment managers for, among other things, certain retail funds (the 

10 Joint Pretrial Order, DE # 96 in the AP at p. 10. See also Tr. Transcript 4/13/22, Part 2 of 2 [DE # 116], at 14:19-

20. 

11 Id. at p. 9. 

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“Retail Funds”) that are regulated pursuant to the Securities Act of 1933, the Securities Exchange 

Act of 1934, and the Investment Company Act of 1940. 

The Advisors provide investment advisory services to their clients pursuant to written 

investment advisory agreements (the “Investment Advisory Agreements”). These Investment 

Advisory Agreements are: (a) the principal source of the Advisors’ revenue, and (b) are the reason 

for the Advisors’ existence. 

An individual named David Klos (“Mr. Klos”) served as Highland’s Controller and Chief 

Accounting Officer during the times relevant in this Adversary Proceeding (including overseeing 

the SSAs and PRAs between Highland and the Advisors) and reported directly to an individual 

named Frank Waterhouse (“Mr. Waterhouse”), who served as both: (a) Highland’s Chief Financial 

Officer (“CFO”), while simultaneously serving as (b) the Treasurer for each of the Advisors. Both 

Mr. Klos and Mr. Waterhouse testified at Trial and seemed to be the witnesses who were most 

involved with the Agreements at the time of their execution, implementation, and during 

performance thereof. 

Mr. Klos now works as CFO of the Reorganized Debtor. Mr. Waterhouse no longer has 

any employment position with the Reorganized Debtor, but he still serves as an officer and/or 

employee of both of the Advisors and of Skyview—the latter of which is an entity that many 

former Highland employees transitioned to around the time that the Highland plan was confirmed, 

and they were terminated from Highland (Skyview now provides middle- and back-office services 

to the Advisors).12 The court found Mr. Klos to be a credible and knowledgeable witness. The 

court found Mr. Waterhouse’s testimony to have been only moderately helpful. Mr. Waterhouse 

12 See Tr. Transcript 4/13/22, Part 2 of 2 [DE # 116], at 55:3-21. 

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testified either “Not that I recall,” “I don’t recall,” “Not that I’m aware of,” or “I don’t remember,” 

more than 75 times, during two hours and 26 minutes of testimony regarding the SSAs and PRAs.13 

A. The SSAs 

i. The HCMFA SSA. 

On February 9, 2012, Highland and HCMFA (then operating as Pyxis) entered into a 

Shared Services Agreement, effective as of December 15, 2011 (“Original HCMFA SSA”).14 On 

September 12, 2012, the parties entered into an Amended and Restated Shared Services Agreement, 

effective as of December 15, 2011.15 Subsequently, the parties entered the Second Amended and 

Restated Shared Services Agreement, effective as of February 8, 2013—which is the SSA that was 

in place between Highland and HCMFA during the bankruptcy case and is at issue in this litigation 

(the “HCMFA SSA”).16

To understand the impetus for the HCMFA SSA (and, for that matter, all of the agreements 

at issue in this Adversary Proceeding) one must fully appreciate that the Defendants/Advisors had 

relatively few employees of their own during the times relevant in this Adversary Proceeding. 

Rather, the Defendants/Advisors essentially contracted for services and/or personnel employed by 

the mothership, Highland. Pursuant to the HCMFA SSA, HCMFA agreed to pay Highland for 

costs relating to certain shared services requested by HCFMA and provided by Highland, 

including, in pertinent part: (i) finance and accounting, (ii) human resources, (iii) marketing, (iv) 

legal, (v) corporate, (vi) information technology, and (vii) operations.17 According to all 

13 With all due respect, the court realizes that most witnesses do not have perfect memories and occasionally testify 

“I don’t recall” or “I don’t know” during testimony. Indeed, during this Trial, other witnesses sometimes testified as 

such. But Mr. Waterhouse’s lack of answers to important questions was somewhat troubling to the court. 14 Pl. Ex. 54. 

15 Pl. Ex. 55. 

16 Pl. Ex. 2. 

17 See id. at Article II, Section 2.01. 

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witnesses, these services are commonly referred to in the industry as “middle- or back-office” 

services, in contrast to “front-office” services that would be investment advisory services. 

Pursuant to the HCMFA SSA, HCMFA was required to pay Highland its allocable share 

of the “Actual Cost” of “Shared Services” and “Shared Assets” based on an “Allocation 

Percentage,” as those terms are defined in the HCFMA SSA.18 To determine the amounts owed, 

(a) Highland was to prepare Quarterly Reports setting forth the cost allocations and detailing 

amounts paid during the applicable quarter; (b) the parties were to agree on the allocations set forth 

in the Quarterly Reports and prepare invoices; and (c) the invoiced amounts were to be paid within 

10 days.19 In contrast to the other SSA with Nexpoint (described below) and the PRAs (also 

described below), the HCMFA SSA is stipulated to have been a variable fee arrangement between 

the parties. 

 ii. The NexPoint SSA. 

On June 5, 2013, Highland and NexPoint entered into their original Shared Services 

Agreement, effective as of January 1, 2013 (the “Original NexPoint SSA”).20 The Original 

NexPoint SSA was modelled after the HCMFA SSA and included a formula for determining 

NexPoint’s share of allocable cost of “Shared Services” and “Shared Assets,” which did not rely 

on an actual analysis of cost, but rather a percentage of managed fund assets.21 This contract 

covered the same “middle- or back-office” services provided under the HCMFA SSA. 

Subsequently, Highland and NexPoint amended the Original NexPoint SSA. The parties 

entered into the Amended and Restated Shared Services Agreement, effective as of January 1, 

2018—which is the SSA that was in place between Highland and NexPoint during the bankruptcy 

18 See id. at Section 4.01. 19 See id. at Sections 5.01, 5.02, & 5.03. 20 Pl. Ex. 29. 

21 See id. at Sections 4.01, 5.01, 5.02, & 5.03. 

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case and is at issue in this litigation (the “NexPoint SSA”).22 The notable changes made to the 

NexPoint SSA included that: (a) the “asset based” formula (which was calculated using the asset 

values of a fund advised by NexPoint) for determining the value of Highland’s services was 

replaced with a monthly, “flat fee” arrangement; and (b) Highland was provided with exculpation 

and indemnification rights. The monthly flat fee charged by Highland to NexPoint in the amended 

NexPoint SSA was $168,000.23

NexPoint agreed to pay Highland the flat monthly fee of $168,000, due before the first 

business day each month, in exchange for the shared services provided by Highland.24

Additionally, under Section 6.03 of the NexPoint SSA, Highland is entitled to recover its costs and 

expenses, including attorney’s fees, incurred in connection with the defense or settlement of 

indemnifiable claims.25 

The NexPoint SSA was signed by Mr. Waterhouse on behalf of both Highland (in his 

capacity as Treasurer of Strand Advisors, Inc., the general partner of Highland) and NexPoint (in 

his capacity as Treasurer of NexPoint Advisors GP, LLC, the general partner of NexPoint). 

On November 30, 2020, Highland—with confirmation of its plan pending, which 

contemplated a separation of Highland from Dondero-controlled entities—exercised its right to 

terminate both the HCMFA SSA and NexPoint SSA, by providing a written termination notice to 

the Advisors, indicating Highland’s intent to terminate them, effective January 31, 2021 (the 

“Termination Date”). However, on January 29, 2021, Highland agreed to extend the Termination 

Date by two weeks (to February 14, 2021), due to ongoing negotiations for an orderly transition 

of services, provided the Advisors paid for the services in advance. Highland has credibly 

22 Pl. Ex. 3. 

23 Id. at Article III, Section 3.01. 24 See id.. 25 See id. at Section 6.03. 

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represented that it believed termination without a service provider in place to fill Highland’s role 

would have had dire consequences to the Retail Funds and their investors. The parties later agreed 

to extend the Termination Date one final time in February 2021, to extend the deadline through 

the end of February 2021. 

The Advisors do not contend that Highland failed to perform under the SSAs, other than, 

perhaps, providing certain legal and compliance services to the Advisors a handful of times, at a 

point in time during the bankruptcy case when the Debtor believed it would be a conflict of interest 

to do so (as the Debtor and Advisors were becoming adverse). Further, it is agreed that the 

NexPoint SSA contemplated a fixed fee arrangement of $168,000 per month. To reiterate, the 

HCMFA SSA was not a fixed fee arrangement, but the amounts invoiced under the HCMFA SSA 

generally ranged between $300,000 to $310,000 each month. 

B. The PRAs 

In addition to the two SSAs, Highland and each of the Advisors/Defendants were parties 

to two “Payroll Reimbursement Agreements” (the “PRAs” and together with the SSAs, the 

“Agreements”). The PRAs—in contrast to the SSAs that were designed to compensate Highland 

for the Defendants’ usage of “middle- and back-office” services—were designed to compensate 

Highland for the Defendants usage of “front-office” services. 

There is a confusing history leading up to execution of the PRAs. Notably, prior to the 

year 2018, Highland had provided “front-office” services to the Advisors for free. Also notably, 

in early 2018, the parties embarked on documenting a new arrangement whereby Highland would 

henceforth be compensated for “front-office” services through the mechanism of “sub-advisory 

agreements” with the Advisors (which would be typical in the industry generally, as a way to 

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compensate a party for “front-office” services). But the parties ended up using the PRAs instead, 

as set forth below. 

i. Events Leading up to the PRAs. 

As noted above, prior to the year 2018, Highland had provided “front-office” services to 

the Advisors for free, for six years.26 But at the end of 2017, Highland was operating at a loss and 

those losses were expected to increase in 2018.27 According to the credible testimony of Mr. Klos 

at Trial, Mr. Dondero came up with a number of $6 million that the Defendant NexPoint should 

be paying Highland, every year in the aggregate, to compensate for the mounting operating losses 

at Highland—which also had the added benefit of reducing NexPoint’s taxable income that it was 

generating, that happened to be flowing up to Mr. Dondero.28 

So, on or about January 11, 2018, Highland and NexPoint entered into that certain SubAdvisory Agreement, effective as of January 1, 2018 (the “Initial Sub-Advisory Agreement”). 

Notably, a typical sub-advisory agreement might provide for compensation for front-office 

services in a myriad of ways, including possibly: based on actual costs; flat fees; or percentage of 

assets under management (“AUM”), using basis points computed on assets managed.29 Pursuant 

to the Initial Sub-Advisory Agreement, Highland would be providing certain “front-office” 

services to NexPoint to enable it to fulfill its obligations to its Clients under its Investment 

Management Agreements.30 In exchange, NexPoint agreed to pay a flat monthly fee of $252,000, 

while each of the parties agreed to bear their own expenses.31 As with the NexPoint SSA, Mr. 

Waterhouse signed the Sub-Advisory Agreement on behalf of both Highland and NexPoint. The 

26 Tr. Transcript 4/12/22, Part 1 of 2, [DE # 110] at 69:13-71:19. 27 Pl. Ex. 86 at p. 2. See Tr. Transcript 4/12/22, Part 1 of 2 [DE # 110], at 65:13-22. 28 Tr. Transcript 4/12/22, Part 1 of 2, [DE # 110] at 66:6-71:19. 29 Tr. Transcript 4/13/22, Part 1 of 2, [DE # 114] at 37-47. 30 Joint Pretrial Order, DE # 96 in the AP at p. 11. 

31 NexPoint Sub-Advisory Agreement, Pl. Ex. 5, §2(a)-(b). 

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payment of $252,000 times 12 equaled $3,024,000; meanwhile NexPoint would be paying 

Highland $168,000 per month under the fixed fee NexPoint SSA, and $168,000 times 12 equaled 

$2,016,000. Thus, by the court’s calculations, this would mean that NexPoint would be paying 

Highland not quite $6 million per month for “back-”, “middle-”, and “front-office” services. 

However, the court understands that a subsidiary of NexPoint, called NREA, would be paying an 

additional $80,000 per month flat amount for “back- and middle-office” shared services, which 

would total $248,000 per month for shared services being paid from NexPoint (inclusive of its 

subsidiary) to Highland.32 $248,000 times 12 equals $2,976,000 and, when added to the 

$3,024,000 being paid for “front-office” sub-advisory services, this totaled exactly $6 million. 

Each year, Mr. Waterhouse and Mr. Klos prepared a written analysis of Highland’s past 

and projected financial performance (each, an “Annual Review”) that they presented to Mr. 

Dondero and Mark Okada (the latter of whom was Highland’s other co-founder).33 The 2017/2018 

Annual Review included statements and information that: (i) Highland was projected to incur 

operating losses of $12 million in 2018;34 (ii) the agreements of NexPoint to pay $6 million in fees 

to Highland was to “remain unchanged;”35 (iii) the aggregate of $6 million to be paid by NexPoint 

to Highland was projected to be unchanged in 2018, 2019, and 2020;36 and (iv) changes through 

new hires, internal transfers, terminations, and compensation and benefits paid had been made 

across the Highland platform.37 

But, a hugely significant event occurred that affected Highland’s cash flow right after the 

2017/2018 Annual Review was presented. On January 30, 2018, a former Highland employee 

32 Pl. Ex. 146. See also Tr. Transcript 4/12/22, Part 2 of 2 [DE # 113], at 70:6-17. 33 See, e.g., Pl. Ex. 86 (2017/2018 Annual Review), Pl. Ex. 142 (2018/2019 Annual Review), & Pl. Ex. 143 (2019/2020 

Annual Review).

34 Pl. Ex. 86 at p. 2. 

35 Id. at p. 36. 36 Id. at p. 46. 37 Id. at pp. 29-33, 48. 

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named Joshua Terry commenced an involuntary bankruptcy case against Acis Capital 

Management, L.P. (“Acis”) in this bankruptcy court (Mr. Terry had obtained a large arbitration 

award and judgment against Acis and was being frustrated in his efforts to collect upon it). At that 

time, Acis was an affiliate of Highland that managed certain collateralized loan obligations 

(“CLOs”). To perform its duties, Acis had earlier entered into its own sub-advisory and shared 

services agreements with Highland (the “Acis Agreements”). The Acis Agreements were a vital 

source of Highland’s revenue. Highland was projected to receive almost $10 million in revenue 

in 2018 alone from the Acis Agreements—Highland’s second-highest source of revenue 

representing nearly 12% of its total projected operating income.38

So, on March 7, 2018, just weeks after the 2017/2018 Annual Review was presented—and 

in an attempt to make up for anticipated lost revenue from Acis—Highland decided to create a 

Sub-Advisory Agreement also for HCMFA, initially for a flat monthly fee of $450,000, 

retroactive to January 1, 2018. Recall that, heretofore, Highland had been providing front-office 

services to HCMFA for free. A week later, a draft Sub-Advisory Agreement modeled on the 

NexPoint Initial Sub-Advisory Agreement was prepared for HCMFA.39 

Notably: (a) the 2017/2018 Annual Review presented to Mr. Dondero and Mr. Okada just 

six weeks earlier did not contemplate that HCMFA would be party to a Sub-Advisory Agreement 

or otherwise would be compensating Highland for investment advisory services Highland was 

providing, and (b) both the title and terms of the draft HCMFA Sub-Advisory Agreement 

corroborated Highland’s contention that the parties intended to create a “fee for service” advisory 

relationship. 

38 Pl. Ex. 86 at p. 35 (“Highland 2.0 CLOs” refers to the CLOs managed by Acis). 39 See Pl. Ex. 87 (e-mails between March 7 and March 15, 2018). 

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But, alas, the Initial Sub-Advisory Agreements for both HCMFA and NexPoint were not 

to be, because Highland learned: (a) from its outside counsel that (i) the Advisors’ Retail Board40

needed to approve the Sub-Advisory Agreements during an in-person meeting, and that (ii) the 

two Sub-Advisory Agreements could not be made retroactive to January 1, 2018, and (b) that the 

next in-person meeting of the Retail Board would not be until June 2018.

41 This was a problem 

because Highland needed cash-flow immediately and could not wait until June 2018. 

Based on this legal advice, the parties concluded that they could not utilize the 

contemplated Sub-Advisory Agreement structure because: (a) Highland would not be able to earn 

any revenue for sub-advisory services until June, the earliest date the Retail Board could approve 

of the Sub-Advisory Agreements during an in-person meeting, and (b) it could not be retroactive 

to January 1, 2018, meaning that Highland would be unable to receive six months’ of needed 

revenue. So, another method was needed to overcome these obstacles—and the Payroll 

Reimbursement Agreements were born.42

ii. The Use of PRAs instead of Sub-Advisory Agreements to Compensate Highland for 

“Front-Office” Advisory Services. 

So, the next month, Highland prepared a draft PRA that did not need the Advisors’ Retail 

Board’s approval and could be made retroactive to the beginning of the year. 

While the Initial Sub-Advisory Agreements had clearly contemplated that a flat fee for 

front-office services would be paid to Highland, Mr. Klos expressed concerns, after reviewing the 

draft PRAs, about language therein—and an Exhibit A chart attached thereto, listing out 25 “Dual 

40 The “Retail Board” is essentially an independent board of trustees or board of directors for retail funds managed 

by the Advisors. Tr. Transcript 4/13/22, Part 1 of 2 [DE # 114], at 4:22-24. 41 See Pl. Ex. 87 (March 15, 2018 e-mails from Lauren Thedford (“Ms. Thedford”), an attorney employed by Highland 

but who also served as an officer of the Advisors). 42 No one ever explained at Trial the exact reasons that a document entitled “Sub-Advisory Agreement” would 

require in-person Retail Board approval and could not be retroactive in effect. But no one seemed to dispute this 

fact. 

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Employees” who would be working both for Highland and the Advisors, and suggesting the 

percentage of time they might be working for the Advisors—that payments to Highland would be 

based on “actual costs” associated with specific employees. Mr. Klos was worried about the 

cumbersomeness of the PRAs and wrote to Highland inhouse attorney Lauren Thedford (“Ms. 

Thedford”), who also served as an officer of the Advisors, that: 

Does it have to be framed as reimbursement of actual costs? We’d much rather it 

be characterized as just an agreed upon amount between the two entities. It’s not 

a small task and involves subjective assumptions to allocate individual employees, 

so as it’s written, it would be creating a ton of work that isn’t creating any value 

to the overall complex.

43

In response, Ms. Thedford stated that she was “open” to changing the “definition of Actual 

Costs” but observed that there “needs to be some method of determining the amounts” and that it 

was “important” to treat the agreement as one for “reimbursement.” In response, Mr. Klos stated: 

Could we say that Actual Cost is being determined at the outset of the agreement, 

have a schedule as of Jan. 1, 2018 and say that Actual Cost shall be as set out in 

that schedule and shall be paid in monthly installments for the term of the 

agreement . . . that way the exercise is only performed once. 

Beyond that year, termination provision kicks-in, so if there’s a belief that Actual 

Costs have changed materially, either party could terminate and/or renegotiate for 

an amended agreement.44

At Trial, Mr. Klos credibly testified that the Exhibit A list of employees attached to the 

PRAs, and the allocation made for employees created in connection with the PRAs, were created 

to be the same monthly fees previously contemplated under the Initial Sub-Advisory Agreement.45

Further, Mr. Klos testified that the estimates, despite being made in good faith, were based on his 

own subjective assessments and were only created as a proxy for the flat monthly fees previously 

envisioned by Mr. Dondero, to get Highland needed cash flow.46

43 Pl. Ex. 129 (emphasis added). 

44 Id. (Klos e-mail to Thedford sent on April 17, 2018, at 10:56 a.m.) (emphasis added). 45 Tr. Transcript 4/12/22, Part 1 of 2, at 104:9-24. 46 Tr. Transcript 4/12/22, Part 1 of 2, at 104:19-106:16. 

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On or around May 1, 2018, Highland and NexPoint entered into that certain Payroll 

Reimbursement Agreement (the “NexPoint PRA”).47 The NexPoint PRA replaced the NexPoint 

Initial Sub-Advisory Agreement that had been effective as of January 1, 2018.48 Then, on or around 

May 1, 2018, Highland and HCMFA entered into that certain Payroll Reimbursement Agreement, 

also effective as of January 1, 2018 (the “HCMFA PRA”).49 

Except for the (a) names of the parties, (b) the amount of monthly payments thereunder, 

and (c) the list of “Dual Employees” and their respective allocations set forth in Exhibit A to each 

of the PRAs, the NexPoint PRA and HCMFA PRA were identical. 

So, to be clear, whereas the SSAs were to provide compensation for “middle-” and “backoffice” services provided by Highland to each of the Advisors, the PRAs were, generally, 

structured for the Advisors to pay Highland amounts in recognition of the “front-office” services 

provided by the Dual Employees to the Advisors (which “Dual Employees” were technically 

employed by Highland). 

To be further clear, both the NexPoint PRA and HCMFA PRA stated that the Advisors 

were required to pay Highland the “Actual Cost” to Highland for the Dual Employees pursuant to 

Section 2.01.50 However, “Actual Cost” was defined in each of the PRAs as: 

with respect to any period hereunder, the actual costs and expenses caused by, 

incurred, or otherwise arising from or relating to each Dual Employee, in each case 

during such period. Absent any changes to employee reimbursement, as set forth 

in Section 2.02, such costs and expenses are equal to [$252,000 for NexPoint and 

$416,000 for HCMFA] per month.

51

47 Pl. Ex. 6 (NexPoint PRA)

48 Joint Pretrial Order, DE # 96 in the AP at p. 11.

49 Id. 50 Pl. Ex. 6 §§ 2.01, 3.01; Pl. Ex. 8 §§ 2.01, 3.01. 

51 Pl. Ex. 6 at Article I (fixing the costs and expenses at $252,000 per month for NexPoint) (emphasis added); Pl. Ex. 

8 at Article I (fixing the costs and expenses at $416,000 per month for HCMFA) (emphasis added). 

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Significantly, pursuant to Section 2.02, the parties could agree to modify the Actual Cost 

if they believed a change to employee reimbursement was appropriate, and each party was required 

to negotiate any change in good faith.52 The Advisors contend that Section 2.02, in conjunction 

with Section 4.02, imposed an affirmative obligation on Highland to update the Exhibit A list of 

Dual Employees and unilaterally adjust the monthly payments, but no such obligation exists under 

the clear language of the PRAs.53

The undisputed evidence establishes that: (a) neither Mr. Klos nor anyone else ever updated 

the Exhibit A list of Dual Employees attached to the PRAs; (b) neither Mr. Klos nor anyone else 

was ever instructed to update Exhibit A attached to the PRAs; (c) at all relevant times, the Advisors 

and Highland had access to the same information concerning the amounts paid under the PRAs, 

the amounts projected to be paid under the PRAs, the termination of Dual Employees, the 

compensation of Dual Employees, and the investment advisory services provided by Highland to 

each of the Advisors; and (d) as discussed below, the parties knew of and relied on Section 2.02 

in December 2018 to amend the PRAs while Mr. Dondero was still fully in control of the entire 

Highland complex. The undisputed evidence was also that four out of the twenty-five Dual 

Employees listed on the Exhibit A’s attached to the PRAs were no longer employed as of the May 

1, 2018 date on which the PRAs were executed (although they had been employed as of the January 

1, 2018 effective date of the PRAs). 

Without considering any extrinsic evidence, the court finds the clear and unambiguous 

language of the definition of “Actual Cost” in the PRAs indicates that these were intended to be 

52 Pl. Ex. 6 § 2.02; Pl. Ex. 8 § 2.02 (“During the Term, the Parties may agree to modify the terms and conditions of 

[NexPoint’s/HCMFA’s] reimbursement in order to reflect new procedures or processes, including modifying the 

Allocation Percentage (defined below) applicable to such Dual Employee to reflect the then current fair market value 

of such Dual Employee’s employment. The Parties will negotiate in good faith the terms of such modification.”). 53 Pl. Ex. 6 § 4.02 (“Should either Party determine that a change to employee reimbursement is appropriate, as set 

forth in Section 2.02, the Party requesting the modification shall notify the other Party on or before the last business 

day of the calendar month”); Pl. Ex. 8 § 4.02 (same). 

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fixed amount contracts, simply plugging in a set monthly amount for front-office services that—

absent agreed modifications—were never required to be adjusted based on particular 

employees’ daily activities or their comings-and-goings, despite the use of the words “Actual 

Cost.” Further, the clear and unambiguous language of Sections 2.02 and 4.02 of the PRAs 

contemplated possible agreed modifications and required “the Party requesting modification [to] 

notify the other Party” before the end of the month to change the employee reimbursement amount 

and the parties had to agree on any change to in amount.54 The requirement that such notification 

and agreement be made shows the monthly payment was intended to be fixed and provided no 

mandatory obligation to update it, based on the Dual Employees’ allocation of time or employment 

at any time. The court finds these provisions, taken together, leave no ambiguity or lack of clarity 

that the terms of the PRAs generally intended to set a fixed monthly amount for front-office 

services, for ease of implementation. The parties could always terminate with or without cause,55

or seek to modify the PRAs if the plugged-in amount seemed unreasonable over time.56 

C. The Amendments to the PRAs 

On December 14, 2018, (a) Highland and NexPoint entered into that certain Amendment 

Number One to Payroll Reimbursement Agreement (the “NexPoint PRA Amendment”), pursuant 

to which NexPoint paid an extra $1,300,000 to Highland, and (b) Highland and HCMFA entered 

into that certain Amendment Number One to Payroll Reimbursement Agreement (the “HCMFA 

PRA Amendment” and together with the NexPoint PRA Amendment, the “PRA Amendments”), 

pursuant to which HCMFA paid an extra $1,200,000 to Highland.57

54 See id. 55 Pl. Exs. 6 § 5.02; Pl. Ex. 8 § 5.02. 

56 Pl. Ex. 6 § 2.02; Pl. Ex. 8 § 2.02. 

57 Pl. Ex. 7 (NexPoint PRA Amendment); Pl. Ex. 9 (HCMFA PRA Amendment). 

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These PRA Amendments are short, sparsely worded documents. They simply indicate that 

the Advisors are agreeing to pay the additional amounts to Highland “representing an estimate of 

additional Actual Costs owed under the [PRAs] for additional resources used.”58 At Trial, Mr. 

Klos credibly testified that neither he, nor anyone else to his knowledge, ever performed an 

analysis of Highland’s actual costs under the PRAs to determine the extra amounts that ended up 

being paid to Highland under the PRA Amendments, and the PRA Amendments were only made 

because Highland was losing money rapidly and the Advisors had taxable income.59 Additionally, 

by December 1, 2018 (before the PRA Amendments were executed), the Advisors had knowledge 

that nine of the twenty-five Dual Employees listed in Exhibit A to the original PRAs were no 

longer employed by Highland.

60 Yet, the Advisors made additional lump sum payments

exceeding the fixed monthly amounts set forth in the PRAs. The Advisors claim it was their 

standard practice to perform annual “true-ups” of the various contracts in the Highland complex 

and that these the PRA Amendments were a “true-up,” which should be used to find that the PRAs 

did not contemplate flat amounts for services. But this would mean that the Advisors paid Highland 

$2.5 million on a PRA “true-up,” when they knew that over one-third of the Dual Employees under 

the PRAs were terminated during the relevant time period. Further, neither the Advisors nor any 

individual ever requested Exhibit A to the PRAs to be amended at any time prepetition. As of the 

Highland bankruptcy Petition Date (October 16, 2019), fourteen of the twenty-five Dual 

Employees were no longer employed at Highland. Mr. Dondero controlled both Highland and the 

Advisors at this time. To be clear, the Advisors had never taken the position that there were 

“overpayments” under the PRAs as of the Petition Date or sought modification of the PRAs. Mr. 

58 Id. 59 Tr. Transcript 4/12/22, Part 1 of 2, at 113:4-21. 60 Pl. Ex. 14 (responses to Interrogatories 3 and 4). 

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Waterhouse, who signed the PRA Amendments on behalf of both Highland and the Advisors, 

testified that he had no recollection of how the amounts set forth in the PRA Amendments were 

determined or whether it was actually a “true-up.” 

The court finds that nothing in the record suggests that the Advisors were doing a “trueup” when implementing the PRA Amendments. Nor do the additional amounts that were paid by 

the Advisors to Highland under the PRA Amendments suggest that the previously fixed monthly 

amount set forth in the PRAs was intended to be a variable amount. The court finds that the PRA 

Amendments were simply made with the purpose of funneling in more money to Highland to help 

with its liquidity crisis—with the added benefit of reducing the Advisors’ taxable income. 

D. Extrinsic Evidence: Post-Petition Communications and Continued Payments under 

the PRAs and SSAs 

The court will now roll forward and consider the extrinsic evidence from the postpetition 

time period that might shed light on the disputes in this Adversary Proceeding. Both Highland and 

the Advisors have taken the position that the Agreements are unambiguous—although they each 

have different interpretations as to what the Agreements mean. While the court is hard-pressed to 

find any ambiguity in the content of the Agreements,61 the court will analyze the extrinsic evidence 

presented, since the parties have submitted it, and want the court to consider it if ambiguity is 

deemed to exist as to the Agreements. 

In January 2020 (early during the Highland bankruptcy case), in response to inquiries from 

the Advisors’ Retail Board, Ms. Thedford sought information concerning expense reimbursements 

and allocations under the PRAs. Mr. Klos thereafter informed Ms. Thedford that such information 

“doesn’t exist in terms of current percentages.” Ms. Thedford then asked whether such information 

61 The court does think the title of the PRAs—Payroll Reimbursement Agreement—is rather ambiguous, given the 

content of the document. Also, the Exhibit A list of employees further injects some ambiguity, given the overall 

content of the Payroll Reimbursement Agreements. 

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was contained in Exhibit A to the PRAs. In response, Mr. Klos reminded Ms. Thedford that the 

allocations in Exhibit A were: 

a point in time estimate as of 2018. Half the people are gone now and if you were 

to reallocate them now, all the percentages would be different. On top of that, we 

don’t have anything comprehensive that is comparable for back office people so 

the only thing we can really provide is a stale percentage on a small subset of the 

overall population. 

Would be much more logical to do the yes/no and then as a blanket statement say 

that HCMFA/NPA pay $x/$y annually to HCMLP for these employees’ 

services.

62

Ms. Thedford responded by simply writing “Got it, thanks.”63

Also, in January 2020 (again, early in the Highland bankruptcy case and the month Mr. 

Dondero ceded control of Highland to the Independent Board under a stipulated corporate 

governance order), Mr. Waterhouse, the Treasurer of each of the Advisors, requested information 

from Mr. Klos concerning the “monthly amount for each agreement.”64 Mr. Klos responded to Mr. 

Waterhouse confirming the fixed amounts under the Agreements: 

Monthly amounts below 

HCMFA 

$416k flat for investment support 

$290k-300k for shared services 

NPA 

$252k flat for investment support 

$248k flat for shared services ($168k from NPA directly; $80k from NREA, but 

assume you’re looking for a consolidated number)65

There is no credible evidence that Mr. Waterhouse ever raised any concerns about the fixed 

monthly amounts being charged and, in fact, he continued approving payments for these exact 

62 Pl. Ex. 151 (emphasis added). 

63 Id. 64 Pl. Ex. 146. 

65 Id. (emphasis added). 

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amounts. Payments did not stop until December 2020, when Mr. Dondero, wearing his Advisors’ 

hat, directed Mr. Waterhouse to stop paying the amounts due under the Agreements. Then the 

Advisors filed their Application for Administration Expense Claim the very next month.66 While 

there was some testimony suggesting that concerns had been raised in early January 2020 

regarding possible overpayments under the PRAs to an individual named Fred Caruso (a financial 

advisor for the Debtor at the firm DSI),67 the court did not have compelling evidence of this—Fred 

Caruso did not testify, and Frank Waterhouse had a generally poor memory for the details about 

this. 

The court finds that these continued communications to officers of the Advisors confirming 

the amounts being paid under the Agreements, and the continued payments by the Advisors, after 

obtaining this information, is further evidence of the intent of the parties to structure the 

Agreements as fixed amount contracts. 

E. Extrinsic Evidence: Highland Performed under the Agreements Postpetition 

Significantly, there was extensive evidence at Trial that Highland performed at all times 

under the Agreements, and the Advisors made contemporaneous and repeated representations to 

their Retail Board that Highland was providing all services required under the Agreements. 

All parties agreed that, as required by the Investment Company Act, the Retail Board for 

the Advisors conducts an annual review whereby it determines whether to extend its own 

Investment Advisory Agreements with the Advisors. This is referred to as a “15(c) review” 

process. A witness Ethan Powell, a member of the Retail Board, credibly testified about all this.68 

66 Pl. Exh. 11. 

67 Tr. Transcript 4/13/22, Part 2 of 2 [DE # ], at 144. 

68 Tr. Transcript 4/13/22, Part 1 of 2 [DE # 114], at 4-34. 

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As part of this “15(c) review” process, and at other times during Highland’s bankruptcy 

case, the Advisors provided the Retail Board with information concerning the status of the shared 

services relationship, Highland’s provision of services thereunder, and contingency planning in 

case the Advisors’ shared services relationship with Highland was terminated. 

The Advisors provided this information to the Retail Board either in writing or orally 

during meetings of the Retail Board (the “Retail Board Meetings”). Minutes from the Retail Board 

Meetings were created in the ordinary course (the “Retail Board Minutes”). Ethan Powell testified 

that the Retail Board Minutes were adopted only after, among other things, the Advisors had an 

opportunity to review and edit their content to assure their accuracy.69

The Retail Board Minutes recite, among other things, that one or more of the Advisors’ 

officers (i.e., Mr. Waterhouse, Mr. Norris, Ms. Thedford, or Mr. Post) or their attorneys (i.e., 

Dennis C. Sauter, the Advisors’ in-house counsel, or K&L Gates, their outside counsel) were 

present and participated in every applicable Retail Board Meeting.70 

Mr. Powell further testified that the Retail Board: (a) assumed that the Advisors made the 

statements and representations reflected in the Retail Board Minutes on an informed basis after 

conducting due diligence, and (b) the Retail Board relied on the statements and representations 

made by or on behalf of the Advisors in the Retail Board Meetings.71

It is important to note that, in January 2020, Mr. Dondero had avoided the likely 

appointment of a Chapter 11 trustee in the Highland bankruptcy case, by ceding control of 

Highland to the three new Independent Board members. With Mr. Dondero’s loss of control of 

Highland, the Retail Board naturally sought information about whether this change would impact 

69 Id., at 9:15-10:24. 70 See generally Pl. Exs. 57-73. 71 See Tr. Transcript 4/13/22, Part 1 of 2 [DE # 114], at 11:22-12:6, 13:1-13. 

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Highland’s staffing. Thus, the Retail Board Minutes from the Retail Board Meeting, held on 

January 22, 2020, included the following entries: 

Ms. Thedford noted that the Meeting Materials included a headcount report that 

lists each employee associated with HCMLP and the Advisers and identifies 

whether the employee is dually employed by both HCMLP and an Adviser or 

pursuant to a separate arrangement, such as Mr. Norris’ employment with the 

Funds’ distributor, NexPoint Securities, Inc. . . . 

Mr. Norris discussed the shared services arrangements that each Adviser is a party 

to with HCMLP pursuant to which the Adviser may utilize employees from 

HCMLP for the provision of various services such as human resources, accounting, 

valuation, information technology services, compliance and legal. Mr. Norris 

noted, however, that many of these “third party” services are readily available on 

the open market.72

In response to the Retail Board’s request, the Advisors included in the “Meeting Materials” 

a list of every person employed in the Highland complex, including (a) name, (b) title, (c) 

department, (d) employing entity (e.g., Highland, HCMFA, NexPoint), (e) whether the person was 

a Dual Employee, (f) office location, and (g) whether the person was an “investment professional” 

or was providing “back office” services.”73

In mid-June 2020, Jason Post (“Mr. Post”), the Advisors’ Chief Compliance Officer, 

assured the Retail Board that the Advisors were “monitor[ing]” the “level and quality” of 

Highland’s shared services and that he was unaware of any disruptions: 

Mr. Post described the team members providing compliance and legal support 

services to the Funds and the Advisers. . . . Mr. Post stated he believed the 

Compliance department was adequately staffed. 

Mr. Post also discussed the quality and continuity of services provided to the Funds 

by HCMLP pursuant to shared services agreements with the Advisers in the context 

of the HCMLP bankruptcy. A discussion ensued during which Mr. Post responded 

to questions from the Board. He noted the regular updates provided to the Board 

and also discussed how the level and quality of services are being monitored and 

72 Pl. Ex. 57 at pp. 2-3. 

73 Pl. Ex. 75. 

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confirmed that he is not aware of any disruptions in the service levels provided to 

the Funds.

74

In August 2020, Dustin Norris (“Mr. Norris”), an Executive Vice President of each of the 

Advisors, represented to the Retail Board that “there had been no issues or disruptions in services 

as a result of the HCMLP bankruptcy matter,” although James P. Seery, Jr. (“Mr. Seery”), 

Highland’s new CEO (and a member of the court-appointed Independent Board), advised the 

Retail Board that certain conflicts might arise, given the differing investment strategies being 

adopted by Highland, on the one hand, and the Advisors, on the other: 

Mr. Norris next provided an overview of the 15(c) review materials and process 

and discussed the expected timeline with respect to Board consideration of approval 

of the renewals. He noted that there had been no issues or disruptions in services 

as a result of the HCMLP bankruptcy matter. 

Mr. Seery then pointed out to the Board a potential conflict of interest that had 

arisen with respect to an investment held by both HCMLP-advised funds and 

certain of the Funds. Mr. Seery explained that the HCMLP-advised funds were 

likely to seek to sell their interests in the investment. This divergence of investment 

objectives of HCMLP and the Funds, and the overlapping portfolio and 

administrative personnel of HCMLP and HCMFA and the NexPoint Advisors 

working on the matter, created a potential conflict between the two groups.75

In advance of a Retail Board Meeting to be held in September 2020, the Advisors sent a 

memorandum to the Retail Board in which they stated, among other things, that the “Advisors and 

HCMLP believe the current shared services being provided are generally consistent with the level 

of service that historically been received,” and further addressed potential conflict issues.76 

During the two-day Retail Board meeting held on September 17-18, 2020, the Retail Board 

was advised that Highland continued to perform all of the shared services and was provided with 

additional information concerning potential conflicts: 

74 Pl. Ex. 58 at p. 20 (emphasis added). 

75 Pl. Ex. 59 at pp. 6, 11. 

76 Pl. Ex. 18 at ACL 080581 (response to question 3). 

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Mr. Surgent joined the Meeting. During the discussion, he responded to the 15(c) 

follow-up questions submitted by the Board relating to HCMLP matters. He 

provided the Board with a status update on the HCMLP bankruptcy and 

discussed the impact of the HCMLP bankruptcy on the shared services 

arrangements with the Funds, noting he does not expect that the level and quality 

of services would change in the immediate term. Regarding the bankruptcy, 

Mr. Surgent reiterated Mr. Seery’s stated goal to achieve a consensual, omnibus 

resolution by the end of the year. To the extent this was not achievable, Mr. Surgent 

noted that an alternative plan had been filed by HCMLP. . . . He indicated that at 

this time it was business as usual with respect to the services provided to the 

Funds and that the Board would be notified immediately of any developments.77 

On October 9, 2020, Mr. Norris sent an e-mail to the Retail Board and other officers and 

agents of the Advisors (including outside counsel) to provide an interim update in which he advised 

the Retail Board that NexPoint was working on contingency plans to “ensure that there is no 

disruption in services”: 

We are working on full responses to your with [sic] 15(c) follow-up questions 

attached, however we want to keep you updated as it pertains to the continued 

developments with shared services and your first question on the attached. As it 

stands today, NexPoint’s senior management’s plan as a backup/contingency plan 

is to extend employment offers to the vast majority of HCMLP’s employees by 

12/31/2020. This will help ensure that there is no disruption in services to the 

Funds. Once we have further details of this we will advise. In the interim the 

plan is to continue with existing shared services.

78

A few days later, on October 13, 2020, Mr. Norris informed the Retail Board during a 

regularly scheduled meeting that, with respect to shared services, “all operations continued in the 

normal course there [sic] had been no material impact on the day-to-day operations of the Funds” 

and that contingency plans were “in place to continue to provide the same level and quality of 

services to the Funds”: 

Mr. Ellington then explained three various potential scenarios contemplated during 

the ongoing negotiations, including a full or partial buyout of certain creditor claims 

by Mr. Dondero or no agreement, which could potentially lead to liquidation of 

HCMLP and termination of all HCMLP employees. . . . 

77 Pl. Ex. 60 at pp 12-13 (emphasis added). 

78 Pl. Ex. 81 (emphasis added). 

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Mr. Sauter also discussed the status of the shared services agreements. In response 

to another question, Mr. Norris discussed the morale employees [sic] and noted 

that all operations continued in the normal course there [sic] had been no 

material impact on the day-to-day operations of the Funds. He indicated that 

there would not likely be any material developments with respect to the status of 

HCMLP until the end of the year at the earliest. The Board requested that the 

Advisers continue working toward developing definitive plan to ensure that the 

resources, both of personnel and equipment, are in place to continue to provide 

the same level and quality of services to the Funds and to continue to report back 

to the Board on the status.79

On October 23, 2020, the Retail Board asked whether there were “any material outstanding 

amounts currently payable or due in the future (e.g., notes) to HLCMLP [sic] by HCMFA or 

NexPoint Advisors or any other affiliate that provide services to the Funds.”80 As to that question, 

the Advisors informed the Retail Board that “[a]ll amounts owed by each of NexPoint and 

HCMFA pursuant to the shared services arrangement with HCMLP have been paid as of the 

date of this letter.”81

On October 28, 2020, the Retail Board was again told that: (i) Highland was expected to 

continue to provide shared services without interruption, (ii) the parties continued to work on a 

“seamless transition,” (iii) according to Mr. [Brian] Collins [HR manager], there had been no 

“significant departures” of employees, and that (iv) the “quality and level” of services had not been 

negatively impacted by Highland’s bankruptcy: 

Mr. Ellington provided an update on the HCMLP bankruptcy, focusing on the 

contingency plan for fund service providers if HCMLP is unable to perform its 

current functions. . . . He also noted that based upon on-going discussions with 

HCMLP, as well as in view of these alternative contingency plans, the Advisers do 

not expect any interruption to the services to the Funds that are currently being 

provided by HCMLP pursuant to the Shared Services Agreement. 

Mr. Collins noted that, although employees of HCMLP were not yet able to be 

released subject to confirmation of the plan of bankruptcy, he was confident in the 

firm’s ability to retain talent throughout this process based on discussions with 

79 Pl. Ex. 61 at pp. 2-3. 

80 Pl. Ex. 22 at 2. 

81 Id. 

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the employees. He noted that every employee team leader had been spoken to and 

also noted that there have been no significant departures to date. . . . 

The Advisers represented that the quality and level of services provided to the 

Funds by the Advisers and pursuant to the shared services arrangements had not 

been negatively impacted to date and that adequate plans were in place prevent 

any diminution of services as a result of any potential issues relating to the 

HCMLP bankruptcy that might arise. . . . 

The Board noted that the level and quality of services to the Funds by the Advisers 

and its affiliates had not been materially impacted by the HCMLP bankruptcy 

and took into account the Advisers’ representations that the level and quality of 

the services provided by the Advisers and their affiliates, as well as of those 

services currently being provided by HCMLP pursuant to the Shared Services 

Agreement, would continue to be provided to the Funds at the same or higher 

level and quality.

82

A week later, Mr. Norris again reassured the Retail Board that Highland continued to 

provide shared services on an uninterrupted basis and that no issues of “conflict” arose: 

Mr. Norris then noted that there has not been any disruption to the services 

provided to the Funds by HCMLP pursuant to the Shared Services Agreement 

and that he expects that such services will continue to be provided in normal 

course. In addition, Mr. Norris noted that there have been no issues with an 

HCMLP employee being conflicted out since the last update.83

By December 1, 2020: (a) Highland had sent the Termination Notices, indicating its intent 

to termination the Agreements; and (b) the Advisors had allegedly discovered the “overpayments 

under the Agreements.”84 Yet, the Advisors continued to reassure the Retail Board that everything 

was proceeding normally and that the parties were working to achieve an orderly, seamless 

transition. 

Indeed, on December 1, 2020, Mr. Post confirmed that Highland sent the Termination 

Notices and informed the Retail Board, among other things, that: 

On November 30, 2020, HCMLP provided notice of termination of the Shared 

Services Agreement to HCMFA/NPA, effective January 31, 2021. However, based 

82 Pl. Ex. 62 at pp. 2-3, 7. 

83 Pl. Ex. 63 at p. 3. 

84 Pl. Ex. 13 ¶16. 

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upon on-going discussions with HCMLP, HCMFA/NPA expects to be able to 

continue to receive these services through a transfer of personnel, equipment and 

facilities from HCMLP either to HCMFA/NPA or to a third-party service 

provider.85

On December 7, 2020, the Advisors provided written responses posed by Blank Rome, 

outside counsel to the Retail Board. In response to a question about who “is responsible for putting 

together the plan to continue to provide/transition shared services for the retail complex,” the 

Advisors stated: 

The senior management team of the Advisors is responsible for the transition of 

services, and this group is made up of Jim Dondero, D.C. Sauter, Jason Post, and 

Dustin Norris. This group is working with HCMLP management to ensure an 

orderly transition.

86

The Retail Board also asked for a “matrix of current services provided and services that 

will be transferred.” In response, the Advisors stated: 

Please see Appendix A below, which includes the list of services provided under 

the shared services agreement with HCMLP. These services fall into two broader 

categories: 1) Employees performing services and 2) Systems, infrastructure, 

software and supplies/equipment. As we understand it, the bankruptcy plan of 

reorganization approved by the bankruptcy court (the “Approved Plan”) anticipates 

the termination of all HCMLP employees by 1/31/21. The Advisors anticipate 

extending employment offers to the vast majority of HCMLP’s employees such 

that the employees would be rehired immediately upon termination of their 

employment with HCMLP. This will cover all of the services under category 1 

above.

87

During a Retail Board meeting held on December 10-11, 2020: (a) Mr. Norris reviewed 

the “current services provided under the shared services agreement with HCMLP and discussed 

the current plans for ensuring the continuation of those services after a plan of reorganization is 

85 Pl. Ex. 16. (December 1, 2020 email from Mr. Post) (emphasis added). 

86 Pl. Ex. 10 at 1 (emphasis added). 

87 Id. at 2 (emphasis added). 

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approved”; and (b) Mr. Sauter “noted that there has been no material attrition to date with respect 

to employees”: 

Mr. Norris provided responses to the Board’s follow up questions that had been 

submitted on their behalf prior to the Meeting. Among these items, Mr. Norris 

reviewed a matrix of current services provided under the shared services 

agreement with HCMLP and discussed the current plans for ensuring the 

continuation of those services after a plan of reorganization is approved. Mr. 

Norris noted that these shared services fell into two broader categories: (1) 

employees performing services and (2) systems, infrastructure, software and 

supplies/equipment. With respect to the first category, Mr. Norris discussed plans 

by the Advisers to extend employment offers to the vast majority of HCMLP’s 

employees such that the employees would be rehired immediately upon termination 

of their employment with HCMLP. In the alternative, these employees could join 

a newly formed entity (New Co) and continue to provide services to the Funds 

through NewCo. With respect to the second category, Mr. Sauter noted that the 

Advisers and HCMLP were in agreement that these would be assigned with a 

payment from the Advisers and that there were working groups set up that were 

pursuing an orderly transition of all of these items, which included orderly 

assignment and assumption of the relevant agreements needed to continue with all 

current services. He noted that there has been no material attrition to date with 

respect to employees. . . . Mr. Norris also discussed the Advisers’ proposed 

alternative plan and confirmed that regardless of whether the Advisers and 

HCMLP came to an agreement on shared services, such services would be 

continued to be provided to the Funds without interruption.

88

By January 2021, Highland had become embroiled in litigation with Mr. Dondero and had 

obtained temporary injunctive relief against him. However, the Advisors assured the Retail Board 

that this had no impact on the Advisors’ ability to obtain access to information and resources 

concerning the Retail Funds: 

Mr. Norris confirmed that the Advisers did not feel limited by the temporary 

restraining orders relating to the HCMLP bankruptcy with respect to access to 

Fund information. Mr. Norris then updated the board on a number of employee 

moves from HCMLP to NexPoint. In response to a question, Messrs. Post and 

Norris confirmed that there was sufficient legal and compliance coverage for the 

Funds. 

Mr. Norris then provided an update on the negotiations with HCMLP on the 

transition of shared services. He noted that both sides had agreed in principle on 

88 Pl. Ex. 64 at pp. 7-8. 

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the transition of services and cost sharing but that it was not yet memorialized in a 

contract and a number of details still needed to be resolved. He confirmed that the 

Advisers continued to receive full access to information and resources with 

respect to the Funds.

89

On January 29, 2021, Jackie Graham, NREA’s90 Director of Investor Relations and Capital 

Markets, sent an e-mail to Mr. Dondero, Mr. Sauter, and others in advance of a Board call in which 

she attached an outline of certain issues concerning shared services provided by Highland and 

stated, among other things, that: 

Because the [relevant Funds] are externally managed by external advisors 

(NexPoint Real Estate Advisors, L.P. and its affiliates (the “Advisors”)), the 

[relevant Funds] rely on the Advisors to provide certain services to them. The 

Advisors utilize Highland Capital Management, L.P. (“HCM”) to provide a 

certain subset of these services under a shared services agreement between HCM 

and the Advisors. . . . 

Employees of the Advisors are working with HCM to provide a transition of shared 

services from HCM to the Advisors or third party providers. . . . Specifically, the 

Advisors and affiliate advisors would pay a one-time fee of $400,000 and ongoing 

monthly costs of $270,000. Additionally, HCM may require the Advisors and 

affiliate advisors to pay previously unpaid fees allegedly owed to HCM totaling 

$5.5m. . . . 

Winston is reviewing potential legal remedies in the event HCM breaches the 

shared services by denying us access to our data held by HCM or otherwise 

attempts to cause harm to our shareholders . . .91

Eventually, a transition of shared services from Highland to a Newco entity known as 

Skyview was effectuated (Skyview being owned and operated by individuals previously employed 

by Highland). As the transition of the shared services from Highland to Skyview was nearing 

completion, the Advisors continued to reassure the Retail Board that all was well. On February 

26, 2021, Mr. Norris provided an update on the transition: 

Mr. Norris provided an update on the shared services arrangements and employee 

transitions. He indicated that there would be no impact as a result of certain 

89 Pl. Ex. 66 at pp. 2-3. 

90 “NREA” stands for NexPoint Real Estate Advisors, L.P., a subsidiary of NexPoint. 91 Pl. Ex. 84 at FUNDS 0000043-44 (emphasis added). 

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employees not transitioning to the Advisers and discussed the team in place and 

their qualifications. He noted that the current shared services arrangements with 

HCMLP would cease at the end of February and that the Advisers wish to move 

forward with new Shared Services Agreements between each Adviser and NewCo. 

He then stated that these Agreements were in the process of being drafted and 

finalized and will be reviewed with the Board at its next meeting. He indicated 

that there had been no major issues in connection with the transition and that 

the personnel from the Advisers had met with HCMLP with respect to data files 

and are comfortable that HCMLP will be providing the necessary information. 

In response to a question from the Board, he indicated that there was not an 

immediate need for such data and confirmed that the Advisers had the data and 

information files they needed with respect to Fund operations and services.92

Based on all the information and representations made by the Advisors, the NexPoint 

Diversified Real Estate Trust (one of the Advisors’ Clients) filed its annual report with the SEC in 

early 2022 (about a year after Highland commenced this Adversary Proceeding and the Advisors 

filed their administrative expense claims) in which it disclosed, among other things, the following: 

The Fund has retained NexPoint Advisors, L.P. (the “Investment Adviser”) to 

manage the assets of the Fund pursuant to an investment advisory agreement 

between the Investment Adviser and the Fund (the “Agreement”). . . . The Board 

of Trustees noted that the level and quality of services to the Fund by the 

Investment Adviser and its affiliates had not been materially impacted by the 

HCMLP bankruptcy and took into account the Investment Adviser’s 

representations that the level and quality of the services provided by the Investment 

Adviser and their affiliates, as well as of those services provided by Skyview to the 

Investment Adviser under the Skyview Services Agreement, would continue to be 

provided to the Fund at the same or higher level and quality.93

Pursuant to the evidence set forth above, the court finds that the Advisors made numerous 

representations to the Retail Board, before and after the Advisors allegedly became aware of the 

“overpayments” and ceased making payments to Highland under the Agreements, indicating that 

Highland had sufficiently performed all services provided under the Agreements. The court notes 

that, many times, the communications between the Advisors and the Retail Board (or the Retail 

92 Pl. Ex. 73 at pp. 9-10 (emphasis added). 

93 Pl. Ex. 77 at 41, 43 

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Board Minutes) refer to no interruption in “shared services.” The court interprets this to 

generically mean shared services under both the SSAs and PRAs. This is strong evidence that 

Highland, indeed, performed all services contemplated under the Agreements. 

F. Extrinsic Evidence that the Advisors had Knowledge of Employees Hired and 

Terminated by Highland, Both Pre- and Post-Petition 

In addition to the evidence detailed above, there is still more credible evidence that the 

Advisors had knowledge of when employees of Highland, including the Dual Employees, were 

hired and terminated by Highland. Among other things: 

x In their written responses to interrogatories, the Advisors admitted that they had 

contemporaneous knowledge of the termination of every Dual Employee;94

x Every month from at least October 2017 through January 2021, Highland’s 

Human Resources department (under the direction of a Mr. Brian Collins) 

prepared a “Monthly Headcount Report” (the “Monthly Headcount Reports”) 

listing every employee in the Highland complex and highlighting new hires and 

terminations and distributed such reports to numerous people, including the 

Advisors’ officers (i.e., Mr. Waterhouse, Ms. Thedford, and Mr. Norris);95

x Mr. Dondero was provided with extensive information concerning hires, 

terminations, and employee compensation and benefits during the Annual 

Reviews;96

x In early 2020, the Advisors provided detailed information to the Retail Board 

concerning all of Highland’s employees;97

Yet, despite having knowledge of Highland terminating certain employees, both when it 

was controlled by the Independent Board and when it was controlled by Mr. Dondero, the Advisors 

continued to approve and make payments in the same monthly amounts under the Agreements. 

94 Pl. Ex. 14 at pp 12-13 (responses to Interrogatories 3 and 4). 

95 Pl. Exs. 88-127. 

96 Pl. Ex. 86 at pp. 29-33; Pl. Ex. 142 at pp. 6-10. 97 Pl. Ex. 57; Pl. Ex. 75. 

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As earlier noted, as of May 1, 2018, when the Advisors entered the PRAs, four of the 

twenty-five Dual Employees on Exhibit A had already been terminated, and Mr. Waterhouse had 

every reason to know that cost allocations for terminated employees were being used when he 

signed the Agreements.98 

As also earlier noted, as of December 14, 2018, when the PRA Amendments paying 

Highland $2.5 million of extra compensation were entered, nine of the twenty-five Dual 

Employees on Exhibit A had already been terminated. Finally, as of the Petition Date, fourteen of 

the twenty-five Dual Employees on Exhibit A had already been terminated. 

Still, no change in the monthly payments (only the unexplained increase in payment made 

by the Advisors under the PRA Amendments that had no analysis done in connection with it) were 

ever made or requested by the Advisors under the PRAs. 

The court finds the Advisors had knowledge of the termination of Dual Employees under 

Exhibit A of the PRAs. Further, the court finds the Advisors continued making the same monthly 

payments under the PRAs, despite knowledge of the terminations, for 35 months. 

G. The Advisors Knowingly and Intentionally Made All Payments under the 

Agreements until November 30, 2020 

The evidence is undisputed that, from January 1, 2018 through November 30, 2020, the 

Advisors made all of the same monthly payments under the Agreements in exchange for the backoffice, middle-office, and front-office services provided to them by Highland. Each of the 

payments that the Advisors made under the Agreements between January and November 2020 

(when the new Independent Board controlled Highland) were exactly the same (or, in the case of 

the HCMFA SSA, utilized the exact same methodology) as the payments that the Advisors made 

98 Tr. Transcript 4/12/22, Part 2 of 2 [DE # 113], at 111:22-112:5. 

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under the Agreements between January 1, 2018 and December 31, 2019 (when Mr. Dondero still 

controlled Highland). 

It cannot be legitimately disputed that the Advisors had knowledge of the payments made 

under the Agreements. The evidence shows: (1) the Agreements were signed by Mr. Waterhouse, 

the Treasurer of the Advisors and the CFO of Highland;99 (2) Highland sought and obtained 

permission from Mr. Waterhouse before making payments under the Agreements as the officer of 

the Advisors;100 (3) Mr. Waterhouse testified that he, in his role as the Treasurer of the Advisors, 

was responsible for ensuring the Advisors paid the proper amounts under the Agreements;101 and 

(4) the Advisors represented to the Retail Board that “[a]ll amounts owed by each of NPA and 

HCMFA pursuant to the shared services arrangement have been paid.”102

The Advisors made an argument in their trial brief that Highland was simply paying itself 

without any involvement from any Advisor employee or officer. This statement is disingenuous, 

given Mr. Waterhouse’s testimony that he was the officer in charge of making sure the proper 

amounts were transferred under the Agreements and his regular approval of payments. 

The court finds, when considering the collective of this evidence, that the Advisors had 

knowledge of and authorized the payments by the Advisors to Highland under the Agreements. 

H. The Advisors’ Stoppage of Payments under the Agreements Late in the Bankruptcy 

Case 

As stated above, from the January 1, 2018 until November 30, 2020, the Advisors paid 

Highland the same fixed monthly amounts due and owing under the Agreements, without change 

or objection.103 

99 There is one exception. The NexPoint SSA, executed in 2013, was signed by James DOndero and by an 

individual named Brian Mitts. Pl. Exh. 2. 

100 See, e.g., Pl. Exs. 147, 152. 101 Tr. Transcript 4/12/22, Part 2 of 2 [DE # 113], at 69:19-25. 102 Pl. Ex. 22 at ACL 080593 (response to Question 2). 103 And, notably, without any request for a modification or “true-up” post-petition. 

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By the end of November 2020: (i) the Independent Board had demanded Mr. Dondero’s 

resignation (from his post-petition role as a portfolio manager for Highland); (ii) Mr. Dondero had 

begun interfering with Highland’s business and engaging in conduct that ultimately led to the 

imposition of injunctive relief; and (iii) Highland had delivered the termination notices for the 

SSAs.104 

It was around this time when Mr. Dondero instructed Mr. Waterhouse to stop making any 

payments to Highland on account of the Agreements. As a result, the Advisors failed to make 

payments under the Agreements for the months of December 2020 and January 2021 (and, in the 

case of the HCMFA SSA, also the month of November 2020). The court finds, and there is no 

dispute by the Advisors, that the Advisors intentionally did not make these payments to Highland 

under the Agreements. 

I. The Advisors’ Lack of an Attempt to Modify the PRAs 

As earlier noted, the Advisors claim that, in late 2019 or early 2020, after Highland had 

filed bankruptcy, Mr. Waterhouse raised the existence of overpayments with Fred Caruso (“Mr. 

Caruso”), an employee of Development Specialists, Inc. (“DSI”), before the new Independent 

Board of Highland was even appointed. Another employee of DSI, Brad Sharp, serve as the Chief 

Restructuring Officer in the bankruptcy, at that time (again, before the Independent Board was 

appointed). However, despite what was alleged in the Advisors’ pleadings, Mr. Waterhouse 

testified that he does not remember ever asking Mr. Caruso to amend the amounts under the PRAs, 

only that he made him aware that there might be overpayments.105 The Advisors and Mr. 

104 The termination notices did not mention the PRAs. Mr. Seery credibly testified that he does not know why the 

PRAs were not mentioned in the termination notices, but that they were rejected as part of the confirmed plan. Tr. 

Transcript 4/13/22, Part 1 of 2 [DE #114], at 62:1-63:21. 105 Tr. Transcript 4/12/22, Part 2 of 2, at 109:18-110:4. 

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Waterhouse claim that Mr. Caruso told Mr. Waterhouse that the PRAs could not be amended 

because of the automatic stay in place from the bankruptcy. There is no documentation of this 

discussion or any subsequent documentation of what Mr. Caruso or Mr. Waterhouse discussed—

only the testimony of Mr. Waterhouse where he couldn’t remember specifics. Mr. Caruso did not 

testify at Trial. 

There is no evidence that Mr. Waterhouse might have followed up with Mr. Caruso. Mr. 

Waterhouse never told anyone else affiliated with the Advisors that he had learned of potential 

overpayments, other than Scott Ellington (“Mr. Ellington”) and Isaac Leventon (“Mr. Leventon”) 

with Highland’s legal department, and this included not telling Mr. Dondero.106 Mr. Waterhouse 

never made Highland’s new Independent Board aware of the alleged potential overpayments, 

despite many interactions with the Independent Board.107 And notably absent from his testimony, 

was any claim that he made a formal request for modifications to the PRAs as the Advisors’ 

Treasurer, despite having knowledge of the alleged overpayments since at least late 2019, and 

likely since the PRAs were signed. 

Viewing the evidence in the light most favorable to the Advisors, they only raised the issue 

of potential overpayments to Highland in late 2019, through Mr. Caruso, Mr. Ellington, and Mr. 

Leventon. The Advisors never subsequently followed up with Mr. Caruso or informed Highland’s 

new Independent Board of the alleged overpayments after the Independent Board was put in place 

shortly after the alleged conversations with Mr. Caruso. Further, and most importantly, the court 

finds that the Advisors, based on the testimony of Mr. Waterhouse, never made a request to modify 

106 Tr. Transcript 4/12/22, Part 2 of 2, at 111:18-112:8. 107 Tr. Transcript 4/12/22, Part 2 of 2, at 114:15-25. 

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the payments under the PRAs during the relevant period before payments were withheld in 

November 2020. 

III. CONCLUSIONS OF LAW 

A. Jurisdiction and Venue 

Bankruptcy subject matter jurisdiction exists in this Adversary Proceeding, pursuant to 28 

U.S.C. § 1334(b), and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), and 

(O). The court has Constitutional authority to enter a final judgment in this Adversary Proceeding.

While Defendants, in their Original Answer, initially contested that core matters were involved 

and they did not consent to bankruptcy court adjudication,108 the parties later stipulated to final 

adjudication of these matters in the bankruptcy court.109 Venue is proper in this judicial district 

pursuant to 28 U.S.C. § 1409. 

B. Choice of Law 

The four relevant documents in the Adversary Proceeding are the HCMFA SSA, NexPoint 

SSA, HCMFA PRA, and NexPoint PRA. All four of these contracts contain choice of law 

provisions that the Agreements “will be governed and construed in accordance with the laws of 

the State of Texas.”110 Accordingly, Texas law applies to the claims at issue. 

C. The Advisors’ Claims for Overpayment under the PRAs 

The Advisors seek an administrative expense claim for alleged overpayments they made 

under the PRAs from the Petition Date until November 30, 2020 (the date the Advisors ceased 

making any payments under the PRAs). 

108 DE # 33 in AP, ¶ 10. 109 DE # 37 in AP, ¶ 2. 110 Pl. Ex. 2 § 9.05; Pl. Ex. 3 § 8.04; Pl. Ex. 6 § 6.05; Pl. Ex. 8 § 6.05. 

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As set forth in the Joint Pretrial Order filed in this Adversary Proceeding, the Advisors 

contend that each of the Advisors were required to reimburse Highland for its actual costs of the 

Dual Employees listed on the Exhibit A’s to the PRAs, but that as of the Petition Date, many of 

the Dual Employees (fourteen out of twenty-five) were no longer employed at Highland. 

Therefore, the Advisors argue, during this period, they were essentially paying Highland for Dual 

Employees who were no longer employed by Highland and that such payments constituted 

overpayments under the PRAs. The Advisors maintain that their monthly payments under the 

PRAs resulted in overpayments by the Advisors to Highland totaling $7,649,942, broken down as 

$4,928,103 in post-petition overpayments by HCMFA and $2,721,839 in post-petition 

overpayments by NexPoint. The Advisors’ overpayment claim is premised on the contention that 

the Advisors were only required to pay for “actual costs and expenses” relating to each particular 

Dual Employee. 

Alternatively, the Advisors argue that if their interpretation of the PRAs is incorrect—such 

that the PRAs contemplated fixed monthly payments and Section 2.02 of the PRAs would have 

required a modification of the PRAs in order to reduce the required monthly payment to conform 

to a smaller number of Dual Employees—then the court should find that the Advisors did, indeed, 

seek to modify the fixed monthly amounts under Section 2.02, but that Highland failed to negotiate 

the same in good faith as required by such section. 

In response, Highland argues that the PRAs clearly and unambiguously require that the 

Advisors pay a flat monthly amount for investment advisory services rendered, regardless of which 

employees actually performed those services, unless the parties agreed otherwise in writing 

pursuant to Section 2.02. Highland also argues that parole evidence and the parties’ uninterrupted 

course of dealing proves that the parties intended for the Advisors to pay a fixed monthly amount 

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for investment advisory services, unless modified pursuant to Section 2.02. Highland further 

argues that the Advisors never sought modification and that their claims have been (a) waived and 

(b) are barred by the voluntary payment rule. 

i. The PRAs are Unambiguous as a Matter of Law 

Under Texas law, a party claiming breach of contract has the burden to prove the following 

elements: “(1) the existence of a valid contract; (2) performance or tendered performance by the 

plaintiff; (3) breach of the contract by the defendant; and (4) damages to the plaintiff as a result of 

the defendant's breach.” Williams v. Wells Fargo Bank, N.A., 884 F.3d 239, 244 (5th Cir. 2018) 

(internal citations omitted). The court’s primary role in interpreting a contract is “to determine the 

parties’ intent as reflected in the [contract’s] terms.” Chrysler Ins. Co. v. Greenspoint Dodge of 

Houston Inc., 297 S.W.3d 248, 252 (Tex. 2009). “Contract language that can be given a certain or 

definite meaning is not ambiguous and is construed as a matter of law.” Id. “If the contract is 

capable of being given a definite legal meaning, parole evidence is generally not admissible to 

create an ambiguity.” Kendziorski v. Saunders, 191 S.W.3d 395, 405 (Tex. App. – Austin 2006). 

“Whether a contract is ambiguous is a question of law for the court to decide by looking at the 

contract as a whole in light of the circumstances present when the contract was entered into.” BCC 

Merchant Solutions, Inc. v. Jet Pay, LLC, 129 F.Supp.3d 440, 466 (N.D.Tex. 2015) (internal 

quotations omitted); see also Watkins v. Petro-Search, Inc., 689 F.2d 537, 538 (5th Cir. 1982) 

(“[W]hen a question relating to the construction of a contract or its ambiguity is presented, the 

court is to take the wording of the contract in the light of the surrounding circumstances, in order 

to ascertain the meaning that would be attached to the wording by a reasonably intelligent person 

acquainted with all operative usages and knowing all the circumstances prior to and 

contemporaneous with the making of the integration”). 

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A contract is unambiguous and will be enforced as written where it is “susceptible to only 

one reasonable construction.” BCC Merchant, 129 F.Supp.3d at 477. “[A] cardinal rule of contract 

interpretation under Texas law is that the entire writing must be examined” and “no single 

provision taken alone [may] be given controlling effect.” Id. (citing Texas law) (internal 

quotations omitted). “Where the language is clear and definite, the contract is not ambiguous, and 

a court must apply the plain language as a matter of law.” Main Street Bank v. Unisen, No. H-06-

3776, 2008 WL 11483415, at *4 (S.D.Tex. Feb. 15. 2008). 

Thus, the court begins its analysis by looking at the plain language of the PRAs. In both of 

the PRAs, Section 2.01 mandated that the Advisors were required to pay Highland the “Actual 

Cost” of the services provided by the Dual Employees.111 However, despite the use of the words 

“Actual Cost,” and an Exhibit A attachment purporting to list out the Dual Employees, the PRAs 

defined that term “Actual Cost” under Article I as a specific dollar amount. The PRAs defined 

“Actual Cost” as equal to $252,000 per month for NexPoint and $416,000 per month for 

HCMFA.112 There was no requirement of periodic reevaluation of the Actual Cost; no automatic 

adjustments to the Actual Cost amounts, for such things as employee comings-and-goings or 

employee changes in job duties; and no mention of a “true-up” annually or at any other time. The 

PRAs simply plugged in a decisive monthly amount. 

Section 4.02 of the PRAs required any party seeking modifications to amounts paid under 

the definition of “Actual Cost” to make a request on the other party “on or before the last business 

day of the calendar month.” Further, Section 2.02 permitted the parties to “agree to modify the 

terms and conditions” of the amounts paid and the parties were required to negotiate any 

111 Pl. Ex. 6 § 2.01; Pl. Ex. 8 § 2.01. 112 Pl. Ex. 6 Article I; Pl. Ex. 8 Article I. 

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modification requested in good faith. Finally, Section 6.02 required that any amendment to the 

PRAs to be in writing by all parties. 

These are the PRA provisions that are germane to the disputes in this Adversary 

Proceeding. When reading these provisions within the entirety of the PRAs, the court concludes 

that the PRAs are unambiguous as a matter of law. Section 2.01 and an accompanying Article I 

definition of “Actual Cost” set forth a flat monthly amount; the parties agreed that this flat monthly 

amount would be deemed to be the “Actual Cost” of the front-office services that Highland was 

providing to the Advisors, through the Highland employees. The accompanying Sections 2.02, 

4.02, and 6.02 allowed for a modification of these amounts, but only if a party notified the other 

party on or before the last business day of a calendar month that it requested such a modification. 

If the parties agreed to a modification, there had to be a written agreement memorializing the 

amendment. 

The Advisors seem to argue that Sections 2.02 and 4.02 imposed an affirmative obligation 

on Highland to update the list of Dual Employees and their respective Allocation Percentages, or 

to unilaterally adjust the “Actual Costs.” The literal wording of these provisions does not support 

such an obligation. Under the Advisors’ interpretation of the PRA, Highland would have been 

obligated to invoke Section 4.02 (which is itself dependent on Section 2.02) on the Advisors’ 

behalf and to adjust the Advisors’ monthly payments as Dual Employees were terminated, or as 

changes were made in their compensation or Allocation Percentages. But again, that is simply not 

what the PRAs provide. The PRAs use the words the “Parties may agree to modify the terms” 

when assigning the obligation under Section 2.02, which the preamble defines as both Highland 

and the Advisors. Further, Section 4.02 requires “the Party requesting modification” to notify “the 

other Party.” Notably, Section 4.02 does not put this obligation solely on Highland as it uses 

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“Party” to refer to either party to the contract, whereas it uses “HCMLP” specifically when 

assigning obligations to Highland elsewhere in the PRAs. The court concludes that the 

unambiguous language put no unilateral obligation on Highland to amend the PRAs to reflect 

changes in Dual Employees, but rather on both the parties to negotiate such amendments. 

ii. Even if the PRAs Were Ambiguous, Extrinsic Evidence Supports 

a Fixed Payment Interpretation

As stated above, the court concludes that the PRAs are not ambiguous, and that the only 

reasonable interpretation of the PRAs is they contemplate a fixed monthly payment. In fact, the 

only aspects of the PRAs that give the court any pause regarding ambiguity are as follow: (a) the 

title of the PRAs (i.e., Payroll Reimbursement Agreement—suggesting an intention to reimburse 

payroll costs); and (b) the fact that there was a list of employees attached as Exhibit A. Why use 

the term “reimbursement” or attach a list of employees if these words/concepts were not really 

dispositive of anything? If these two aspects of the PRAs make them ambiguous, then the court 

is required to consider the wording of the contract in the light of the surrounding circumstances, 

in order to ascertain the meaning the agreements, as might be given by a reasonably intelligent 

person acquainted with all operative usages, and knowing all of the circumstances prior to and 

contemporaneous with the making of the agreements. See Watkins v. Petro-Search, 689 F.2d at 

538. 

The Findings of Fact set out a plethora of evidence that established that the parties always 

contemplated fixed amounts being used to pay Highland for providing front-office services to the 

Advisors. This evidence included, among other things: (1) Mr. Klos credibly testifying that the 

PRAs, and Exhibit A’s, were created to reflect payments, in conjunction with the other 

Agreements, that equaled the annual amounts that Mr. Dondero wanted transferred to Highland 

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after the 2017/2018 Annual Review to deal with Highland’s cash liquidity problems (recall that 

prior to 2018, Highland provided sub-advisory services to the Advisors for free and Highland was 

facing an imminent loss of its Acis sub-advisory fees); (2) Mr. Waterhouse testifying that he was 

aware that four of the Dual Employees had been terminated at the signing of the PRAs, yet did not 

seek to update the Dual Employee allocations on the Exhibit A’s at any point to reflect this; (3) 

employees and officers of the Advisors received Monthly Headcount Reports from Highland, 

detailing the hiring and termination of employees, including the Dual Employees during the 

relevant period; (3) the Exhibit A’s were never updated, even though Dual Employees were 

terminated over time, and no one was ever asked to update them; (4) Mr. Waterhouse, as the 

Advisors’ Treasurer, had knowledge of Dual Employees being terminated or otherwise leaving 

Highland, and continued to approve payments under the PRAs on 35 separate occasions; (5) Mr. 

Klos communicated with Mr. Waterhouse in January 2020, during which Mr. Klos confirmed to 

Mr. Waterhouse that the Agreements were “flat” amount payments and the same amounts had been 

paid since the PRAs were signed; and (6) no request for an amendment to the PRAs was made 

through November 2020 (except for the 2018 PRA Amendments—pursuant to which $2.5 million 

extra was paid to Highland on account of the PRAs, even though five more employees on the 

Exhibit A lists had left Highland since execution of the PRAs). 

In summary, this extrinsic evidence further supports a conclusion that the PRAs were fixed 

rate contracts, if the PRAs should be determined to be ambiguous. This extrinsic evidence reveals 

that the Advisors were aware Dual Employees were being terminated, made no request for an 

amendment to the PRAs, and continued to make payments under the PRAs until Mr. Waterhouse, 

under the direction of Mr. Dondero, stopped making payments in November 2020. 

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Given that the court has concluded that the PRAs were fixed rate arrangements, the 

Advisors have failed to meet their burden of proving overpayments under the PRAs. 

iii. Highland Did Not Fail to Negotiate in Good Faith

The court noted above that Section 2.02 of the PRAs included language that required the 

parties to negotiate in good faith when a party notifies the other party that it is requesting a 

modification, pursuant to Section 4.02, before the last business day of the calendar month. The 

Advisors allege that Highland never negotiated in good faith when the Advisors supposedly made 

Highland aware (through Highland’s consultant, Mr. Fred Caruso) that overpayments under the 

PRAs may have been made, and Mr. Caruso told the Advisors that an amendment could violate 

the automatic stay in bankruptcy. 

The court has already found and concluded that: (a) the PRAs unambiguously created a 

fixed amount contract; (b) Highland was under no duty to unilaterally modify the PRAs if it knew 

that Dual Employees were terminated; and (c) the Advisors failed to provide sufficient evidence 

that they made a formal request of Highland to modify the fixed monthly amount, pursuant to the 

terms of the PRAs.113 Thus, the Advisors never triggered Highland’s obligation under Section 

2.02. Specifically, without a formal notification/request of the type set forth in Section 4.02 of the 

PRAs, Highland’s obligation to negotiate in good faith could not exist. Discussing potential 

overpayments with a third-party consultant (Mr. Caruso)—assuming such overpayments could 

even be possible—is not enough. Additionally, if the automatic stay was a valid concern of the 

Advisors (potentially impairing their ability to exercise contractual rights under the PRA), there 

were options available to them, including filing a motion for relief from stay to exercise 

113 The Advisors, in their pleadings, claimed Mr. Waterhouse made such a request in late 2019 in his conversations 

with Mr. Caruso. However, Mr. Waterhouse testified that they talked about overpayments possibly being made, but 

that he never recalled requesting amendment of the PRAs. 

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termination rights (termination was permissible under the PRAs, with or without cause, on 60-day 

notice)114 or filing a motion to compel rejection of the PRAs pursuant to Bankruptcy Code section 

365. 

As such, the court concludes that Highland did not fail to negotiate in good faith under 

Section 2.02. 

iv. Highland’s Waiver Defense to Overpayments under the PRAs

Alternatively, if the PRAs should be construed to have contemplated variable amounts—

that should have changed automatically as Dual Employees departed, as opposed to fixed rate 

amounts—Highland argues that the preset monthly amounts listed in the PRAs were controlling 

until the Advisors made a request under Section 2.02 to change those monthly amounts, and that 

the Advisors waived any right to overpayments by not making such a request or objecting to 

payments under the PRAs for all the many months during which Dual Employees were being 

terminated. 

“Under Texas case law, waiver is the intentional relinquishment of a known right or the 

intentional conduct inconsistent with claiming that right.” Sedona Contracting, Inc. v. Ford, 

Powell & Carson, Inc., 995 S.W.2d 192, 195 (Tex. App. 1999). The elements of waiver include: 

(1) an existing right, benefit, or advantage held by a party; (2) the party’s actual or constructive 

knowledge of its existence; and (3) the party’s actual intent to relinquish the right or intentional 

conduct inconsistent with the right (which can be inferred from the conduct). See id.; see also

Ulico Cas. Co. v. Allied Pilots Ass'n, 262 S.W.3d 773, 778 (Tex. 2008); Tenneco Inc. v. Enter. 

Products Co., 925 S.W.2d 640, 643 (Tex. 1996) (“The affirmative defense of waiver can be 

114 Pl. Ex. 6 § 5.02; Pl. Ex. 8 § 5.02. 

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asserted against a party who intentionally relinquishes a known right or engages in intentional 

conduct inconsistent with claiming that right.”). 

Waiver “results as a legal consequence from some act or conduct of the party against whom 

it operates” and is “essentially unilateral in character,” meaning “no act of the party in whose favor 

it is made is necessary to complete it.” Shields Ltd. P'ship v. Bradberry, 526 S.W.3d 471, 485 

(Tex. 2017) (quotation marks omitted). “Silence or inaction, for so long a period as to show an 

intention to yield the known right, is also enough to prove waiver.” Tenneco, 925 S.W.2d at 643. 

While waiver is ordinarily a question of fact, when the surrounding facts and circumstances 

are undisputed, the question becomes one of law. Motor Vehicle Bd. of Tex. Dep't of Transp. v. El 

Paso Indep. Auto. Dealers Ass'n, Inc., 1 S.W.3d 108, 111 (Tex. 1999); Tenneco, 925 S.W.2d at 

643. 

The first element is met here. Pursuant to Sections 2.02 and 4.02 of the PRAs, the Advisors 

had the right to seek a change to the fixed monthly rate if they believed a change was appropriate. 

There is no dispute over the second element. The PRAs were signed by Mr. Waterhouse as 

an officer of both Highland and the Advisors. Further, the Advisors have never disputed having 

knowledge of Sections 2.02 and 4.02 under the PRAs during the relevant period. 

The third and final element is the most pertinent under the analysis for waiver—the 

question being whether the actions or inactions of the Advisors were sufficient to show an intention 

to relinquish their right to modify the PRAs. Relevant here: (a) the Advisors (through their officers 

Mr. Waterhouse, Mr. Norris, and Ms. Thedford) were kept up to date from before the PRAs were 

signed until after November 30, 2020, by Monthly Headcount Reports created by Highland and 

distributed to these officers; (b) the Advisors signed the PRAs on May 1, 2018, at which time, the 

Advisors knew four of the twenty-five Dual Employees under the attached Exhibit A’s had been 

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terminated; (c) the Advisors entered into the PRA Amendments in December 2018, when they had 

knowledge that nine of the twenty-five Dual Employees had been terminated—instead of 

attempting to amend under Sections 2.02 and 4.02, to reduce the monthly payments, to reflect the 

reduced number of Dual Employees, the Advisors paid Highland an additional sum of $2.5 million 

and never requested an amendment thereafter; and (d) on the Petition Date in October 2019, the 

Advisors were aware that fourteen of the twenty-five Dual Employees had been terminated; yet, 

from the Petition Date to November 30, 2020, the Advisors never made a request to modify the 

PRAs under Sections 2.02 and 4.02 and continued to pay the fixed amounts, despite knowledge 

that over half the Dual Employees had been terminated. 

In summary, the Advisors did not exercise their alleged right to correct the monthly flat 

amount, to account for alleged overpayments, for almost three years (from the time the contract 

was signed until November 30, 2020). Mr. Waterhouse authorized payments under the PRAs for 

almost three years—i.e., thirty-five times. 

The court notes again that Mr. Waterhouse, when asked directly, did not recall ever 

requesting that the PRAs be amended in his conversations with Mr. Caruso and also failed to ever 

make a request to amend to Highland’s new Independent Board. The Advisors do not claim to 

have made a request for amendment to the PRAs, despite claiming that Highland failed to negotiate 

in good faith when Mr. Caruso allegedly suggested the automatic stay might prevent amendments 

to the PRAs. 

The waiver here cannot be remedied by the general non-waiver provisions in the PRAs.115 

A nonwaiver provision in a contract that purports to absolutely bar waiver in the most general of 

terms might be wholly ineffective and itself can be waived. Shields Ltd. P'ship v. Bradberry, 526 

115 See Section 6.02 of Pl. Exh. 6 and Pl. Exh. 8. 

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S.W.3d 471, 484 (Tex. 2017) (while contrarily noting that specific non-waiver provisions noting 

specific actions or inaction that will not result in waiver are wholly enforceable). Nothing in the 

general non-waiver provisions in the PRAs provided any specificity as to the above actions or 

nonactions of the Advisors regarding amendment to the PRAs that would prevent waiver. 

The Advisors never exercised their rights under Sections 2.02 and 4.02 of the PRAs and, 

indeed, acted counter to those rights by continuing to make payments without requesting 

amendment to the fixed monthly amounts from the time that the PRAs were signed until November 

30, 2020, while simultaneously having knowledge that many of the Dual Employees were gone. 

Accordingly, the court concludes that Highland has met its burden of proof that the Advisors 

waived any amounts of alleged overpayments that might have been properly remedied by 

amendment of the monthly rates under Sections 2.02 and 4.02. 

v. Highland’s Defense to Overpayments under the Voluntary Payment Rule

Highland also raised the voluntary payment rule as a defense to the Advisors claims of 

overpayments. Under the voluntary payment rule, “money voluntarily paid on a claim of right, 

with full knowledge of all the facts, in the absence of fraud, duress, or compulsion, cannot be 

recovered back merely because the party at the time of payment was ignorant of or mistook the 

law as to his liability.” Miga v. Jensen, 299 S.W.3d 98, 103 (Tex. 2009). “The rule is a defense to 

claims asserting unjust enrichment; that is, when a plaintiff sues for restitution claiming a payment 

constitutes unjust enrichment, a defendant may respond with the voluntary-payment rule as a 

defense.” XTO Energy Inc. v. Goodwin, 584 S.W.3d 481, 497 (Tex. App. 2017). Highland 

contends that the Advisors overpayment claims under the PRAs are essentially ones for unjust 

enrichment and, thus, the voluntary payment rule is a proper defense to such claims. 

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In response, the Advisors contend that the voluntary payment rule cannot be asserted in 

regard to a breach of contract claim, which is what the Advisors contend they are claiming (i.e., 

not unjust enrichment). Texas case law cited by the Advisors states, “although the voluntarypayment rule may have been widely used by parties and some Texas courts at one time, its scope 

has diminished as the rule’s equitable policy concerns have been addressed through statutory or 

other legal remedies.” BMG Direct Mktg., Inc. v. Peake, 178 S.W.3d 763, 771 (Tex. 2005). “Like 

other equitable claims and defenses, an adequate legal remedy may render equitable claims of 

unjust enrichment and equitable defenses of voluntary-payment unavailable.” Id. at 770. While not 

completely abrogated, the rule today has only “limited application in Texas jurisprudence.” Id. at 

771. 

The court need not decide the scope and applicability of the voluntary payment rule to the 

disputes under the PRAs at this time. The court has already found and concluded that the PRAs 

are unambiguous and created a fixed amount payment arrangement. The court has also found and 

concluded that, even if the PRAs were ambiguous, the extrinsic evidence supports the 

interpretation that the PRAs created a fixed amount payment arrangement. Further, the court has 

found and concluded that, even if the PRAs were not intended to be fixed amount payment 

arrangements, the Advisors waived their right to modify by continuing to make payments with 

knowledge of terminated Dual Employees for three years. 

D. The Advisors’ Claims under the SSAs 

i. The Advisors’ Claim for Breach of Contract under the SSAs

Turning to the SSAs—which were less of a focus at Trial than the PRAs—the Advisors 

claim that Highland breached the SSAs by failing to perform certain services owing to the 

Advisors, including legal and compliance services, thereunder. The Advisors contend that on or 

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around July 2020, Highland instructed its employees to cease providing certain services to the 

Advisors which Highland believed were adverse to the interests of Highland. The Advisors 

maintain that this forced the Advisors to retain two new employees to “cover” for such lost 

services, resulting in $425,000 in damages. The Advisors also contend that they were forced to 

pay Highland $1 million for legal services that Highland was no longer providing, resulting in $1.3 

million in payments post-petition for services that Highland failed to provide. The Advisors seek 

damages for overpayments and breaches of the SSAs totaling $1,725,000. 

As stated above, the elements of breach of contract under Texas law are: (1) the existence 

of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the 

contract by the defendant; and (4) damages to the plaintiff as a result of the defendant's breach. 

Williams, 884 F.3d at 244. 

Highland argues that the Advisors have not met their burden of proving the elements of 

breach or damages. Highland argues that the evidence, to the contrary, shows that Highland 

continued to perform under the SSAs—not the least of which was the evidence of the Advisors’ 

continuous representations to the Retail Board that the quality of services under the agreements 

with Highland had not deteriorated. 

As discussed extensively in the court’s Findings of Fact above, the Advisors made 

numerous repeated representations to the Retail Board that performance under the SSAs continued 

as normal following July 2020—despite the Advisors now alleging that legal and compliance 

services were withheld. 

To recap, in August 2020, the Advisors represented to the Retail Board that “there had been 

no issues or disruptions in services as a result of the HCMLP bankruptcy matter” and that the 

Advisors believed “the current shared services being provided are generally consistent with the 

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level of services that historically have been received.”116 In September and October 2020, the 

Advisors continued their representations that shared services continued to be properly provided. 

During a two-day meeting of the Retail Board, on September 16-17, 2020, the Advisors told the 

Retail Board that they do “not expect that the level and quality of services would change in the 

immediate term, and Mr. Norris stated he was “comfortable with the level and quality of services 

being provided and has not seen any issue with the conflicts process.”117 On October 9, 2020, the 

Advisors told the Retail Board there were “contingency plans” being formulated but “[i]n the 

interim the plan is to continue with the existing services.”118 On October 13, 2020, Mr. Norris 

represented to the Retail Board that “all operations continued in the normal course [sic] there had 

been no material impact on the day-to-day operations of the Funds”.119 On October 28, 2020, the 

Advisors continued to reassure the Retail Board by saying Highland and the Advisors were 

working on a “seamless transition” and the “quality and level” of services had not been negatively 

impacted by Highland’s bankruptcy.120 A week after that, the Retail Board was told there “has not 

been any disruption to the services provided to the Funds by HCMLP pursuant to the Shared 

Services Agreement”.121 The Advisors continued to communicate with the Retail Board in 

December 2020 and January 2021 but never made any representation Highland had provided any 

less quality or level of services than it had previously under the SSAs. 

Based on their own representations to the Retail Board, the court finds and concludes that 

the Advisors have failed to meet their burden for proving the element of breach by Highland for a 

lack of services provided under the SSAs. 

116 Pl. Ex. 59; Pl. Ex. 18. 117 Pl. Ex. 60. 118 Pl. Ex. 81. 119 Pl. Ex. 61. 120 Pl. Ex. 62. 121 Pl. Ex. 63. 

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Further, based on those same representations and no other evidence showing otherwise, the 

Advisors did not meet their burden of showing damages as a result of the alleged breaches. The 

Advisors failed to show that the “loss” from employing two new employees to provide certain 

legal services were caused by Highland’s failure to perform under the SSAs. 

ii. The Advisors’ Claim for Overpayment under the SSAs

Finally, the Advisors also have brought a claim for overpayments under the SSAs, asserting 

that they overpaid Highland by $1 million for legal services that Highland stopped providing. This 

claim, like the Advisors’ breach of contract claim, relies on the court concluding that the Advisors 

have satisfied their burden of showing Highland did not perform under the SSAs. Relying on the 

analysis above, the court concludes that the Advisors have not satisfied their burden of showing 

Highland failed to provide any services contracted for under the SSAs and, thus, cannot succeed 

on their claim for overpayment. 

iii. Highland’s Waiver Defense to the Advisors’ Claims under the SSAs

If the court were to find that Highland had breached the SSAs, Highland alternatively 

pleaded the defense of waiver, similar as it did with regard to the Advisors’ claims under the PRAs. 

The elements of waiver, again, include: (1) an existing right, benefit, or advantage held by 

a party; (2) the party’s actual or constructive knowledge of its existence; and (3) the party’s actual 

intent to relinquish the right or intentional conduct inconsistent with the right (which can be 

inferred from the conduct). Sedona Contracting, Inc., 995 S.W.2d at 195. 

The Advisors don’t dispute that they signed the SSAs and were aware of the terms of the 

SSAs. 

Again, similar to waiver under the PRAs, the third element requires the most analysis here. 

The Advisors have admitted that Mr. Waterhouse oversaw and authorized all payments made 

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under the SSAs. The Advisors never made objections to making such payments under the SSAs 

as they were making them. Further, the Advisors never raised any objection to the payments with 

Highland to put them on notice. In fact, quite the opposite, the Advisors made representations to 

the Retail Board, detailed above, that everything was running smoothly with regard to the services 

provided under the SSAs. The Advisors knowingly and intentionally made payments every month 

under the SSAs until November 30, 2020 but decided not to raise the issue at any point with 

Highland until they stopped paying under the SSAs. 

The Advisors’ conduct is inconsistent with asserting rights under the SSA. The Advisors 

hired two new employees to perform certain services under the SSAs, allegedly indicating that 

they thought the SSAs were being breached. Yet, the Advisors continued authorizing the same 

payments to Highland. The Advisors did not tell Highland that it believed required services were 

not being provided and did not assert an administrative expense claim at the time. 

 If silence were not enough, as detailed above, the Advisors made numerous representations 

to the Retail Board after the supposed breach that everything was operating as normal under the 

SSAs, and Highland’s service were of the same “quality and level” as always. 

The Advisors conducted themselves intentionally in a manner inconsistent with asserting 

their claims of breach of the SSAs. Accordingly, the court concludes the Advisors have waived 

their claims resulting from the payments under the SSAs. 

D. Highlands’ Breach of Contract Claims Relating to All Four Agreements 

Finally, Highland has claimed breaches of contract by the Advisors under all four of the 

Agreements due to nonpayment under each Agreement for certain months, starting in November 

 

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2020. The months in which Highland claims nonpayment are as follows: 

Agreement Months of Nonpayment Amounts Unpaid 

HCMFA SSA November 2020, December 2020, 

and January 2021 

$924,000122

HCMFA PRA December 2020 and January 2021 $832,000 

($416,000/month) 

NexPoint SSA December 2020 and January 2021 $336,000 

($168,000/month) 

NexPoint PRA December 2020 and January 2021 $504,000 

($252,000/month) 

Highland also sought damages relating to the nonpayment of fees under its Shared Service 

Agreement with NREA. NREA is a wholly owned subsidiary of NexPoint. The SSA with NREA 

apparently had a monthly fee of $80,000 every month, the payment on which also ceased in 

November 2020. While there was evidence to support this arrangement existed (for example, Mr. 

Waterhouse confirmed there was an SSA between Highland and NREA),123 the NREA SSA itself 

was not submitted into evidence and NREA is not listed as a defendant to this Adversary 

Proceeding. The court concludes that, even though NREA is apparently a subsidiary of NexPoint, 

no sufficient theory of liability has been argued as to why NexPoint should be held liable for an 

agreement Highland made with NREA. As such, the court will not grant relief related to the alleged 

NREA SSA in connection with this Trial. 

The burden of proving the elements of breach of contract for its claims asserted now 

switches to Highland. As stated above, the elements are: (1) the existence of a valid contract; (2) 

122 The HCMFA SSA was the one and only agreement with a variable fee arrangement. Highland made this calculation 

by taking the most recent payment due in November of $308,000 and multiplying that number by three for the three 

months of nonpayment. 

123 Tr. Transcript 4/12/22, Part 2 of 2, at 70:6-17 [DE # 113}. 

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performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; 

and (4) damages to the plaintiff as a result of the defendant's breach. Williams, 884 F.3d at 244 

(internal citations omitted). 

 Element one is quickly satisfied as neither party disputes the existence of valid contracts 

here. 

The court relies on its Findings of Facts and previous Conclusions of Law to satisfy element 

two. As stated by the court above, the PRAs unambiguously established a fixed payment 

arrangement that was not variable based on the termination of certain Dual Employees. The 

remaining Dual Employees continued to provide front-office services and, thus, Highland 

performed under the PRAs. Further, Highland clearly performed under the SSAs at all times 

according to the Advisors’ own representations to the third-party Retail Board that Highland was 

sufficiently performing at all times. The representations were constant and continued from July 

2020 through early 2021, the entire period in which the Advisors now claim legal and compliance 

services were not being provided. 

The third element is uncontested. The Advisors do not contest that they stopped making 

payments under all of the Agreements in November 2020 at the direction of Mr. Dondero. 

The last element, damages, is also present and easily calculable. The nonpayment by the 

Advisors establishes Highland’s alleged compensatory damages. Highland’s damages are: (a) the 

amounts that were not paid in December 2020 and January 2021 under all four Agreement, plus 

for November 2020 in the case of the HCMFA SSA. 

The court concludes that Highland has met its burden on breach of contract by the Advisors 

on each of the Agreements due to their nonpayment of amounts required. 

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E. Do Equities Matter at All Here? 

This court often states that “facts matter”. Occasionally, facts suggest a certain equitable 

result contrary to what the law requires. This can sometimes make a court wrestle with a result. 

Are the Advisors being treated inequitably or unfairly here—by having to pay a fixed amount 

under the PRAs when the number of employees at Highland dropped precipitously during the term 

of the PRAs? 

Putting aside for a moment the fact that the Advisors had a right to seek modification of 

the PRAs—a fact about which they profess confusion, because of the Bankruptcy Code’s 

automatic stay—here are a few facts that detract from any equitable arguments that the Advisors 

might have. 

First, prior to 2018—for six years—Highland provided “front-office” sub-advisory 

services to the Advisors for free. For free. Perhaps this is the real reason why folks were not too 

worried about potential overpayments under the new PRAs that were executed in May 2018—at 

least not until the Advisors and Highland began their corporate divorce. Sounds like the Advisors 

had been getting a windfall. 

Additionally, Mr. Seery credibly testified (and no one ever disagreed) that the SSAs (in 

contrast to the PRAs) were money-losers for Highland. The SSAs were unprofitable for Highland. 

If the PRAs were profitable, well, that arguably balanced things out a bit. 

The fact is that the Agreements were not arms-length agreements, and this cannot be 

overlooked here. They were intercompany agreements—i.e., entered into between parties that were 

friendly and affiliated, back at their time of execution. The arrangements were all about the 

perceived needs of the Highland complex at a time when there was no bankruptcy. The evidence 

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suggests that everyone was just fine with the agreements for years. But the parties are now hostile 

and disagree on just about everything. 

The fact is that the Agreements, by their terms, could have been renegotiated or terminated 

by either party during the bankruptcy case. But the Advisors would have had to file a motion to 

lift stay and ask court permission. This would not necessarily have been a good strategy for them, 

because the Advisors and Mr. Dondero thought/hoped he might gain back control of Highland 

eventually (and, therefore, would have the whole complex back under his control). Thus, it might 

not make sense to change the status quo on the Agreements. In any event, in such a scenario. the 

court might have denied relief from the stay (depending on the merits of arguments made). Or, 

the court might have granted relief to the Advisors, in which case Highland might have decided it 

had to abruptly liquidate—due to a loss of a steady cash stream—which might have caused an 

abrupt departure of employees or, at best, an abrupt transition of employees away from Highland 

to the Advisors or an entity with whom the Advisors would contract (such as Skyview). This abrupt 

transition might not have been pretty. 

Equities? Ultimately, the court has interpreted the contracts here (and other evidence—in 

case the Agreements should be construed as ambiguous) as it thinks is required. But again, these 

were not arms-length contracts. They were contracts among insiders, made at a time when 

everyone was friendly. Made at a time when Highland needed cash, and at a time when Highland 

had been providing free front-office services to the Advisors for years. Free services when—

meanwhile--the Advisors were parties to investment contracts with Retail Funds, whereby the 

Advisors were no doubt earning many millions of dollars of fees therefrom for themselves 

(considering that they were managing many billions of dollars of assets). If equities matter at all 

here, the result reached here seems entirely fair. 

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IV. DAMAGES COMPUTATION FOR JUDGMENT 

The court will grant damages in favor of Highland of: (i) $924,000 for unpaid fees under 

the HCMFA SSA for November 2020, December 2020, and January 2021; (ii) $832,000 for unpaid 

amounts under the HCMFA PRA for December 2020 and January 2021; (iii) $336,000 for unpaid 

fees under the NexPoint SSA for December 2020 and January 2021; and (iv) $504,000 for unpaid 

amounts under the NexPoint PRA for December 2020 and January 2021. 

All relief requested by the Advisors for administrative expense claims for (i) alleged 

overpayments and (2) alleged breaches of contract by Highland under the Agreements are denied. 

Additionally, Highland has asserted that it is entitled to costs and expenses, including 

attorneys’ fees, in connection with prosecuting its claims and defenses against the Advisors. No 

evidence was presented on the shifting of expenses, including attorney’s fees. The parties agreed 

in their Joint Pretrial Order that “[t]he quantification of any attorney’s fees awarded in this 

Adversary Proceeding, subject to defenses, will be handled through post-trial motion practice 

under Rule 54(d)(2), and no Party need present evidence on any attorney fee claim at the trial of 

this Adversary Proceeding.”124 Accordingly, Highland may file its post-trial motion forthwith. 

Unless the parties otherwise agree, Highland’s post-trial motion for fees, costs, and expenses is 

due within 21 days of entry of these Findings of Fact and Conclusions of Law; with a Responses 

of the Advisors due 21 days thereafter, and any reply do 10 days thereafter. The parties may seek 

a hearing thereafter. 

# # # END OF FINDINGS OF FACT AND CONCLUSIONS OF LAW # # #

 

124 DE # 96 in the AP at p. 16. 

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JOINT NOTICE OF APPEAL—Page 1 

Davor Rukavina, Esq. 

Texas Bar No. 24030781 

Thomas D. Berghman, Esq. 

Texas Bar No. 24082683 

Julian P. Vasek, Esq. 

Texas Bar No. 24070790 

MUNSCH HARDT KOPF & HARR P.C. 

500 N. Akard Street, Suite 3800 

Dallas, Texas 75201 

(214) 855-7500 

COUNSEL FOR HIGHLAND CAPITAL MANAGEMENT 

FUND ADVISORS, L.P. AND NEXPOINT ADVISORS, L.P. 

UNITED STATES BANKRUPTCY COURT 

NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

In re: 

HIGHLAND CAPITAL MANAGEMENT, 

L.P. 

 Debtor. 

§ 

§ 

§ 

§ 

§ 

§ 

Chapter 11 

Case No. 19-34054-sgj11 

HIGHLAND CAPITAL MANAGEMENT, 

L.P., 

 Plaintiff, 

v. 

HIGHLAND CAPITAL MANAGEMENT 

FUND ADVISORS, L.P. and NEXPOINT 

ADVISORS, L.P., 

 Defendants. 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

§ 

Adv. No. 21-03010-sgj 

JOINT NOTICE OF APPEAL 

COME NOW NexPoint Advisors, L.P. and Highland Capital Management Fund Advisors, 

L.P. (together, the “Advisors”), the defendants in the above styled and numbered Adversary 

Proceeding, and, pursuant to 28 U.S.C. § 158(a), hereby appeal to the United States District Court 

for the Northern District of Texas that certain Judgment (“Judgment”) entered by the Bankruptcy 

Court on September 14, 2022 at docket no. 126. 

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JOINT NOTICE OF APPEAL—Page 2 

A copy of the Judgment is attached hereto as Exhibit “A.” 

The names of the parties to the Order, their roles in the appeal, and the contact information 

for their counsel are as follows: 

1. Appellants: 

 NexPoint Advisors, L.P. 

 Highland Capital Management Fund Advisors, L.P. 

Attorneys: 

Davor Rukavina 

Julian P. Vasek 

MUNSCH HARDT KOPF & HARR, P.C. 

3800 Ross Tower 

500 N. Akard Street 

Dallas, Texas 75201-6659 

Telephone: (214) 855-7587 

Facsimile: (214) 855-7584 

Email: drukavina@munsch.com 

Email: jvasek@munsch.com 

2. Appellee: 

 Highland Capital Management, L.P. 

 Attorneys: 

 

 PACHULSKI STANG ZIEHL & JONES LLP 

Jeffrey N. Pomerantz (CA Bar No. 143717) 

John A. Morris (NY Bar No. 2405397) 

Gregory V. Demo (NY Bar No. 5371992) 

Hayley R. Winograd (NY Bar No. 5612569) 

10100 Santa Monica Blvd., 13th Floor 

Los Angeles, CA 90067 

Telephone: (310) 277-6910 

Facsimile: (310) 201-0760 

jpomerantz@pszjlaw.com 

jmorris@pszjlaw.com 

gdemo@pszjlaw.com 

hwinograd@pszjlaw.com 

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JOINT NOTICE OF APPEAL—Page 3 

HAYWARD PLLC 

Melissa S. Hayward 

Texas Bar No. 24044908 

MHayward@HaywardFirm.com 

Zachery Z. Annable 

Texas Bar No. 24053075 

ZAnnable@HaywardFirm.com 

10501 N. Central Expy, Ste. 106 

Dallas, Texas 75231 

Tel: (972) 755-7100 

Fax: (972) 755-7110 

RESPECTFULLY SUBMITTED this 20th day of September, 2022. 

MUNSCH HARDT KOPF & HARR, P.C. 

By: /s/ Davor Rukavina 

Davor Rukavina, Esq. 

Texas Bar No. 24030781 

Julian P. Vasek, Esq. 

Texas Bar No. 24070790 

500 N. Akard Street, Suite 3800 

Dallas, Texas 75201-6659 

Telephone: (214) 855-7500 

Facsimile: (214) 855-7584 

Email: drukavina@munsch.com 

Email: jvasek@munsch.com 

 

ATTORNEYS FOR NEXPOINT ADVISORS, 

L.P. AND HIGHLAND CAPITAL 

MANAGEMENT FUND ADVISORS, L.P. 

CERTIFICATE OF SERVICE 

 The undersigned hereby certifies that, on the 20th day of September, 2022, true and correct 

copies of this document, including any exhibit(s), were electronically served via the Court’s 

CM/ECF system on all parties entitled to such notice, including counsel for the appellee. 

By: /s/ Davor Rukavina 

Davor Rukavina, Esq. 

4868-4900-9972v.1 019717.00001 

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IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION 

 ) Case No. 19-34054-sgj-11

In Re: ) Chapter 11

 ) 

HIGHLAND CAPITAL ) Dallas, Texas

MANAGEMENT, L.P., ) Tuesday, April 12, 2022

 ) 9:30 a.m. Docket 

 Debtor. ) 

 ) 

 ) 

HIGHLAND CAPITAL ) Adversary Proceeding 21-3010-sgj

MANAGEMENT, L.P., ) 

 ) 

 Plaintiff, ) 

 ) 

v. ) TRIAL

 ) 

HIGHLAND CAPITAL MANAGEMENT ) ADVISORS' ADMINISTRATIVE CLAIM 

FUND ADVISORS, L.P., ) 

et al., ) Excerpt: 9:38 a.m. to 2:19 p.m.

 ) 

 Defendants. ) 

 ) 

TRANSCRIPT OF PROCEEDINGS

BEFORE THE HONORABLE STACEY G.C. JERNIGAN,

UNITED STATES BANKRUPTCY JUDGE.

 

WEBEX APPEARANCES: 

For the Plaintiff: John A. Morris

 Gregory V. Demo

 Hayley Winograd

 PACHULSKI STANG ZIEHL & JONES, LLP

 780 Third Avenue, 34th Floor

 New York, NY 10017-2024

 (212) 561-7700

For the Plaintiff: Zachery Z. Annable

 HAYWARD, PLLC

 10501 N. Central Expressway,

 Suite 106 

 Dallas, TX 75231

 (972) 755-7108

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APPEARANCES, cont'd.:

For the Defendants: Davor Rukavina

 Thomas Daniel Berghman

 MUNSCH HARDT KOPF & HARR, P.C.

 500 N. Akard Street, Suite 3800

 Dallas, TX 75201-6659

 (214) 855-7587 

Recorded by: Michael F. Edmond, Sr. 

 UNITED STATES BANKRUPTCY COURT

 1100 Commerce Street, 12th Floor

 Dallas, TX 75242

 (214) 753-2062

Transcribed by: Kathy Rehling

 311 Paradise Cove

 Shady Shores, TX 76208

 (972) 786-3063 

Proceedings recorded by electronic sound recording; 

transcript produced by transcription service.

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DALLAS, TEXAS - APRIL 12, 2022 - 9:38 A.M.

 THE CLERK: All rise. The United States Bankruptcy 

Court for the Northern District of Texas, Dallas Division, is 

now in session, The Honorable Stacey Jernigan presiding.

 THE COURT: Good morning. Please be seated. All 

right. We have a two-day setting in Highland. It's both 

Adversary 21-3010 as well as the Funds' request for 

administrative claim. Let's get appearances from the lawyers 

first.

 MR. MORRIS: Good morning, Your Honor. John Morris 

from Pachulski Stang Ziehl & Jones for Highland Capital 

Management, LP. I'm here this morning with my colleagues Greg 

Demo, Hayley Winograd, and Zachery Annable.

 THE COURT: Okay. Good morning. 

 MR. RUKAVINA: Your Honor, good morning. Davor 

Rukavina and Thomas Berghman here for the Advisors: NexPoint 

Advisors, LP and Highland Capital Management Fund Advisors, 

LP. 

 THE COURT: Good morning. All right. Do we have any 

other appearances? These are, of course, the only parties, 

but ...

(No response.)

 THE COURT: All right. Well, you all have given me a 

lot of paper to prepare me. Before we ask for opening 

statements, I'm going to ask for housekeeping matters. I see 

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we have exhibit lists that have been filed and some written 

objections, and I think your scheduling order said that if 

there were no written objections then they were waived except 

for relevance and privilege, I guess. So do we have 

stipulations on exhibits?

 MR. MORRIS: We do, in fact, Your Honor. I apologize 

for the late notice. Mr. Rukavina and I just reached an 

agreement about an hour ago that resolves all objections to 

documents, --

 THE COURT: Okay.

 MR. MORRIS: -- as well as the objection to the 

subpoenas that Highland had served upon the Advisors, --

 THE COURT: Okay.

 MR. MORRIS: -- which were the subject of the 

objection that was filed at Docket No. 98 and the response 

that was filed at Docket No. 101. So, if I may, I'd just like 

to read the stipulation into the record --

 THE COURT: All right.

 MR. MORRIS: -- and tell you where we go from there. 

 THE COURT: That's fine.

 MR. MORRIS: So, the parties stipulate to the 

admissibility of a single document, which will be marked as 

Highland's Exhibit 161. That document, Your Honor -- this is 

not part of the stipulation -- but that document sets forth 

amounts that were paid to certain former Highland employees 

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postpetition. And so that document is going to be marked as 

161, and the parties stipulate that the Advisors acknowledge 

that they have no basis to challenge the facts that are 

recited and reflected in the document.

 THE COURT: Okay.

 MR. MORRIS: Based on the foregoing, the parties 

agree and stipulate that the objection to the trial subpoenas 

that was filed at Docket No. 98 shall be deemed resolved. I 

don't know if Your Honor would like us to file some kind of 

order or stipulation to that effect, or if this is sufficient.

 THE COURT: I think this is sufficient on the record.

 MR. MORRIS: Okay.

 THE COURT: Thank you.

 MR. MORRIS: The parties also agree that the Advisors 

shall withdraw all of their objections to Highland's exhibits, 

which were also filed on the docket. And forgive me, but I 

don't have that docket number.

 THE COURT: Let's see. Docket 82 --

 MR. MORRIS: Okay.

 THE COURT: -- is where the Advisors' objection to 

the Debtor's exhibits is.

 MR. MORRIS: Right. And then, finally, Highland 

stipulates that it does not contest the accuracy of the 

mathematical calculations in the Advisors' Exhibits G and H

and that the charts are based on compensation information that 

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was maintained by Highland and that is accurate only as to the 

compensation numbers paid to the listed employees.

 MR. RUKAVINA: And Your Honor, that is correct, and 

you'll see as the trial progresses Exhibit G is a PDF of 

Exhibit H, which is an Excel spreadsheet which is our damages 

calculation. So I think, with that, with that stipulation --

I understand that Highland has other objections -- but I think 

that that stipulation will go some way. And then there's a 

couple more of my exhibits that are objected to. We'll just 

take those in due course. 

 THE COURT: Okay. All right. So, are you asking me, 

then, to pre-admit all of the exhibits that are not objected 

to at this point? 

 MR. MORRIS: Highland does move for the admission of 

Exhibits 1 through 161, and at this point I understand there 

are no objections.

 THE COURT: Okay. And you confirm, Mr. Rukavina?

 MR. RUKAVINA: I do.

 THE COURT: All right. So Highland Exhibits 1 

through 161 are now admitted.

 (Plaintiff's Exhibits 1 through 161 are received into 

evidence.) 

 THE COURT: And then turning to the Advisors' -- I 

think I called them the Funds earlier. Sorry. I get my 

nicknames mixed up at times. The Advisors' Exhibits, it looks 

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like --

 MR. RUKAVINA: Your Honor, it's Exhibit A through DD. 

I'd move for the admission of all of those, except G, H, L, Z, 

CC.

 THE COURT: Okay. So you aren't actually moving for 

admission of G and H, which you just talked about? 

 MR. RUKAVINA: Correct.

 THE COURT: There's just a stipulation about --

 MR. RUKAVINA: Correct. Yeah.

 THE COURT: -- the correctness? 

 MR. RUKAVINA: We'll address -- yeah. We'll address 

that admissibility tomorrow when Mr. Norris testifies. 

 THE COURT: Okay.

 MR. RUKAVINA: But with respect to all other exhibits 

other than G, H, L, Z, and CC, I'd move to admit them now. 

 THE COURT: Okay. So except for, you said, L, Z, CC?

 MR. RUKAVINA: Correct.

 THE COURT: Okay. And you agree?

 MR. MORRIS: No objection to those exhibits.

 THE COURT: Okay. So those are admitted by 

stipulation as well. 

(Defendants' Exhibit A through DD, exclusive of G, H, L, 

Z, and CC, are received into evidence.)

 THE COURT: All right. Is that all of our 

housekeeping matters?

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 MR. MORRIS: It is. I do have a copy of Exhibit 161, 

if I can approach --

 THE COURT: You may.

 MR. MORRIS: -- and give that to the Court. 

 THE COURT: And hopefully you have --

 MR. MORRIS: And I have a couple of copies.

 THE COURT: -- two copies. One for Nate over here. 

 MR. MORRIS: Yeah. 

 THE COURT: Thank you. All right. You may proceed 

when you're ready.

 MR. MORRIS: Okay. Before I begin, I just do want to 

give the Court some sense of what we expect to do today and 

tomorrow. 

 THE COURT: Okay.

 MR. MORRIS: We'll have our openings this morning. 

Highland intends to call as its first witness David Klos. Mr. 

Klos will be followed by Mr. Waterhouse. If time permits, 

we'll examine Mr. Seery. And then, regardless of what time we 

complete, if we complete a little bit early, we'd like to stop 

for the day. We're trying to manage a lot of schedules --

 THE COURT: Uh-huh. 

 MR. MORRIS: -- and witnesses and third-party people 

who have said, I can do it Tuesday but not Wednesday, I can do 

it Wednesday but not Tuesday.

 THE COURT: Uh-huh. 

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 MR. MORRIS: So that's the plan, and I hope, I really 

do hope that we're able to get through those three witnesses 

today.

 THE COURT: All right. Well, you've answered one 

question I had: Who goes first? Because we, you know, could 

go either way because we have the breach of contract claim in 

the adversary and the request for administrative expense. 

There's an agreement that you go first?

 MR. MORRIS: We do have an agreement --

 THE COURT: Okay.

 MR. MORRIS: -- that Highland will call the witnesses 

that are on its witness list, to the extent that it decides to 

do so, first. And Mr. Rukavina will then cross without 

restriction to my direct.

 MR. RUKAVINA: Exactly. Rather than me recalling 

them, we'll just handle it all at one time, get the subpoenaed

witnesses out of here. 

 MR. MORRIS: Because it's really the flip side of the 

same coin.

 THE COURT: Okay. All right. Well, I have 

flexibility as far as when and how long we stop for lunch, as 

well as when we stop tonight. 

 MR. MORRIS: Right.

 THE COURT: So it sounds like you're wanting maybe a 

definite stopping point tonight, or no?

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 MR. MORRIS: No, not really.

 THE COURT: Okay.

 MR. MORRIS: The only -- the most important thing for 

me is to get Mr. Waterhouse off the stand. 

 THE COURT: Okay.

 MR. MORRIS: Because he's not available tomorrow. 

 THE COURT: Gotcha. I've got you.

 MR. RUKAVINA: Yeah. I think that the -- that's 

exactly right. Really, the concern that I have is that we 

actually finish early today. So we're just informing the 

Court that, if we finish early, we ask the Court's permission 

to just resume tomorrow morning, because, again, we subpoenaed 

certain witnesses tomorrow that are not available today.

 THE COURT: Okay. 

 MR. RUKAVINA: So we may finish early. We may finish 

late. Either way, we only have three witnesses for today, and 

the other ones are going to appear tomorrow.

 THE COURT: Okay. Gotcha. All right.

 MR. MORRIS: So, with that, I'd like to just proceed 

to my opening.

 THE COURT: Uh-huh. 

 MR. MORRIS: And I do have -- I do have a slide deck 

for use, if I can approach. 

 THE COURT: Okay. You may. Thank you.

OPENING STATEMENT ON BEHALF OF THE PLAINTIFF

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 MR. MORRIS: All right. I don't -- I don't know if 

Ms. Canty is putting this on the screen. Maybe it's blank 

because we're in the courtroom.

 THE COURT: Ms. Canty?

 MR. MORRIS: Ah, there we go. Yeah.

 THE COURT: Ah.

 MR. MORRIS: All right. So the expectation was that 

Ms. Canty would help me out in going through the slide deck.

This is going to be, you know, a somewhat lengthier 

opening than I'm used to, but this is a pretty fact-intensive 

case.

 THE COURT: Uh-huh. 

 MR. MORRIS: We submitted what we thought was a 

fulsome description of the evidence in our proposed findings 

of fact and conclusions of law. You know, the Court either 

has or will read that. There is other evidence, obviously, 

that's going to be in the record that we didn't include there. 

And what I would do is I would describe what I'm about to say 

for the next hour or so -- 

 THE COURT: Okay.

 MR. MORRIS: -- is the greatest hits. It's kind of a 

summary of what we think the evidence is going to show.

 THE COURT: Okay.

 MR. MORRIS: So if we can go to the next slide, Your 

Honor. This is just a quick overview of the parties' 

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competing positions. Highland is here to recover for breach 

of contract damages under an assortment of contracts. There's 

five different contracts at issue. It believes that it's 

entitled to unpaid fees and that it was -- that it will be 

entitled to recover attorneys' fees. 

Highland believes that the Advisors' claims, such as they 

are, are without merit, and we take that position for the 

following reasons. 

We believe that the contracts are clear and unambiguous on 

their face and they entitle Highland to a judgment. But the 

overwhelming evidence, Your Honor, we believe that even if the 

Court found an ambiguity, that the parol evidence -- really, 

the contemporaneous evidence at the time these contracts were 

entered into, the parties' unequivocal, uninterrupted course 

of dealing, and all of the surrounding circumstances, will 

lead the Court to conclude that only Highland's interpretation 

is reasonable.

Highland is going to prove that it fully performed, and 

it's going to prove that performance not just through its own 

witnesses but through the documentary evidence and through the 

Advisors' witnesses, the Retail Board minutes. Mr. Waterhouse 

is going to acknowledge that. 

Your Honor is going to have to deal with the fact that the 

allegations of breach are particularly vague when it comes to 

what it is that Highland supposedly did or didn't do and when 

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and how it didn't do it. 

There's lawyers' letters that are part of the evidence of 

performance, because from October 16th until December 31st the 

Advisors sent five different letters by lawyers asserting all 

kinds of things except breach of contract, which is kind of 

telling. 

The evidence is going to show that the Advisors had all of 

the information that they claim Highland used to hide the 

ball. The evidence is going to show that they knew what 

payments were projected. They knew what payments were made. 

They -- it's in their books, their own books and records, the 

evidence is going to show. They knew exactly when every dual 

employee was terminated. Right? They told the Retail Board 

time, time, time, time, and probably five more times again 

that they knew exactly -- that they were monitoring the 

services.

So we don't think -- we don't think the evidence is going 

to show anything other than full performance. But even if 

they -- even if they had some basis for a claim, they've 

either waived that claim or it's barred by the voluntary 

payment rule.

If we can move to the next slide, please.

This is just the contractual language of the payroll 

reimbursement agreements, Your Honor, and we believe that this 

is clear and unambiguous on its face. Paragraph -- Section 

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2.01 specifically states that NexPoint shall reimburse 

Highland for the actual cost to HCMLP. But note, Your Honor, 

actual cost is not lower case, it's upper case. It's a 

defined term. They could have used hamburger. They could 

have used tofu, if that's really to your liking. Actual cost 

has a meaning, a very specific meaning under this contract, 

and that's in the box below.

Originally, the Advisors wanted to read out that second 

sentence. You know, Mr. Norris, I think, is going to testify 

that he just assumed that Highland was adjusting the amounts 

paid as each dual employee left. There's no basis for that 

assumption, and that assumption is completely undermined by 

the second sentence of the definition of actual cost, which 

says specifically that, absent changes pursuant to 2.02, this 

is the fee. Such costs and expenses are equal to $252,000 per 

month. Clear and unambiguous.

If we can go to the next slide, please.

Let's look at 2.02. Right? The argument is made, well, 

Highland had a unilateral obligation to make adjustments. 

Highland had a unilateral obligation to adjust the payments. 

Highland had a unilateral obligation to do this, that, and the 

other thing. Where does the word Highland even appear in 

2.02? It refers to the parties. It refers to the parties 

reaching an agreement. Highland can't act uni... not only is 

it not required to, it can't. It just can't. The parties may 

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agree. That's what 2.02 says.

If we can go to the next slide, please.

As Your Honor may have seen from the evidence from the 

pretrial findings, proposed findings of fact, the parties 

actually amended their agreement just seven months after they 

signed it. And I'm talking specifically about the payroll 

reimbursement agreements. And that payroll reimbursement 

amendment specifically refers to what? I mean, it does refer 

to Section 2.02, which is stated in the paragraph above, I 

believe. But they're going to pay a flat fee of $168,000. 

The evidence is going to show that this payment was not 

based on any calculation of actual cost with an upper A and an 

upper C or a lower A and a lower C. There's no analysis 

whatsoever. 

You're going to hear an assertion that it was based on a 

true up. I think Dustin Norris is going to say that David 

Klos conducted some true up in December of 2018. No true up 

exists. Mr. Norris has absolutely no personal knowledge about 

what happened in December of 2018. 

Mr. Waterhouse, who signed the amendment, is going to 

testify that he has no idea where the number came from.

So, so I actually think I'm a little bit confused. The 

$168,000, and I'm going to clear this up right now, the 

$168,000 is the monthly charge in the original document. So 

we actually confused that. This is the -- this is Paragraph 

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3.01 from the original payroll reimbursement agreement, and 

that's the flat fee from that particular document. I think 

that's the -- the HCMFA document. 

So, here's the story, Your Honor. The story is pretty 

simple. Late 2017, Highland had a horrible year. They had to 

get more cash to Highland. Mr. Dondero knew that he had 

personal tax exposure at the Advisors. And so he just wanted 

to push money from the Advisors to Highland. It knocked off 

two birds with one stone, right? It got him a tax deduction 

at the Advisors level. It got more cash into the Highland 

bank accounts.

And the way they originally did that was to say, let's 

just do a subservice agreement. The evidence is going to be

undisputed that prior to 2018 Highland provided subadvisory 

front office services to both Advisors and never got paid a 

nickel. Okay? But now they needed to get some more money to 

Highland, so they came up with the concept of a subadvisory 

agreement. 

And what's on the screen, if we can go to Slide 5, is a 

page from a deck that was presented to Mr. Dondero in January 

of 2018 that showed -- the next slide, please, 5 -- that 

showed that NexPoint and subs and subsidiaries would be --

would be paying $6 million for subadvisory and shared 

services. That was an increase from less than $2 million. It 

was a number that Mr. Dondero personally dictated. Mr. Klos 

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is going to testify that Mr. Dondero came up with that number 

and that they had to use these various agreements to come up 

with a $6 million fee. It's reflected in the document. It's 

reflected in the contracts. $6 million doesn't change from 

December 2017 until termination. It's exactly what NexPoint 

paid.

Interestingly, Your Honor, below it there's a reference to 

Acis. Acis, I know you're familiar with. This is January 

2018. Highland is in control of Acis. Acis has its own 

subadvisory and shared services agreements with Highland. 

It's not based on actual costs. Nobody cares what the actual 

cost. It's based on basis points. 

So they've got all of these -- you're going to hear 

testimony that they've got a myriad of ways of compensating: 

flat fees, percentage of assets under management, these basis 

points. There's no rhyme or reason to it. But the evidence 

is going to show and there'll be no dispute that in December 

2017 the number was fixed at $6 million and never changed.

If we can go to the next slide.

So, Mr. Klos is going to testify that each January, maybe 

early February, there was a meeting. And the meeting was with 

Mr. Klos, Mr. Waterhouse, Mr. Dondero, and Mr. Okada. The 

purpose of the meeting was to look back at the prior year and 

to talk about the future year. And the meeting would take 

place at that particular moment in time because February 28th 

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was bonus day and they used this information to decide how 

much, you know, how the pie was going to be divided and what 

bonuses were going to be paid.

So the documents that we're looking at right now come from 

the deck that was prepared by Mr. Klos, under Mr. Waterhouse's 

review, and was gone over with Mr. Dondero and Mr. Okada in 

this meeting. 

And this is -- this slide here shows Highland's projected 

continued losses. You see that they were projected to lose 

$12 million on an operating basis in 2018. Mr. Klos will 

testify that they weren't projected to change that much at 

all, but that -- you see the flip to a positive $46 million? 

That $56 million, between a negative 12 and a positive 46 -- 

is I guess $58 million -- is really answered up above in 2019 

by those incentive fees. 

Those incentive fees were projected to occur. That was 

supposed to be the incentive fee for MGM. If you remember, 

Your Honor, that was going to be MGM. It didn't happen. And 

Your Honor knows, if it had happened, Highland would have 

gotten that $55 million, but according to Mr. Dondero and 

Nancy Dondero, Highland would have had to cancel the $70 

million of notes that they had signed. But neither one of 

those things ever happened. Right?

The fact of the matter is if you reduce, if you eliminate 

that $55 million, and you should, they still would have been 

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losing more than $12 million on an annualized basis.

If we can go to the next slide, please. Because this is 

another critical piece of evidence here. You've got the 

subadvisor fees and the shared services expenses. You'll 

recall, Your Honor, I said that they reached an agreement on 

the $6 million number in December. Well, here's the January 

annual review. It's presented to Mr. Dondero. And we've 

highlighted for you the projected subadvisor and shared 

services expenses. And if you add those two numbers up, it's 

not a coincidence that they add up to $6 million. And the 

$3,024,000 number, divide it by 12, you come up with the 

$252,000 that was in the subadvisory agreement and that 

ultimately became the payroll reimbursement agreement. 

$3,024,000 divided by 252 -- divided by 12 equals $252,000.

And the shared services expenses, there are actually two 

pieces there. And one of the things that I think is very 

important for the Court to know is that, prior to 2018, 

NexPoint's shared service agreement with Highland had a 

complicated mechanism for calculating the fee for the shared 

services. One option was actually actual cost. But Mr. Klos 

is going to tell the Court, he's going to testify that they 

didn't use that option, they used a different option, and they 

wound up paying based on a percentage of AUM, A-U-M, Assets 

Under Management. 

But here's the important point. At this moment in time, 

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to get to Mr. Dondero's $6 million number, they amend the 

shared services agreement for NexPoint to provide for a flat 

fee. And when you combine the flat in the NexPoint shared 

services agreement with the $80,000 flat fee in the NexPoint 

Real Estate Advisors' shared services agreement, which is a 

subsidiary of NexPoint, that's how you get to the $2,976,000. 

Not a coincidence here. It's three agreements. It's the 

subadvisory agreement. It's the newly-amended and restated 

shared services agreement with NexPoint. It's the new shared 

-- the newly-amended shared services agreement with NexPoint 

Real Estate Advisors. Add them up. $6 million. Right?

So, they're telling -- picture it. They're in a meeting 

room at Highland's offices. Everybody's sitting in Mr. 

Dondero's office. They're walking through this. And Mr. Klos 

is going to testify that here's where we told Jim this is how 

we're going to execute your plan. You've given us an 

instruction to get to $6 million. Here's the plan. Okay? No 

dispute.

So, a funny thing happens. Right? No so funny, actually. 

The deck is dated January 26th. I think Mr. Klos says the 

meeting happened at or around that time. But as Your Honor 

knows, just a couple of days later, Josh Terry filed Acis for 

bankruptcy. And what you're going to see in the deck, which I 

don't have the slide for, is that Highland had projected that 

it was going to receive almost $10 million in revenue through 

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the Acis shared services and subadvisory agreement and that 

the Acis revenue represented Highland's second-largest 

projected source of revenue for 2018. And days after they 

have this meeting and go through this, Josh Terry files Acis 

for bankruptcy and all of a sudden all of that revenue is 

threatened.

So the very first thing they do in March, not in this deck 

but it's in the proposed findings, the very first thing they 

do when they realize all of this revenue is at risk is they 

say, let's duplicate that subadvisory agreement that we just 

prepared for NexPoint for HCMFA. The projections that we just 

looked at, you'll never find a projection showing that there 

was any expectation in January 2018 that HCMFA was going to 

pay subadvisory agreements. They were supposed to just 

continue getting them for free. But after the Acis bankruptcy 

was filed and there was a loss, a potential loss of up to $10 

million in revenue, they needed to get more money to Highland, 

because that revenue was going to be -- was threatened and 

could be frozen. So that this was the plan they came up with. 

Just duplicate that agreement for HCMFA. And that's what they 

did, and that's what the evidence shows.

And the interesting thing, Your Honor, because I don't 

remember what the exhibit number is, but you'll look -- we'll 

look at the subadvisory agreement that was prepared. There's 

nothing about actual cost. It is flat fee agreements. And 

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for NexPoint it was $252,000. Right? This was the first way 

they were going to address the crisis that was presented by 

Acis.

Days later, after coming to that solution, a new problem 

emerged. Lauren Thedford, an attorney at Highland who also 

served as the secretary of the Advisors -- she was a lawyer, 

she was an officer of the Advisors -- she was told by outside 

counsel, you can't use the subadvisory agreement. Why? 

Because (a) it can't be retroactive to January 1st; and (b) it 

can only be used if it's approved at an in-person meeting of 

the Retail Board. And they realized that that meeting 

wouldn't take place until June.

And so that meant Highland was going to be without all of 

this revenue that it desperately needed at the time that they 

intended to make retroactive to January 1st, they were going 

to go six months without any of the subadvisory revenue that 

they were hoping to place in Highland's lap through NexPoint 

and HCMFA.

Needed a solution. They came up with the payroll 

reimbursement agreement. It's the only reason it exists. Had 

they -- had Lauren Thedford not gotten the advice, and Mr. 

Klos will testify to this, had Lauren Thedford not gotten the 

advice that the subadvisory agreements couldn't be retroactive 

and couldn't be adopted without Retail Board approval in an 

in-person meeting, payroll reimbursement agreements would 

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never exist. And so she said the only way around it is to use 

this payroll reimbursement agreement, because that can be 

retroactive and it doesn't need Retail Board approval. 

And so if you go to Slide 8, please. This is -- this is 

the most classic parol evidence I have ever seen. Because, 

remember, the payroll reimbursement agreements aren't signed 

until May. And this is an email exchange between Mr. Klos and 

Ms. Thedford, a lawyer, an officer of the Advisors. And I'm 

not going to read it here, Your Honor, but it shows Mr. Klos 

saying, actual -- let's just start at the top. He's 

protesting. He says, What do you mean, actual costs? It 

would be creating a ton of internal work that isn't adding any 

value to the overall complex. It would involve subjective 

assumptions. He doesn't want to do this. 

And Lauren says, look, I'm open to changing the 

definition, but we have to treat it as reimbursement. 

And Dave's response at 10:56 the same day is, Could we say 

Actual Cost? Now he's using uppercase letters. Can we say 

Actual Cost is determined at the outset of the agreement? 

Have a schedule as of January 1, 2018 and say the actual cost

will be set out in the schedule and paid in monthly 

installments for the term of the agreement? That way, the 

exercise is performed only once. 

And then he says, and if the parties don't like it, they 

can terminate or renegotiate.

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And that's exactly what the payroll reimbursement 

agreement says. She says -- Lauren's response is, I think 

that's workable. Do you have a methodology for the outset 

determination? 

And you'll see the rest of the email during Mr. Klos's 

testimony. He actually does create a list of dual employees 

with allocations of how much time they're going to work with 

these entities, but he's going to explain to you very clearly

it's just his own subjective numbers in his head. And what he 

-- the point of the exercise was to back into the $252,000 

that was necessary so that we could get to the $6 million that 

Mr. Dondero determined.

It's not a coincidence that you have a list of two dozen 

or more employees, with allocations as random as nine percent, 

that you wind up with a $252,000 number. It's not a 

coincidence. It was, Mr. Klos is going to tell you, that was 

the point of the exercise. Okay? This is parol evidence like 

I've never seen before.

So they signed the agreement in May. And you have to 

understand -- this will be more evidence, Your Honor --

everybody -- nobody's going to contest this evidence. The 

dual employees on Exhibits A to the payroll reimbursement 

agreements, they're being terminated before the document was 

even signed. Four of the dual employees had been terminated 

before the document was even signed. So they created a 

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document based on employees who weren't even there when Mr. 

Waterhouse signed this agreement on behalf of the Advisors.

But wait. There's more. During the course of 2018, more 

dual employees left. So that by the time you get to December, 

nine of the 26 dual employees have been terminated. More than 

a third of the people on the list have been terminated. And 

what do they do? They amend the agreement. This is the 

amendment that I was mistakenly referring to earlier. This is 

the amendment, Your Honor, on Slide 9. They amend the 

agreement, because Highland was still needing cash, the 

Advisors still had taxable income, so Mr. Dondero realized, I 

can kill two birds with one stone again. Let me shelter more 

of the income, let me get some more cash to Highland because 

they need some more cash. And so he decides, send $2.5 

million from Highland -- from the Advisors to Highland. And 

they do that with two amendments to the payroll reimbursement 

agreements, one for $1.3 million, one for $1.2 million. 

Mr. Klos is going to testify no true up -- this is the 

point of the true up. I think Mr. Norris is going to say that 

Dave told him that there was a true up in December 2018. 

These are random numbers that are designed just to keep 

Highland chugging along and giving Mr. Dondero a tax break. 

There's no analysis. 

And it makes no sense. The concept that there was a true 

up is just categorically ridiculous. Why? Mr. Waterhouse is 

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going to tell you that NexPoint was paying on an annualized 

basis an additional 40 percent over the annual cost based on 

the $252,000 and that HCMFA was paying almost 25 percent more. 

So they're paying 40 percent more, 25 percent more, at a time 

when more than one-third of the dual employees have been 

terminated. How could that possibly be a true up? How could 

that possibly reflect actual costs? It doesn't. And it 

didn't. 

Dual employees continue to be terminated. The calendar 

turns to 2019. By the time Highland files for bankruptcy, I 

believe the number is 14. Fourteen of the 26 dual employees 

have been terminated. And here is undisputed fact. Not one 

time -- you know what, I want to take a step back for a 

second, Your Honor. I'm talking quickly. 

These agreements were in effect for three years. They're 

signed as of January 1, 2018, and they're in effect basically 

until the end of 2020. It's a three-year period. It's 36 

months. There's no dispute that Mr. Dondero controlled the 

Advisors and Highland for two of those three years. For 2018, 

even after the bankruptcy was filed, through the end of 2019, 

Mr. Dondero was in sole control of everything.

Why is that important? That's the course of dealing, Your 

Honor. The unequivocal, uninterrupted course of dealing. In 

those first two years, the Advisors paid a flat fee under the 

payroll reimbursement agreement. Nobody cared that dual 

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employees were leaving. There will be no evidence that 

anybody said, how come we're not paying actual costs? They 

just did it, and they did it because that was the plan. And 

they have a document and an agreement that effectuated that 

plan, and everybody stuck to the plan. For two years. And 

the undisputed evidence is going to show that nothing changed 

after the bankruptcy, that the Advisors were charged and paid 

the exact same amounts in the 12 months in 2020 that they paid 

in the 24 months in 2018 and 2019. Nothing changed. 

Nobody asked for a change in 2018. Nobody suggested that 

-- because everybody knew -- here's another piece of evidence. 

It's enormous. Your binders have dozens of what are called 

monthly headcount reports. Right? And we may look at one of 

them, but I'm going to tell you what they are right now in 

case we don't. Those monthly headcount reports identify --

name every single employee who ever worked for Highland since 

like 2007. It tells you when they were hired. It tells you 

when they were fired. It tells you what position they had. 

And it was distributed to a whole host of people, including 

D.C. Sauter, Dennis Norris, Lauren Thedford, Frank Waterhouse 

-- i.e., every single officer of the Advisors. Every single 

officer of the Advisors got a report every single month that 

told them exactly who was terminated. And the reports would 

actually highlight the terminations in yellow in case somebody 

didn't know. So that everybody, every one of the officers 

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knew, Frank Waterhouse knew, had the information in his lap 

when he signed the agreements, that four of the 26 dual 

employees had already been terminated.

There's going to be so much more evidence about what they 

knew.

But fast forward to 2020. So, Highland files for 

bankruptcy. Most of the dual employees are already gone. 

Nobody is saying a word about it. Nobody cares. Why? 

Because this is a pay-for-service agreement. It has nothing 

to do with who provides the services. It's important that the 

services be provided. And Highland continued to perform.

There will be no evidence, there's been no allegation, 

they filed an administrative claim, they have filed two 

different -- a response, they filed their pretrial brief. 

They don't make any allegation that Highland failed to perform 

front office investment advisory services. As their pleading 

says, their position is simple. Dual employees left. We 

shouldn't have to pay for dual employees that left.

The Advisors are not in the business of consuming dual 

employees. They're in the business of providing investment 

advisory services to the Retail Funds and to other investment 

vehicles. That's the point of the exercise. They are going 

to testify that is the reason they exist, is to serve their 

clients.

And so does it matter to the Advisors if one person or six 

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people or 24 people provide the services? It shouldn't. The 

important thing is that they're getting the services that 

allow them to satisfy their contractual obligations to their 

clients.

This is all -- it's just -- it's just all so simple. It's 

a lot of facts, but it's all just so simple. They continued 

to pay not because they didn't know dual employees had left. 

They knew that. They continued to pay because they were 

getting uninterrupted service, as they told the Retail Board 

time and time and time again. 

If we can go to Slide 10, I'm going to try and pick it up 

just a bit here. 

The calendar turns to 2020, Your Honor. This is more, you 

know, particularly relevant evidence because it's another 

back-and-forth between Ms. Thedford and Mr. Klos. It's 

January 2020. And I note the timeline, Your Honor, because, 

you know, this is the moment that Mr. Dondero is about to 

surrender control to the Independent Board. But there's no 

disputes. There's no disputes. And that's the beauty of this 

particular email exchange. Nobody is questioning, how much am 

I paying? Nobody is questioning, what services are you 

providing? But Lauren does have some questions about --

because the Retail Board. That's what prompts this. This has 

nothing to do with the Advisors or anything. The Retail 

Board. And you'll see it in the full email. The Retail Board 

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has asked some questions about, you know, how does the 

Advisors pay for expenses? 

And Lauren said to Dave, and you'll see it in the email, 

wasn't there something about those Exhibit As? And Dave's 

response is, Those were a point-in-time estimate as of the 

beginning of 2018. Half the people are gone now. And if you 

were to reallocate them now, all the percentages would be 

different. 

And Mr. Klos is going to testify that the reason that the 

percentages would be different is exactly what I just said, 

and that is this is a pay-for-service agreement. When the 

dual employees were terminated, Highland didn't just stop 

providing the services that those people were performing. 

They reallocated them. That's exactly what he's telling her. 

It's exactly what everybody knew to be true. 

So if in January 2018 one of the dual employees was 

terminated and his job, let's say, was to give investment 

advice on Asset A, Highland didn't just suddenly stop 

providing investment advice on Asset A. Somebody was given 

the responsibility to do that. And that's exactly -- Mr. Klos 

is going to tell you that's exactly what that means there, 

that all the percentages would be different if you did it 

again today because you had the departure of all of these dual 

employees and somebody picked up the slack. Makes total 

sense. It's a pay-for-service contract. That's what it is. 

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It's a flat fee contract. 

Later the same month -- if we can go to the next slide --

Mr. Waterhouse, who is the CFO, asks Mr. Klos, how much --

remind me again, how much is paid under those agreements? 

Without equivocation, without ambiguity, flat, flat, flat. 

Except for the one HCMFA shared services agreement that had a 

very, very narrow band, and Mr. Klos will testify as to why 

that band existed. 

 But there's that $6 million number again, if you look at 

NPA. That's NexPoint. $252,000 plus $248,000 equals $500,000 

times 12. Six million. The $248,000 is for shared services. 

It's broken out, as I mentioned earlier, between NexPoint and 

NexPoint Real Estate Advisors. Here we are, January 2020, Mr. 

Klos again confirming for Mr. Waterhouse, flat fee, flat fee, 

flat fee, $6 million.

If we can go to the next slide. 

I've alluded to some of this, Your Honor. The Advisors 

contemporaneously had all of the relevant facts. This is 

just, again, the highlights here. 

If you look at Exhibit 14, it's the Advisors' responses to 

the Debtor's interrogatories. And if you look at 

Interrogatory 3 and 4, it's going to provide a list of each of 

the dual employees that were attached as the Exhibit As to the 

payroll reimbursement agreements and it's going to give you 

the date of termination for each person. And then 

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Interrogatory -- the response to Interrogatory No. 4 simply 

says, we knew contemporaneously when these people left. 

They've admitted it. 

The monthly headcount reports, as I said, there's 12 plus 

27, there's at least 39 of them. Thirty-nine monthly. 

Because I took it back to October 2017. I think it goes back 

much earlier, but that's what we produced, just to make sure 

the Court had the evidence, that this was a process of 

disclosure of hires and terminations that was provided before 

these contracts even existed. And it's a practice that 

continued right up until January 2021, when these contracts 

ended. Every single month. The same analysis. Went to every 

single officer of the Advisors. 

And they're -- and Mr. Norris is going to sit in that box 

tomorrow and he's going to say he was shocked, shocked, that 

Highland was charging this money for these employees who were 

terminated. We'll see how that goes.

Annual reviews. Exhibits 86 and 142. These are portions 

of the annual reviews where Mr. Dondero is just given a wealth 

of information about hires, termination, compensation budgets, 

everything one would need to know from the human resources 

department. If Mr. Collins comes in and testifies, he's going 

to testify -- and I didn't depose him -- but he had no choice. 

He's the human resources officer reporting to the owner of the 

company. If he says anything other than I kept him fully 

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informed about staffing issues, I'll be shocked.

Representations to the Retail Board. They represented to 

the Retail Board a couple of times that there has been no 

material attrition in employees. How can they make that 

representation if it's uninformed? They didn't. It was 

completely informed. The Advisors knew exactly what was going 

to be paid. 

We looked at the projections in the annual review that was 

given to Mr. Dondero. Mr. Waterhouse is going to testify that 

there were 13-week forecasts that were prepared. The 

forecasts showed every single payment that was going to be 

made by the Advisors under these intercompany agreements. 

He's going to testify that before the Independent Board was 

appointed he would go through those forecasts with Mr. Dondero 

every week, and then after the Independent Board was appointed 

he would still do it with Mr. Dondero, although with less 

frequency. And Mr. Waterhouse started going through those 

forecasts with the Independent Board, and sometimes Mr. 

Dondero would participate. Right? In the early -- in the 

first six months of this case, everybody was looking to 

cooperate. Right? Before the board said, we need to get this 

done.

They knew what was going to be paid. Mr. Waterhouse, the 

unequivocal evidence will be that Mr. Waterhouse approved all 

payments. You may hear some argument about the shared 

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services agreement, and Highland was supposed to do this or 

supposed to do that. You're going to have the evidence in 

front of you. Mr. Waterhouse is going to admit he had to 

approve all of the payments. He is not just the CFO of 

Highland. He is the treasurer of the Advisors, charged with 

the responsibility of finance and accounting. He's the 

approval person. 

You're going to see emails from Kristen Hendrix that say, 

Frank, here's the payments I'm going to make today. Is it 

okay? And he would say, go ahead. And you're going to see, 

and we just have a couple of examples, but he's going to 

testify that was the practice. And you'll see in the examples 

it says $252,000, payroll reimbursement. Or subadvisory. 

Right? Mr. Waterhouse -- how do we know the Advisors knew 

what would be paid? From the projections. How do we know 

that they knew what would be paid? Mr. Waterhouse approved 

it.

But wait, there's more. Mr. Waterhouse is also going to 

admit that every single payment that was made by the Advisors 

under these intercompany agreements is reflected in the 

Advisors' books and records. Right? Their own books and 

records.

They represented to the Retail Board on October 23rd that 

all amounts due and payable under these agreements were paid 

in full. How do you make that representation if you don't do 

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the due diligence to know what was paid and whether -- whether 

it should have been paid. Right?

So they -- they've either got to -- Your Honor is going to 

have to decide, did they lie to the Retail Board or are they 

lying in this courtroom? Because they can't be true. You 

can't reconcile what they told the Retail Board with what they 

may tell you today and tomorrow. It can't be reconciled. You 

can't tell the Retail Board Highland is fully performing, 

we've paid everything we're supposed to pay Highland, and then 

come into this courtroom with a contrived administrative claim 

to say, oh, gee, they didn't provide services and we overpaid. 

You can't reconcile the two.

I ask the Court to listen carefully to the testimony and 

see if there's a credible witness for the Advisors who can 

explain how they told the Retail Board fifty times that 

Highland was performing and that they paid everything, and yet 

somehow something fell through the cracks.

Again, think about the whole purpose of this. The purpose 

is for Highland to provide services to enable the Advisors to 

fulfill their obligations to the Retail Board, to the Retail 

Funds, and the other investment vehicles who were their 

clients. That's the purpose. And that's exactly what 

happened.

They knew what services were provided. We're just going 

to do a quick greatest hits here of some of the retail 

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representations by the Advisors. You know, there had been an 

objection that some of the statements were made by people 

other than Advisors' representatives, so I took -- I took a 

little timeline here and focused really solely on the 

representations that were made by the Advisors and their 

officers.

In June, Mr. Post told the Retail Board, the level and 

quality of services are being monitored. I mean, think about 

that. Being monitored. It's a very active word. He is not 

aware of any disruptions in the service levels provided to the 

Funds.

A couple of months later, Mr. Norris -- we'll hear from 

him tomorrow -- he noted that there have been no issues or 

disruptions, no issues or disruptions in the services as a 

result of the bankruptcy.

The next month, the Advisors state in a memo -- I believe 

it's in a memo -- the Advisors and HCMLP believe the current 

shared services being provided are generally consistent with 

the level of service that has historically been received. How 

do they come into this Court and tell you we breached the 

agreement by failing to perform when they have told their 

clients exactly the opposite?

On October 13th, Mr. Sauter, a lawyer, the general counsel 

of the Advisors, noted that there has been no material 

attrition to date with respect to employees.

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Somebody's going to come in here and say, oh, because of 

the bankruptcy, Highland was firing people? That's not true, 

as a practical matter. Maybe a couple people on a net basis. 

Didn't have a material impact.

Ten days later, the Advisors told their Retail Board, all 

amounts owed by each of the Advisors pursuant to the shared 

services arrangement -- that's not a mistake there, it's a 

lower case S, a lower case S, a lower case A, because it 

encompasses both shared services and front office investment 

advisory services -- all amounts owed pursuant to the shared 

services arrangement with HCMLP have been paid as of the date 

of this letter. That's October 23rd. 

Go to the next slide. It continues. Five days later, the 

Advisors represent that the quality and level of services 

provided to the Funds by the Advisors and pursuant to the 

shared services arrangements have not been negatively impacted 

to date. No negative impact. October 28th. No negative 

impact. 

November 5. Mr. Norris noted that there had not been any 

disruption to the services provided to the Funds by HCMLP 

pursuant to the shared services agreement and that he expects, 

his expectation, is that such services will continue to be 

provided in the normal course.

Your Honor may remember that on November 30th Highland 

gave notice of termination. We had just gotten our disclosure 

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statement approved and time to execute. Right? The world is 

going to change. So we give notice of termination on November 

30th. And the next day, the Advisors do what they're supposed 

to and they tell the Retail Board, we finally got that notice 

of termination that we were planning for. And they say, we're 

going to -- Mr. Post states that the Advisors expect to be 

able to continue to receive the services through a transfer of 

personnel. 

You can't expect to continue to receive services that 

you're not receiving. Right? This is the morning after. 

This is what they report to the Retail Board. Don't worry. 

They've terminated. Don't worry. We're going to continue to 

receive these services.

As late as December 10th and 11th, Mr. Sauter noted that 

there had been no material attrition to date with respect to 

the employees. And they're here suing on a breach of contract 

theory for failure to provide services?

Mr. Waterhouse, the Advisors' treasurer, is going to 

testify that he knows of no services that Highland failed to 

perform postpetition. 

These are excerpts from his deposition, but you can 

imagine that I might turn that into leading questions that'll 

go something like this: You were unaware of any specific 

service under the shared service agreements that Highland 

failed to perform at any time from the petition date until 

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they were terminated in early 2021; isn't that correct? And 

he's going to have to say, I'm not aware of any.

Mr. Waterhouse is going to have to answer the question 

this afternoon: You never had any discussion with anybody at 

any time about Highland's failure or alleged failure to 

provide services under the shared services agreement at any 

time from the petition date until they were terminated in 

early 2021; isn't that correct, sir? He's going to have to 

say, I have no recollection of that.

This is their officer. 

Last slide, 16. It's really important that the Court 

appreciate the complete change of position that the Advisors 

have undertaken here, because until they filed their pretrial 

brief their whole theory of the case was that, you know, the 

-- Highland failed to perform some services under -- some 

unidentified, vague services under the shared services 

agreement and that Highland overcharged them and they overpaid 

under the payroll reimbursement agreement because all these --

all these dual employees were gone. That was their theory of 

the case. 

Their theory of the case was that we had the obligation, 

right, Mr. Norris testified on March 5th and he's going to 

testify tomorrow that he believed that Highland had the 

obligation to charge the right fees based on the dual 

employees.

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In their pretrial brief, they've now completely changed 

their position, and they're -- I think they're basically 

agreeing with our interpretation of the contract, that it was 

a fixed fee unless changed by the parties. Because on March 

28th or March 29th, I took Mr. Waterhouse's deposition and he 

told -- he told -- you know, he testified. I don't want to be 

pejorative. He testified that he recalled that in December 

2019 Dave Klos did an analysis that showed that Highland was 

making millions of dollars off these agreements and that --

and that Mr. Waterhouse took that information and went to 

Isaac Leventon and Scott Ellington and Fred Caruso -- Mr. 

Caruso was an employee of DSI, the Debtor's then-financial 

advisor -- and he spoke to the three of them and he said, 

guys, we're overpaying, the Advisors are overpaying. And all 

three uniformly told him: Can't do anything about it because 

of the automatic stay. You can't do anything about it because 

of the automatic stay. That's what he's going to testify to. 

That's what he said took place.

Now, complete about-face, and so now they're saying that 

they should be relieved of any obligation to pay and they 

should get all their money back because Highland breached its 

duty under Section 2.02 of the payroll reimbursement agreement 

that says the parties shall negotiate in good faith. So 

they're saying Highland didn't negotiate in good faith because 

Frank spoke to Fred Caruso and Fred Caruso said there's 

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nothing we can do about it because of the automatic stay. 

That's the story. That's their -- that's their theory today. 

There's no excuse for them being surprised by Mr. 

Waterhouse's testimony. None. You may hear somebody say we 

couldn't speak to Mr. Waterhouse. And I know that his counsel

has done the right thing, because he has an obligation under 

his agreement with Highland not to cooperate in claims against 

them, so he's done the right thing. But that, that advice, 

Mr. -- I don't know when the advice was given, obviously, but 

I know from the representations that have been made by counsel 

to the Advisors, that wall came down between them and Mr. 

Waterhouse last summer. 

And we know it didn't come down before that because Your 

Honor already has a litany of evidence showing that D.C. 

Sauter had multiple conversations with Mr. Waterhouse in the 

spring of 2021. Remember, he submitted not one but two 

declarations in support of HCMFA's notes defense. And 

remember that? We'll talk about this more next week. Mr. 

Sauter conducted an internal investigation in the spring of 

2021 to try to figure out where did these HCMFA notes come 

from. And remember, Frank Waterhouse told him those notes 

exist because we needed to document it for the auditors. Mr. 

Waterhouse knew exactly why those notes existed.

And so how do the Advisors do an investigation, interview 

Mr. Waterhouse three times in the spring of 2021 about the 

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notes, and never ask him a question about this? And Mr. 

Waterhouse is going to testify he's never seen the 

administrative claim and he's never spoken to anybody in the 

world about the administrative claim until I deposed him, 

other than his counsel.

How do they do that? Frank Waterhouse is in their 

offices. There's investigations being conducted about HCMFA's 

notes. They're trying to figure out the origin of the notes. 

D.C. Sauter. And nobody asks him, what about this 

administrative claim? Do you know why we kept paying that 

money? Never happened. Maybe they would have learned at that 

time that Mr. Waterhouse thought that something happened in 

December of 2019 that was relevant.

The story that they've now adopted completely contradicts 

their early version, earlier theory of the case. Their 

earlier of the case, Your Honor, if you look at their 

response, which was filed in December, it's filed as Exhibit 

13, at Paragraph 6, their response to our waiver argument was 

we could not have waived, we could not have waived because the 

issue didn't crystallize until November 2020. That's when 

they said they first learned about all these problems. And 

now they've done a complete about-face and they say no, wait, 

Frank knew about it, Frank -- Dave Klos told him about the 

overpayments, Dave Klos told Frank, and Frank went to Caruso, 

and Caruso said nothing we can do about it, and that's a 

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violation of 2.02. And that's their theory. Really. 

Completely contradicts.

So all they've actually done now, if the Court actually 

buys that argument, is strengthen our waiver argument even 

more. Because now Frank knew in December 2019 -- I don't 

think the Court's ever going to credit his testimony, but if 

the Court did so, okay, fine, heads I win, tails they lose. 

It's just waiver. He knew -- he knew at the outset of the 

overpayments. 

And here's the really interesting thing. He never told 

Mr. Dondero. And he never told Mr. Norris and he never told 

Mr. Sauter and he never told Ms. Thedford and he never told 

the Independent Board. He never told anybody. But if you buy 

the story, you have to buy the whole story. You can't just 

buy the fact that Mr. Waterhouse didn't tell anybody. You 

also have to buy the fact that apparently Mr. Leventon never 

told Mr. Dondero. Mr. Ellington never told Mr. Dondero. 

Because if they had told Mr. Dondero, we would have had this 

story -- we would have heard about this story in the 

administrative claim or we would have heard about the story in 

the response. Instead, we're told the issue didn't 

crystallize until November 2020.

So not only did Mr. Waterhouse simply accept the advice of 

two in-house counsel and a financial restructuring 

professional, he didn't tell anybody, and nobody who he told 

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told anybody. Kind of funny. Kind of interesting. I'll use 

interesting.

There will not be a document or a witness who will 

corroborate Mr. Waterhouse's assertions. The contemporaneous 

documents will actually completely contradict Mr. Waterhouse's 

assertion. 

Which documents am I referring to? There actually was an 

analysis that Mr. Klos prepared in December 2019. He's going 

to share with the Court what that analysis was. And what that 

analysis shows is that, after making adjustments to present 

the analysis in the most positive light for the UCC, Highland 

was still losing a million and a half dollars a year under 

these intercompany agreements.

I can't explain Mr. Waterhouse's testimony. I thought 

originally when I was asking him about it that he was confused 

with a later analysis that was prepared in December 2020 that 

we'll talk about. He insists it was in December 2019. I 

don't know what to say. But there will be nothing that 

corroborates it. There won't be a witness in this courtroom 

who corroborates it. There's going to be -- it's going to be 

challenged by Mr. Klos. We're going to have documentary 

evidence that shows he's mistaken.

I don't need to ascribe bad motive. This guy's just 

mistaken. And given his lack of recollection about so many 

things, it's not terribly surprising.

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Subsequent communications are inconsistent. There's 

another couple of exhibits. And we just looked at one, the 

one with Ms. Thedford from January. Like a couple of weeks 

after Dave supposedly told Frank that there's millions and 

millions of dollars of profit being made under these 

contracts, he's turning around and saying to Ms. Thedford, 

we're not doing actual cost, it's a flat fee agreement. He's 

just ratifying everything that the parties have been doing for 

the 24 months under Mr. Dondero's control. 

I'm about done, Your Honor. I just want to talk for a 

moment about a couple of the witnesses. You are going to hear 

from Mr. Klos, and I'm delighted that you're going to do so. 

Nobody is going to take Mr. Klos on. He's a man of integrity. 

And I know, I know the Court will find him very credible. 

You'll find him credible for three reasons.

 Number one, his story makes sense. Every single thing 

that he says, he's going to say, that makes sense on a 

timeline, that makes sense from an economic perspective, that 

makes sense based on what I know of this institution and these 

individuals. 

You're going to find him credible for the second reason. 

His story is consistent. There's no equivocation. There's no 

change of story. I'm not worried about him being crossexamined with his deposition transcript. His story is going 

to be consistent. It's going to make sense. It's going to be 

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consistent. 

And the third reason is that it's all going to be 

corroborated by the contemporaneous documentation. 

So I look forward to presenting Mr. Klos. I think that he 

has more knowledge about these issues than anybody. He was 

involved in structuring the entire economic relationship 

between the parties. He was involved in the drafting of the 

agreements. And he was the person primarily responsible for 

the administration of the agreements. 

So that's one witness I hope the Court will pay particular 

attention to.

Mr. Waterhouse, obviously. He wore dual hats. He's going 

to say he wore dual hats. He's going to tell you that Mr. 

Dondero gave him all of those hats. But the Advisors can't 

get away from the fact that two of those hats were as the 

treasurer of HCMFA and as the treasurer of NexPoint. There's 

nothing that's in his head that can be attributable to 

Highland that cannot also be attributable to him as an officer 

and the treasurer of the Advisors. Right? So anything he 

knows, anything they want to put in his head, he knew not just 

for Highland but he knew for the Advisors.

And then there's Mr. Norris. I mean no ill will to Mr. 

Norris, but he has very little to offer here. And why is 

that? Because he's the executive vice president of the 

Advisors, and his responsibility was marketing. 

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You're going to hear Mr. Klos and I believe you will hear 

Mr. Waterhouse testify that Mr. Norris had absolutely no 

responsibility or involvement in the structuring of the 

economic relationship between the parties. They are going to 

testify that Mr. Norris had no involvement or personal 

knowledge about how these contracts were executed. 

Mr. Norris comes on the scene at the very last second. 

And like Mr. Sauter did in the spring of 2021 when he insisted 

that Mr. Waterhouse, the officer whose name appears on the 

HCMFA's notes, made a mistake, even though Mr. Waterhouse had 

absolutely no personal knowledge of anything, you're going to 

hear Mr. Norris testify that he came onto the scene in October 

or November and December 2020 and he was shocked, shocked, at 

how much was being charged. Where have you been? Where have 

you been? Did you look? Did you look in 2018 when Mr. 

Dondero was in control and all of the dual employees were 

leaving? Did you say, hey, hey, what are we doing here? No. 

Did you do it in 2019? No. He did in Month 35 of a 36-month 

relationship, without having had any involvement or 

responsibility for the negotiation or administration of these 

contracts.

I will be objecting as appropriate on foundation grounds, 

because a witness can only testify based on personal 

knowledge. And he can testify to whatever he did, but he 

should not be permitted to testify about the parties' intent. 

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I have nothing further, Your Honor.

 THE COURT: All right. Thank you. Mr. Rukavina? 

OPENING STATEMENT ON BEHALF OF THE DEFENDANTS

 MR. RUKAVINA: Respectfully, Your Honor, what you 

just heard was misdirection, irrelevancy, things that are not 

going to be in the record, things that are not in the record, 

and parol evidence. 

What Highland is trying to do here today is to ignore the 

fact that there are four contracts. Two of them are payroll 

reimbursement agreements; two of them are shared services. 

They are different contracts that provide for different 

things. And what you just heard was confusing the two, and I 

think you even heard Mr. Morris say that the PRAs were 

actually pay-for-services agreements.

They're trying to read these contracts into something that 

they're not, using parol evidence. And I find it particularly 

ironic given that in all those promissory note cases Highland 

is here hitting this table saying, follow those notes to the 

letter, ignore everything else, and now they're trying to 

shoehorn what is a very clear, unambiguous payroll 

reimbursement agreement into some kind of parol evidence, it 

was meant to be a flat payment every month for services.

What I first want you to focus on, because I really 

believe that it's unbelievable misdirection, are all of these 

references to representations that my clients made to the 

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board. And if you have Slide 13 of the deck, Your Honor --

did Mr. Morris give you Slide 13 -- you see -- you see, for 

example -- are you there, Your Honor? 

 THE COURT: Uh-huh. 

 MR. RUKAVINA: You see the first one, June 18th to 

19th, level and quality of services are being monitored.

August 13th. No disruptions in the services.

September 17th. Current shared services are being 

provided.

October 23rd. Pursuant to the shared services agreements.

Yes, Highland performed under the shared services 

agreements, except for two minor things that we've put in our 

trial brief and that we'll talk about that total about $1.3 

million in damages. 

What we're talking about here today, the bulk of our claim

is under the payroll reimbursement agreement. So as we 

proceed with the evidence, the Court needs to be careful to 

have that separation. Because the fact that we told the board 

the truth, that under shared services we were being provided 

shared services, does not mean that we told the board that, 

oh, wait, there's a problem under payroll reimbursement. The 

two are separate.

And I really want to point out two exhibits to Your Honor, 

if Ms. Canty would do me the favor, or if Your Honor wants to 

look at them in her binder. It's Highland Exhibit 58. Ms. 

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Canty, is it possible -- Mr. Morris, are you willing to share 

Ms. Canty?

Yes. Ms. Canty, if you have your own Exhibit 58. 

She might not even be listening. 

(Pause.)

 MR. RUKAVINA: Is it just easier, Your Honor, if Your 

Honor gets a binder? 

 THE COURT: I can do that.

 MR. RUKAVINA: Your Honor, it's -- I believe it's -- 

it's Volume 2. Volume 2 of the Highland exhibits. 

That's okay, Ms. Canty. Thank you. I think this will be 

faster if we just use binders. 

Your Honor, it's Exhibit 58, when you're ready.

 THE COURT: Minutes?

 MR. RUKAVINA: Yes, Your Honor. On the bottom, it's 

Page 20. Just it's a few pages in. The bottom, it says Page 

20.

 THE COURT: Okay.

 MR. RUKAVINA: So, it says Mr. Post also discussed 

the quality and continuity of services provided to the Funds 

by HCMLP pursuant to shared services agreements with the 

Advisors. And then you'll see that he says that there's no 

material disruptions in services. 

What about that is not true? What about that has anything 

to do with a multimillion-dollar overpayment under payroll 

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reimbursement? But that's what you're being told. Again, 

they're trying to confuse the issues.

And if Your Honor will quickly flip to Exhibit 61.

 THE COURT: Okay. 

 MR. RUKAVINA: And it's the bottom of Page 3. And in 

the very middle you'll see it says, Mr. Sauter also discussed 

the status of the shared services agreements. 

 THE COURT: Okay. The one I have is redacted. 

 MR. RUKAVINA: Page -- the bottom of Page 3, Your 

Honor?

 THE COURT: Yes.

 MR. RUKAVINA: Of this? The top should not be 

redacted.

 THE COURT: It's not. Oh, okay. Yes. Mr. Morris 

discussed. 

 MR. RUKAVINA: And then, yeah, in the middle it says, 

Mr. Sauter also discussed the status of the shared services. 

 THE COURT: Okay. Gotcha. 

 MR. RUKAVINA: But look at what they say on Slide 13. 

They say Sauter noted that there has been no material 

attrition to date with respect to employees. Where is that in 

this document? We'll talk about that later. That's nowhere 

in this document. 

Again, they're intentionally conflating shared services, 

that we're not saying we didn't get shared services, with 

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payroll reimbursement. 

The facts here matter, Your Honor. And I caution the 

Court to be careful because, again, these are separate 

contracts that have separate provisions and they work 

separately.

You're also going to be told about, oh, well, a lot of 

these employees weren't even there when the payroll 

reimbursement agreements were made. I think Mr. Morris said 

four. Yeah, except that they were signed in May to be 

effective as of January 1. And if Mr. Klos really is this 

impeccable, unbribable character of pristine morals, well, did 

he create a fake agreement? Did he lie? Of course not.

Again, misdirection. Misdirection.

You are told, well, a lot of these employees left. What 

you're going to hear is that a lot of those payroll 

reimbursement employees, those dual employees, left because 

the Advisors changed their business model to a real estateheavy business model, whereas before they had a lot of credit, 

they had debt, equities. They changed to real estate. So 

that's why 20 out of 25 employees that were dual employees 

left, because they saw the writing on the wall, not for these 

other reasons. Because the argument that you're hearing is, 

well, don't look at these two contracts, Judge, the payroll 

contracts. Consider it a services agreement. And even though 

those 20 employees were no longer there, Highland made it up 

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with other employees that were there. Therefore, the spirit 

and intent of the agreement is honored. 

No. No, Your Honor. No. Highland did not make up those 

services. Highland was providing those services pursuant to 

the shared services agreements, and those dual employees left 

and they were not replaced, their services were not replaced, 

because they were no longer needed. Except guess what? 

Highland never told us that. The one we contracted with to 

review our contracts, to review our bills, to review our 

invoicing, to make sure that we're paying only appropriate 

amounts. You're going to hear from everyone that that was one 

of the services that we were paying pursuant to shared 

services. Highland never bothered telling anyone, oh, we're 

still going to bill you for these 20 employees that are gone. 

You've been told that everyone in the world knew those 

employees were gone. Of course. But not that we were still 

being billed for it. Because it was only Highland people that 

billed us for that and paid themselves from our bank accounts 

which they have control over.

Mr. Dondero didn't know. No officer of the Advisors knew. 

Mr. Waterhouse knew. And yes, Mr. Waterhouse was an officer 

of the Advisors and an officer of the Debtor. And you're 

going to hear from Mr. Waterhouse what he tried to do about 

that.

But, again, don't allow that misdirection to color the 

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true record here. Our contractual counterparty, the one 

providing services to us, a debtor in bankruptcy, every month 

was billing us and paying itself from our funds for 20 

employees who weren't there. 

And Mr. Klos -- again, the man that we've all be told is 

the most credible man in this court -- will confirm that. And 

he calculated our damages for us. You're going to see all 

that.

So let's, again, stick to the facts. The payroll 

reimbursement agreements are reimbursement agreements. 

Everyone in the world knows what the word reimburse means. 

There was not to be any profit margin on there. We are to 

reimburse for actual cost. Actual cost means the actual cost 

to Highland of a dual employee. 

Yes, there are some issues with notices and when did we 

know, when did we act? You're going to hear all about that. 

But at the end of the day, if the Court is looking for the 

intent and purpose of the contract, it is a reimbursement. 

And each of those have a schedule of 25 employees that was 

accurate and current -- Mr. Klos himself performed those 

percentages -- that was accurate and current when those 

contracts were done.

You are then going to hear that Highland, pursuant to its 

general practices, did a true up or a reconciliation of all of 

its contracts on an annual basis. 

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There is language in these contracts that talks about, 

well, why don't the parties look at the actual costs every 

month. There is that language. We will discuss that. But 

the course of conduct at Highland, both generally and in this 

case, was to do it once a year at the end, because to do it 

monthly was burdensome. 

In the first year of that contract, the parties did a true 

up, and my clients ended up paying $2.5 million more in 

because we underpaid. You're going to hear some fiction that 

this was some means of getting a tax deduction for Mr. 

Dondero. Well, the contracts, again, say what they say, and 

they say we did a true up -- they don't say that. We did an 

analysis and the Advisors underpaid, so now the Advisors are 

going to pay $2.5 million. 

So, again, is that a fraudulent document? Is that 

Highland document a fraudulent document? Were people lying on 

these documents? 

Then the bankruptcy happens, and it's time for the next 

true up in late 2019. Coincidentally, at the same time that 

the Committee, appropriately so, is asking DSI and asking the 

Debtor, what are these intercompany agreements? This -- these 

are insider agreements. Explain to us. Is Highland losing

money? Is Highland making money?

So what happens next? Mr. Klos -- again, the most 

credible man in this room, we're told -- does an analysis, and 

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he says that at that point in time Highland is making a $3 

million annualized profit on the payroll reimbursement 

agreements. Okay. He also says that Highland is losing money 

on the shared services agreements. That's true. But, again, 

don't allow that misdirection. On the payroll agreements, 

Highland is at that point in time making a $3 million profit. 

 He tells Mr. Waterhouse, his boss, did you know about 

these overpayments? You should do something about that. And 

Mr. Waterhouse, a professional man, does what he should do. 

He talks to the general counsel at Highland and he talks to 

the CRO and DSI and says, it's time that we revise these 

numbers, because we're overpaying, the Advisors are overpaying 

by $3 million a year, and that's not fair, it's not right. 

That's extra-contractual. The general counsel, the associate 

general counsel, and the man who's been in bankruptcy for 30 

years tell him there's nothing we can do because of the 

automatic stay. We will address it and deal with it in due 

course. 

What more was Mr. Waterhouse supposed to do at that time? 

Call Mr. Dondero? His own general counsel and his own CRO 

just told him what the law is, and he relied on that and 

believed them and said, okay, there's nothing to be done at 

this time, we'll address it in due course. 

Months go by. Months go by. The overpayments become 

greater and greater and greater as there's fewer and fewer 

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employees. Mr. Waterhouse is still acting in reliance on 

this. You know that there were negotiations on a global plan. 

Well, at some point in September or October 2020, the 

situation was no longer tenable. That's when Mr. Norris comes 

in, my client's officer. Yes, he's a marketing guy, but he's 

a very sophisticated businessman with a lot of education, and 

he's tasked with this. 

He starts talking to Mr. Kos. He starts talking to Mr. 

Waterhouse. He starts talking again to the lawyers. Hey, we 

are overpaying. And Mr. Klos, you'll hear, repeatedly 

acknowledged the fact of overpaying. But he's again told the 

automatic stay applies, you can't do nothing. If you send a 

letter, if you do anything, it's going to be a stay violation. 

You'll recall we had a preliminary injunction hearing at 

which the Court was none too happy about a letter sent from 

K&L Gates to the Pachulski firm threatening action subject to 

the -- subject to the automatic stay. They hauled us in front 

of Your Honor on an emergency hearing on that. Imagine if we 

sent them a letter saying, we're going to revise this 

contract, or we're going to terminate this contract. That 

would have been a stay violation. 

But all along, the contract says that once the issue is 

raised, once a change is requested, the parties shall 

negotiate in good faith. Shall negotiate in good faith. 

That's not meaningless language. And there was no 

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negotiation. Repeated admissions of overpayments, no 

negotiations, but hiding behind the automatic stay, perhaps 

appropriately, perhaps not.

 And then finally in December 2020 I think the key evidence 

here will come out, because it happened before litigation. It 

happened by a professional, honorable man of integrity that 

you've heard, Mr. Klos. It happened when we were not 

contemplating being here today. Mr. Klos was asked by Mr. 

Waterhouse to calculate the profitability or the loss of 

Highland on these four contracts. He was told, or he assumed, 

or he may -- well, the evidence differs. Mr. Klos will say 

Mr. Waterhouse told him to make assumptions. Mr. Waterhouse 

will say it was Mr. Klos's assumptions. It doesn't matter. 

There were two assumptions in the work product that Mr. Klos, 

this professional accountant, prepared. Use actual headcount 

today. Not the original 25, but the actual headcount today, 

which was five. And do not include bonuses. Highland didn't 

pay insider bonuses, which were a huge amount. There were 

other bonuses paid, so the numbers need to be adjusted a 

little bit. Mr. Klos didn't include any bonuses. 

And he said at that point in time, in December 2020, 

Highland was making an annualized $6.6 million profit on the 

payroll reimbursement agreements and a $1 million annualized 

profit on the shared services agreements, even though you 

heard in this Court repeatedly from Highland employees and 

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witnesses that, oh, we're losing money on all these contracts.

So, is Mr. Klos a liar? Is he -- is he a nincompoop who 

can't do his job? Is he changing his story now? How could 

there have been a $6.6 million profit on one and a $1 million 

profit on the others when the contracts (inaudible) profits 

then? Did he create a fictitious document then? No. He did 

his job as he should have, and that is the key evidence here. 

That is the key evidence. 

What this trial will come down to, Your Honor, is the 

contract. Whether my clients had an obligation under the 

contract -- because, again, the fact of overpayment cannot and 

will not be disputed. Twenty of twenty-five employees weren't 

there. We can quibble about damages, but the fact of 

overpayment will not be disputed. Cannot be disputed. The 

question is, again, did my clients waive their rights because 

they did not more frequently or more formally trigger the 

process of revisiting the actual cost formula?

Those contracts are very clear. There's no need for parol 

evidence. There's no ambiguity. The fixed monthly amount 

stays unless changed at the request of either party, upon 

which time the parties shall negotiate such change in good 

faith. 

We requested it repeatedly. They stood behind the 

automatic stay. And the Court will have to construe that 

contract as a matter of law and decide whether that is a 

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waiver or not. 

There's no other waiver. There's no voluntary payment 

rule. The voluntary payment rule doesn't apply to contracts. 

And we weren't paying these bills. Highland was paying 

itself. 

And that's the thought I want to leave you with, Your 

Honor. That's the thought I want to leave you with, that your 

Debtor, who has gotten immense protections from this Court, 

fiduciaries to the estate, every single month billed my client 

for almost a million dollars more than they were entitled to 

under these contracts because there was no reimbursement by 

this Debtor of its own employees. Month after month, with 

knowledge that these employees weren't there, with knowledge 

that Highland was making a profit on these contracts when it 

was not allowed to, they billed my clients and paid themselves 

for employees who were not there. Whether it's contract or 

equity or just good business ethics or just being a good 

debtor-in-position, that ought to bother the Court. That 

ought to bother the Court, and that's why we have an 

administrative claim. 

Thank you.

 THE COURT: All right. Thank you. It's 11:01. 

We'll take a ten-minute break and come back and hear the 

evidence.

 THE CLERK: All rise.

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(A recess ensued from 11:01 a.m. until 11:15 a.m.)

 THE CLERK: All rise. 

 THE COURT: All right. Please be seated. We're back 

on the record in the Highland matter.

Mr. Morris, are you ready to call your witness?

 MR. MORRIS: Good morning. Yes, Your Honor. 

Highland calls as its first witness David Klos. 

 THE COURT: All right. Mr. Klos? Okay. If you 

could approach the witness box, I'll swear you in. Please 

raise your right hand.

(The witness is sworn.)

 THE COURT: All right. Thank you. You may be 

seated.

DAVID KLOS, DEBTOR'S WITNESS, SWORN

DIRECT EXAMINATION 

BY MR. MORRIS:

Q Good morning, Mr. Klos.

A Good morning.

Q So, I'm going to ask you some questions this morning. And 

I would ask you to listen carefully to my questions and do the 

best you can to answer them. Okay? 

A Absolutely.

Q I've put before you, or Mr. Rukavina and I have put before 

you some binders. There is two binders that have Highland's 

exhibits and there is one binder that has the Advisors' 

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exhibits. And from time to time I may ask you to pull 

documents out. But that's what those -- that's what those big 

binders are in front of you.

A Okay. 

Q Are you comfortable? Are you prepared to proceed? 

A Yes.

Q Okay. Mr. Klos, you're familiar with Mr. Waterhouse, 

obviously, right?

A Yes.

Q Okay. And did you understand that Mr. Waterhouse served 

as Highland's chief financial officer at least for the fiveyear period through 2021?

A Yes. He -- he elevated to that role in the 2011-2012 time 

frame.

Q Okay. And are you aware that at the same time he served 

as Highland's CFO he also served as the treasurer of each of 

the Advisors? 

A Yes.

Q And are you aware that Mr. Waterhouse, in his dual 

capacity as the CFO of Highland and as the treasurer of the 

Advisors, he's the one who signed the payroll reimbursement 

agreements?

A Yes. That's correct.

Q And the payroll -- do you recall that the payroll 

reimbursement agreements had the list of dual employees?

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A Yes.

Q And from the time the -- for the three-year period from 

December -- from January 1, 2018 until the end of 2020, was it 

Mr. Waterhouse's practice to approve each and every payment 

that was made on behalf of the Advisors pursuant to not just 

the payroll reimbursement agreements but all of the 

intercompany agreements?

A Yes. That was the general practice.

Q Can you just describe for the judge your understanding of 

how that practice operated?

A For making the payments?

Q Yes.

A Yes.

Q Approval. Approval of the payments. 

A Yes. Yeah, I mean, generally speaking, our assistant 

controller, usually Kristin Hendrix, would -- would prep wires 

on an ongoing basis, whether first of the month or just weekly 

type wires. She'd send an approval email to Frank saying, 

here are the wires for today. Okay to release? Or something 

like that. And Frank would respond with yes, or if he had 

questions then he might -- he might chime in. But usually 

just an approval.

Q Okay. Can you just -- are you currently employed, sir? 

A Yes.

Q And who's your employer?

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A Highland Capital.

Q And what's your title today?

A CFO and COO.

Q And when did you first join Highland? 

A End of March 2009.

Q And during the period -- let's -- I'm going to use the 

phrase "the relevant period" to mean from January 1, 2018 

until the end of 2020, that three-year period. Is that okay?

A That's fine.

Q Okay. During the relevant period, what titles did you 

hold at Highland?

A I was controller through April of '20, and then I was 

chief accounting officer from April '20 forward. 

Q Okay. And you reported to Mr. Waterhouse, correct?

A Yes. Throughout.

Q Okay. Now, can you describe generally for Judge Jernigan 

what your duties and responsibilities were as the controller 

and the chief accounting officers during the relevant time? 

A Sure. And I'll qualify that I had responsibilities over 

different departments. But as it pertains to this matter, I 

was the department head for corporate accounting group, so the 

group that does the Advisor accounting both for HCMLP as well 

as other call it non-fund advisor or proprietary-type 

entities, and oversaw a team of -- that encompassed the A/P 

and the general accounting function for those entities.

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Q I'm going to use another term, I'll just call it "the 

intercompany agreements," to refer to the payroll service 

agreements and the shared services agreements between Highland 

and the Advisors. Is that okay? 

A Yes, that's fine.

Q Okay. Did you personally play any role in the 

preparation, creation, and administration of the intercompany 

agreements during the relevant period?

A Yes. And even outside the relevant period, because one of 

the shared services agreements is long in the tooth and goes 

back to the 2012 time frame, and I was -- I was involved in 

that one as well.

Q Okay. And can you just describe generally -- well, we'll 

talk about the details of it. Let's take you back to December 

2017, the month before the beginning of the relevant period. 

Do you have a recollection as to how Highland was performing 

on an operating basis in 2017?

A Yes. It was performing poorly. Assets were being shed. 

A lot of our business had been CLOs, which had been steadily 

declining over the years. They were past their reinvestment 

period, so assets declined, cash flow declined, and by that 

time we were cash flow negative. At HCMLP proper. 

Q Okay. And did you participate in any discussions within 

Highland in December 2017 as to how Highland might address 

these operating losses?

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A Yes. So we had standing weekly cash -- cash meetings 

between myself, the CFO, and usually Kristin would participate 

in those, and then we would also meet with Mr. Dondero from 

time to time on those cash meetings. And we did have such a 

meeting in December of 2017.

Q Can you describe for Judge Jernigan your recollection of 

the meeting that was had in December of 2017 where the issue 

of -- how the losses were going to be addressed? 

A Absolutely. And I caution, I don't remember the 

specifics, the specifics in terrible detail of that meeting, 

but I'm certain that it was me, Frank, and Jim Dondero. And 

that the substance of that meeting -- again, I don't know if 

this was coming from Jim or from Frank and I -- was we're 

really bleeding cash quickly. We need more cash at Highland 

to operate, to pay bills, to do what we need to do, because we 

always operated very lean across the entire structure. And, 

you know, Jim, can you -- can you help with that? Help us 

solve this problem. And the solution that was given to us, my 

recollection, I think that the -- the idea was that you would 

just increase the shared services agreement that was already 

in place with NexPoint, and Mr. Dondero had this idea of 

bifurcating it, create a new agreement, such that NexPoint is 

paying Highland six in the aggregate on a prospective basis.

Q And six meaning $6 million? 

A $6 million. I apologize. 

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Q And is your recollection that Mr. Dondero gave the 

instruction to increase the amount that NexPoint was paying to 

Highland for the services rendered, should be -- should be 

increased to $6 million? 

A Yes. Because at the time, NexPoint was paying Highland 

about, annualized, $1.2 [million] per year. So this was a 

significant step up.

Q Okay. And did you personally do any work to try to figure 

out how to execute on Mr. Dondero's instruction?

A Just in the sense of -- I think I passed that off to one 

of the employees that worked under me to work with Legal to 

work through drafting of agreements to update to reflect that, 

that desire. 

Q Okay. I'm going to ask you to turn to Exhibit 130. 

1-3-0.

A Okay. I'm there. 

Q And I'll just ask generally -- take a moment to look at 

it.

A Yep. I'm there.

Q Do you recall that in late December, early January of the 

relevant period, you were engaged in discussions with some of 

your colleagues about how to document the $6 million 

direction?

A Yes.

Q Okay. Directing your attention to the email that you sent 

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on January 4th at 3:16 p.m., which can be found on the 

document ending in Bates No. 47, -- 

A I'm there.

Q -- I see there's a chart. Can you explain to the judge 

what you're conveying in that chart?

A Sure. There are -- there are four agreements that are 

going to be put in place to get to the -- to the $6 million 

number in the aggregate. You see one of them, the one that's, 

at least on my thing, is highlighted, there's one that's an 

intercompany between parent and sub, NexPoint/NREA. For our 

purposes today, that's kind of irrelevant. 

But for the other three, you have Highland HCMLP as the 

service provider, and you see the breakdown of those -- those 

three agreements between $252,000 per month for subadvisory --

sorry. $168,000 to NexPoint Advisors for shared services. 

And then $80,000 for -- from NexPoint to NREA for shared 

services. 

And so the sum of those of three amounts to HCMLP, 

$252,000 plus $168,000 plus $80,000, equals $500,000 a month, 

times 12 is the $6 million number that we had talked to Jim 

about, you know, within a month.

Q Okay. So, as of January 4, 2018, this was the idea that 

you and your colleagues came up with on how to execute the $6 

million directive; is that fair? 

A That's -- that's -- generally. That's right. 

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Q Okay. I just want a stop for a second. You know, you 

refer in this to subadvisory, SubADV. Can you just explain to 

Court what your understanding is of what subadvisory services 

are and -- I'll just stop there. 

A In the most general sense, investment advice to client 

funds. So, in the context of this, you have the Retail 

Advisors that are the named advisor, but you also have 

Highland people, HCMLP employees that are providing services. 

So this is a mechanic for those employees to give that service 

to the Funds, give investment advice, which is a little bit 

different than the shared service, which tends to be back and 

middle-office operational-type services. 

Q Okay. Do you know if Highland provided subadvisory 

services to the Advisors prior to January 1, 2018? 

A Yes. Not pursuant to an agreement, but the services were 

provided going back to -- to when those contracts were moved 

from Highland back in the twenty -- I want to say 2012 time 

frame.

Q So, for approximately six years, Highland had provided 

subadvisory services to the Advisors for no compensation? Do 

I have that right?

A That's correct.

Q Okay. Did anybody during that six-year period from 

Highland say, oh, gee, we should be getting paid for 

subadvisory services?

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A No. No one said that.

Q At this time, Mr. Dondero controlled the Advisors and 

Highland, correct? 

A That's right.

Q Why the change at this time, then? Why go, after six 

years of not paying for subadvisory services, to all of a 

sudden creating an agreement pursuant to which subadvisory 

services -- fees would be paid? 

 MR. RUKAVINA: Your Honor, object. There's a lack of 

foundation. He didn't sign those contracts and there's no 

predicate been laid as to why.

 THE COURT: Response?

 MR. MORRIS: The witness has already testified that 

he's the person -- I mean, look at his email. He's the one 

who's responsible for allocating money under these various 

agreements. I can -- I'll ask -- I'll ask a foundational 

question. 

 THE COURT: Okay. He'll ask --

BY MR. MORRIS:

Q As part of the discussions, did anybody talk about why the 

subadvisory agreement was going to be adopted at that moment 

in time?

A In a general sense, yes. It was going to be providing for 

the services that had already been provided, but to have 

Highland be able to start earning a fee for that service. 

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Q And was there discussion at that time that the fee that 

would be paid to Highland would not only give Highland access 

to needed capital but it would also provide a shield to the 

taxable income of the Advisors? 

 MR. RUKAVINA: Your Honor, that's leading.

 THE COURT: Sus...

 MR. RUKAVINA: And again, what is the -- I'm sorry. 

I'm sorry, Your Honor.

 THE COURT: I'm going to sustain on leading. 

 MR. MORRIS: Okay. Fine.

BY MR. MORRIS:

Q Can you tell me what the reasons were for entering into 

these agreements? What were the -- what were all of the 

reasons that were discussed at that time?

A Yeah. The reasons I remember specifically were need for 

cash flow at Highland, because Highland was negative on cash 

flow, and need for a deduction at NexPoint, because NexPoint 

was generating taxable income that indirectly flowed -- flowed 

up to Mr. Dondero. 

Q And when you wrote your email and you said that the 

subadvisory fee should be $252,000 a month, had you done an 

analysis of the actual cost to Highland of providing those 

services?

A No.

Q Did anybody ask you to make sure that the $252,000 was 

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tied to the actual cost of services being delivered? 

A Not at all.

Q Was the $252,000 number that was allocated to the 

subadvisory agreement related in any way to the cost of 

providing services?

A No, just in the sense that it was a -- you know, that 

there was service being provided for value. But in terms of 

the actual number, no.

Q Did the Advisors -- do you know whether Highland went out 

and tried to determine what the value of their services were 

to make sure that they were getting fair value for the 

services? 

A Absolutely not. It would have been a preposterous 

proposition to do that.

Q Was there any discussion at any time as to whether or not 

the Advisors should go out into the marketplace to see whether 

they could obtain these subadvisory services at a price less 

than $252,000?

A No discussion. And you have to keep it in context, 

because this all was a single complex. So you had people that 

were being used across different Advisors to support the 

complex's goals. And they were being used that way. And, you 

know, I think -- I think Mr. Dondero was generally happy with 

the people and the team. And so this is all behind the 

scenes, just transferring money between, you know, pockets 

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that he -- that he has. 

Q Was there any discussion at that time as to whether or not 

Highland would make a profit off of a $252,000 subadvisory 

contract?

A No.

Q Was there any discussion at that time as to whether 

Highland should or shouldn't make a profit under the 

subadvisory agreement?

A No.

Q You mentioned that -- in your email that the sub -- the 

shared services would be at $168,000. Do I have that right? 

A Correct. With respect to the NexPoint Advisors, LP 

agreement, --

Q Okay.

A -- yes.

Q And do you have an understanding as to whether or not that 

--

 MR. RUKAVINA: Your Honor, again, objection. 

Leading. The question should be, What is your understanding, 

not, Do you have an understanding that--?

 THE COURT: Well, I'll let him ask the whole 

question.

 MR. RUKAVINA: But that's the problem, because then 

the witness will hear the question, and then my objection will 

be irrelevant.

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 MR. MORRIS: Okay.

 THE COURT: I'll sustain. I'll let you rephrase the 

question.

 MR. MORRIS: Okay.

BY MR. MORRIS:

Q Was the hundred and -- so, were these -- were these 

numbers -- did you intend, when you wrote these numbers, --

 MR. RUKAVINA: Objection, Your Honor. Again, 

leading. Did you intend? It's -- the question should be, 

What did you intend?

 MR. MORRIS: I don't --

 MR. RUKAVINA: It's a leading question. Did you 

intend that--? The question, the question has the answer 

within it, Your Honor.

 THE COURT: Okay. 

 MR. MORRIS: Mr. Klos, --

 THE COURT: Sustained. 

BY MR. MORRIS:

Q -- were these numbers intended to be variable? 

A No.

Q And when you say that, what do you mean?

A What I mean by that is we already had the direction, $6 

million was going to be the number from NexPoint Advisors, 

including subsidiaries, to HCMLP. So the numbers were already 

known. And just as I was explaining before, there's three 

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components to it, but $252,000, $168,000, and $80,000 gets you 

to the $500,000 per month or $6 million per year. 

Q And was the $168,000 for shared services by NexPoint, was 

that a change in the methodology by which the fee would be 

calculated?

A Yes. Yeah. Yeah, it was a change. 

Q Can you get -- please turn to Exhibit 29? 

A Okay. I'm there.

 MR. MORRIS: All right. Let me know when you have 

that, Your Honor.

 THE COURT: Uh-huh. 

BY MR. MORRIS:

Q Okay. Do you know what that document is, Mr. Klos?

A I do. This appears to be the original shared services 

agreement between Highland Capital Management, LP and NexPoint 

Advisors that went all the way back to 2013. So this was the 

predecessor for the 2018 amendment.

Q And can you turn to Page 4, Section 4.01?

A Okay. I'm there.

Q Do you have an understanding as to how NexPoint paid 

Highland for shared services prior to January 1, 2018 under 

this provision?

A Yes. It was all -- it was all pursuant to 4.01(c) that 

has a little bit of a long, convoluted discussion, but at the 

end of the day, just boiling it down, what this -- what this 

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section means is that Highland was going to be charging 

NexPoint Advisors 10 basis points on assets managed by the --

I think it was NHF at the time, NexPoint Strategies Fund, and 

it was going to be charging 15 basis points on basically all 

other assets of that fund, and that that was going to be --

that was, I think it's a defined term, that was actual cost, 

notwithstanding that that concept is completely divorced from 

cost.

Q And how is the issue of actual cost completely divorced 

from cost? 

A Because the charge itself was being generated off of the 

assets managed by a single fund, and that -- I don't know how 

else to say it other than that has -- that has nothing to do 

with cost.

Q Okay.

A What it does have to do with was that that was a charge --

that was a fund that charged 120 basis points, so NexPoint was 

earning 120 basis points and it was paying some blend of 10 to 

15, so it was pocketing 90 percent of the revenue. 

Q And can you explain to the judge why the change was made 

from a formula depending on asset values to a fixed fee of 

$168,000 a month?

A Yeah.

 MR. RUKAVINA: Your Honor, objection, based on 

foundation. 

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 MR. MORRIS: Your Honor, he has testified to 

everything already. 

 MR. RUKAVINA: No, he hasn't, Your Honor. He hasn't 

testified that he knows why this change was made or that 

anyone told him why this change was made or that he made this 

change. He's speculating.

 THE COURT: I overrule the objection.

 THE WITNESS: So, the reason to switch it to fixed 

is, again, you already know the answer, so the answer is $6 

million, the answer -- the split is going to be roughly 50/50. 

It's a little bit -- it's a little bit weighted to the -- to 

the subadvisory. Why are you introducing any variability when 

you already know the answer?

BY MR. MORRIS:

Q Okay. And the answer here was what?

A The answer here was $168,00 with respect to NexPoint 

Advisors, $80,000 with respect to NexPoint Real Estate 

Advisors. And then, like I said, on the subadvisory, 

$252,000. 

Q Okay. Can you turn to Exhibit 3, please? And can you 

describe for the Court your understanding of what that 

document is?

A Exhibit 3, you said?

Q Yes.

A Ah. So this, this is the amended and restated agreement 

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for NexPoint Advisors.

Q Okay.

A So this, this is the agreement that updates to the fixed 

$168,000.

Q Okay. And if you can turn to last page, the one ending at 

Bates No. 647. Are you familiar with those signatures?

A Yes, I am.

Q And what's your understanding of who signed this contract? 

A So, this contract was by Frank Waterhouse.

Q Okay. And when was this contract effective?

A This was effective January 1st of 2018. I believe it was 

executed in the early part, around -- on or around January 

11th, my recollection. 

Q Okay. Can you turn to Page 9, please? 

A I'm there.

Q In Section 3.01, is that the section that sets forth the 

provision for compensating Highland for shared services by 

NexPoint?

A I'm sorry. What's the exhibit again?

Q It's Exhibit 3, Page 9. 

A Oh. I'm sorry. I went to Exhibit 9.

Q I may have -- I may have misspoken. 

A Exhibit 3, Page 9?

Q Right.

A Okay. Okay. I'm there.

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Q And can you describe for the Court your understanding of 

what Section 3.01 provides?

A Yes. It's providing for what I was -- what I was just 

explaining, which is the flat fee of $168,000 per month.

Q So, did this agreement put into practice what was in your 

email?

A Yes.

Q Okay. Did you personally, as the controller of Highland 

at the time, did you have any view as to whether or not $6 

million was the right number of compensation for subadvisory 

and shared services by NexPoint?

A I don't know that I had a view on that that was the right 

number, but it was certainly a number in the right direction, 

because the previous charges, like -- as you mentioned 

earlier, there were no previous charges for any of the front 

office services, and the back office services were locking in 

a 90 percent profitability. So it was -- it was a step in the 

right direction. Hard to say if that was the perfect number, 

but a stopped clock tells the right time twice a day, so at 

some point maybe.

Q Did you personally do any analysis in late 2017 or early 

2018 to determine whether $6 million was fair value for the 

subadvisory services and shared services that Highland was 

providing?

A No. 

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Q Are you aware of anybody doing any such analysis?

A No.

Q Did you do any analysis to assess on a holistic basis 

whether Highland was going to make a profit off of the $6 

million for shared and subadvisory services?

A In a way. Maybe not directly, but, you know, around that 

same time we were preparing our annual presentation for Jim, 

so we had a sense of what the Advisors were -- where they were 

shaking out in the future.

Q Okay. We'll look at that in a moment. On your email, 

there was the $80,000 for NREA. Do I have that right?

A Yes.

Q Can you just explain to the Court what that referred to 

and why that was part of your email?

A Yes. So, NREA, NexPoint Real Estate Advisors, LP, is a 

wholly-owned subsidiary of NexPoint Advisors. At the time, I 

believe it just had a single entity that it provided services 

for, which was a public REIT with a ticker NXRT. And so there 

were services being provided by Highland people to that 

advisor to basically keep that REIT functioning.

Q Okay. You just mentioned an annual review. Did you 

participate in an annual review?

A Yes.

Q And can you describe for the Court the process of the 

annual review?

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A Yes. So, going back to I want to say 2013, myself and 

Frank would generally meet with Mr. Dondero and Mr. Okada at 

the end of the -- at the beginning of the year. And, really, 

the purpose of that agreement, or that meeting, was to sit 

down, review the year that we just had, what happened, who 

came, who went, what were our wins, what were our losses, and 

then -- and then talk about the year to come, how we're 

projecting what's on the horizon, and then also, you know, we 

had -- our bonus process culminated at the end of February, so 

this was a good opportunity to start getting initial feedback 

from Jim on where he saw the compensation pool for that coming 

year. And this was a good way to wrap that all together, try 

to be objective, and give him the data to kind of do his own 

evaluation of what kind of a year we just had.

Q Okay. In connection with the annual review, did you 

prepare written information?

A Yes.

Q Can you describe for Judge Jernigan what information you 

prepared and how you went about preparing it?

A Yes. So, the information, my recollection, it was usually 

like a 40 to -- 40- to 60-page type presentation, a slide 

deck. And it would include financials from the previous year, 

a section on HR, a section on forward-looking projections, a 

section on fund performance across the platform, and probably 

a few other things that I'm forgetting up here. 

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Q And did you obtain information from other areas of the 

enterprise?

A Yes. So that was a -- it was a collaborative process. I 

would work on it, I would delegate some parts of it to my 

team, and then also go to other departments for some of the 

information as well.

Q Would Mr. Waterhouse have an opportunity to review the 

deck before it was presented to Mr. Okada and Mr. Dondero? 

A Yes. Absolutely. We would meet on it ahead of time, he 

would provide comments, and we would -- I would work through 

incorporating those comments.

Q So do you recall preparing a deck for the review of 2017 

and for the outlook of 2018? 

A Yes.

Q Okay. Let's take a look at Exhibit 86, please. 

A Okay.

Q Do you know what this is?

A Yes. This is -- these are materials I was just referring 

to.

Q And do you recall meeting -- having the annual review 

meeting on or around January 26, 2018?

A Yes. Right around that time.

Q And can you describe for the Court just the setting that 

you recall about this meeting?

A Yes. This was always an in-person meeting, so this would 

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have been in Jim's adjacent conference room, with, again, me, 

Frank, Jim, Mark. I can't remember, it's possible that Sean 

Fox might have sat in, but I don't remember specifically.

Q Okay. Let's just take a look at some of the information 

in here. If we can turn to the second page, the executive 

summary.

A Okay. I'm there. 

Q Do you see there's a bullet point that begins, The 

platform will continue experiencing operating cash shortfalls?

A Yes. I see that.

Q Can you just tell the judge what that and the bullet point 

underneath were intended to convey?

A Yes. So, by cash shortfalls, hopefully self-explanatory. 

On an operating basis, we're burning cash. And what the subbullet is saying is that overall operating income -- and by 

that I mean operating income across all of the affiliate 

Advisors -- is projected at, you know, positive $.9 million. 

But on a standalone basis for HCMLP, it's negative 12. 

Q Uh, --

A And I -- if I can add one more thing. The clause at the 

end there is just -- is -- this is -- this is kind of a 

tickler for Jim to remind him you have substantial other 

investment commitments. You're invested in private equity 

funds that call capital. So Highland is losing 12, but then 

you're also going to need to generate more cash to fund those 

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commitments as well.

Q Can you turn to Slide 6 in this deck, the one with Bates 

No. 308?

A I'm there.

Q Can you describe for the Court what this shows? Just 

generally?

A Yes. So this is a balance sheet, so it's a point-in-time 

look at the assets and liabilities of -- we're saying 

consolidated, meaning Highland -- it's in the -- it's 

contained in the Footnote 1. Highland, Highland Capital 

Management Fund Advisors, NexPoint, including its 

subsidiaries, Acis Capital Management, and then three other 

kind of rounding error-type Advisors: Falcon, Granite Bay, 

and Highland Healthcare Advisors.

Q And was it the practice in Highland at this time to look 

at the enterprise from a holistic point of view? 

A Absolutely. 

Q Okay. And if we could just flip some of the pages here, 

would the same holistic enterprise view be reflected on Slide 

11 and being in Bates No. 313? 

A Let me just make sure I'm on the right slide. The -- it 

has Consolidated P&L --

Q Yes.

A -- with a footnote? Yes. That's correct. Same -- same 

view. Same entities incorporated.

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Q Meaning -- does that mean that the view on this slide was 

looking at the profits and loss for the Highland enterprise at 

a whole -- as a whole, without regard to its component pieces? 

A Correct. And along those same lines, all -- it's part of 

the reason we refer to them as intercompany. They're all 

intercompany, so they all just eliminate. So that activity 

isn't even shown on here because it all cancels each other 

out.

Q All right. We'll talk about that more in a moment. And 

the same would be true of Slides -- tell me if it's different 

or if you can confirm that the following slides are also 

presented on a consolidated basis: Slide 13, 14, 15, 16, 17, 

18?

A Um, yes, yes to all, although I'm not sure on 18, if you'd

just bear with me for a moment.

Q Uh-huh.

(Pause.)

A It -- it appears 18 is consolidated, but I'm not a hundred 

percent sure. I'm 90 percent sure.

Q Okay. Can you go to Slide 29, please? Can you describe 

for the Court what Slides 29 to 30 -- through 33 convey, what 

type of information?

A Yes. So this was what I was referring to in terms of some 

of the -- a refresh on what happened over the course of the 

year. So, hey, Jim, here's -- here's what happened over the 

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course of the year from an HR perspective. Here are people 

that transferred roles. Here are people that were promoted 

during the year. Here's a view on headcount. I'm flipping 

from Slide 29 to Slide 30. 

31, here's a summary of all the people we hired over the 

year. And, again, this is agnostic as to Highland Capital 

Management versus the other Advisors. This is looking at it 

all holistically. Although it is subdividing between our 

broker-dealer and everybody else, so I should -- I should 

point that out.

And then Slide 32, 2017 Terminations. Here's a summary of 

all the people that terminated over the course of the year.

Q Did Brian Collins participate in these meetings at all?

A He didn't participate in the meetings, but he would help 

on some of the document-gathering and helping me validate the 

accuracy.

Q Okay. Let's go to Slide 34, please. The first bullet 

point is about CLOs. Can you explain to the Court what you 

were conveying in the first bullet point about Acis CLOs? 

A Yes. So what's being conveyed here was the current 

thinking at the time, which was that the likely outcome for 

the Acis CLOs -- and just for additional background, the Acis 

CLOs were CLOs managed by Acis Capital Management that were 

subadvised and shared services provided by HCMLP. And so what 

this bullet is saying is we expect that 3 through 6 are going 

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to reset, they're going to reset under Highland, and --

directly or indirectly, and the reinvestment period and 

maturity is going to shift out by two and a quarter years. 

Q Do you know if the expected reset was intended to have any 

implications for the shared services and subadvisory 

arrangement?

A Up until the reset, the assumption was that Highland would 

continue earning subadvisory and shared services, then postreset it would be -- I don't frankly recall if it was direct 

or if it was indirect, but effectively Highland was going to 

retain the management fees on a go forward basis. 

And I should point out, there is a second bullet here 

that's talking about new issuance. So it's assuming that CLOs 

continue to be churned out over the next several years and 

that -- and that all that AUM goes to HCMLP. 

Q Okay. Can you go to the next slide, please? Can you 

describe generally what Slide 34 depicts? 35 depicts? 

A Yes. I can. One moment. Yeah. So, 35 is depicting the 

revenue that's coming in from all the various funds. Again, 

this is Highland as well as the affiliate Advisors. And it's 

just breaking it out by either fund or it's lumping the 2.0 

and the 1.0 CLOs together to give you a picture of where's all 

the revenue coming in from the complex from all these 

different sources.

Q And what is the second rank, the Highland 2.0 CLOs? Do 

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you know what that's referring to?

A Yes. That's referring to the Acis deals that were assumed 

to be up for reset, 2.0 meaning the post -- post prices. 

Q So am I reading this correctly that the Acis CLOs were 

expected to generate fees for Highland in 2018 of 

approximately $9.7 million?

A Yeah, in that ballpark. 

Q Okay.

A That's the projection.

Q And was that projected to be approximately 12 percent of 

Highland's entire revenue in 2018?

A The royal Highland. Not HCMLP, but the overall complex, 

yes.

Q Okay. As part of this presentation, did you and your team 

present forecasts? 

A We did.

Q Okay. And are those forecasts in this deck?

A They are.

Q Okay. Let's go to Slide 36. That's entitled Assumptions 

in the Forecast. Can you just describe for the Court what 

assumptions are listed in the first piece concerning material 

intercompany arrangements?

A Yes. So, the first piece on intercompany is describing 

the HCMFA, NexPoint, and Acis relationships, and it's saying 

that at this time we're projecting -- or, we're assuming for 

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purposes of the forecast that HCMFA will pay 2.7 to Highland. 

NexPoint and subsidiaries will pay 6. That's the same 6 that 

we've already spent some time on. And then the third bullet 

point being Acis, saying that it'll continue to pay the thenrates in effect of 20 basis points subadvisory, 15 shared 

services. And then the Up to Reset is an allusion to the fact 

that once they reset it'll just -- it'll be to Highland and 

that mechanism goes away.

Q Okay. Let's go to Slide 44, please. Can you describe for 

the Court what Slide 44 is?

A Slide 44, it's looking at a three-year forward forecast 

for HCMLP. This is just HCMLP. Excuse me. So this is a 

single -- a single entity view. And so, as a result, you do 

have -- you have the intercompany agreements that are picked 

up in this agreement. And the total operating income number 

of 12 is -- is the very same that we were looking at on the 

executive summary.

Q And I see in 2019 the operating income is supposed to go 

-- projected to go from negative 12 to positive 46. Do I have 

that right?

A Yes.

Q And do you have an understanding as to what the cause of 

that $58 million flip is?

A Yes. So it's primarily driven by the lines, the second 

line called Incentive Fees.

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Q Uh-huh.

A And what we were using in this forecast -- again, it's 

just a forecast, you know, it's -- it's never going to be 

exactly right -- but this was assuming a monetization of MGM 

that would trigger a large fee in 2019. Obviously, that 

didn't happen, but that was what was assumed in the 

projections.

Q And if you remove that assumption, where does that --

where does that leave Highland on a projected operating income 

basis for 2019?

A It would be -- it would be a dollar-for-dollar reduction, 

so you'd just take the 45,919 of operating less the 55,298. 

Q Okay.

A So, call it -- call it 10 negative. I'm not going to do 

the math.

Q And these -- withdrawn. Does the 2018 projection of $12 

million loss, does that take into account the $6 million, -- 

A It -- it does. 

Q -- or it does not? 

A It does. It takes into account the $6 million from 

NexPoint. It -- those -- that amount is a component part of 

the line that says Shared Services & Subadvisory Fee. So it's 

6 of the 10.

Q So is my math right that if the amount hadn't been 

increased from, let's say, 1.5 to 6, then the $12 million loss 

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would have been increased --

A Be close to 17.

Q -- by 4-1/2?

A Yeah. Yes. Call it 16, 17.

Q Okay. Let's go to the next slide, please, which is Slide 

45. What's being depicted there? 

A So, again, this is a -- going to a standalone view, so 

Highland Capital Management Fund Advisors standalone. And it 

-- it looks like this is also consolidating the broker-dealer 

that sits under it. But that's somewhat irrelevant. But it's 

depicting a three-year forecast for HCMFA. Again, '18, '19, 

'20. And it's got a line item for shared services expenses, 

which I believe is a reference to HCMLP, at least 2.7 of it, 

if not the full 2.8.

Q And there's a reference there to subadvisor fees, do you 

see that, for several hundred thousand dollars?

A I do.

Q Does that relates the Highland or to somebody else?

A No, no, that relates to -- there was a subgroup of -- I 

think there was around three at the time -- of funds that were 

subadvised by an actual -- an actual outside subadvisor. And 

so those are -- those are fees to that outside subadvisor, not 

fees to Highland.

Q As of the date of this deck, January 26, 2018, was HCMFA 

projected to pay any subadvisory fees to Highland? 

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A No.

Q Let's go to Slide 46, please.

A Okay. I'm there.

Q Is this just the same three-year P&L for, this time, 

NexPoint?

A Yeah.

Q Okay. And focusing your attention to the lines Subadvisor 

Fees and Shared Service Expenses, can you describe for the 

Court what those line items reflect? 

A Yes. Those are reflecting amounts to HCMLP for 

subadvisory and shared services. And we've spent a lot of 

time talking about $6 million, but this is the $6 million. 

$3,024,000 plus $2,976,000. There's the six. So that's 

what's being assumed as far as the intercompany.

Q And do you recall that the subadvisory agreement was 

already in place at the time of this meeting?

A Yes. Yeah, it was.

Q Okay. And let's just -- let's just take a look at Exhibit 

130 quickly.

A Okay. I'm there.

Q Do you know what that is?

A 130. This looks to be a continuation of the chain that we 

were discussing earlier, going back and forth with the 

internal attorneys on having these agreements executed in the 

very early part of January and then culminating with the 

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actual execution of those agreements, it looks like, on 

January 11th of '18. 

Q And are you specifically referring to Mr. Fox's email as 

of January 11th, the very last email in the chain, looking in 

reverse order?

A Yes. 

Q Okay.

A That's right.

Q Okay. So let's talk about the subadvisory agreement for 

just a moment, if you can turn to Exhibit 5. 

A Okay. I'm there.

Q And if you can -- if you can, just tell the Court what 

your -- do you have an understanding of what that document is? 

A Yes. This is the subadvisory agreement between NexPoint 

Advisors, LP and Highland Capital Management, LP. 

Q And can you turn to the page that ends in Bates No. 580?

A I'm there.

Q And do you -- are you familiar with the signatures on that 

page?

A Yes. It's Frank's. Frank Waterhouse.

Q Okay. And can you go back to the first page of the 

document and let the Court know if you have an understanding 

as to when this subadvisory agreement became effective?

A It became effective January 1st of 2018. But, as 

discussed, it was -- it was executed, you know, a little -- a 

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little less than two weeks later, but to be effective January 

1st of '18.

Q Okay. And if you can turn, please, to Section 2 on the 

page ending in Bates No. 570.

A I'm there.

Q And can you explain to the Court what Section 2 provides?

A So, Section 2(a) provides for a monthly fee in the amount 

of $252,000. 

Q And is that fee variable or fixed?

A No, it's fixed. It's just $252,000 a month.

Q And is that -- do you recall if that's consistent with the 

number that was in your earlier email at Exhibit 130?

A I don't remember the exhibit number, but yes, it's 

consistent with the email.

Q Okay. Is it fair to say that this agreement is another 

agreement intended to execute on the direction that you 

received from Mr. Dondero? 

A Absolutely. 

Q Is there anything in the subadvisory agreement that's 

before you that concerns or relates to Highland's actual cost 

of providing subadvisory services?

A No.

Q Do you recall anyone ever suggesting in late 2017 or early 

2018 that NexPoint should only pay its allocable share of 

actual costs for subadvisory services? 

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A No. Nobody said that.

Q Okay. So the meeting takes place on or around January 

26th. Does anything happen to upset the projections or any of 

the information that you had just conveyed to Mr. Dondero and 

Mr. Okada?

A Yes. So, contemporaneous, within days of that, of that 

presentation, Acis is put into an involuntary by Mr. Terry. 

And so this is -- at best case, we understood that a critical 

fee stream was going to be tied up a while. And worst case, 

it might be -- it might be gone forever. And so definitely an 

important moment, and a big change relative to the 

projections, because, as you pointed out, there was a $10 

million assumption in there that, like I said, at least 

temporarily is going poof, if not forever going poof. 

Q And did you personally participate in discussions about 

how to address that development?

A Yes. So, you know, this wasn't a mystery to anybody, that 

Acis had just been put into involuntary, so by the beginning 

part of March we met again with Jim. Kind of a similar 

conversation to the December 2017 conversation of we're not 

going to get any Acis fees for a while, if not forever. We 

need help to operate. What do you want, you know, what --

what do you want to do? 

And the response was, well, just do the same thing that 

you guys just did for NexPoint. Put in place a subadvisory 

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agreement and -- and that's the -- it's not the solution 

because it doesn't -- it doesn't completely cushion the fall, 

but it at least mitigates the -- some of the loss that we 

would be experiencing. 

Q And did you personally participate in the conversation and 

the follow-up to that meeting? 

A Yes.

Q Okay. And do you recall whether a subadvisory agreement 

was created for HCMFA?

A It wasn't ultimately, no.

Q Okay. Let's turn to Exhibit 87. And I apologize. Before 

you look at that, when you say it wasn't, do you mean it 

wasn't drafted, or it was never executed? 

A It --

Q If you recall.

A It was -- I don't remember if it was drafted. What I 

recall was that there was communication with in-house counsel 

to draft it and there were -- there were concerns expressed 

about whether that agreement would -- would work, for lack of 

a better term.

Q Okay. Do you recall how much was initially discussed that 

HCMFA would pay for subadvisory services? 

A It was around $5 million. I have a recollection of 

exactly $5 million, but I have seen other emails that refer to 

$450,000 a month, which annualizes to a little bit more than 

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5, around 5.4. But the number that I remember was 5, which

was the -- $5 million, which was the number that was 

ultimately landed on.

Q Okay. Did there come a time after this discussion with 

Mr. Dondero about duplicating that NexPoint subadvisory 

agreement for HCMFA, did there come a time when you learned 

that that wasn't a viable option? 

A Yes. It was -- it was sometime in the late March, early 

April time frame. And the thinking going into that was this 

shouldn't be a very difficult exercise, you've already got a 

template, it's going to look exactly the same save for the 

number on the page. So the expectation was that that would be 

a pretty quick and easy process to get documented through 

Legal. But, you know, when concerns were raised, obviously, 

we had to pivot.

Q And do you recall what those concerns were?

A Yeah. So the concerns as I understood them were that our 

internal legal team, mainly Lauren Thedford, who is a -- she's 

an HCMLP employee and an officer of the Advisors, and the 

Funds, I believe. But she, she highlighted a potential issue 

that because it's -- it's subadvisory, that it would -- the 

only way to have an agreement like that ratified was going to 

be to go to the board in an in-person meeting. The next such 

meeting was going to be in June, later that year. And that --

and that it couldn't be made retroactive. It had to only be 

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prospective.

Q And just take a look at Exhibit 87 now. Does that -- does 

that comport with the recollection you just described for the 

Court? 

A I'm sorry. 87?

Q Yes.

A Okay. Ah, yes. Yes, it does. I was looking at the older 

part of the chain. But, yes, this is the email from Lauren 

saying that it's in person, it can't be made retroactive. So 

that's, you know, that's the problem.

And another problem is that it also means that the 

NexPoint agreement that was already in place doesn't work and 

that needs to be -- that needs to be fixed as well. 

Q And what's the implications of being unable to use the 

subadvisory agreements under those circumstances?

A So, without being able to go back, you're talking about $5

million with respect to HCMFA and $3 million with respect to 

NexPoint. And the earliest you're going to be able to 

implement that is the middle part of the year. So, call it $8 

million times 50 percent is the -- is the implication there. 

Q And you're getting those numbers by -- how are you getting 

those?

A Yeah. Sorry.

Q Yeah. It's a little shorthand. 

A The $252,000 annualizes to $3,024,000. The $416,000 for 

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HCMFA annualizes to $4,994,000. So the sum of those two is 

approximately $8 million per year. Fifty percent of the year 

is $4 million.

Q Had -- was there any discussion prior to Ms. Thedford 

sending her mail on March 15th, had there been any discussion 

of using a model for the payment of subadvisory fees other 

than the subadvisory agreements that had been drafted? 

A No, not that I can remember.

Q Had anybody expressed any concern prior to March 15th that 

the Advisors should be paying fees based on actual costs? 

A No.

Q Had anybody done an analysis before March 15th about what 

the cost was to Highland for providing subadvisory services to 

the Advisors? 

A No.

Q Okay. After getting this news from Ms. Thedford, what 

happened?

A Um, definitely a reaction. This is -- this is a problem. 

That as we just looked at, we're already operating quite 

negatively. We're no longer getting a fee stream from Acis. 

We're being told that we're not going to be able to start 

getting a fee stream from these other Advisors for several 

months, at the cost of millions more dollars. So this needs 

to be addressed. 

Again, this is all in the spirit of one big happy family, 

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one complex, so the whole exercise itself seems somewhat 

silly, for someone who just wants to move money from his right 

pocket to his left pocket, to have to go through all this 

brain damage, but we need to go through the brain damage to 

get this done.

Q And did you see a draft of a payroll reimbursement 

agreement after March 15th?

A Yes. I think towards the end of April, to the best of my 

recollection.

Q And did you participate in discussions with Ms. Thedford 

about the terms and provisions of the draft agreement that you 

saw?

A Yes, I did.

Q And did you communicate with Ms. Thedford in writing about 

-- about that draft agreement that you saw? 

A I did.

Q Okay. Can we turn to Exhibit 129, please? And I'm going 

to start at the beginning, which is at the page with Bates No. 

425. Did -- do you recall in mid-April that Mr. Fox sent you 

a draft of the payroll reimbursement agreement? 

A Yes.

Q And can you review and then describe for the Court what 

you told Ms. Thedford after you obtained a copy of the initial 

draft of the payroll reimbursement agreement?

A Yes. So I think, similar to NexPoint, I had tasked Sean 

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with running it down through Legal. It looks like Sean was on 

vacation, so he passed it along to me to review as well. And 

my -- from email and from my recollection, recall the way that 

the agreement was stated being very clunky, because we don't 

have a way to actually track actual costs in any sort of 

scientific way. 

And so I make the suggestion to Lauren that -- and it's 

kind of a parenthetical; it's not necessarily apparent in the 

email -- but can we just do this once? Can we do an estimate 

of cost as of some point in time, done in good faith, you 

know, with a reasonable estimate, and not have to do it ever 

again? 

Because, again, there's not a way to really validate any 

of the assumptions in such an analysis, and all it's going to 

be doing is churning up a lot of work for people to do 

internally to track amounts that ultimately benefit Jim. It's 

just not a -- it's not a useful -- it's not a good use of 

time. 

Q And is that essentially what you're -- is that a fair 

description of what you're saying to Ms. Thedford at 10:48 

a.m. on April 17th?

A Yeah. That's exactly right. Too much subject -- too much 

subjectivity. Too much time involved. We already know what 

the number is going to be. So this is creating a lot of 

unnecessary scrambling around.

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Q And what did -- do you recall or can you read what Ms. 

Thedford said in response?

A So, she responds, she says she's open to changing the 

definition. There needs to be some method of determining 

amounts. To which I say, can we -- can we set it out as of 

the beginning of the agreement, have a schedule, never update 

that schedule unless -- with the only update ever being if the 

-- if the parties come to a consensus and want to change it at 

some point in the future.

Q And is it your understanding that that's what became the 

actual agreement that was signed?

A Yes.

Q And did you subsequently perform the -- create the numbers 

that are reflected in the email above on Pages 423 and the top 

of 424?

A I did.

Q Okay. Why did you create that?

A Well, you know, per the -- per the email chain, that was 

going to check the box for what we needed to check the box. 

So we were -- we were going to have a schedule that had 

percentages set out. And, you know, I was able to, you know, 

work through a spreadsheet and put percentages in that ended 

up resulting in the $252,000 a month number for NexPoint and 

the $416,000 a month number for FA. 

Q Okay.

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A HCMFA. 

Q And when you are having these -- did you speak with Ms. 

Thedford beyond the emails, or does the emails -- 

 MR. MORRIS: God bless you, Your Honor. 

BY MR. MORRIS:

Q Or do the emails reflect the entirety of your 

communications?

A I think they reflect the substance of it. There may have 

been some -- some additional -- some minor additional 

discussion. I don't remember specifically. 

Q And are these, are these allocations -- can I call these 

allocations? Is that fair?

A That's okay.

Q Okay. Are the allocations on this email the allocations 

that were ultimately adopted in what became Exhibit As to the 

two --

A Yes.

Q -- payroll reimbursement agreements? 

A Yes.

Q Did anybody change it?

A No.

Q Did anybody ask you how you calculated the numbers? 

A No.

Q Did anybody ask to see your work?

A No.

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Q Did anybody suggest that maybe these allocations weren't 

right?

A No.

Q Did anybody -- did you have any discussion with anybody at 

any time as to how you came to these numbers?

A Not that I remember.

Q In this time period?

A No, not that I can remember.

Q Okay. At the top of Page 423, which is really the 

beginning of your email that contains the allocations, there's 

-- can you just read out loud what that sentence says or what 

those two sentences say?

A I'm sorry. It's this that starts, Here are the listings?

Q Yes.

A Yes. It says, Here are the listings for the reimbursement 

agreements. Monthly amounts should be $416,000 for HCMFA and 

$252,000 for NPA.

Q And how did you come up with those numbers?

A So, these were already-known numbers. The $252,000 in 

respect of NPA, consistent with what we had talked about for 

the past several months and what was already in effect via the 

subadvisory agreement, and then the $416,000 based on further 

conversation in the March time period where he was comfortable 

to do a $5 million a year run rate payment from FA.

Q So the $252,000 is the same $252,000 that was in your 

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December email, in the January deck, in the subadvisory 

agreement, --

A Yes.

Q -- and now it's still there? 

A Yes. Of course.

Q The allocations there, what information did you rely on to 

create those allocations?

A So, I relied on compensation information for the -- for 

the list of employees. And then the, in terms of the 

percentages, it was at the time, I believe, based in part for 

some people on AUM across the platform, and then for some 

other people it was just -- basically, just subjective 

percentages based on my general understanding of what those 

people tended to work on.

Q Did you -- did you speak to any of the dual employees to 

see if those allocations were accurate from their perspective?

A No.

Q Did you have any records that you could rely upon to 

confirm your subjective assessments?

A No. There were no such records.

Q If we wanted to know today how much time each dual 

employee spent working on matters for the Advisors, how would 

we create such an analysis?

A There's not a -- there's not a good way to do it.

Q Is there -- is there any way to do it? 

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A No. Not -- not any -- not any good way. The reason I'm 

hedging a little bit is, if it was important enough, you could 

talk to every single employee, ask them how they think they 

spend their time. And then even that's flawed, because 

people's compensation isn't necessarily tied to how they were 

-- to how much time they spend on something. They could have 

spent a little time on something, had a great return, got paid 

a huge bonus, and it has nothing to do with time.

So no matter how you do it, it's going to be incredibly 

subjective and really fatally flawed.

Q Is this fatally flawed?

A It's -- it's maybe flawed -- it's flawed from the 

standpoint that it has all those subjective assumptions baked 

into it. It's not fatally flawed from the standpoint that 

there's a -- there was a general effort to assess where people 

were likely spending their time. 

Q Were investment professionals ever asked to keep time 

entries so that actual costs could be accurately calculated? 

A No.

Q Did you ever update Exhibit -- withdrawn. So I think 

you've testified, these -- this analysis became the Exhibit 

As. Do I have that right?

A Yes, that's right.

Q Okay. Did you ever update Exhibit A at any time from the 

date of this email until today?

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A No.

Q Did anyone ever ask you or instruct you to update Exhibit 

A from the time you sent this email to today?

A No.

Q Are you aware of anybody at Highland or the Advisors ever 

making any effort --

A If I could take a step back, there was -- there was a 

request from Lauren in the early 2020 time range. So I should 

be fair, she did ask the question, and I basically pushed back 

and said that's a ridiculous exercise, we should do it a 

different way.

Q Okay.

A I didn't really take that as a request to update it, but 

she was -- she was implicitly asking for that information, --

Q All right.

A -- so I should qualify that. 

Q We'll take a look at that. You're aware that a number of 

investment professionals, these dual employees, were 

terminated even at the time you wrote this email, right? 

A Yes. Yes.

Q Why would you include dual employees in this analysis if 

they'd already been terminated?

A So, I'm not sure if it's in this email chain, but as I 

mentioned in one of the email chains, we were going to be 

doing a roster as of a specific point in time, that time being 

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the effective date of the agreement, or January 1st. 

Q And I think, just to be clear, if you can look back at 

your April 17 email sent at 10:56 a.m., is that the one you're 

referring to?

A 10:56? Yes. That's -- that's exactly right. That's the 

one.

Q And can you just explain to the judge what you're telling 

Ms. Thedford in that email?

A Yes. So I'm really laying out what would ultimately be

the agreement, which is that we're going to have a schedule, 

it's going to be as of January 1st, it's going to have the 

roster that was in place at that time, and that's -- that's 

where the schedule's going to originate, and we'll -- we're --

we're not planning to update. We're only going to perform 

this exercise once.

Q Okay. Did anyone express any concern to you that you were 

using a -- you were setting the costs of subadvisory services 

based on employees that were known to have already been 

terminated?

A No. No concern.

Q Did that ever come up before December 2020?

A I don't know if I would go so far as December. Certainly, 

by summer of 2020, no one had ever brought it up.

Q Okay. During the two-year period that Mr. Dondero was in 

control of Highland and the Advisors, did anybody ever ask you 

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if that number should be adjusted to take into account 

terminated dual employees?

A No.

Q Okay. Do you recall that, after the payroll reimbursement 

agreements are entered into, that dual employees continue to 

be terminated throughout 2018? 

A Yes.

Q And do you have a recollection to the magnitude of the 

dual employees on the Exhibit As that were terminated as of 

December 2018?

A Yes. It was -- it was around ten, nine or ten. 

Q Okay. Can we just take a quick look at Exhibit 14, 

please?

A 14? 

Q And I'll represent to you that these are the Advisors' 

responses to interrogatories. If you could turn to Page 12 of 

18. 

A Okay. I'm there.

Q Okay. Do you recall that this list of people here that 

continues to the top of the next page, that's the list of -- 

is that the list of dual employees? 

A It appears to be. I can't quickly reconcile it, but it 

looks to be the same list.

Q Okay. And do you have any reason to doubt the dates of 

termination set forth in the Advisors' response to 

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Interrogatory No. 3?

A No, no reason to doubt any of those.

Q Okay. And if you can turn the page to Interrogatory No. 

4, do you see the Advisors stated that they were, quote, 

generally aware of the employees' terminations and departures 

as they occurred?

A Yes.

Q And is that consistent with your understanding of how 

information was shared and conveyed within Highland? 

A Yes. Absolutely. Both informally and formally. 

Informally, you had everyone sharing the same office space, 

sitting next to each other. More formally, there were --

there were things like monthly reports that would go out, 

again, agnostic as to HCMLP versus NexPoint or others, just 

looking at it all as a complex, that would be distributed 

pretty broadly to -- to, you know, among others, officers of 

HCMFA and NexPoint, but also including a pretty wide swath of 

the rest of the overall complex for multiple different 

entities.

Q Okay. So do you recall that in December 2018 the payroll 

reimbursement agreements that had just been signed the prior 

May were amended?

A Yes.

Q Okay. Did you participate in discussions concerning those 

amendments?

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A Yes.

Q Can you describe for the Court what you recall about the 

discussions that led to the execution of the December 2018 

amendments?

A Yes. I remember a meeting early December of 2018, 

early/mid-December, I can't remember the specific date, with 

-- with Jim and Frank. I don't believe anyone else was in 

that meeting. And part of the concern expressed in that 

meeting was that NexPoint in particular, but both Advisors, 

but particularly NexPoint, taxable income was -- was looking 

like it was running a little too hot for 2018. Too hot as in 

too high, so too much tax liability. And, you know, should 

there be -- what can be -- what can be done over the course of 

the next several weeks to generate taxable deductions for 

those Advisors? 

Q And what was the solution?

A So, the solution was to amend the two payroll 

reimbursement agreements. I don't think we got into that 

level of detail in the meeting with Jim, but when we -- we 

took that away and worked with internal Legal, the amendment 

that was ultimately produced was just an amendment to add an 

additional amount for both of the Advisors in the sum of 2.5 

in the aggregate. And the split amount was 1.3 and 1.2 to the 

two respective Advisors. I can't remember which one was 1.3 

and which one was 1.2. 

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Q Okay. Let's take a look at Exhibit 7, please. Can you 

tell the Court what that is?

A Yes, it's the amendment itself. And I can clarify that 

the 1.3 was for NexPoint Advisors, the 1.3 of additional 

annual costs as it's defined in the amendment. And that tells 

me that the identical agreement for Fund Advisors was also put 

in place except with the amount being 1.2 even.

Q Okay. Did you update Exhibit A before executing -- before 

Mr. Waterhouse executed this document? 

A No.

Q Do you know if anyone took any steps to try to determine 

HCMLP's actual costs of providing front office services before 

signing this?

A No.

Q Did you do a true up?

A No. 

Q Did you ever do a true up in your life?

A I suppose I've done true ups, but not as it pertains to 

this agreement. This was -- this was a mechanism to send 

another $2-1/2 million of cash --

Q Did you --

A -- from these Advisors. 

Q Did you tell Dustin Norris at any time that the amounts 

set forth in the amendments were the result of a true up? 

A Not that I remember. I'm sure I told him that there was 

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an end-of-the-year amendment, so it's possible that he mistook 

me or misunderstood. But no, never a true up. This was an 

end-of-the-year amendment. 

Q Do you know whether the $2.5 million, or the amount that 

each of the Advisors paid, was that in any way based on any 

assessment of actual costs?

A No. (Pause.) If I can -- the answer is no, but if I can 

expand on that. There wasn't an analysis done. However, we 

had a current view of who's making money and who's not making 

money. And the reality is that, at this point in time, much 

of the revenue at Highland Capital Management, LP is coming 

from these intercompany agreements. Highland Capital 

Management, LP is losing money hand over fist. The other 

Advisors are making money. 

So that's not an analysis, obviously, that 2.5 is the 

right number, but it tells you that it's directionally right, 

because these are effectively the same people doing the same 

type of business for the same types of client, earning a fee. 

In what -- on what planet does one of those operate at a 

massive operating loss while the other two operate really 

strongly?

Q Did anybody suggest that it was terribly unfair that 

Highland was performing these services at an operating loss? 

A I don't -- no. I don't remember anyone saying that. 

Q Was there any guarantee in any agreement that you're aware 

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of that prevented Highland from incurring operating losses 

through the performance of these intercompany agreements? 

A No.

Q By the time Highland filed for bankruptcy in October of 

2019, more investment professionals or dual employees had been 

terminated, correct?

A Yes. A handful. Maybe four or five.

Q And do you --

A In that area.

Q Do you have a recollection as to how many of the dual 

employees, roughly how many of the dual employees had been 

terminated in the 21-month period between January of 2018 and 

the end of September 2019, just prior to the petition date?

A It was -- it was on the magnitude of half.

Q So roughly half of the dual employees were already gone? 

During that period, did anyone request an analysis of actual 

costs?

A This is around the time of the petition date?

Q Yep.

A Um, --

Q Up to the petition date.

A Up to the petition date? No.

Q Okay. Up to the petition date, did anyone request that 

Exhibit A be updated?

A No.

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Q Up to the petition date, did anybody ever suggest that the 

Advisors should only be paying the actual costs under the 

payroll reimbursement agreement?

A No, other than the amounts were fixed per the agreement, 

so that what's had been paid all along.

Q In fact, do you recall if, during this two-year period 

when Mr. Dondero was in control, the Advisors made monthly 

payments under the PRAs that differed in any way from the 

initial amounts set forth in those agreements?

A No. They paid exactly the amounts, those amounts each 

month. 

The one caveat on that is, because it was executed a few 

months in arrears, I think there was some sort of a catch-up. 

But notwithstanding that initial catch-up, it was exactly the 

same amount per the agreements every single month.

Q And did that practice continue after the bankruptcy as 

well?

A Yes. It continued until November of 2020.

Q And what happened in November?

A So, on November 30th, there were notices of termination of 

the shared services agreement, and shortly thereafter there 

was a directive that I understood to have come through Mr. 

Dondero to stop all payments.

Q Do you have an understanding as to who that directive was 

given to? 

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A Yes. To Frank.

Q And did Mr. Waterhouse follow that directive?

A Yes. He conveyed that to the accounting team, and -- in 

uncertain terms, that that's the -- that's the directive from 

Mr. Dondero.

Q So when Mr. Dondero wanted the payments stopped, was he 

able to effectuate that desire?

A Yes.

Q Okay. So, Highland files for bankruptcy in October 2019. 

Were you given any instructions by anybody concerning the 

continued administration of these agreements post-bankruptcy?

A I don't remember specific to these agreements, but more 

generally there was a business as usual, keep -- Team, keep 

doing what you're -- what you've been doing. That was the --

that was the go-forward direction. 

Q Do you recall the intercompany agreements being the topic 

-- a topic of discussion with the UCC and FTI after the 

bankruptcy filing?

A Yes. It was a -- it was a very -- it was immediately a 

point of issue. I had conversations with Fred Caruso as well 

as Jack Donoghue from the DSI team. And it was my 

understanding that this was a -- this was an issue that was 

very hot on the minds of both the UCC as well as their 

financial advisors, FTI, and that there was -- there was going 

to be -- there was going to need to be some work done to get, 

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you know, help them get comfortable with where we stood on 

those agreements.

Q When you say the issue was hot, can you just explain for 

Judge Jernigan specifically what the hot issue was, as you 

understood it?

A Yes. So, I mean, the hot issue was really just that these 

were all agreements with affiliates. These are -- these are 

creditors who have been fighting with Jim for years. And the 

fear on their part would have been these are wildly 

unprofitable contracts for Highland, value is siphoning out to 

these other advisors that he owns and controls and that are 

separate and apart from the bankruptcy, so if that is in fact 

happening, we, the UCC, need to intervene quickly. 

Q Did you undertake any analysis of these contracts in 

response to the issues and concerns raised by the UCC?

A Yes.

Q And who did you work with on that analysis? 

A I worked with a number of people. That included the two 

gentlemen from DSI that I just mentioned, Fred and -- Fred and 

Jack, as I recall. Frank, internally, as well as Isaac. And 

then it was my understanding -- I don't know that I had direct 

conversations with Scott Ellington, but it was my 

understanding that he had at least -- kind of was aware of the 

analysis. Put it that way.

Q Okay. Can you turn to Exhibit 144, please? And can you 

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tell the Court what's depicted on that analysis there? 

A So, this is -- sorry. This is a -- this is an early 

iteration of that analysis sent to Isaac with the overall 

summary of the output of that analysis. And I'd be happy to 

walk through it. 

Q Yes, please.

A Okay. 

Q Well, let me try and speed this up a little bit. Can you 

just explain for the judge the portion of the analysis that 

deals with the intercompany agreements?

A Yes. So, the portion that deals with the intercompany

agreements is, if you have it in front of you, it's the top --

it's the top box. And that box is summarizing what was being 

paid and charged under those agreements. It's the four 

agreements -- there's technically five here because the 

NexPoint and NREA are both being included as a single number. 

But this box is showing you the 6 that's being charged to 

NexPoint and then the 8.6 that's being charged to Fund 

Advisors, broken out between five of -- we're calling it 

investment support fee here, but that's a reference to the 

PRA. And then 3.6 of shared services. So a total of 14.6 

being charged. 

And then the other number that I suppose indirectly 

pertains to the agreements is the number directly below that 

of estimated cost to provide services of 16.9.

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Q Okay. So, under this analysis, how does the cost of 

providing services under the intercompany agreements compare 

with the revenue?

A So, the cost is higher by approximately $2.3 million, 

which is just the 16.9 less the 14.6.

Q Okay. And why is that 16.9, why is there a, you know, 

really a reduction of $900,000 to the 1.4? 

A Yes. So this is -- you know, with this being a hot issue 

for the UCC, projecting this in the best possible light, there 

were -- Highland had a few other small shared services 

agreements with other parties that it was generating it looks 

like less than a million dollars a year of shared services 

revenue. 

So, for presentation purposes, the takeaway is, 

notwithstanding that Highland might be -- might, again, very 

subjective, might be losing $2.3 million on these contracts 

collectively, well, we're getting some fees from other places, 

too, so it's not really 2.3, it's really 1.4, which -- which 

is a little bit of a stretch. 

Q Until the time that you prepared this analysis for the 

UCC, had you ever undertaken any attempt to try to look at how 

the costs of providing services compared to the revenue under 

the intercompany agreements?

A No. No, this was the -- this was the first. 

Q Until the UCC made this request, had anybody in the world 

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ever asked you at any time whether you could analyze the costs 

under the intercompany agreements as compared to the revenues?

A No.

Q Okay. Did you give this document to the UCC? 

A Not this document, no.

Q How come?

A So, like I said, this was an iteration. We're within a 

few weeks of having filed. So this analysis continued to get 

refined over the next couple weeks. And ultimately an updated 

version was presented to FTI in the offices in December of 

'19.

Q Okay. Can you tell me how you calculated, how you -- it 

says estimated costs to provide services. What's -- how do 

you get to that $16.9 million number?

A Yeah. So, the methodology that was used, and I don't 

think I'm underestimating when I said I mentioned this to FTI 

probably 50 times in the thee-hour call -- was goalposts. 

Subjective ranges of how people might have been spending their 

time around the time of the bankruptcy. 

So we took a September -- sorry. We took an October 15th 

roster at the time and we put -- we put big ranges on people. 

This, you know, Person A, they might be spending between 30 

and 70 percent of their time on NexPoint-related matters. And 

so we had a low end of the goalpost and a high end of the 

goalpost. And the sausage that's being made to have the 16.9 

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spit out is the midpoint of those huge goalposts. 

Q Did you do this analysis only for the dual employees, or 

did you do it for all employees?

A Everybody. And also including the people that were 

brought in to replace the dual employees that had left between 

2018 and 2019. 

Q Does this have anything to do with an analysis of the 

actual costs of any particular contract?

A Only in the sense that all the contracts are spelled out. 

It's not necessarily apparent on this page.

Q Uh-huh.

A But they are, they are spelled out within the body of the 

analysis.

Q And when you did the analysis for the payroll 

reimbursement agreements, did that include -- did that exclude 

all of the terminated employees? 

A It excluded anybody that would have terminated up until 

the petition date.

Q Okay. And did you have a conversation with the UCC about 

what was being paid under the agreements at that time?

A Not with -- not with the UCC. But we -- but we met with 

FTI, their financial advisor, in December and discussed, you 

know, what was being paid at the time.

Q Okay. Did you modify this analysis in the future?

A The updated analysis that was done was from -- I just want 

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to make sure I'm on the same page -- but from this November 

iteration to Isaac for the actual version that was presented 

to the -- to the -- to FTI. 

Q Okay.

A In December. Mid-December of 2019. 

Q Okay. Let's go to --

 THE COURT: Mr. Morris, I had hoped to --

 MR. MORRIS: Yes?

 THE COURT: -- break for lunch when the direct is 

over. How much more, do you think? 

 MR. MORRIS: I've got a bit. I would suggest that we 

break for lunch now. I would respectfully request that we try 

to limit that to maybe a half hour or 45 minutes, if we could. 

 THE COURT: Well, it's easier for us to take a short 

lunch break than it is for you all.

 MR. MORRIS: Yeah. 

 MR. RUKAVINA: Your Honor?

 THE COURT: Mr. Rukavina? 

 MR. RUKAVINA: Your Honor, I think the cafeteria 

downstairs -- the cafeteria downstairs is closed, so we're 

going to -- we didn't bring a box lunch, not knowing that, so 

--

 THE COURT: Okay. 

 MR. RUKAVINA: We'll go to the nearest place, though. 

 THE COURT: Okay.

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 MR. RUKAVINA: Post-pandemic, I'm not even sure 

what's here anymore.

 THE COURT: Well, let's take a 45-minute break. 

We'll come back at 1:30.

 MR. MORRIS: Okay. 

 THE COURT: Okay.

 MR. MORRIS: Thank you, Your Honor.

 THE COURT: Thank you.

 THE CLERK: All rise.

(A luncheon recess ensued from 12:45 p.m. to 1:35 p.m.)

 THE CLERK: All rise.

 THE COURT: All right. Please be seated. We're 

going back on the record in the Highland matter. Let's see. 

Are we ready to proceed?

 MR. MORRIS: Yes, Your Honor.

 THE COURT: Okay. Mr. Klos, you're still under oath. 

 THE WITNESS: Yes.

 THE COURT: Thank you.

 MR. MORRIS: Okay. May I go ahead, Your Honor?

 THE COURT: You may.

 MR. MORRIS: Okay.

DIRECT EXAMINATION, RESUMED

BY MR. MORRIS:

Q Mr. Klos, just to kind of reset after the lunch break, 

before we left we had looked at a November 2019 analysis that 

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you had prepared and had shared with Isaac Leventon. Do you 

remember that?

A Yes.

Q And did you revise that analysis in December of 2019?

A Yes.

Q Can you turn to Exhibit 145 in your binder? Oh, you know 

what, hmm, I think we need Ms. -- oh, no.

 THE COURT: Mine says, Document provided in native 

format. 

 MR. MORRIS: Yes. Okay. So we're just going to have 

to wait a moment for Ms. Canty, because that's an Excel 

spreadsheet.

 THE COURT: Okay.

 MR. MORRIS: So I'm going to cross my fingers and 

hope --

 MS. CANTY: Which document, John? I'm sorry.

 MR. MORRIS: 145. 

(Pause.)

 MS. CANTY: I'm sorry, John. I'll need a minute for

that one. It's not in my -- yeah, I'll need a minute on that 

one.

 MR. MORRIS: Okay. 

 MR. RUKAVINA: John, we have it ready right now, if 

you want. 

 MR. MORRIS: If you can -- in hard copy, or you can 

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put it on the screen? 

 MR. BERGHMAN: Well, I have to be able to share my 

screen on WebEx. 

 MR. MORRIS: Yeah.

 MR. RUKAVINA: We just printed it out and just 

brought it to court.

(Pause.)

 MR. RUKAVINA: I mean, yeah, John, if you want Thomas 

to screen-share, we can put it up. 

 MR. MORRIS: You know, I'm just going to wait for Ms. 

La Asia, and I'm going to -- I'm going to detour for a second 

--

 THE COURT: Okay.

 MR. MORRIS: -- while we wait for her. 

 THE COURT: Okay. 

BY MR. MORRIS:

Q Mr. Klos, do you remember having a conversa... or,

communicating with -- with Ms. Thedford in approximately 

January of 2020 concerning the payroll reimbursement 

agreements?

A Yes.

Q And do you recall generally -- so we're going to just jump 

a little bit in time, we're going to come back to your revised 

analysis in December of 2019. But after you prepared that, do 

you recall talking to Ms. Thedford about the payroll 

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reimbursement agreements?

A Yes, I do.

Q And what do you recall about that?

A I recall, generally speaking, around that January time 

frame, the Retail Board that's the trustees over the Retail 

Funds understandably was asking questions about who's 

providing services and digging in maybe more than they had 

previously. 

And one of the questions and where I got pulled into it 

with Lauren was asking about the schedule, the Schedule A, if 

we're able to provide an update to the Retail Board on that, 

on that schedule, to which I basically responded to say it 

doesn't exist. You know, again, as a refresher from when we 

put this agreement in in the first place, this was a -- this 

was a one-and-done deal. This was something that we were 

going to do as of January. We can be more general and say, 

you know, these are the amounts that are being paid for these 

services, but not get to the granularity of employee by 

employee.

Q So your recollection is that this was an exchange that was 

intended to provide information to the Retail Board; is that 

right?

A That's my recollection.

Q All right. Can you go to Exhibit 151 in your binder? 

Okay. And do you see Lauren's email at the bottom of the 

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first page? She's got some boxes there. 

A Uh-huh. Yes. 

Q And do you recall what -- what it is she was asking to be 

done here?

A Yes, although just give me one moment to --

Q Yeah. Take your time.

A -- to refresh myself on this one. 

Q Sure.

(Pause.)

A Yeah. So, this is the -- oh, this is actually -- this is 

an interesting example. So this is -- just starting at the 

back of the chain, this is that monthly process that we were 

describing earlier with the effective headcount report that's 

-- that's pushing out to a number of people within the 

organization anybody who is termed hired during that period. 

And so, responding to that email that would have gone out 

every month, Lauren is saying to Brian and Kelly, who are the 

HR department at Highland, we have a request from the Retail 

Board. You know, they want to understand the contractual 

employer, the ultimate payor, and their starting point is 

going to be -- is going to be headcount. So, you know, I 

explained that the payment is accomplished through the shared 

services and the expense reimbursement. That's a reference to 

the PRAs, as we've been describing them.

Q Uh-huh.

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A And then Lauren asked me to fill out a chart that says --

although actually I'm not sure if this was directed at me or 

HR -- but saying, can we have a list of employees, show their 

contractual employer? And then she's asking for, can we do 

the percentages like you did for Schedule A? And I'm sorry, 

this is a lot of background, but it's helpful for me to see 

it. Where I say, basically, it doesn't exist. It was a 

point-in-time estimate. 

And that's the email that's at 11:45 a.m., where I say, 

this was a point-in-time estimate. January 1. Estimate is --

is definitely the word. 

Q Can you just read the email? 

A Sure. Sure.

Q I'm sorry to interrupt, but --

A Sure. Sure. Sure.

Q -- let's make sure the record is clear. 

A Yeah.

Q Go slowly, because --

A Yeah. Yeah.

Q -- I know that you know this stuff, but Judge Jernigan 

didn't live it like you did.

A Yes. Yeah.

Q So can you just read your 11:45 a.m. email to Ms. 

Thedford?

A Yes. So, in response to Lauren asking, wouldn't this just 

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be the Exhibit A percentages, I say, Those were a point-intime estimate as of beginning of 2018. Half the people are 

gone now. If you were to reallocate them, all their 

percentages, all the percentages would be different. On top 

of that, we don't have anything comprehensive that is 

comparable for back office people. So the only thing we can 

really provide is a stale percentage on a small subset of the 

overall population. It would be much more logical to do 

Yes/No and then have a -- and then as a blanket statement say 

that NPA/HCMFA pay x and y dollars annually to HCMLP for these 

employees' services and overhead.

Q And from your perspective, is that consistent with the 

email communication and exchange you had with Ms. Thedford in 

April of 2018 before the payroll reimbursement agreements were 

signed?

A Yes, it's consistent.

Q And did -- did Ms. Thedford accept your response? 

A Yes. She said, Got it. Thanks. And I don't remember 

ever having any follow-up beyond that. 

Q Okay. So did -- do you know, to the best of your 

knowledge, did Highland or the Advisors ever provide to the 

Retail Board any updated analysis of the allocation of costs? 

A No.

Q To the best of your recollection, did Highland or the 

Advisors ever provide to the Retail Board any assessment of 

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the costs that the Advisors were bearing under the payroll 

reimbursement agreements?

A No, not specifically. No. No. The answer is no. 

Q And why is it not specifically?

A Because, as part of the 15(c) process that happens every 

year, there is some disclosure to the board about the 

profitability of the Retail Advisors. And so kind of implicit 

in that is some of the underlying information from what 

they're paying under these -- the PRAs and the SSAs. 

Q And --

A So, that's why I was a little hesitant there.

Q And so I really appreciate the specificity. Within the 

analysis that you're thinking of, would the flat monthly fees 

that were paid under the payroll reimbursement agreements, 

would that be one component of the profitability of the 

Advisors?

A Yes.

Q And that's what you were referring to, --

A That's right.

Q -- right? 

A That's right. 

Q Okay. Let's go back. Now we've got the document up on 

the screen. This is Exhibit 145. Can you just describe for 

the Court what's happened here? And, again, just to level 

set, this is an update of the analysis that we looked at 

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before lunch that you did in November, right?

A Yes.

Q What's -- what's changed? What is this? 

A Yes. So this is the same summary output in terms of the 

overall presentation. I'm looking at these side by side, so 

I'll try to -- try to walk through. 

Q Uh-huh.

A But you have the same top box with the same number, 14.6. 

This is what's being charged, $14.6 million, across the -- the 

several contracts. 

Q Uh-huh.

A You have the same line just below it of estimated cost to 

provide services. This number has come in between iterations, 

so what was 16.9 on the previous analysis is now 16.1. 

And then the other difference that's rolling through here 

is that there is another offset that doesn't really have, 

really, relation to these agreements, which is an offset of 

nondebtor employees that are -- were providing services. So 

that's the -- that's the .9. And it looks like we did a sign 

flip on the -- on the shared services agreement. 

So, net-net, our loss went from -- estimated loss went 

from 2.3 on the original analysis to 1.5. And then when you 

start to take in these factors that are outside of the 

agreements, we picked up another $900,000 of offsets. 

And this was the version that was ultimately presented to 

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FTI, showing that -- what, net, net, net, with all the -- with 

all the disclaimers about subjectivity, these shared services 

agreements -- and when I say shared services, I'm lumping in 

the lot of them -- all of the intercompany are kind of a net, 

it's kind of a net neutral. It's basically a breakeven, 

understanding that there's tremendous subjectivity. 

Q And did you have a goal? Like, were you trying to 

accomplish anything other than running numbers when you 

prepared this analysis for the UCC?

A Yeah. Absolutely. The goal here was to be able to, in 

good faith, be able to come up with an analysis that we could 

share with the UCC that would effectively buy time in the 

bankruptcy process. We were still very early. We understand 

Jim Dondero was working really hard to come to some sort of a 

resolution. And we really wanted space before something 

drastic would happen. So there was definitely a bias in this 

exercise to put the profitability of these contracts in the 

best possible light that we could and still -- and still have 

our credibility.

Q Okay. I appreciate that. So, in the span of the one 

month, the difference between the -- the deficit or the loss 

under the intercompany agreements was reduced by $800,000, 

right? 6.9 to -- $800,000, right? 

A $800,000. Yeah. 16.9 to 16.1. 

Q And you got there solely by adjusting the expense side, 

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right?

A Correct. Correct. The fee side stayed exactly the same.

Q Right? Because the fee side is fixed and that can't 

change, right?

A Correct. That's the 15.6 --

Q Okay.

A -- in the box in both analyses. 

Q And so did anything actually happen between November and 

December to change the expenses?

A No. I think we had one employee who left right at the end 

of December who was a -- not a highly-compensated employee. 

Q So that -- so that the difference is the result solely of 

the change in assumptions that you were making; is that fair?

A Right. More tweaking and -- yeah, that's right. 

Q Okay. And can -- okay. Fine. So you prepared this 

analysis. You give it to the UCC. You speak with Ms. 

Thedford. We looked at that. And I'm just trying to finish 

this up. Do you recall that at the end of November Highland 

had given notice of termination of the shared services 

agreements?

A Yes.

Q Okay. Do you recall the very next day you exchanged some 

emails with Dustin Norris?

A Yes.

Q You knew Dustin, right?

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A Yes.

Q Okay. And how did you know him?

A We -- we've worked together for a long time. Never 

particularly closely, but he was hired at Highland in the 

2010-2011 time frame, and then a few years in moved to 

Highland Capital Management Fund Advisors. And then in 2019 

transferred again from Highland Capital Management Fund 

Advisors to NexPoint Advisors, LP. And so we've interfaced 

from time to time on a variety of issues.

Q Do you have an understanding of what his role is at the 

Advisors?

A Yes. You know, generally speaking, marketing and 

distribution and investor and wirehouse interface for the 

(inaudible) funds, as well as for some of the private 

offerings done through NexPoint.

Q To the best of your recollection, did Mr. Norris 

participate in any way in the discussions in late 2017 through 

May 2018 about the creation of these agreements and the 

economic relationship between the Advisors and Highland? 

A No.

Q To the best of your recollection as you sit here today, 

did Mr. Norris play any role at all in formulating, drafting, 

or administering the subadvisory agreements that were 

originally prepared for NexPoint and HCMFA in early 2018?

A No.

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Q To the best of your recollection, did Mr. Norris play any 

role at all in the formulation, drafting, or administration of 

the payroll reimbursement agreements?

A No.

Q To the best of your recollection, did Mr. Norris play any 

role in formulating, drafting, or executing the amendments to 

the payroll reimbursement agreements in December 2018?

A No.

Q To the best of your recollection, did Mr. Norris play any 

role at all in the formulation, drafting, or administration of 

the NexPoint or HCMFA shared services agreements?

A No.

Q Prior to December 2020, had you ever discussed with Mr. 

Norris how the amounts paid under the payroll reimbursement 

agreements were calculated?

A Not that I can remember, no.

Q Prior to December 2020, had Mr. Norris ever asked you any 

questions about the actual costs of services rendered under 

the shared services or payroll reimbursement agreements? 

A Maybe -- maybe in the November time frame, but it really 

became acute in December and January.

Q Okay. If Mr. Norris testifies that the December 2018 

amendments to the PRAs was the result of a true up that you 

prepared, what would you say? 

A I would say there was -- there was no true up. There was 

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no analysis done. And I'm sorry to put it so bluntly, but you 

weren't there, and so it just didn't happen.

Q And did you ever tell him that?

A Not -- certainly not in those -- in those words, no. 

Q Okay. Let's go -- let's grab the Advisors' binder and go 

to Exhibit P, please. P as in Peter. I think -- I think you 

testified that you recall the notice of termination of the 

shared services agreement was November 30th. Do I have that 

right?

A Yes.

Q Okay.

A Yes, you do. 

Q Let's take a look at this. If you could just -- are you 

familiar with this email exchange?

A Yes. Yes.

Q Okay. And can you describe generally for Judge Jernigan 

what's happening on December 1, 2020, the morning after notice 

of termination is given?

A Yes. So, I think there's a lot of running around, hair on 

fire going on around that time, particularly for the Retail 

Advisors. So the notice was I think the evening of November 

30th. And it's my understanding that that notice was quickly 

provided to the -- to the Retail Board, who certainly, 

understandably, wanted assurance that there would be no 

disruption in services and that there would be a smooth 

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transition.

So I think there was a flurry of activity right after that 

point to help, you know, answer those types of questions that 

the Retail Board had. And then also really get serious about 

an actual transition plan.

Q And if you look on the page ending in Bates No. 107, 

you'll see an email from Mr. Norris at 8:53 a.m. Do you see 

that? 

A Yes.

Q Okay. And is -- are the emails that followed a discussion 

about kind of amounts that were paid under the payroll 

reimbursement agreements?

A Yes. As well as the shared services agreements.

Q Okay. And do you see Mr. Norris included a chart there of 

fees?

A I do.

Q And did you give him that information? 

A I don't believe so. Based on the date being 6/30 of 2020, 

I assume he -- he likely pulled it himself from the 15(c) 

materials that I was discussing earlier, because those 

materials were presented each year through 6/30. So that 

would have been -- that's my guess, is that that's where he 

pulled those, those numbers.

Q Any idea why NexPoint paid $5,040,000, why it's shown as 

-- for the 12-month period, and not the $6 million? 

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A Yes. And actually, that's contained in my response at 

9:00 o'clock a.m. 

Q Uh-huh.

A So, yeah, so he sent this at 8:53. And it looks like, 

from his -- from his email, he's wanting to, first and 

foremost, make sure the numbers are right, but -- but is 

starting to think about these termination notices. So the 

reason it's -- to answer your question, the reason it's 

$5,040,000 is because the numbers that he pulled were NexPoint 

standalone, and so it's missing the $80,000 a month from 

NexPoint Real Estate Advisors. And that's what I clarify in 

the email that I sent back to him seven minutes later, is just 

saying that, you know, note that while these, you know, these 

amounts are what they are, there is an additional $960,000 per 

year in shared services through NREA.

Q So, if we went back and looked at your -- not that I'm 

going to do this -- but if we went back and looked at your 

December 2017 email that we started a couple of hours ago 

with, it would show the exact same numbers that are on this, 

but for the addition of that $80,000 a month from the NexPoint 

Real Estate Advisors shared services agreement. Do I have 

that right? 

A Yes. And that was -- and that was there, too. It's just 

that it's not included in this specific chart.

Q Okay. Now, do you see Mr. Norris's email at the top?

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A Yes.

Q Okay. And can you just describe for the judge what your 

recollection and understanding is of what the back-and-forth 

here, what's going on?

A Yeah. So he's -- he's highlighting the fact that some of 

the people that were originally part of schedules aren't there 

anymore. Mark, which that's a reference to Mark Okada. Jim. 

That's a reference to Jim Dondero. Pogs. That's a reference 

to Jon Poglish, who -- who term'd in, I think, September of 

2020. 

Q Uh-huh.

A Trey is a reference to Trey Parker, who term'd in February 

of 2020. Parm is a reference to Andrew Parmentier, who term'd 

in May -- May-ish 2019. And many others. So he's -- he's 

asking me about, are we still paying the same amounts because 

of the BK?

Q Okay. And what's your response? What do you tell Mr. 

Norris at this point?

A So, I say the amounts have not changed since BK. And then 

I go on to point out that -- that given the changes in 

headcount, profitability would have increased from HCMLP's 

perspective.

Q And why did you -- why did you tell Dustin that? 

A I think mainly it's -- it's a statement that's somewhat 

obvious, which is that if revenue stays exactly the same and 

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expensive people leave, then profitability is going to 

increase for the -- for the party that's receiving the revenue 

and bearing the burden of the expense. So it's -- I think 

it's a pretty straightforward statement. And recognizing 

that, you know, we have been paying -- sorry, we had been 

receiving those flat amounts throughout the period.

Q And is it your understanding, after your negotiations --

withdrawn. I'll just leave it.

After you had this exchange with Mr. Norris, do you recall 

being asked by Mr. Waterhouse to update the analysis that you 

had prepared in December 2019?

A Yes. So, about a week later, December -- I think it was 

December 8th, -- 

Q Uh-huh.

A -- I got a call from Frank with a request to update the 

analysis that we had done for the UCC the previous year. 

Q And do you recall discussing that with Frank? 

A Yes. I'll say, this -- the agreements had just been 

terminated the week before. It was, I guess, my -- my Spidey 

senses were up a little bit. It was -- it seemed like an odd 

request. We hadn't -- we hadn't looked at this in a long 

time. And so I did, I asked him in that moment what are --

can you -- can you confirm for me that this is not for any 

sort of adverse purpose? And he told me that -- that it 

wasn't. 

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And then in terms of the actual analysis, the analysis 

that was requested was, you know, roll forward that schedule 

from last year that you shared with the UCC, update it for the 

current headcount -- so remove people who terminated; add 

people who were hired -- and delete everyone's bonus, and 

don't touch any of the percentages. 

Q And do you understand that that became the foundation of 

the administrative claim that was filed the following a month?

A I believe it probably was.

Q And the assumptions that you were just asked to make, were 

those assumptions that you on your own decided to make, or 

were those assumptions that Mr. Waterhouse asked you to make?

A They were -- they were given. 

Q Did you believe -- let's see. Let's take a look. We're 

at Exhibit Q. That's your email to Mr. Waterhouse. Do I have 

that right? 

A Yes.

Q Okay. And let's look at the attachment for a second. So, 

the attachment -- tell -- explain to Judge Jernigan what's 

happening in this attachment to Exhibit Q.

A Yes. So this attachment, it actually -- it looks 

different from some of the other analyses that we were looking 

at before. In reality, it's just another tab on the same 

analysis in the Excel spreadsheet. 

And so what it is, what it is doing is it's doing a -- the 

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-- I'll point out the individual numbers. The front office 

current charge is a reference to the -- to the PRAs of $8 

million a year. So, $3 million for NexPoint, $5 million for 

HMCFA. And then the shared services, again, current charge is 

the $3 million of shared services to NexPoint plus NREA and 

the $3.6 million for HCMFA that was running around -- it was 

300 a month-ish, but it would vary slightly from month to 

month. 

And then all the other numbers that are -- that are -- for 

example, the investment support, directly below current 

charge, is -- is the build up from the assumptions that I had 

layered in: namely, updating the headcount, not touching the 

percentages, and deleting everyone's bonuses.

Q Did you ever discuss this document with anybody prior to 

confirmation of the Debtor's plan on February 2, 2021? 

A I don't believe so, other than Frank.

Q Do you know what Frank did with the document?

A No, I don't.

Q Did you believe at that time that this document accurately 

and fairly reflected Highland's profitability under the 

payroll reimbursement agreements or the shared services 

agreements?

A Absolutely not.

Q And why is that?

A Well, bonuses are a big component of compensation for 

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asset managers. So there are some -- there are some definite 

flaws here in terms of leaving that out, both the bonuses as

well as the deferred bonuses, which were material for some 

people.

Another factor that would have skewed this result is not 

touching any of the allocations, because the reality is, after 

the petition date, investment activity of Highland, at HCMLPmanaged funds, dropped tremendously, because you had investor 

redemptions, you had funds getting closed. So those same 

employees were -- would have been spending more time and 

working more on Retail Advisor issues. And you also did have 

people whose roles changed in the interim time period. 

For example, Trey Parker left, who was an investment 

professional, and his roles and responsibilities were 

transferred to the legal team which took over the distressed 

PE management, which was pretty active for the -- for the 

Retail Funds.

Q So, on that topic, can you go to -- let's flip through 

these real quick -- Exhibit 36? 

A Bear with me. 

 MR. MORRIS: Your Honor, this is a good time to tie 

one other tiny loose end. I think on Friday the Reorganized 

Debtor filed an emergency motion to I think redact or file 

under seal certain documents. The documents we're about to 

look at are those documents. 

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 THE COURT: Okay.

 MR. MORRIS: And they have been redacted to take out 

addresses, home addresses of certain people. I just want you 

to know that what you have in your binder is not going to be 

the official exhibit, --

 THE COURT: Okay.

 MR. MORRIS: -- the only difference being that if 

that motion is granted -- I don't think Your Honor has tended 

to it yet -- but we're just going to redact addresses. That's 

the only purpose of the motion.

 THE COURT: Okay. I have not tended to it, -- 

 MR. MORRIS: Yet.

 THE COURT: -- but I presume it's not opposed. 

 MR. MORRIS: I just -- correct. 

 THE COURT: Okay.

 MR. MORRIS: He certainly is familiar with all these 

people.

 THE COURT: Okay. Mr. Rukavina, you're --

 MR. RUKAVINA: No, Your Honor, of course --

 THE COURT: The motion to redact is not opposed? 

It's just addresses?

 MR. RUKAVINA: No, of course not.

 THE COURT: All right. 

 MR. RUKAVINA: Yeah.

 THE COURT: All right. I'll be signing an order on 

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that.

 MR. MORRIS: Okay. 

BY MR. MORRIS:

Q So, starting with -- we're just going to look at these 

very quickly. In February 2020, do you recall that the titles 

of certain employees at Highland were changed?

A Yes. For a number of people.

Q And were the -- were the title changes related in any way 

to the changing responsibilities that these employees 

undertook?

A Yes. And specifically for the ones that I think we're 

about to look at, it's -- it was in relation to Trey Parker 

leaving, who he was the head of private equity at Highland, 

and so his responsibilities were carved up amongst a number of 

people.

Q So, did Ms. Irving take on responsibility as a managing 

director of distressed, as reflected in Exhibit 36?

A Yes.

Q And let's go to Exhibit 37. As of February 28th, was Ms. 

Vitiello given responsibility in the area of distressed? 

A Yes.

Q Exhibit 38. Was Mr. DiOrio made a managing director of 

private equity?

A Yes.

Q The next exhibit is 39. Was Mr. Leventon, in February 

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2020, given the new title, the new additional title of 

managing director, distressed?

A Yes.

Q Exhibit 40, Mr. Cournoyer. Was he also given a new title, 

co-head of private equity? 

A Yes.

Q And were all of these changes related to changes in 

responsibilities?

A Yes. Expansion of responsibilities and, you know, 

coinciding with the termination of Mr. Parker, which was on 

the same date as all these letters, February 28th of 2020. 

Q And did those individuals we just looked at, do you know 

if those individuals kind of filled the void of Mr. Parker's 

departure?

A Yes. Again, group effort, so it's not -- it's one 

person's big responsibilities getting carved up amongst a 

number of different people.

Q So when you talked about with Ms. Thedford, really, in the 

exact -- I guess the month before all of this happened, you 

mentioned that there would be reallocations if somebody was 

actually to go back and look and review the exhibit, the 

exhibits. Do I have that right?

A Yeah. That's -- that's correct. Everyone's role -- and 

this was true prepetition and postpetition -- people's roles 

evolved and changed. And so any sort of a point-in-time 

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estimate, however flawed, is just that. It's a point in time. 

Q Are you aware of any -- the changes that you just 

described for the individuals that you just described, would 

it be fair to describe those new responsibilities as 

investment advisory services?

A I believe so.

Q And they were within Trey Parker's bailiwick; is that 

right?

A Yeah, within his bailiwick. You know, managing and 

monitoring those PE investments.

Q Okay. Are you aware of anybody ever saying at any time 

prior to November 2020 that Highland was failing to provide 

investment advisory services of the type that they provided 

for a decade before?

A No, with the only small exception was that there was a --

there was a conflict identified on a single private equity 

asset in the summer, call it August-ish time frame. 

Q What's the name of that asset?

A That one was OmniMax. 

Q So, other than with respect to OmniMax, did -- are you 

aware of any statement, suggestion, allegation prior to 

November 2020 where somebody alleged that Highland was failing 

to provide investment advisory services?

A Never.

Q Okay. Two very short topics. Let's turn to Exhibit 159. 

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Can you tell Judge Jernigan what that is?

A Sorry. Bear with me. 1-5-9?

Q Yes.

A Okay. I'm there.

Q Can you just describe for the Court what that document is? 

A Yes. This is the September monthly invoice from Highland 

Capital Management, LP to Highland Capital Management Fund 

Advisors under the shared services agreement. We haven't 

spent too much time on it, but most of the agreements were 

fixed. This was the one that did have a little bit of 

variability because we would -- we would charge these invoices 

each month.

Q Okay. And that was the practice going back to about 2013; 

is that right?

A Might have even been 2012, but a long way back. 

Q Okay. And when we talk about the five intercompany 

agreements today, is this the only one that was variable?

A Yes.

Q Okay. And did you have any responsibility for the --

would Highland prepare four HCMFA monthly invoices for shared 

services?

A Yes.

Q And did you have any responsibility for the preparation of 

those invoices?

A Like I said, this was a practice for many years, so early 

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on I did, maybe the first year or two. And then that became a 

task that was passed among the team. And so for years that 

process rolled up through me as the -- as the head of the 

department.

Q Okay. And did -- did the invoiced amount stay fairly 

consistent within a small band over time? During the relevant 

period?

A Yeah. During the relevant period, during the relevant 

period it would have crept up a little bit as compensation 

went up, and I believe there was a small net increase in 

headcount. Postpetition, it barely moved. It was always 

between call it $290,000 and maybe just over $300,000 per 

month.

Q Okay. I just want to ask about one particular entry on 

here. There's an entry in the middle for legal. Do you see 

that?

A Yes.

Q And it's $10,000?

A Yes.

Q Does that mean that for legal services rendered by 

Highland under the shared service agreement HCMFA paid $10,000 

per month?

A Yes. At this time, that's right.

Q That's the total of what they paid?

A Yes.

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Q So, $120,000 for a whole year? 

A Yes. There's a five percent markup on it, so it's $10,500 

per month times 12.

Q How did that -- did anybody do an analysis to see if HCMFA 

was actually responsible for $10,000 a month --

A No.

Q -- in legal fees? 

A No.

Q Anybody ever say at Highland, gee, we should be charging 

HCMFA more money because the actual cost of their services is 

much greater?

A No. Nobody said that.

Q Finally, let's just talk about damages. Have you done an 

analysis of the damages that Highland alleges that it has 

sustained from the Advisors' breach of contract? 

A Yes, in part.

Q Okay. Let's talk about the part that you prepared. Can 

you describe for the Court your damage analysis? 

 MR. RUKAVINA: And Your Honor, I do have to object 

here. This witness has not been qualified as an expert, 

designated as an expert. There's no expert report. 

Now, if the damages are just they didn't pay per month and 

they owe us for that month, that's not an expert deal. But I 

hear damages analysis and I hear that this person did an 

analysis, so --

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 MR. MORRIS: He's going to -- he's going to add the 

amounts in the contracts, multiply them by the number of 

months that weren't paid, and come up with a number. 

 MR. RUKAVINA: That's -- that's easy. 

 THE COURT: Okay.

 MR. RUKAVINA: We know what that number is. That's 

easy. 

 THE COURT: Okay.

 MR. MORRIS: So will you stipulate? 

 MR. RUKAVINA: Huh? 

 THE COURT: Okay. I overrule the objection if 

there's still one pending. 

 MR. MORRIS: Okay. All right.

BY MR. MORRIS:

Q Mr. Klos, can you describe for the Court how we arrive at 

our breach of contract damages?

A So, to summarize, NexPoint was paying $500,000 per month. 

It didn't pay for two months. So that's a million from 

NexPoint.

HCMFA had the payroll reimbursement, the $416,000 per 

month. It didn't pay for two months. So that's $832,000. 

And then on the shared services agreement, HCMFA actually 

didn't pay for three months, because the -- the November of 

twenty -- let get my year right -- November of 2020, HCMFA 

invoice hadn't been created at the Mr. Dondero said to stop 

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payments.

So three months of HCMFA shared services, two months of 

PRA, and then two months of NexPoint for everything.

Q And if we could just quickly look at Exhibit I in the 

Advisors' exhibits so we can get a number for the HCMFA shared 

services three-month piece. 

A I?

Q Yes.

A Do you have a page, by any chance? Is it in the back? 

Q It's the last page. 

A In the last --

Q It's Exhibit A. And I'll just represent to you that this 

is the Debtor's responses to the Advisors' discovery requests.

A This -- this, to me, looks like payments made as opposed 

to amounts outstanding. 

Q I understand that.

A Okay.

Q Okay. So, so the Advisors -- did the Advisors pay for 

shared services in November, December of 2020, or January of 

2021?

A Oh, I understand. Not as it pertained to Highland Capital 

Management Fund Advisors shared services. 

Q Okay. And if you look at the middle of the page, the 

amount that was paid each month for the preceding six months 

is approximately two hundred and -- $308,000 or $305,000? Is 

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that right?

A I'm sorry. One -- can you ask that again, please? 

Q The amount -- do you know what Exhibit A is? 

A Yes. Exhibit A is a listing of all the payments that were 

made postpetition by the Retail Advisors.

Q Okay. So in the middle of the page, there are payments 

that were made each month by HCMFA under the shared services 

agreements. Am I reading that correctly?

A Yes. Yes, you are.

Q And how much were they paying in 2020?

A Got it. Yes. So they were paying, just looking at it 

quickly, it looks like the lowest was about $294,000 and the 

highest was around $308,000.

Q Okay. And how would you calculate the damages for the 

three months that they didn't pay, looking at this?

A It would be approximately -- the best proxy for it would 

be the November payment, so it would be approximately three --

three more of the November 30th payment of about $308,000. 

Q Okay. So 308 times three?

A Yes.

Q Plus the million dollars from NexPoint?

A Yes. Plus the 832 of PRAs. 

Q Ah. Correct. Okay. And is it your understanding that 

Highland also seeks to recover its attorneys' fees, costs, and 

expenses under the contracts?

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A That's my understanding.

Q Okay. 

 MR. MORRIS: Your Honor, I have no further questions.

 THE COURT: All right. Pass the witness. Mr. 

Rukavina? 

(Transcript excerpt concluded at 2:19 p.m. Proceedings 

concluded at 6:19 p.m.)

--oOo--

CERTIFICATE 

 I certify that the foregoing is a correct transcript from 

the electronic sound recording of the proceedings in the 

above-entitled matter. 

 /s/ Kathy Rehling 04/14/2022

______________________________________ ________________ 

Kathy Rehling, CETD-444 Date

Certified Electronic Court Transcriber

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INDEX

Excerpt: 9:38 a.m. to 2:19 p.m. 

PROCEEDINGS 3

OPENING STATEMENTS

- By Mr. Morris 10

- By Mr. Rukavina 48

WITNESSES 

Plaintiff's Witnesses 

David Klos

- Direct Examination by Mr. Morris 61 

EXHIBITS 

Plaintiff's Exhibits 1-161 Received 6

Defendants' Exhibits A through DD (exclusive of Received 7

G, H, L, Z, and CC)

RULINGS 

Motion to Redact - Granted 144

 

END OF PROCEEDINGS 154

INDEX 155

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IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

IN RE 

HIGHLAND CAPITAL MANAGEMENT, L.P. § 

 § CASE NO. 19-340540SGJ11 

 § DALLAS, TEXAS 

 Debtor § WEDNESDAY, APRIL 13, 2022 

 § 9:39 A.M.- 11:17 A.M. 

HIGHLAND CAPITAL MANAGEMENT, L.P., § 

 Plaintiff, § 

vs. § ADVERSARY PROCEEDING 

 § NO. 21-03010-SGJ 

HIGHLAND CAPITAL MANAGEMENT FUND § 

ADVISORS, L.P., et al. § 

 Defendants. § 

TRIAL - DAY TWO 

BEFORE THE HONORABLE STACEY G. JERNIGAN 

UNITED STATES BANKRUPTCY JUDGE 

 

 

Proceedings recorded by electronic sound recording; 

transcript produced by transcription service. 

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APPEARANCES: 

FOR HIGHLAND CAPITAL MANAGEMENT, JOHN A. MORRIS, ESQ. 

LP HAYLEY R. WINOGRAD, ESQ. 

 PACHULSKI STANG ZIEHL & 

 JONES, LLP 

 10100 SANTA MONICA BVD 

 13TH FLOOR 

 LOS ANGELES, CA 900067 

 

FOR HIGHLAND CAPITAL MANAGEMENT DAVOR RUKAVINA, ESQ. 

 FUND ADVISORS, L.P. THOMAS D. BERGHMAN, ESQ. 

 MUNSCH, HARDT, KOPF & HARR 

 500 N. AKARD STREET 

 SUITE 3800 

 DALLAS, TX 75201 

COURT RECORDER: ME 

 Clerk’s Office 

 U.S. Bankruptcy Court 

 501 W. 10th Street 

 Fort Worth, TX 76102 

TRANSCRIPTION SERVICE: ACORN TRANSCRIPTS, LLC 

 3572 Acorn Street 

 North Port, FL 34286 

 

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DALLAS, TEXAS; WEDNESDAY, APRIL 13, 2022; 9:39 A.M. 

 THE MARSHAL: All rise. 

 (Call to Court) 

 THE COURT: Good morning, please be seated. All 

right. We're back for day two of our trial in Highland 

Capital Management versus the advisors, Highland Capital 

Management Fund Advisors and NexPoint Advisors. 

 All right. We have everyone here we need. We got 

plaintiff -- well, debtor's counsel and the advisor's 

counsel. All right. Do you have something to present, 

counsel? 

 MS. WINOGRAD: Good morning, Your Honor, Highland 

is calling the retail board. 

 THE COURT: Okay. 

 MS. WINOGRAD: And the representative Ethan Powell 

hasn't yet arrived. 

 THE COURT: Okay. 

 MR. RUKAVINA: He's right here. 

 UNIDENTIFIED: He's right here. 

 MS. WINOGRAD: Oh, I'm sorry about that. Okay. 

 THE COURT: Okay. Is that our first -- 

 MS. WINOGRAD: Yes. 

 THE COURT: -- witness today? 

 MS. WINOGRAD: Highland would like to call Ethan 

Powell please. 

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 THE COURT: Okay. Tell me the name again. 

 MS. WINOGRAD: Ethan Powell. 

 THE COURT: Ethan Powell. Okay. Welcome. If you 

could approach our witness box. That box right there, if 

you'll -- I'll swear you in before you take a seat. Please 

raise -- 

 MR. POWELL: Okay. So -- 

 THE COURT: If you could stand and I'll swear you 

in first. 

 MR. POWELL: Oh, sorry. 

ETHAN POWELL, WITNESS, SWORN 

 THE COURT: All right. Now you may be seated. 

 THE WITNESS: Thanks. 

DIRECT EXAMINATION 

BY MS. WINOGRAD: 

Q Good morning, Mr. Powell. 

A Good morning. 

Q My name is Hayley Winograd, I'll be asking you some 

questions over the next few minutes. Thank you for being 

here. 

A Okay. Of course. 

Q You're a member of the board of trustees or the board 

of directors of certain retail funds, correct? 

A I am, yes. 

Q Can I refer to these retail funds as the funds? 

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A You may. 

Q Are you familiar with an entity called Highland Capital 

Management Fund Advisors LP? 

A I am. 

Q Can I refer to them as HCMFA? 

A You may. 

Q And are you familiar with an entity called NexPoint 

Advisors LP? 

A I am. 

Q Can I refer to them as NexPoint? 

A You may. 

Q And can I refer to them collectively as the advisors? 

A Sure. 

Q These two entities -- the funds are managed by the 

advisors, correct? 

A Correct. 

Q And I want to talk a little bit about the relationship 

between the regional funds and the advisors. The funds 

entered into certain investment advisory agreements with 

each of the advisors, correct? 

A Correct. 

Q And pursuant to those advisory agreements, the advisors 

provide advisory services to the funds, correct? 

A Correct. 

Q And the regional board was aware that Highland filed 

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for bankruptcy in October 19th of 2019, correct? 

A Yep. 

Q And the retail board is aware that Highland provided 

certain shared services to the advisors, correct? 

A Correct. 

Q And Highland provided these services pursuant to 

various shared services agreements, correct? 

A Correct. 

Q And the retail board was aware that these shared 

service contracts enabled the advisors to satisfy their 

obligations under the investment advisory contracts, 

correct? 

A Correct. 

Q And the retail board was aware that at some point in 

February of 2021 the shared services agreements between 

Highland and the advisors were terminated, correct? 

 MR. RUKAVINA: Your Honor, at this time I will 

object. We're past the preliminaries, counsel is leading, 

this is not a hostile witness or a party opponent, so I 

object on leading. 

 THE COURT: Sustained. 

 MS. WINOGRAD: Okay. 

BY MS. WINOGRAD: 

Q Can I refer to the period between Highland's bankruptcy 

filing and the termination of the shared services agreement 

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as the relevant period? 

A You may. 

Q Okay. And during the relevant period, did the retail 

board regularly hold meetings? 

A We did. 

Q Did the retail board keep minutes of its meetings? 

A We do. 

Q And did those minutes generally reflect the 

conversations that were had at those meetings? 

A Correct. 

Q And one of -- did -- was one of the topics that was 

covered at those board meetings Highland's performance under 

the shared services arrangements? 

A Collectively with the advisors, yes. 

Q Okay. And do the board minutes reflect all material 

communications between the retail board members concerning 

Highland's performance under these shared services 

arrangements? 

A It represents the conclusions reached. 

Q Okay. Can you think of any material communications 

that weren't represented in those meetings? 

A Well, the meeting minutes are -- 

Q In the meeting -- in the minutes, I'm sorry. 

A Yeah, the meeting minutes themselves aren't intended to 

be a transcript. 

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Q Uh-huh. 

A And our meetings sadly can go very, very long. So 

oftentimes there will be material considerations that are 

presented that aren't necessarily documented in the meeting 

minutes, but the conclusions reached are. 

Q Okay. During the relevant period, did the retail board 

ever allege that either of the advisors ever breached any of 

their obligations owed to the funds under the investment 

advisory agreements? 

A Can you repeat that question? 

Q During the relevant period, did the retail board ever 

allege that either of the advisors breached their 

obligations under the investment advisory agreements? 

A No, we did not. 

Q Did the retail board ever notify the advisors of any 

breach of their obligations under the investment advisory 

agreements? 

A No. 

Q From the retail board's perspective, were the advisors 

fully able to perform their obligations under the investment 

advisory agreements? 

A Yes. 

Q Do the board meetings substantively reflect the 

communications between the board members and the advisors 

concerning Highland's performance under these shared 

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services arrangements? 

A Our assessment was never Highland versus the advisors, 

it was always collectively. And we were always given 

assurances that collectively they could fulfill the 

obligations. 

Q Do the board minutes materially reflect the 

communications between the board members and the advisors 

concerning the advisors' performance under the investment 

advisory agreements? 

A They do. 

Q Now, I want to talk to you a little bit about the board 

meetings and the minutes, and specifically the process that 

went into them. 

A Uh-huh. 

Q Was there a process in place to prepare and finalize 

the board minutes? 

A There is. 

Q And as part of this process, did the funds 

administrator FTI send the draft minutes to certain 

individuals and entities for review? 

A They do. 

Q Did one of these entities include the funds counsel? 

A It did. 

Q And did one of these entities also include the 

advisors? 

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A Yes. 

Q Was this to give the advisors the opportunity to review 

the minutes before they were finalized? 

A Yes. 

Q And it was the -- was it the secretary of the advisors 

who reviewed the board minutes on behalf of the advisors? 

A I'm not sure. 

Q Okay. 

A But that would be typical. 

Q Okay. 

A Yeah. 

Q Was that person, to the best of your recollection, 

Lauren Bedford? 

A She was the secretary during the period. 

Q Did the -- did SCI send the draft board minutes to the 

advisors to give the advisors the opportunity to provide 

feedback on those minutes? 

A They did. 

Q Did they specifically do this so that the advisors 

could confirm the accuracy of those minutes? 

A They did. 

Q Was this process for finalizing the board minutes 

generally the same throughout the relevant period? 

A It was. 

Q I'm going to ask you now about the advisors' 

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representations to the retail board about Highland's 

performance under the shared services arrangements. 

 Did the advisors provide regular updates to the retail 

board concerning the quality and continuity of the services 

provided to the advisors pursuant to these shared services 

arrangements? 

A Collectively with the advisors, yes, but individually 

as HCMLP service provider, no. 

Q I'm going to turn your attention to some documents that 

I'll be referring to for a few minutes and those documents 

are located in the binders as exhibits in front of you in 

Volume 1 and 2. So I might ask you to open one. 

 Can you please turn to Exhibit 58? 

A So that would be binder -- 

Q That would be Volume 2 I believe. 

A Volume 2, all right. 58. I should have brought my 

glasses. Okay. 

Q Are these the June 18th to 19th of 2020 board minutes? 

A They appear to be. 

Q Okay. Can you please turn to page 20? 

A Page 20. Okay. 

Q Do you see there in a June 2020 board meeting Mr. Klos, 

the advisors' chief compliance officer represented to the 

board that the advisors were monitoring the level and 

quality of the shared services being provided by Highland? 

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A Give me one second, I'm not finished reading. 

Q Uh-huh. 

A Yep, I see that. 

Q Did the board rely on the advisors to monitor the 

quality of those shared services? 

A We did. 

Q Does the retail board conduct an annual 15-C review 

process? 

A We do. 

Q Is this the process whereby the retail board decides 

whether or not to extend its -- 

 MR. RUKAVINA: Objection, Your Honor, leading. 

The proper question is what is that process. 

 THE COURT: Sustained. 

BY MS. WINOGRAD: 

Q What's the process whereby the regional board decides 

whether or not to extend its investment advisory agreements? 

A It's very long and arduous process, I don't think we 

want to get into the details here but -- 

Q But is that called the 15-C process? 

A It is the 15-C, yes, that's right. 

Q Okay. Can you please turn to Exhibit 59? 

A Okay. 

Q Are these the August 13th of 2020 board minutes? 

A They appear to be. 

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Q Can you turn to page 6 please? Do you see that Mr. 

Norris, the executive vice-president of the advisors, quote, 

“provided an overview of the 15-C review materials and 

process and discussed the expected timeline with respect to 

board consideration of approval of the renewals?” He noted 

that there had been no issue or disruption in services as a 

result of the HCMLP bankruptcy matter. Do you see that? 

A I do. 

Q Did the retail board rely on this statement? 

A We would have. 

Q Did the retail board expect that the statement was made 

on an informed basis? 

A We would have. 

Q Can you please now turn to Exhibit 60? Do you see that 

these are the board minutes from September 17th and 18th of 

2020? 

A I do. 

Q Can you please turn to the bottom of page 12, which -- 

and going on to the rest of 13. In September of 2020, Mr. 

Surgent, the chief compliance officer of the advisors 

assured the retail board that it -- that in response to 

certain 15-C follow-up questions that at that time, quote, 

“it was business as usual with respect to the services 

provided to the funds and that the board would be notified 

immediately of any developments.” Do you see that? 

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A Give me one second, finish reading. 

 I do see it. 

Q Okay. As part of the 15-C review process, was the 

retail board also required to assess the financial 

wherewithal of the advisors? 

A We were. 

Q Can you please turn to Exhibit 22? 

A 22, so that's Volume 1? 

Q Yeah. 

A Okay. I'm there. 

Q Do you see that these are the advisors October 23rd of 

2020 responses to questions raised by the retail board to 

the advisors in connection with the 15-C review process? 

A I do. 

Q If you could turn your attention to question 2, please. 

Do you see that the regional board asked the advisors 

whether there were any amounts payable or due to Highland 

from either of the advisors? 

A I see that. 

Q Do you see that the advisors represented in their 

response to the regional board that as of the date of that 

letter, all amounts owed by each of NexPoint and HCMFA 

pursuant to the shared services arrangement with HCMLP have 

been paid as of that date? 

A I do see that. 

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Q Did the retail board rely on the accuracy of this 

statement in making its decision as to whether or not to 

extend the advisory agreements? 

A We would have. 

Q And did the retail board assume that that statement was 

true and accurate? 

A We would have. 

Q Did the retail board assume that the statement was 

based on the advisor's due diligence and actual knowledge? 

A Correct. 

Q Can you please turn to Exhibit 62? 

A Yes. Okay. 

Q These are the October 28th of 2020 board minutes. Do 

you see that? 

A I do. 

Q Directing your attention to page 3 about halfway 

through the second paragraph, do you see that the advisors 

represented to the board at the end of October of 2020 that 

quote, the quality and level of services provided to the 

funds by the advisors and pursuant to the shared services 

arrangements have not been negatively impacted to date? 

A Oh, boy, I'm going to have to find that. Give me one 

second. 

(Pause) 

Q Uh-huh. 

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A You said halfway through? 

Q It's about halfway through the second big paragraph. 

A Oh, the second paragraph -- 

Q Uh-huh. 

A -- okay, I got you. Okay. I see it. 

Q Did the retail board assume that this representation as 

made on an informed basis? 

A We would have, yes. 

Q Did the retail board rely on this representation in 

deciding whether to extend its advisory contracts? 

A Among other things, but yes. 

Q Was one of the retail board's concerns during the 

relevant period related to the continuation of material 

services to the funds? 

A Correct. 

Q Was one of the assurances the retail board had been 

asking for related to the sufficient employees at Highland, 

whether there was a sufficient amount of employees at 

Highland to be able to provide services that the advisors 

needed in order to fulfill its obligations under the 

investment advisory contracts? 

A It would have been at the advisors and Highland. 

Q Uh-huh. Can you please turn to Exhibit 64? This is 

December of 2020 minutes, correct? 

A Yep. 

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Q If you could turn to page 7 at the very bottom. Do you 

see there that the advisors assured the retail board that 

there was sufficient personnel to continue the shared 

services to the regional funds? 

A I see that. 

 MS. WINOGRAD: Your Honor, can I confer with 

counsel for a minute? 

 THE COURT: Sure. 

 (Pause) 

 MS. WINOGRAD: That's all I have. Thank you very 

much. 

 THE COURT: Okay. 

 THE WITNESS: Thank you. 

 THE COURT: Pass the witness. Wait. I can tell 

you don't do this very often, right? 

 THE WITNESS: I try not to to the extent possible. 

 THE COURT: All right. Mr. Rukavina, you have 

questions? 

 MR. RUKAVINA: Yes, I do, Your Honor. 

CROSS-EXAMINATION 

BY MR. RUKAVINA: 

Q Mr. Paul, good morning. 

A Good morning. 

Q Just to confirm, you're on the board of those retail 

funds, right? 

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A Correct. 

Q Okay. And would Mr. Seery sometimes participate in 

these board meetings during the period that counsel has 

called the relevant period? 

A He would. 

Q Do you have an understanding as to why Mr. Seery would 

participate? 

A I do. 

Q What's your understanding? 

A To provide updates on the HMLP bankruptcy/implications 

to HCMLP's services provided under the services agreement. 

Q And what did you understand generally to be the 

services that HCMLP was provided to the advisors under the 

shared services agreements? 

A Primarily back-office accounting, finance, HR, IT, 

support services. 

Q Was that of relevance to the funds? 

A It would have been, yeah. 

Q Why? 

A So our primary focus is the nature and quality of 

services being provided to the investors, particularly as it 

relates to investment selection monitoring of the funds and 

ensuring that the financial outcomes to our investors are 

maximized. 

 There are lots of service providers involved and it's 

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our job to assess each service provider's role and whether 

or not they are fulfilling their role within the context of 

an agreement we have with them, we being the investors in 

our funds. 

 So we have separate administration agreements with SCI 

for example. They actually do fund accounting. Our 

advisory contract with the advisor, their primary role is 

investment selection. They need support staff in order to 

help facilitate that. So we really looked to the advisor to 

assess what they needed and whether or not they were getting 

from HCMLP all of the, you know, various back office and 

mid-office support services that they needed to order to 

perform their primary function. 

Q So we'll break that down just a little bit. So first 

of all, let's give the judge an order -- an idea of the 

order of magnitude of the assets under management that the 

funds have that the advisors are advising for -- 

A For these? 

Q Yes. 

A 3 billion we'll call it. 

Q How much? 

A 3 billion. 

Q 3 billion with a B? 

A Uh-huh. 

Q And you mentioned back-office services, you described 

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those -- you mentioned mid-office services, can you give a 

generalized description of your understanding of middle 

office service? 

A Sure. Middle office would be trade settlement, trade 

reconciliation, performing some of the fund analysis and 

portfolio compensation analysis. Back office would be more 

accounting and audit support services. 

Q Have you also heard of the phrase front office 

services? 

A I have. 

Q What's your understanding of that phrase? 

A Front office is the primary investment selection and 

monitoring decisions. 

Q And I think you mentioned that's what the advisors did. 

A Yes, correct. 

Q Okay. Did you understand that that -- did you 

understand that shared services, those contracts did not 

include front office services? 

A I did. 

Q Okay. Have you heard of payroll reimbursement 

agreements between the advisors and Highland? 

A I believe so, yes. 

Q And we'll go through those in some details. Are these 

board meetings that counsel took you through, who actually 

prepared those meetings? 

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A That would be SCI's regulatory administration group. 

Q Okay. Did Ms. Bedford have a -- I can't pronounce her 

name I apologize, I'm a foreigner, did Ms. Fedford have a 

role in that? 

A You did a good job on that. She would have, yeah. 

Q Okay. Was she primarily the one that put it together? 

A She would have been the primary review party from the 

advisors. 

Q Do you have an understanding with whose employee she 

was? 

A She was I believe HCMLPs, but it's also important to 

note that lots of people had multiple hats and were employed 

by multiple different entities. 

Q And you mentioned multiple times or at least twice when 

counsel was asking you about services being provided by 

HCMLP, which we also call the debtor here, which is why. 

A Uh-huh. 

Q And you mentioned that what was interest -- of interest 

to you was the services being provided by both the advisors 

and the debtors. Do you remember testifying? 

A Yes. 

 MS. WINOGRAD: Objection, leading. 

 MR. RUKAVINA: Well, I'm phrasing my next 

question. I'm just phrasing -- it's a predicate to my next 

question. 

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 THE COURT: Overruled. 

BY MR. RUKAVINA: 

Q What did you mean by that when you said that for both 

the advisors and HCMLP? 

A So, yeah, our contract is primarily with the advisors 

period. What they choose to do with what's called their 

bona fide profits, which is their management fee is really 

up to them, right. 

 A lot of fund complexes don't have multiple advisory 

entities and it's just a single advisor without any sort of 

shared services arrangement in and amongst the various 

entities. 

 So we really just looked at the advisor to make sure 

that first and foremost that the financial outcomes for our 

investors were what we set out to provide them, right, and 

that was front office. 

 To the extent that the front office function was using 

HCMLP to support them it was somewhat ancillary because, you 

know, as long as they had what they needed to perform their 

job and the performance results were as intended, how they 

got there and how they used the management fee that the 

funds paid them was really up to them. 

Q Did you have an understanding during what was described 

as the relevant period as to whether the advisors had their 

own employees? 

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A Yes. 

Q Okay. What was your understanding as to the advisors’ 

own employees? 

A That the advisors' employees that were, you know, very 

experienced, capable financial professionals, capable of 

stepping in as needed in the event that there was any, you 

know, misstep from a shared services perspective. 

Q And what was your understanding as to what services the 

advisors own employees were providing during the relevant 

period to the funds? 

A In any -- 

Q You mentioned front office, middle office and back 

office. 

A Right. 

Q Can you kind of put them into one or more of those 

buckets? 

A Oh, they were front office primarily, yeah. 

Q And during this relevant period, were you concerned or 

to your knowledge was the board concerned about Highland 

employees leaving en masse? 

A Yes. 

Q Was that discussed internally? 

A Yes. 

Q Was that discussed with Mr. Seery? 

A Yes, I imagine it was. 

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Q What was the concern, why were -- why was the board 

concerned? 

A Again, (indiscernible - 10:04:36) services you're 

talking about a pretty public bankruptcy, it's a competitive 

job market, you know, Highland has a pretty complex and 

nuanced investment philosophy and strategy. So finding and 

retaining quality candidates in any one of those three 

buckets you outlined, you know, in that environment might be 

difficult. 

Q And you also mentioned that these meetings were present 

the conclusions reached and you mentioned that the meeting 

sometimes took a long time. 

A Correct. 

Q Can you help us understand some more the relationship 

between the meetings and what was actually discussed during 

these sometimes lengthy meetings? 

A As it relates to the meeting minutes or? 

Q Yes, sir. 

A Right. So like I said the idea isn't that the meeting 

minutes aren't a transcript because that would be cumbersome 

and not productive. You know, at least on a quarterly basis 

we would have two-day meetings. We, during the period, had 

I don't even know how many meetings, but many, many 

meetings. 

 And the idea of the meeting minutes was really to 

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memorialize the conclusions reached, material questions 

asked and answered. And any supporting documentation that 

may be relevant to reach those conclusions. 

Q Could it be that things were discussed at those 

meetings that did not end up in the minutes? 

A Yes, absolutely. 

Q Do you recall whether there was ever discussed with the 

advisors that various employees at Highland pursuant to 

certain payroll reimbursement agreements were no longer 

there, were no longer providing services? 

A At some point we did hear about that, yes. 

Q And I asked you whether you'd heard of the payroll 

reimbursement agreements. 

A Uh-huh. 

Q What is your understanding of the payroll reimbursement 

agreements between the advisors and Highland? 

A That part of the compensation under the shared services 

agreement was to share in some of the costs of the actual 

labor resources at HCMLP. 

Q Did you understand the payroll reimbursement agreements 

were separate from the shared service agreements or did you 

just kind of think that they were one in the same? 

A Yeah, they were one in the same as far as we were 

concerned. 

Q What -- the concern to you was that you were getting 

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the services that you needed and how they were contractually 

done didn't necessarily matter. 

A That's right. We did not dive into that and we did not 

dive into the bankruptcy. 

Q Do you recall ever at these meetings specifically 

discussing the payroll reimbursement agreements themselves? 

A Not in detail. 

Q What is your best recollection about the discussion 

that you said you do remember at some point in time about 

Highland employees leaving and no longer being available to 

the advisors? What do you remember? 

A That there was some attrition and we really always come 

back to how is the attrition impacting our investors. And, 

you know, some of the quotes in the meeting minutes include 

the assessment that, you know, as it relates to our 

investors, either HCMLP debtor employees were picking up or 

the advisors' employees were stepping in and performing 

services. 

Q Did you have an understanding that the advisors 

actually hired a number of their own employees to provide 

front office service? 

A Yes. 

Q Okay. Also briefly do you have an understanding -- 

well, strike that. I won't burden you with that. 

 Let's go through some of these same exhibits, please, 

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that counsel took you through. Please start with Exhibit 

No. 57. 

A 57. 

Q Yeah. 

A Okay. 

Q Okay. So let's look at page 3 please, the bottom 

paragraph. Are you there, sir? 

A I am. 

Q Okay. Mr. Norris discussed the shared services 

arrangements that each advisor is a party to with HCMLP. 

Did I read that correctly? 

A You did. 

Q Okay. Is there any mention of payroll reimbursement 

agreements there? 

A There is not. 

Q Okay. And he concludes or he discusses further on that 

the advisors may use employees from HCMLP for the provision 

of various services such as human resources, accounting, 

valuation, information technology services, compliance and 

legal. Did I read that correctly? 

A You did. 

Q Please put those services into one or more of your 

three buckets that you mentioned earlier. 

A Okay. All right. 

 I'll go with human resources as back office, as with 

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accounting, information technology services and compliance 

and legal. Valuation would be more of a mid-office 

function. 

Q None of those front office functions, are they? 

A None of those are front office. 

Q Okay. And let's go to Exhibit 58, please. 

A Okay. 

Q And, sir, if you'll back to page 20, the same one that 

Ms. Winograd asked you about. 

A Okay. 

Q And it starts by Mr. Post also discussed the quality 

and continuity of services provided to the funds by HCMLP, 

pursuant to shared services agreements with the advisors. 

Did I read that correctly? 

A You did. 

Q Anything in there about payroll reimbursement 

agreements? 

A There is not. 

Q And Exhibit 59, we're going to burn through these. I'm 

going to have the same question for every one. 

A Okay. 

Q Exhibit 59, page 6 please. Okay. Page 11 please. The 

larger bottom paragraph it starts with Mr. Seery then 

pointed out to the board a potential conflict of interest. 

Do you recall what Mr. Seery was discussing? Please read 

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that to refresh your memory. 

A Sure, yeah. 

Q Do you have a memory of what was being discussed? 

A I do. 

Q What is it? 

A We held a position in our funds that were also held as 

debtor collateral in the bankruptcy and we had collectively 

a large position and debtor was going to liquidate their 

position and was interested in us joining the liquidation 

and we were not. 

Q So that's the complex that was created? 

A Correct, yeah. 

Q Do you know who Jason Post is? 

A I do. 

Q What was Jason Post's role during the relevant period 

vis-a-vis the funds? 

A He was the chief compliance officer. 

Q Okay. Do you understand whether at some point in time 

Mr. Post left HCMLP to join the advisors? 

A I do. 

Q Okay. Do you have an understanding as to why that 

happened? Well, let me ask it this way. Did it have 

anything to do with this conflict of interest? 

A Not directly, but yeah, it was definitely a considering 

factor. 

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Q This conflict of interest was identified, was it a 

concern that there might be future ones? 

A Yep, yes. 

Q So was Mr. Post's reason, to your understanding, for 

changing from HCMLP to the advisors to, in effect, remove 

these potential conflicts? 

A That's right. 

Q Do you have an understanding as to whether Mr. Seery 

approved Mr. Post leaving HCMLP to work for the advisors 

directly? 

A I believe he did, yes. 

Q If we continue with these exhibits, Mr. Powell, Exhibit 

60 please. And it's going to page 7 and it's the big full 

paragraph, it's too long for me to read, but you see that it 

talks about Mr. Seery discussing the shared services 

agreements and services under the shared services 

agreements. Do you see that, sir? 

A Yes, I do. 

Q Any mention in here of payroll reimbursement 

agreements? 

A Oh, boy, give me a second. 

 No. 

Q Okay. And if we go to -- your answer was no, correct? 

A No, that's correct. 

Q And if you flip to the next exhibit, please which is 

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60, or I'm sorry, we're still on 60, aren't we? 

A Yeah, we're on 60. 

Q Go to page 12, review of the 15-C materials. 

A All right. 

Q And it talks about in there that Mr. Surgent, who did 

you understand Mr. Surgent to be? 

A Thomas Surgent, complex CCO. 

Q Okay. CCO. And it talks about he provided the board 

with a status update on the HCMLP bankruptcy and discussed 

the impact of the HCMLP bankruptcy and the shared services 

arrangements with the funds noting he does not expect that 

the level and quality of services would change in the 

immediate term. Did I read that correctly? 

A You did. 

Q Any discussion there about the payroll reimbursement 

agreements? 

A There's not. 

Q Okay. Exhibit 61, please, sir. 

A All right. 

Q And if you'll flip to page 3. 

A Okay. 

Q And take as much time as you need to read, but it talks 

about Mr. Sauder. Who did you understand Mr. Sauder to be? 

A D.C. Sauder, one of the counsel for the advisor. 

Q Mr. Sauder also discussed the status of the shared 

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services agreements, et cetera, et cetera. Any mention in 

there about payroll reimbursement agreements? 

A There is not. 

Q And I'll spare the Court, we're going through the next 

10 of these and I'll address them during closing, but do you 

remember the advisors ever telling you that everything was 

fine under the payroll reimbursement agreements, as opposed 

to the shared services agreements? 

A Yeah, we would have just said is everything fine 

relative to the shared services. 

Q The shared services. 

A Yeah. 

Q Okay. And let's look at Exhibit 22 real briefly before 

we conclude. You looked at that earlier. 

A Yeah. Okay. 

Q So are you there, sir? 

A I am. 

Q “A-1, please provide to the extent practical the 

contingency plans with respect to the services provided 

under the shared services agreements.” Did I read that 

correctly? 

A You did. 

Q And then there's an answer. Anything in here about 

payroll reimbursement agreements? 

A No. 

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Q And then in number 2 at the end of the response, the 

advisors respond to you, all amounts owed by each of 

NexPoint and HCMFA pursuant to the shared services agreement 

with HCMLP have been paid as of the date of this letter. 

Did I read that -- 

 MR. MORRIS: One second, please, Your Honor, what 

exhibit is that? 

 MR. RUKAVINA: Exhibit 22, the supplemental 15-C. 

 MR. MORRIS: Okay. Can we please read that more 

accurately? 

 MR. RUKAVINA: I'm sorry, I need new reading 

glasses. 

 MR. MORRIS: Okay. 

 MR. RUKAVINA: I'm trying. It says, all -- 

 MR. MORRIS: It doesn't say shared services -- 

 MR. RUKAVINA: Arrangement, arrangement. 

 MR. MORRIS: It says shared services -- 

 MR. RUKAVINA: Yeah, and I apologize. 

 MR. MORRIS: -- arrangement. 

 MR. RUKAVINA: That's true and I apologize. 

Again, you'll see that I can't -- 

 MR. MORRIS: No problem. 

 MR. RUKAVINA: I'm of that age where I need 

reading glasses and I'm too embarrassed to admit it. 

BY MR. RUKAVINA: 

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Q All amounts owed by each of NexPoint and HCMFA pursuant 

to the shared services arrangement with HCMLP had been paid 

as of the date of this letter. I apologize for my mistake. 

Did I read that correctly now? 

A You did, yes. 

Q Any mention about payroll reimbursement agreements? 

A There is not. 

 MR. RUKAVINA: Okay. Thank you, Mr. Powell, for 

your time. Pass the witness, Your Honor. 

 THE COURT: All right. Redirect? 

REDIRECT EXAMINATION 

BY MS. WINOGRAD: 

Q Mr. Powell, you were aware of the payroll reimbursement 

agreements; is that right? 

A Conceptually, yes. 

Q Did you view them -- did you view the shared services 

and the front office services as one in the same? 

A Shared services and front office? 

Q Uh-huh. 

A No, we do not. 

 MS. WINOGRAD: Thank you. 

 THE WITNESS: Okay. 

 THE COURT: Any recross? 

 MR. RUKAVINA: No, Your Honor, thank you. 

 THE COURT: All right. Thank you, Mr. Powell, 

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you're excused now. 

 THE WITNESS: Okay. Thank you. 

 THE COURT: All right. Your next witness? 

 (Witness excused) 

 MR. MORRIS: Good morning, Your Honor, John Morris 

from Pachulski Stang Ziehl & Jones for Highland Capital 

Management. 

 Highland next calls Mr. James P. Seery, Jr. 

 THE COURT: Mr. Seery. 

 MR. SEERY: Good morning, Your Honor. Off the 

record, I've been wearing a mask because I have a cold and 

I've been testing, so I'm -- every day, so. 

 THE COURT: Well, you may have noticed I've 

been sniffling a lot up here and I'm pretty sure it's 

allergies. 

 MR. SEERY: My apologies. If the Court would like 

me to wear the mask under testimony, I can do that, 

otherwise, I will be a bit raspy. 

 THE COURT: Well, you know, it's up to you. I'd 

say whatever makes each individual feel comfortable, so 

please raise your right hand. 

JAMES P. SEERY, WITNESS, SWORN 

 THE COURT: All right. Please be seated. 

 THE WITNESS: Thank you. 

 THE COURT: Okay. 

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DIRECT EXAMINATION 

BY MR. MORRIS: 

Q Good morning, Mr. Seery. 

A Good morning. 

Q You were appointed in January of 2020; is that right? 

A As an independent board member, yes. 

Q Okay. And at the time -- and you were appointed with 

two other gentlemen, correct? 

A Yes, Mr. John Dubell (ph) and Mr. Ruff Snelms (ph). 

Q After the independent board was appointed on January 

1st, 2020 did the independent board meet with Frank 

Waterhouse to go after financial information concerning 

Highland? 

A Yes. We met with the whole team. Often individually 

including Frank individually for the senior people and then 

each group. So with finance and accounting it was Frank and 

Dave Klos. 

Q Okay. And do you recall the topics of discussion 

during the early period after the independent board was 

appointed that you had with Frank and with Mr. Klos? 

A Yes. 

Q Can you describe for the Court what you recall 

generally about the substance of those discussions? 

A These were multiple topics, multiple meetings starting 

on the afternoon of the 9th and going forward I was in 

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Dallas most days usually at least Monday to Wednesday or 

Thursday, sometimes Tuesday to Friday but most of the days 

up until COVID hit. And we had in-depth conversations 

regarding each of the funds that Highland managed, each of 

the sources of revenue, each of the obligations that 

Highland had, the employees, everything that rolled up to 

Waterhouse and Klos, which included HR, which rolled up to 

Waterhouse. And then we show up -- the investing in a 

distressed company we show up in a bankruptcy it's like real 

estate, there's three important things, liquidity, liquidity 

and liquidity. 

Q Did the issue of the relationship between Highland and 

affiliates who were owned and/or controlled by Mr. Dondero 

come up? 

A Yes. Right out of the gate. So Highland, the way it 

was set up -- 

 MR. RUKAVINA: Your Honor, excuse me. Your Honor, 

he's not allowed to testify narratively, he answered the 

question, what do you recall about that topic. 

 THE WITNESS: So right out of the gate one of the 

important considerations were what were the contractual 

relationships that Highland had, what were the revenues you 

could receive from those contractual relationships, what 

were the obligations you had to do to manage those 

obligations, and what were the risks with respect to those 

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obligations. Did they -- were they ultimately -- were they 

worthwhile keeping, were they things you should think about 

getting rid of, how to staff them, were there ways to manage 

that exposure. 

 And the interrelationship of the Highland entities 

was front and center in the case. So even from before the 

case got transferred here, one of the big issues for the UCC 

which was mentioned at a lunch we had with some of the UCC 

members which I don't -- it may have been the day of the 

appointment was issues with respect to is Dondero -- is 

Dondero or are Dondero entities siphoning value from 

Highland to the detriment to the creditors and to the 

Highland estate. 

BY MR. MORRIS: 

Q And did that topic continue to be discussed between you 

and the independent board and the committee into March? 

A These are front and center major issue and the reason, 

the reason it was is sort of obvious. But it was not just 

ultimate value, but it would have to do with liquidity. So 

when we considered the various contractual arrangements what 

were the ways that we got revenue and was that revenue 

important enough to keep. 

 So we thought about it as the big four in terms of 

revenue. You had the 1.0 CLOs and they would pay management 

fees based upon the fee stream that they had, which was at 

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that point simply just the management portion of the CLO 

fee. And then you had the HCMFA which was paying a 

combination of fees, flat fees under the -- about a flat 

fee, a flat fee under the payroll reimbursement and a 

relatively flat fee although it had a slight fluctuation, I 

can go into detail on that, on the shared services. And 

their flat fee from NPA on shared services and a flat fee 

from NPA on the PRAs. 

 The structure of that, that was the vast majority of 

the revenue on a regular basis that you'd get. Everything 

else was kind of a rounding error. 

Q Do you recall having a meeting in which Josh Carey (ph) 

participated where the topic of the shared services and subadvisory or payroll reimbursement agreements was discussed? 

A Well, Mr. Terry had a -- yes, and Mr. Terry -- 

Q Do you recall the meeting? 

A Yeah. 

Q I just want to satisfy counsel, let me just ask the 

questions. Do you recall the meeting? 

A I recall the meeting, yes. 

Q Okay. Can you explain to the judge what you recall 

about the meeting? 

A It was actually multiple meetings. So it started at 

this lunch which was we stayed at the Jewel the first night 

of the first hearing and I think our lunch was there or 

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right in and around there. And Mr. Terry and his counsel 

peppered us with information regarding their perspective on 

certain things went on at Highland. 

 And Mr. Terry had a unique perspective because he was 

part of the ASIS arrangement. So ASIS which managed the CLO 

business, which had been Highland's business and then got 

put off to ASIS, ASIS had a shared service arrangement. 

ASIS had a -- didn't have a -- I don't think it had a PRA, 

but it didn't really make a difference. If it did, it might 

have been a nominal fee. And ASIS also had a sub-advisory 

fee. 

 So ASIS was paying sub-advisory to Highland at a very 

low rate. And ASIS was paying shared services amounts at a 

very low rate and getting lots of value. How did Mr. Terry 

know this? Because he was one of the partners in ASIS that 

benefitted from this value transfer. 

 ASIS was getting value from Highland. When the ASIS 

bankruptcy happened and it started stripping out assets, 

they upped the fees on the management fee from I think five 

bips to 25. ASIS was probably making around 40. So he knew 

exactly that these arrangements and from his perspective 

took value away from Highland for the benefit of these other 

entities. That was ASIS and he was focused on HCMFA and NPA 

because NPA's completely owned by Dondero through Dougaboy 

(ph) and HCMFA had been completely owned by Dondero but then 

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it was owned by Dondero and Okada through entities. 

Q And after having these conversations and leading up to 

these conversations, did you communicate with Mr. Waterhouse 

about the economics of the intercompany agreements that you 

just described? 

A Well, right out of the gate that was important, not 

only for as I said earlier for Mr. Terry's inquiry, and it 

became a larger committee inquiry, but because of the 

liquidity issues. 

 So I needed to know what was coming in from each of 

these contracts, what were the risks. The 1.0 CLOs while 

they had a lot of assets under management, they were lumpy 

because some of them didn't have cash. They -- we've talked 

about it before, they weren't really CLOs. They're 

basically closed in funds because they don't go buy any 

assets, they don't have anything that's really income 

producing. 

 They own reorganized equity, defaulted debt, so when 

those paid off, then one would come in and get paid fees, 

otherwise the fees accrued. So that was lumpy. Then you 

had direct fees from HCMFA, in the form of the two 

agreements, indirect fees from NPA. 

 And I had a very specific conversation with Mr. 

Waterhouse and Mr. Klos and I recall it vividly, I'm 

burdened by that, and I can picture Mr. Waterhouse on the 

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table telling me, well -- because I looked at the exhibits 

and I said how do I know this money's coming in. And they 

told me it was a flat fee coming in so we could count on 

that. 

 And I asked about the specific schedule at the back of 

these agreements and I said, who came up with this, where 

Sirhan (ph) is 29 percent for one and 9 percent for another, 

how do I know that that's an accurate number. And they said 

well -- and it's going to keep coming in every month. They 

said, well, that's a fixed number one day, it's just a plug, 

it was topped down, don't worry about it, that comes in 

every month. 

 And I said, well, HCMFA does that come in every month. 

And the answer was, well, it has a variable on the shared 

service by it's very small, it's 290 to 300,000 a month. 

Q I just want to -- 

A So that was the focus on the first time we talked about 

the shared service arrangements was liquidity. We didn't 

talk about at that point whether Mr. Terry's concern that 

value was getting sucked out. It was first how much money I 

have to keep the lights on here. 

Q Okay. And you were actually looking at the exhibits to 

the payroll reimbursement agreements -- 

A Yeah. 

Q -- do I have that right? 

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A Uh-huh. 

Q All right. I'm not going to take the time to go 

through that. Did -- 

A Yeah, you'll see each of them, he's the first guy. And 

I remember, I just remember specifically asking 9 percent, 

how did you guys come up with that, maybe I'm too simple, 

but I think in 5s and 10s if I'm rounding and they laughed 

and said it's a plug number, you needed to adjust it to get 

the output. 

Q Okay. Did either Mr. Klos or Mr. Waterhouse tell you 

ever that the advisors were overpaying under the payroll 

reimbursement agreements? 

A Absolutely not. 

Q Okay. You sat here yesterday. You saw the analyses 

that Mr. Klos prepared in late 2019 before the independent 

board was appointed. Did either Mr. Klos or Mr. Waterhouse 

show you either one of the analyses that Mr. Klos prepared 

in 2019? 

A I never saw those until we started preparing for this 

trial. And this was a front and center issue. So the 

committee was pushing very early for Highland to terminate a 

lot of employees. Because as I said, Mr. Terry knew the 

arrangements and knew how it worked. And it worked as I 

described. And the committee, other members, picked that 

up. 

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 And so the first meeting, we had a face-to-face meeting 

on March 9th in New York City at the Pachulski offices. 

What I remember it was the last chopper out of Saigon as 

they say, it was the last meeting before COVID really shut 

down New York and literally that night it was over. And it 

was a very tense meeting for a whole bunch of reasons. 

Including UBS issues which were separate, but Mr. Terry was 

very focused and I don't recall if he was there, but it was 

a packed conference room, so in hindsight felt very 

unhealthy. 

 A lot of focus on the value being sucked out by Dondero 

entities. And I was ill prepared. I don't show up very 

often unprepared and I was not at my best and he was giving 

it to me pretty good. 

 And so that became a major focus for us to start 

figuring out how -- what are we burning cash on and why are 

we burning so much cash and why don't these arrangements, 

the big four, CLOs which were fixed, HCMFA, NPA, why don't -

- I forget the fourth, why don't we have enough money 

because we knew by then we were burning cash. 

Q Did you communicate with Scott Ellington (ph) and Isaac 

Leviton (ph) during the six months after the appointment 

about various matters? 

A Absolutely. 

Q Did either Scott Ellington or Isaac Leviton tell you at 

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any time in the history of the world that they had 

information from Frank Waterhouse showing that the advisors 

were overpaying under the payroll reimbursement agreement? 

 MR. RUKAVINA: Your Honor, that's going to be 

hearsay, objection. Those are not our officers, not a party 

admission. 

 THE COURT: Okay. Let me think through that. 

 Okay. Not a party opponent because they're 

technically Highland employees, so. 

 MR. MORRIS: I want to know what the newly 

appointed independent board knew, right, isn't it important 

to know based on their entire case -- all right. I'll ask 

this question. 

 THE COURT: Okay. 

BY MR. MORRIS: 

Q Did anybody in the world, anybody in the whole wide 

world ever tell you or any member of the independent board 

that Highland was overcharging the advisors under the 

payroll reimbursement agreements? 

A It didn't happen and it couldn't happen and the reason 

it couldn't happen was because these arrangements were 

massive money losers. 

 So the issue that Mr. Terry raised on the first day and 

beat me up on March 9th on didn't stop on March 9th, it 

continued. Again, the committee's focus was how do we stop 

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the burn. We did 13-week cash flow meetings every single 

week. I am not comfortable with a 13-week cash flow where 

the numbers have parenthesis around them. That means 

they're negative. And so I don't like looking out five 

weeks and see we're running out of cash. 

 So we were continually working to figure out why -- 

where we were burning cash, where we could offset, at the 

same time not going through a wholesale firing of employees 

because my view at the time and the board concurred with me 

and held the same view, was that we should try to hold the 

organization together and get a larger reorganization, which 

would have required Mr. Dondero's participation and it 

wouldn't have made sense for Mr. Dondero to participate if 

the entity had lost all its employment and utility to him 

and his companies. 

Q If the contracts were losing so much money, why didn't 

you just immediately move to reject? You were getting this 

pressure from Mr. Terry, why didn't you just reject the 

contracts? 

A Well, precisely because we wanted to hold the business 

together. So what we did was, we did -- by the time we got 

to June-ish, May/June, we had really analyzed these 

arrangements. And we found that the arrangement with DAF, 

which was one of the big four was profitable, it had a 

shared service but I don't think there was a fee under it, 

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but it was a typical 2 and 20 arrangement. 

 So you've got 2 percent of the assets under management 

and then you've got 20 percent of the upside and I think it 

was annual, I don't think it had an earlier advancement of 

the profit up. So that was a good arrangement. You got a 

good sense of where that was coming in. That was a 

profitable arrangement. 

 The other contracts by the time we had the next meeting 

with the committee were in the 8 to $10 million loser range. 

That's what we were burning at Highland ex-restructuring 

costs. So not including counsel and committee counsel and 

financial advisors. 

Q Okay. Let's shift gears a little bit to the provision 

of services. From your perspective, did Highland perform 

the services required under the payroll reimbursement 

agreements and the shared services agreements? 

A Absolutely. That was what the employees did and it was 

middle, front and back. And we didn't, to be fair, look and 

say, oh, look at this one contract versus this one. They 

were arrangements. They were the complete arrangement with 

HCMFA. 

 And let's be clear about what we're talking about and 

everybody else knows this, HCMFA and NPA aren't real 

separate entities, they've now developed. 

 MR. RUKAVINA: Your Honor, I object. Now, this is 

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narrative, this is all kinds of legal conclusions, expert 

conclusions that has no relevance to this. 

 THE WITNESS: This is factual. 

 MR. RUKAVINA: To say that my clients are not 

separate legal elements -- entities, the man is just 

narratively telling you a story that has some tangential 

relevance. He should be asked questions and give clear 

answers. 

 MR. MORRIS: Okay. 

 THE COURT: All right. Well, there is some 

narrative but we've got two days for this trial, you know. 

I mean, I'm trying to balance the narrative versus we don't 

want this going on four days. So let's just try to keep it 

in check. 

BY MR. MORRIS: 

Q Mr. Seery, from the date that the independent board was 

appointed on January 9th, 2020 until November 30th, 2020 

when Highland gave notice of termination under the shared 

services agreements, did you -- do you recall receiving any 

complaints about Highland's performance of back, middle and 

front office services to -- withdrawn. I'm going to start 

this differently. 

 Let's call that the relevant period from your 

appointment until November 30th, 2020. Okay. 

 I'll start with the advisors. Do you recall receiving 

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any complaints at any time during that period that the 

advisors -- that Highland was failing to perform back, 

middle, or front office services under the three agreements 

-- under the agreements? 

A From the advisors? 

Q Yes. 

A Not at all, never, not once. 

Q Not once. 

A Not once. 

Q Okay. Is there anybody in the world that you recall 

complaining about the provision of services by Highland 

during the relevant period? 

A Yes. 

Q Who made the complaint? 

A John Holt. 

Q Who's John Holt? 

A He's the CEO of NexBank. 

Q And do you recall the nature of the complaint, just 

briefly? 

A Yes. He thought he was being charged too much for his 

various service arrangements and didn't think he was getting 

quality service, particularly from the legal department, Mr. 

Allenton (ph), Leviton, compliance, et cetera. 

Q And did you -- what happened as a result of the 

complaint that you received? 

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A I investigated it. I talked to Allenton and the rest 

of the legal team. They came back with specifics that Mr. 

Holt was in their opinion mistaken, that they had been 

providing significant services for NexBank and that he may 

not have been aware of them as the CEO. 

 They complained that he as paid on an EBITDA basis so 

that his incentive was to reduce costs wherever he could and 

get services for free. I found Mr. Holt to be a 

sophisticated, straight businessman. We had a discussion on 

the phone. We agreed to disagree and defer discussion on it 

until we could figure out how to best separate the 

relationship between Highland Capital Management and 

NexBank. 

Q Do you recall receiving a letter from D.C. Sauder (ph) 

in mid-October, 2020? 

A I believe I got a letter from Mr. Sauder. I'm not sure 

if I even knew who he was when I got it. And it was right 

after, I believe it was right after things had really gone, 

I would say south with Mr. Dondero. 

Q Do you recall -- when you say it went south, did there 

come a time when Mr. Dondero resigned from Highland? 

A Beginning of October. 

Q Okay. And your recollection is that you received this 

-- give me just one second. 

A In or around that time. 

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 MR. MORRIS: I apologize, but give me just one 

second. 

Q It's Exhibit 148 in your book, if you can get that. 

 THE COURT: I'm sorry, what number? 

 MR. MORRIS: 148. 

 THE COURT: Okay. 

BY MR. MORRIS: 

Q And if you could just take a look at that, Mr. Seery. 

A I thought you said it was from Sauder. This says from 

Norris. Did I miss -- 

Q Oh, no. I may just be mistaken, I apologize. This is 

a letter from Mr. Norris. 

A I don't think I knew who he was either. 

Q Okay. So do you recall receiving this letter then? 

A I recall getting a letter in or around this time from 

NexPoint. 

Q And can you take a quick look at that letter and see if 

you can let the Court know if you recall whether Mr. Norris 

put Highland on notice about any failure to provide back, 

middle, front office services of any kind? 

A It looks to me to be a complaint about the OmniMax 

issue. 

Q Is that -- do you understand that that's the issue that 

Mr. Powell just testified about? 

A He -- I heard Mr. Powell's testimony and he mentioned 

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the OmniMax issue. He -- to be clear, I was invited to the 

board meetings. I didn't volunteer to go to the retail 

board meetings and I said I would do that. And I did raise 

the issue around the OmniMax transaction. 

 And what happened was Highland had a big position. The 

retail funds had a small position. We thought the 

transaction was a good transaction because the company -- 

this other guy is going to file and the buyer of the company 

was willing to take out the whole piece. 

 I had been in discussions with Mr. Dondero. Mr. 

Dondero had agreed to a price. When I came back with the 

price, he said I never agreed to that price. I said fine, 

we're going to trade these because this is a good price. 

And the structure of the trade was such that with the buyer, 

if need be, would be put into bankruptcy and the hold out 

would be crammed down. And we were happy to do that. 

 Mr. Dondero ultimately held out. The funds held out. 

They cut a deal with the buyer and then we had to pick part 

of it because it was less expensive than filing the company 

for bankruptcy. 

Q And -- 

A So they got bought out at a little bit higher level. 

Q Is it fair to say that there was simply difference in 

investment strategy between you and Mr. Dondero? 

A Yes, I think that's fair. 

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Q And is that when we talk about conflict is that what 

you're talking about? 

A That's correct. 

Q Can you think of any other transaction -- oh. Was it 

possible that conflicts would arise with respect to other 

jointly held assets? 

A Definitely could be. 

Q And that's really -- did you understand that's what Mr. 

Norris was referring to? 

A I do. 

Q In the second paragraph. 

A That's what it looks like he's referring to. I'm not 

remember spending that much time thinking about this letter 

frankly. 

Q Okay. Do you -- I'm -- do you recall receiving other 

letters from the advisors and from their lawyers at K&L 

Gates? 

A Definitely lawyer letters, yes. 

Q Do you recall whether any lawyer -- withdrawn. 

 Do you recall whether any letter because I don't want 

to go through all of them, they speak for themselves, so I'm 

asking for your recollection; do you recall receiving any 

letter sent by the advisors or by their lawyers where they 

made any complaint at all about the provision of front, back 

or middle office services? 

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A Never received, other than the Holt complaint related 

to NexBank, never received a complaint about the amount of 

the services or the quality of the services that were being 

provided front, middle or back. And it was all three. 

Q In the administrative claim there's an allegation that 

you instructed Highland's employees to stop providing 

services in July 2020. Are you familiar with that 

allegation? 

A I'm familiar with the allegation. 

Q Did you instruct anybody in July 2020 to stop providing 

services to anybody? 

A No, never happened. 

Q Do you have any understanding or recollection as to 

what you said at that time that they might be referring to? 

A Very distinct recollection, yes. 

Q Can you explain to Judge Jernigan what your 

recollection is as to what you actually said? 

A There was a discovery dispute between the committee and 

Highland at the time. And the discovery dispute was 

actually quite surprising to me because I'd instructed the 

Pachulski team and the Highland team to produce information 

because there was really no point in wasting a lot of time 

fighting about discovery. 

 And frankly Mr. Levinson found a different way to deal 

with discovery that was less than cooperative. And the 

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committee raised the issue about multiple parties wearing 

multiple hats to the Court. And it was a bit Alice in 

Wonderland in terms of Mr. Leviton and others saying, well, 

I'm the advisor to the -- I'm the counsel to the advisor and 

I have a fiduciary duty to them, you're our lawyer, you have 

to do what we direct you to do. And it was very 

manufactured. 

 And my recollection, and I took it very directly 

because I was on video, but I took this as if the Court were 

talking to me directly was that you better make sure you 

have your house in order regarding people with conflicts 

what they are doing, especially lawyers, who claim to be 

wearing multiple fiduciary hats and forsaking their duties 

to the debtor. 

 I left that hearing really informed and nervous isn't 

the right word, but focused, that we needed to make sure 

that everyone got the message. So I had a specific call 

with the entire legal department. And the legal department 

at Highland, it may be a misnomer, because there were a 

number of non-lawyers in that department and they did 

different things in the Cayman Islands or other places that 

didn't have much to do with Highland. 

 And I had very direct discussion and I used the word 

and it seems to show up now inimical but any -- taking any 

adverse action to the Highland estate and if anybody felt 

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that they had a reason that they couldn't do something for 

the Highland estate I better hear about it directly. 

 And it was a very direct discussion. I had then had 

the same call with Mr. Waterhouse, Mr. Klos, Ms. Hendricks, 

Mr. Darquentin (ph) may have been on it, he may have been 

too junior, but very direct. And then a similar discussion 

with Brian Collins, head of HR, that we better -- I better 

not hear about this again because you do it, you be fired 

for cause and we will take action. It was, I took it very, 

very seriously. 

Q So there was no direction to stop performing services? 

A No, absolutely not. You still had to do your job and 

if something raised a conflict, I needed to know about it, 

like ultimately the OmniMax transaction which was after this 

time, but if you didn't think you could produce documents 

because you had some other duty, I needed to know about 

that. 

 If you thought that you represented any other entity, 

Dougaboy, whomever and that interest was averse to the 

estate, I needed to know about it. And I was very clear. 

And I think it had the desired effect. We had a larger call 

with the team that was not nearly as forceful, but people 

needed to know that this is an estate and as employees of 

the estate, you have duties to the estate. And as officers 

of the estate, you have fiduciary duties to the estate. 

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Q And did you -- going back you mentioned OmniMax, you 

mentioned the possibility that there might be other 

conflicts that arose as a result of jointly held assets. 

Other than OmniMax did, in fact, any other conflict ever 

arise prior to the termination of the agreements? 

A Not that I recall. And just so we're clear, you used 

the term jointly held assets. They're not actually jointly 

held. Highland owns its own assets. The 1.0 CLO owned 

their own assets. HCMFA had their assets in their name. 

NPA, et cetera, Dougaboy, et cetera, DUC, DAF (ph). 

Q So let me restate the question. Were there any other 

issues that arose where Highland and another entity 

controlled by Mr. Dondero owned assets of the same kind 

where investment decisions diverged?

A Not that I recall. Certainly not during this period, 

not that I recall at all. 

Q Okay. Did there come a time that Jason Post left the 

employ of Highland and became the chief compliance officer 

at the advisors? 

A Yes. 

Q And when did that happen? 

A It was right after Mr. Dondero resigned, right in that 

time frame. 

Q So sometime in October? 

A I believe so. 

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Q So he served in that capacity for six weeks before the 

notice of termination was given? 

A Roughly, I believe. 

Q And do you have any understanding as to why that move 

was made by Mr. Post? 

A The reason was they requested it. I agreed that it was 

a good idea because it was evolving and becoming more and 

more likely that there was not going to be a grand bargain 

or a settled solution to this case. There wasn't a moment 

in time where you knew that, but Mr. Dondero required to -- 

we had got through mediation, very successful vis-à-vis 

settlement with ASIS, productive vis-à-vis UBS, wholly 

unproductive for a global settlement. We continued to try 

to work on those things, but it became less and less likely. 

 And so by October the plan, I don't know when we filed 

it, but it was clear it was going to get filed if we had not 

yet filed it. And where we thought that was the crucible to 

bring a settlement, it was having the desired effect on the 

creditors' side to have them think about compromising their 

claims, it wasn't bringing Mr. Dondero and the creditors 

close enough together. Although there were efforts, but by 

that time it looked like the -- 

 MR. RUKAVINA: Your Honor, again, this is just -- 

 THE WITNESS: -- the advisors could have the 

issue. 

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 MR. RUKAVINA: -- just narrative now about 

negotiations. The question was why did Post leave. He 

answered that question. 

 THE COURT: Sustained. 

BY MR. MORRIS: 

Q All right. Let's talk about the payroll reimbursement 

agreements. Do you recall that the Court-approved 

Highland's disclosure statement in mid-to-late November 

2020? 

A Yes. 

Q And do you recall that Highland gave notice of the 

shared service agreements that it had with the advisors on 

November 30th, 2020? 

A Notice of termination? 

Q Yes. 

A Yes. 

Q Was there a relationship between the Court's approval 

of the disclosure statement in mid-to-late November and the 

sending of the notices of termination concerning the shared 

services agreements on November 30th -- 

A Yes. 

Q -- 2020? 

A Yes. 

Q Can you describe the Court -- for the Court what the 

relationship was between those two events? 

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A The relationship was purely timing so that once we knew 

we had a disclosure statement approved, then we could set a 

confirmation date, and we looked at where that confirmation 

date is and we needed to be able to terminate the agreements 

before we got to the confirmation date or right at and about 

to that time. Then it would, assuming it got confirmed, it 

would go to the monetization plan. 

Q Is it fair to say that the termination of the shared 

services agreements was consistent with the plan of 

reorganization that Highland was hoping to get approved? 

A Yes. 

Q Okay. Did this -- did the debtor ever seek to assume 

the payroll reimbursement agreements? 

A No. 

Q Did the debtor ever consider assuming the payroll 

reimbursement agreements? 

A No. 

Q Why not? 

A The arrangements with HCMFA and NPA, as I said, were 

money losers. There was -- I think I was even asked about 

it at the confirmation hearing, why not assume these, 

because they're money losers. So there was never a plan to 

do that. And we weren't going to keep around staff to be 

able to work on retail funds. The idea was to focus on 

assets that would produce value to the creditors of the 

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estate, not to provide money losing services to third-party 

funds. 

Q Are you familiar with the termination provisions in the 

payroll reimbursement agreements? 

A Generally. 

Q Can we take a look at them just quickly? Go to Exhibit 

6, please. 

 Do you have that in front of you? And we're on the 

page ending in Bates Number 622. And I would direct your 

attention down to Section 5.02. 

A Yes. 

Q If Highland had assumed the payroll reimbursement 

agreements, is it your understanding that they have -- would 

have had to assume the entirety of the agreement? 

A I know Counsel doesn't like me talking about the law, 

but that is the law. 

Q Okay. And -- 

A (Indiscernible) as we say. 

Q And so it would have had to also assume Section 5.02, 

right? 

A That's correct. 

Q And what does Section 5.02 provide? 

A It provides that either party can terminate on 60 days' 

advance written notice. It -- I think it's the same in most 

of the shared service arrangements as well. 

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Q Well, but I'm just focused on the payroll reimbursement 

agreements. 

A Yeah. 

Q Okay. They could terminate on 60 days' notice. Is it 

your understanding based on this agreement that the advisors 

needed a reason to terminate? 

A No, neither party needs a reason. 

Q And that's -- and where do you get that idea from? 

A There's no provision in 5.02 that would require a 

reason. 

Q It says, with or without cause, right? 

A Yeah. 

Q Just to close this topic, can you go to Exhibit 8, 

please, which is the one -- 6, I think, was the next payroll 

reimbursement agreement. 8 is the HCMFA payroll 

reimbursement agreement. And does it also have the same 

Section 5.02 that would have permitted the advisors or HCMFA 

to terminate the payroll reimbursement agreement without 

cause on 60 days' notice? 

A Yes. These two agreements are identical say for the 

party names and the actual amount paid each month. 

Q Do you recall -- I'm not going to dig it up. I'm just 

going to ask you if you recall that the plan specifically 

provided that any contract not specifically assumed would be 

deemed rejected? 

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A Yes. That's a pretty standard provision. You only 

want to assume the agreements that you intend to assume. 

Excuse me. 

Q Okay. So how come -- are you aware of any -- did 

Highland give notice of termination of the payroll 

reimbursement agreements? 

A I frankly don't recall. Mr. Rukavina asked me that at 

my deposition. I thought we did with the tiered service 

arrangements because they -- we viewed them as one in the 

same. But apparently, I've now learned that we didn't, and 

they were just rejected as part of the plan. 

Q During -- were you involved in the discussions 

concerning the transition of Highland's employees and assets 

to the advisors that took place in early January/February 

2020? 

A Yes. 

Q During those discussions did Highland make a demand to 

keep the employees that were performing front office 

investment advisory services? 

A If I understand your question, did we make a demand to 

keep the employees? No. We were going to terminate them. 

Q Okay. And which employees were you intending to 

retain? 

A At that point I was working on my team, but I was not 

going to have more than 10 to 15 employees. I didn't need 

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them. 

Q And the team that you were constructing, was it a team 

that was expected to provide front office investment 

advisory services to the advisor’s post-confirmation? 

A No. 

Q Okay. I just -- 

A I may not be understanding your question. I -- 

Q No, you are. 

A -- apologize. 

Q I mean, it's -- but that's -- that was suggested 

yesterday. 

 I heard you say, I think, in October, you know, as part 

of the Jason Post move you thought that part of the factor 

was that negotiations didn't -- weren't bearing fruit with 

Mr. Dondero. Is that just generally fair? 

A Yeah. That's fair. I think it was -- 

Q Okay. 

A -- just the idea that there was more and more tension 

and that even though there had not arisen another conflict, 

but OmniMax at that time that there could be one and that it 

would be better for the advisors to have their own chief 

compliance officer as opposed to -- Jason worked for Thomas 

Surgent who provided -- I think Mr. Ethan testified that it 

was found that Thomas was the CCO for the complex. He was 

Jason's boss. And it just seemed -- they brought it to me. 

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I think -- I don't remember if Jason did or Thomas did. It 

just seemed a better way that if another conflict arose, 

that Surgent or someone else wouldn't be put in the position 

that I had admonished people about in July. 

Q Nevertheless, do you recall that really through 

December up until the confirmation hearing, without 

characterizing your views as to the likelihood of success, 

did negotiations with Mr. Dondero continue? 

A Yes. 

Q Okay. 

A Not with me directly because he wasn't allowed to talk 

to me, which was all fine by me at some point in there, but 

through counsel. 

Q Through counsel. Did Mr. Waterhouse play any role in 

those negotiations? 

A None whatsoever. These are the negotiations with Mr. 

Dondero around a larger plan. 

Q Correct. 

A Yeah. None whatsoever. 

Q None. Did you ever ask him to prepare any kind of 

analysis of profitability for the inter-company agreements 

between the advisors and Highland for use in the 

negotiations? 

A Never. 

Q You've sat here, you know, for more than a day and 

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you've heard about the allegations about overpayments. Do 

you recall when the first time you heard about the issue of 

overpayments? 

A I think the first time I recall hearing about 

overpayments was an allegation that Mr. Dondero put in a 

January term sheet that was part of negotiations where he 

basically said in addition to all the value I'm getting, I'm 

going to pick up the $14 million advisor admin claim. And I 

wrote an acronym for something that basically indicates that 

I was saying, what does this mean. 

 It was nothing I had ever heard of and it was -- that 

was the first time was in January. 

Q And the first time you heard it was -- 

A That I recall. 

Q -- in connection with a proposed plan of reorganization 

that Mr. -- 

A It was a pot plan. 

Q Pot plan. 

A Yeah. And I think at the time it was -- I can't 

remember the exact date, but the first couple of weeks of 

January. And I believe he and his counsel had filed a plan 

under seal right around that time, and this was -- which I 

never saw. This was the term sheet for it. 

Q We can look at them, but I'll test your memory first. 

 So that's the first time. So is it fair to say that 

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you have no recollection of the issue of overpayments being 

raised in any of the K&L Gates letters that were sent as 

counsel to the advisors to Highland in December 2020? 

A Not that I recall. 

Q Do you recall if K&L Gates or any lawyer acting on 

behalf of the advisors ever sent any kind of demand for the 

return of money that they alleged was overpaid under the 

payroll reimbursement agreements? 

A They never did. And I'll just expand for a second 

here. It didn't make sense because we were also negotiating 

the transition. And as part of the transition I required -- 

I wasn't going to keep providing services for free. By this 

time it's pretty hot in January and we required NPA and 

HCMFA to pay the shared service amount and the PRA amounts 

in January and February, and they were doing it by a weekly 

basis. And our term sheet demanded that they pay the 

November and December amounts that they had failed to pay. 

 And they came back and said, well, we're going to have 

trouble with that with Mr. Dondero and they tried to agree 

that they could pay it over time, and ultimately I acceded 

to that. So the transition services arrangement that was 

going to move the employees to either NPA or an affiliate or 

an employee-owned entity contemplated that we were going to 

get paid back the money from November and December. Nobody 

ever said, we don't owe you that money. You've been 

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overpaying us or we've been overpaying you or some such 

thing. 

 MR. MORRIS: I have no further questions, Your 

Honor. 

 THE COURT: All right. Pass the witness. 

 Mr. Rukavina. 

 MR. RUKAVINA: Your Honor, may Mr. Morris and I 

confer for a moment? 

 THE COURT: Sure. 

 (Pause) 

 MR. RUKAVINA: Your Honor, we've been conferring 

about schedules and we've been, I think, very cooperative 

with each other. We've told Mr. Dondero to be here at one, 

so we have an hour right now and I hate to tell the Court 

that we're -- we don't want to use that hour. I would like 

to recall Mr. Seery when my case begins. 

 We will get done today. 

 MR. MORRIS: Oh, no. Why aren't you going to 

cross-examine him? 

 THE COURT: No. I have to stop -- my presentation 

starts at noon. They wanted me to patch in -- 

 MR. RUKAVINA: Then I'll cross-examine Mr. -- 

 THE COURT: -- 10 or 15 minutes early. 

 MR. RUKAVINA: I'll cross-examine Mr. Seery now. 

 THE COURT: Okay. 

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 MR. RUKAVINA: And then -- 

 MR. MORRIS: I thought you said you had five 

minutes. 

 MR. RUKAVINA: Yeah, I do. 

 And then -- yeah. But I'm just telling the Court 

that we're going to give you back some time, but it's 

because we had agreed to have Mr. Dondero here at one. 

 THE COURT: Okay. Yeah. But I'll need to stop at 

11:45. 

 MR. MORRIS: All right. But I just -- I need to 

just clarify, the whole idea is to call witnesses once. 

We're not going to -- 

 MR. RUKAVINA: Yeah. I'll call -- 

 MR. MORRIS: -- recall him in your case -- 

 MR. RUKAVINA: Yeah. That's fine. 

 MR. MORRIS: -- later, right? 

 MR. RUKAVINA: That's fine. 

 MR. MORRIS: Okay. 

 THE COURT: Okay. 

CROSS-EXAMINATION 

BY MR. RUKAVINA: 

Q Mr. Seery, good morning. 

A Good morning. 

 MR. RUKAVINA: Mr. Berghman, if you'll please pull 

up Exhibit 10 to Mr. Seery's deposition. 

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 Your Honor, this is being printed and will be 

couriered to the Court as a paper exhibit prior to 1:00. 

 THE COURT: Okay. 

 MR. RUKAVINA: So we'll just have it 

electronically for now. 

 THE COURT: Okay. 

 MR. BERGHMAN: You said Exhibit 10, right? 

 MR. RUKAVINA: Yeah. 

BY MR. RUKAVINA: 

Q Mr. Seery, you'll have to scroll down through this, but 

do you -- this is a December 11th letter from K&L Gates. Do 

you recall having received this letter through your counsel? 

 And please take -- tell my partner just scroll down at 

your pace. 

A Okay. 

Q Next page. 

 (Pause) 

A Okay. 

Q Next page, please. 

A I'm skimming, just to be clear. 

Q Well, you tell us when you want the next page, please. 

A I -- do you want me to read the whole letter? 

Q I want to ask you just about what's written in here 

about PRAs and shared services. But you have the right to 

read every word of this if you need to. 

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A Just can you go to the next page? 

 And then take me back to the top. 

 Ask away. 

Q Do you recall receiving this letter through counsel on 

or about December 11th, 2020? 

A I don't specifically recall this letter. There's 

another K&L Gates letter, I believe. I thought there were 

multiple, but I may be -- 

Q Would you please pull up -- 

A -- I may be mistaken. 

Q -- Mr. Seery's deposition transcript. See if I can 

refresh your memory. 

 MR. RUKAVINA: Page 42, Thomas. 

 It's not going to be in there, Mr. Seery. 

 MR. MORRIS: What exhibit is this? I apologize. 

 MR. RUKAVINA: It's Exhibit 10 to his deposition. 

This is an impeachment exhibit that is -- 

 MR. MORRIS: Oh, okay. 

 MR. RUKAVINA: -- an exhibit to his deposition. 

 MR. MORRIS: Okay. Thank you. Can I have a copy? 

 MR. RUKAVINA: That's what I told the judge. It's 

being couriered. Paper copies are being couriered. They'll 

be -- 

 MR. MORRIS: Thank you very much. 

 Go ahead. 

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 MR. RUKAVINA: -- here before lunch. 

 MR. MORRIS: Go ahead. Yeah. 

BY MR. RUKAVINA: 

Q Mr. Seery, you're in the wrong binder, please. It's 

not -- 

A Oh, you can do what you like. I got binders. Am I not 

allowed -- 

Q But I'm telling you -- 

A -- to look at them? 

Q I'm telling you this is not in those binders, sir. 

A That's okay. I'm just thumbing through the binders. 

Q Okay. No problem. No problem. 

 Mr. Seery, if you'll look, please, I asked you at your 

deposition. We marked Exhibit 10. I asked, do you remember 

seeing this letter on or about December 11th, 2020 and you 

answer, yes. Does that refresh your memory that you did, in 

fact, see this letter on or about December 11th, 2020? 

A Truly I don't recall seeing this letter. 

Q Okay. 

A It -- because it deals a lot with the notes. I just 

don't recall it. There's another K&L Gates letter that I'm 

quite sure that I did get from counsel. They were not 

addressed to me. I don't recall seeing this letter. So I 

quoted I said, yes. If this is the same letter, I just 

don't recall it. 

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 MR. RUKAVINA: You can pull down this deposition 

transcript, Thomas, and go back to the letter. 

BY MR. RUKAVINA: 

Q Would you like to revise your prior testimony, sir, 

that at no point in time in the history of the world did 

anyone for the advisors or their lawyers ever inform you of 

alleged overpayments and alleged failure to provide 

services? 

A No. I wouldn't. I don't recall receiving this letter. 

This letter does complain in the one paragraph I did read 

about shared services, about some sort of failure of 

services. Where's the overpayment section? 

Q Go back to payroll. 

 And, again, sir, I apologize. We'll have this on paper 

momentarily. 

 MR. RUKAVINA: Scroll down, Thomas. 

 MR. BERGHMAN: You want the next page? 

 MR. RUKAVINA: Yes. 

 THE WITNESS: I just don't -- you know, I don't 

recall you giving me exhibits, correct? You just put them 

on the screen during our deposition, right? 

 MR. RUKAVINA: Sir, I ask the questions, not you. 

I did -- 

 THE WITNESS: But I'm just -- 

 MR. RUKAVINA: I did send them to your counsel 

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prior to the deposition. 

 THE WITNESS: Yeah. I didn't -- 

BY MR. RUKAVINA: 

Q You see, sir, in -- 

A We looked at them on a screen. 

Q You see, sir, in there that it talks about -- you can 

please read it, but it talks about based on a preliminary 

analysis -- this is near the bottom -- next point, HCMFA 

believed they have over-reimbursed HCMLP under the payroll 

reimbursement agreements of approximately $5 million. 

A I see that, yes. 

Q You have no recollection of having heard about that on 

or about December 11th? 

A No, I don't. 

Q Then let's go back to your deposition transcript, 

please, Page 42. Well, not yet, but do you remember I asked 

-- well, let me ask you right now. 

 Sir, do you remember whether in light of this letter 

there were any negotiations to try to revise the amounts 

under the payroll reimbursement agreements? 

A There never were, no. 

Q Okay. And I asked you about that at your deposition 

and you said -- 

A Yes. 

Q -- there never were any. 

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A Correct. 

Q Okay. So let me ask you again. You don't want to 

revise whatever prior testimony you gave that no one from 

the advisors, no one at K&L prior to Dondero complaining in 

January 2021. You never heard about potential overpayments 

under the payroll reimbursement agreements? 

A I don't recall ever hearing about potential 

overpayments. Obviously, this December 11th letter was 

received by my counsel. I am certain they gave it to me. I 

do not recall it. So when you showed it to me at the 

deposition I just missed because there is another K&L Gates 

letter that's pretty lengthy in and around this time. 

Q So when you said you were -- 

A There might be two or three. 

Q So when you said you read it on or about December 11th 

at your deposition, you're now saying that you were 

incorrectly testifying at your deposition? 

A That's correct. 

Q You -- 

A Yes. 

Q -- confused it with another K&L letter? 

A Correct. 

Q Okay. 

A I just don't recall seeing this letter. 

Q Okay. But -- 

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A I'm sorry. 

Q -- would you expect your professional counsel at 

Pachulski to forward this to you, this letter -- 

A Absolutely. 

Q -- or advise you of its substance? 

A They certainly would have forwarded it to me. I'm -- 

Q Okay. 

A I suspect they would have talked to me about it. I do 

not recall those conversations, not because it's privileged. 

I just don't recall having a discussion about this letter. 

There were multiple letters at the time. 

Q Okay. Do you think that the advisors could have 

terminated the payroll reimbursement agreements or shared 

services agreement post-petition without violating the 

automatic stay? 

A Absolutely. 

Q Okay. You're a lawyer? 

A Yeah. 

Q And you've been a bankruptcy professional for decades? 

A Yes. 

Q And you're telling the Court that the automatic stay 

does not prevent a counterparty to an unassumed executory 

contract from terminating that contract? 

A That's not what I said and that's not what you asked 

me. 

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Q I asked you -- I'll ask it differently. 

 Do you think that had the advisors tried to terminate 

these contracts, all four of them, post-petition, that that 

would have been a stay violation? 

A Not if they did it correctly, no. 

Q And how would they have done it correctly? 

A They would file a motion to terminate the contract and 

set forth why -- 

Q That's a little different -- 

A -- they wanted to term -- 

Q That's a little different. 

 MR. MORRIS: Let him -- please let him finish his 

answer. 

 THE WITNESS: Except what -- why? 

 MR. RUKAVINA: That's a little different. 

 THE WITNESS: You can fight with me all you want. 

You asked me, could they do this, and the answer is yes. 

 MR. RUKAVINA: Is it -- 

 THE WITNESS: You file a motion to terminate the 

contract and they set forth their reasons. And even though 

it's without cause, the debtor is protected. But that 

doesn't give the debtor the right to just receive money and 

not get services. That happens all the time. That's what 

happens in Bankruptcy Court. 

 MR. RUKAVINA: Word plays, Mr. Seery. Word plays. 

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BY MR. RUKAVINA: 

Q What about the January -- 

A It's not. 

Q What about the January 9th injunction prohibiting Mr. 

Dondero from causing any related entity from terminating a 

contract? 

A The -- 

Q Do you believe that that order would have prevented the 

advisors from terminating these four contracts? 

A No. They have to come in to the court and file a 

motion. 

Q Okay. 

A Now I guess you're admitting that Mr. Dondero 

completely controls -- 

Q Stop talking, sir. 

A -- the advisors. 

Q I've answered -- you've answered my question. I've 

asked a question. You've answered it. Okay. 

A Oh, I'm sorry. 

Q You're not here to pontificate. You're here to answer 

questions. 

 MR. MORRIS: Your Honor, I know Mr. Seery is a 

seasoned professional, but there ought to be a limit to the 

badgering. 

 THE COURT: Okay. Mr. Rukavina -- 

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 MR. RUKAVINA: I'm actually done -- 

 THE COURT: -- I know you -- 

 THE WITNESS: I'm okay. 

 THE COURT: -- can keep it in check here. 

 MR. RUKAVINA: Okay. 

 THE COURT: Okay. 

BY MR. RUKAVINA: 

Q And I think you testified that you never instructed 

Highland employees not to provide services. Did I get that 

correct? You never -- when Mr. Morris was asking you about 

whether you ever issued -- 

A No. I never instructed any Highland employees not to 

provide services. I did instruct Highland employees not to 

take an adverse position to the estate, and if one arose, 

they had to come to me. 

Q Okay. You taught me a word that I never heard before. 

It's a cool word. Inimical. Is that -- 

A You've got to expand your vocabulary. 

Q I agree. You -- did you not issue instructions that if 

any Highland employee undertook an action inimical to the 

interest of Highland they would be fired? 

A Yes. 

Q Thank you. 

 MR. RUKAVINA: I'll pass the witness. 

 THE COURT: Redirect? 

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 MR. RUKAVINA: And just so Your Honor knows, we'll 

supplement the record with that Exhibit 10 to the deposition 

as soon as it comes in. 

 THE COURT: All right. 

 MR. MORRIS: Just one question, Mr. Seery. 

REDIRECT EXAMINATION 

BY MR. MORRIS: 

Q At no time prior to the termination of the shared 

services agreements did you ever hear the word -- no. Let 

me rephrase. 

 Did you ever hear the word, overpayment, at any time 

prior to the date that Highland gave notice of termination 

on November 30th, 2020? 

A No. 

Q At any time prior to November 30th, 2020 did anybody 

ever tell you that Highland was failing to perform back 

office middle office or investment advisory services on 

behalf of the advisors? 

A No. 

 MR. MORRIS: No further questions. 

 THE COURT: Any recross? 

 MR. RUKAVINA: Just very briefly. 

RECROSS-EXAMINATION 

BY MR. RUKAVINA: 

Q Mr. Seery, I want to be very respectful, but I heard 

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you say earlier that you're cursed with apparently a very 

good memory because you remember exactly how Mr. Waterhouse 

was seated opposite of you when you were having that 

discussion. 

A Typically, yes. 

Q So -- 

A When I tie the verbal to the visual, I actually have a 

pretty good memory. 

Q I'll share that with you. 

 But sitting here today you still don't remember the 

December 11th K&L letter raising the overpayments and the 

failure to provide services? 

 MR. MORRIS: Objection, Your Honor. Beyond the 

scope of redirect. I asked questions going to November 

30th, 2020, period, full stop. 

 MR. RUKAVINA: That's fair enough, Your Honor. 

 THE COURT: Okay. Sustained. 

 MR. RUKAVINA: Thank you. 

 THE COURT: All right. Mr. Seery, you're excused 

from the witness stand. 

 Thank you. 

 THE WITNESS: Thank you, Your Honor. 

 THE COURT: Okay. 

 MR. MORRIS: So, Your Honor, as discussed with Mr. 

Rukavina, respectfully we would like to break now. 

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 THE COURT: Okay. 

 MR. MORRIS: What time do you think the Court will 

be available to reconvene? 

 MR. MORRIS: I would say five after one. 

 MR. MORRIS: Okay. We'll -- 

 THE COURT: I just, the meeting is supposed to -- 

 MR. MORRIS: We'll -- 

 THE COURT: -- stop at one and -- 

 MR. MORRIS: We'll be back at five after one, and 

after conferring with Mr. Rukavina, we do remain confident 

that we're going to finish today. There are only two more 

witnesses. I expect my examination of both Mr. Dondero and 

Mr. Norris to be under an hour each -- 

 THE COURT: Okay. 

 MR. MORRIS: -- for sure. 

 THE COURT: So we just have Dondero and Norris. 

 MR. MORRIS: Yeah. That's it. 

 THE COURT: All right. Thank you. 

 MR. MORRIS: All right. Thank you, Your Honor. 

 THE COURT: We'll see you at five after one. 

 THE COURT OFFICER: All rise. 

 (Recessed at 11:17 a.m.) 

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I N D E X 

WITNESS DIRECT CROSS REDIRECT RECROSS 

ETHAN POWELL 4 17 34 

JAMES P. SEERY, JR. 36 69 80 80 

R U L I N G S 

 PAGE 

None 

 

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C E R T I F I C A T I O N 

 We, Sheila Orms and Nancy B. Gardelli, Court approved 

transcriptionists, for Acorn Transcripts, LLC, certify that 

the foregoing transcript is a correct transcript from the 

official electronic sound recording of the proceedings in 

the above-entitled matter. 

FOR ACORN TRANSCRIPTS, LLC April 14, 2022 

_____________________________ 

SHEILA ORMS 

________________________ April 14, 2022 

Nancy B. Gardelli 

Operating Manager 

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS (DALLAS)

IN RE: . Case No. 19-34054-11(SGJ)

 .

HIGHLAND CAPITAL . Earle Cabell Federal Building

MANAGEMENT, L.P., . 1100 Commerce Street

 . Dallas, Texas 75242

Debtor. . 

. . . . . . . . . . . . . .

 . Adv. No. 21-AP-3010(SGJ) 

HIGHLAND CAPITAL . 

MANAGEMENT, L.P., .

 .

Plaintiff, .

 .

 v. . 

 .

HIGHLAND CAPITAL, . 

MANAGEMENT, FUND . 

ADVISORS, L.P., et al., .

 .

Defendant. . Wednesday, April 13, 2022

. . . . . . . . . . . . . . 1:09 p.m.

TRANSCRIPT OF TRIAL

PM SESSION

BEFORE HONORABLE STACEY G. JERNIGAN

UNITED STATES BANKRUPTCY COURT JUDGE

APPEARANCES:

For Plaintiff Highland Pachulski Stang Ziehl & Jones LLP

Capital Management BY: JOHN MORRIS, ESQ.

L.P.: 780 3rd Avenue, 34th Floor

New York, NY 10017

For Defendant Highland Munsch, Hardt, Kopf & Harr 

Capital Management By: DAVOR RUKAVINA, ESQ.

Fund Advisors, L.P.: 500 N. Akard Street, Ste 3800

Dallas, TX 75201

Audio Operator: Michael F. Edmond

Proceedings recorded by electronic sound recording, transcript

produced by a transcript service.

_______________________________________________________________

LIBERTY TRANSCRIPTS

7306 Danwood Drive

Austin, Texas 78759

E-mail: DBPATEL1180@GMAIL.COM

(847) 848-4907

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2

INDEX

 PAGE

WITNESSES

FOR THE PLAINTIFF:

James Dondero

 Direct Examination by Mr. Morris 4

 Cross-Examination by Mr. Rukavina 47

 Redirect Examination by Mr. Morris 73

Dustin Norris

 Direct Examination by Mr. Morris 83

 Cross-Examination by Mr. Rukavina 102

 Redirect Examination by Mr. Morris 156

 Recross-Examination by Mr. Rukavina 171

 Examination by the Court 174

FOR THE DEFENDANT:

 (None)

EXHIBITS ID EVD

FOR THE PLAINTIFF:

 (None)

FOR THE DEFENDANT:

Exhibit EE 4 4

Exhibit G 98 98

Exhibit H 98 98

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Dondero - Direct 3

1 (Proceedings resumed after the lunch recess at 1:09 p.m.) 

2 THE CLERK: All rise.

3 THE COURT: Please be seated.

4 All right. We're back on the record in the Highland

5 trial. Mr. Morris, Mr. Rukavina, what do you have?

6 MR. MORRIS: Just before we proceed with the next

7 witness, I think Mr. Rukavina just wants to present the exhibit

8 that he used on --

9 MR. RUKAVINA: Yes, Your Honor. 

10 THE COURT: Okay. 

11 MR. MORRIS: -- with Mr. Seery.

12 MR. RUKAVINA: As I promised, we do have paper copies

13 couriered. I've marked it as EE. 

14 THE COURT: Okay. 

15 MR. RUKAVINA: If I may approach and move for the

16 admission of EE as an impeachment exhibit.

17 THE COURT: Okay. And there's no objection?

18 MR. MORRIS: No objection.

19 THE COURT: Okay. You may approach.

20 Thank you. EE will be admitted.

21 (Defendant's Exhibit EE admitted into evidence)

22 MR. MORRIS: I do want to note that -- maybe I spoke

23 too fast. I object to the extent it's being offered for the

24 truth of the matter asserted. Mr. Rukavina specifically said

25 it was for impeachment, and I have no objection to its use for

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Dondero - Direct 4

1 that purpose.

2 THE COURT: Okay. So impeachment in an attempt to

3 impeach Mr. Seery saying he had never heard anything --

4 MR. MORRIS: Correct.

5 THE COURT: -- until January 2021 -- 

6 MR. MORRIS: Correct.

7 THE COURT: -- about the alleged overpayments. Okay. 

8 MR. RUKAVINA: Yeah. That's all it's offered for,

9 Your Honor. 

10 THE COURT: It's admitted for that purpose.

11 MR. RUKAVINA: That's fine by me. That's all I'm

12 offering it for.

13 THE COURT: Okay. 

14 MR. MORRIS: Okay. So Highland's next witness is Mr.

15 James Dondero.

16 THE COURT: All right. Mr. Dondero, if you could

17 approach the witness box, I will swear you in.

18 Please raise your right hand.

19 JAMES DONDERO, PLAINTIFF'S WITNESS, SWORN

20 THE COURT: All right. Please be seated.

21 DIRECT EXAMINATION

22 BY MR. MORRIS:

23 Q Good afternoon, Mr. Dondero.

24 A Good afternoon.

25 Q Let me know when you're comfortable.

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Dondero - Direct 5

1 A Good afternoon.

2 Q Are you okay there?

3 A Yes.

4 Q Okay. So there's three binders in front of you. From

5 time to time, I may ask you to look at a particular document. 

6 There's water there if you need it. I don't expect my

7 examination of you to be very long. We'll see what happens. 

8 But are you ready to proceed?

9 A Yes. 

10 Q Okay. Frank Waterhouse is the treasurer of the Advisors. 

11 Correct?

12 A I -- I don't know his title specifically. I think he's

13 the CFLA. I don't know. 

14 Q He's an officer of the Advisors. Correct?

15 A Yes. 

16 Q And when I use the phrase Advisors, you understand I mean

17 NexPoint Advisors LP and Highland Capital Management Fund

18 Advisors L.P. Is that fair?

19 A I don't know specifically. 

20 I believe HFAM. I don't know about NexPoint. I think

21 NexPoint has its own CFO now. I don't know if he's treasurer. 

22 I -- I don't know these things. I know these things -- I know

23 these things on a current basis, but I want to be refreshed.

24 Q You don't -- do you know if Mr. -- let's take it one at a

25 time. Do you know if Mr. Waterhouse serves as an officer of

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Dondero - Direct 6

1 NexPoint Advisors, LP today?

2 A I don't know for sure. 

3 I believe so, but I -- I don't know. But Nexpoint has its

4 own -- excuse me -- it's own CFO and it has its own C-Suite in

5 the various (indiscernible) separate from Frank. But I don't

6 know the corporate ownership of NexPoint.

7 Q Okay. 

8 A I don't believe so.

9 Q I'm not asking you about ownership. I don't mean to

10 interrupt. I'm not asking about ownership. I'm just asking

11 specifically whether Mr. Waterhouse has a role or a title at

12 NexPoint today? 

13 A I -- I don't know.

14 Q Okay. Do you know if Mr. Waterhouse has a role or a title

15 today at HCMFA?

16 A I -- I don't know post the restructuring with Skyview, et

17 cetera. I -- I don't know. I believe so, but I don't know. 

18 Q Okay. Let's focus on the period January 1st, 2018 until

19 the end of 2020, that three-year period, okay. So 2018, 2019,

20 and 2020. I'm going to refer to that as the relevant period. 

21 Are you with me?

22 A Yes. 

23 Q Do you recall if Mr. Waterhouse had a role or a title at

24 NexPoint during the relevant period?

25 A I -- I believe he was an officer of all the major entities

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Dondero - Direct 7

1 during that period.

2 Q And when you use the phrase "all the major entities," what

3 are you referring to when you use that phrase?

4 A Highland, Strand, NexPoint, HFAM. I believe he was an

5 officer of all the -- all the major operating entities.

6 Q And do you recall that he served as either the treasurer

7 or the CFO of the Advisors at all times during the relevant

8 period?

9 A I believe so.

10 Q And do you have an understanding of what Mr. Waterhouse's

11 duties and responsibilities were as the treasurer or the CFO of

12 the Advisors during the relevant period?

13 A Yes. 

14 Q Can you describe for the Court your understanding of what

15 Mr. Waterhouse's duties and responsibilities were in that

16 capacity at that time?

17 A To be the chief financial accounting officer above

18 corporate accountants, above the tax accountants, above

19 anything accounting and regulatory-wise other than compliance

20 reporting. Other -- other than compliance didn't report to

21 him. 

22 Q And did you understand that as an officer that 

23 Mr. Waterhouse was a fiduciary of the Advisors during the

24 relevant period?

25 A I -- I don't want to broadly answer that question

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Dondero - Direct 8

1 generally, but it varies depends on -- depending on the level

2 of fiduciary responsibility, depends on whether it's a public

3 entity or a listed fund or a -- or a private entity.

4 Q Okay. I appreciate that distinction, and I just want you

5 to focus on the two advisors, NexPoint Fund Advisors, L.P., and

6 NexPoint -- Highland Capital Management Fund Advisors.

7 Is it your understanding as the person in control of those

8 entities that Mr. Waterhouse owed those entities a fiduciary

9 duty during the relevant period?

10 A Yes. 

11 Q Okay. And was one of his duties as the treasurer or the

12 chief financial officer of the Advisors, was that to make sure

13 that the Advisors only paid the amounts that they owed under

14 the contracts that they had?

15 A I would describe it more generally as to administer

16 contracts according to the contracts, the spirits of the

17 contracts and best industry practices.

18 Q Okay. And to the best of your knowledge, did 

19 Mr. Waterhouse fulfill the responsibility of administering

20 contracts in accordance with their terms during the relevant

21 period?

22 A I -- I don't know and I can't make a blanket statement.

23 Q Do you have any knowledge about any failure on 

24 Mr. Waterhouse's part to fulfill his responsibility of

25 administering contracts in accordance with their terms during

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Dondero - Direct 9

1 the relevant period?

2 A When does the relevant period end again?

3 Q December 31st, 2020.

4 A I think there are a lot of issues in the last year or in

5 that 2020 year. 

6 I think his employment was -- or his responsibilities or

7 who reported to him changed materially in that year. And what

8 other people performed or responsibilities or DSI had, I don't

9 know. I -- yeah, I don't know how long he had responsibility

10 or control.

11 Q Is it your understanding that DSI had any responsibility

12 whatsoever for anything having to do with either of the

13 Advisors after the petition date? 

14 A I'm just saying as Frank got neutered and

15 compartmentalized and we moved from various different roles,

16 somebody else filled them, and I don't know who. But I -- I

17 can't say that Frank was responsible if he wasn't in his same

18 position of responsibility and authority.

19 Q Did Frank Waterhouse fail to administer the contracts that

20 the Advisors entered into with Highland after the petition

21 date?

22 A I -- I think there was a failure by Highland to administer

23 the contracts. Whether it was Frank's responsibility or

24 somebody else's, I don't know. 

25 Q Who on behalf of the Advisors was charged with the

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Dondero - Direct 10

1 responsibility of making sure that the contracts that the

2 Advisors were party to were properly administered after the

3 petition date? Who is the person?

4 A There -- there's almost nobody at the Advisors, period.

5 The Advisors were paid a fee for Highland to administer

6 the contracts. Highland had all the accountants, compliance,

7 and lawyers. The Advisors had either no employees or they had

8 a portfolio manager or trader or somebody who is front office

9 focused on the investor funds. So there wouldn't have been

10 anybody to make sure or double check or be persistent if

11 Highland wasn't doing it.

12 Q So did Frank Waterhouse have the duty and the obligation

13 to administer contracts in accordance with their terms on

14 behalf of the Advisors or did he not?

15 A It depends on the time frame. Pre -- pre-bankruptcy,

16 sure. And any of his group were doing it for everybody, and

17 they were doing it well. But by the time 2020 came along, his

18 authority and responsibilities changed materially along the

19 way.

20 Q Who changed his authority?

21 A Seery.

22 Q Jim Seery changed Frank Waterhouse's authority with

23 respect to the Advisors?

24 A With respect to everything in his role at Highland, which

25 is -- his role at Highland was administering -- one of his

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Dondero - Direct 11

1 roles at Highland or his group's roles were administering the

2 contracts with NexPoint and HFAM.

3 Q And it's your testimony that Jim Seery told Frank

4 Waterhouse that he couldn't do the exact same thing with

5 respect to the administration of these contracts after he got

6 appointed than he was before he got appointed? 

7 A I'm saying by middle of '20 when Seery kind of started

8 betraying the estate and moving for his own self-interest, he

9 started making material changes to the employee and

10 responsibility base of the Highland employees, and one of those

11 people were Frank Waterhouse. And Frank Waterhouse's authority

12 and functions changed materially. 

13 And I don't know -- I -- I wasn't privy to a lot of that,

14 and some of it was negotiating part of a settlement or a lease

15 with him and some other stuff. But his -- his responsibilities

16 and his role changed materially. I'm not sure how it changed. 

17 I wasn't privy to it, but I can't broad-brush Frank as being

18 responsible or liable for the fact that the Advisors were

19 overbilled by Highland.

20 Q Did Frank Waterhouse tell you at any time that he was no

21 longer able to continue to perform the function of

22 administering the Advisors' contracts in accordance with their

23 terms? Did he tell you that?

24 A Not specifically.

25 Q Did anybody in the world ever tell you you're not going to

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Dondero - Direct 12

1 believe what Seery did, Seery told Frank cut it out, you're not

2 allowed to administer the contracts on behalf of the Advisors

3 anymore? Anybody say that?

4 A No. 

5 But no one said he still could in his reduced, diminished,

6 changed role, either. I wasn't -- I wasn't aware. But I

7 assumed Highland was still performing the functions that it was

8 getting paid for.

9 Q Can you tell Judge Jernigan your understanding of exactly

10 what Frank Waterhouse was allowed and not allowed to do with

11 respect to the administration of the Advisors' contracts? What

12 was he not allowed to do?

13 A I wasn't privy to those reductions of his responsibility. 

14 I was really handed to a portfolio management position that was

15 not managerial, and Seery was cutting side deals and bribing

16 people and doing all kinds of crap.

17 MR. MORRIS: I move to strike, Your Honor. 

18 THE COURT: You move to strike the words "bribe?"

19 MR. MORRIS: Yes. Yes. The entirety of the last

20 portion because the question was about Frank Waterhouse. 

21 THE COURT: Okay. Sustained.

22 BY MR. MORRIS: 

23 Q This would go a lot smoother if you'd just stick to the

24 issues. 

25 What is the basis for your testimony that Frank Waterhouse

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Dondero - Direct 13

1 was not permitted to administer the contracts on behalf of the

2 Advisors in the exact same way after the Independent Board was

3 appointed as he did before the Independent Board was appointed? 

4 What's the basis for that?

5 A His role was changed. 

6 His responsibility -- responsibilities and people who

7 reported to him diminished and changed at least a couple of

8 times starting in the summer of '20. I can't represent that he

9 was told not to administer contracts, but I also can't

10 represent that he was still administering contracts and didn't

11 do them. I'm just saying it's not logical -- it's not logical

12 for me to be able to represent any of that.

13 Q Okay. When did you learn this?

14 A I don't want to say contemporaneously, you know, because

15 there was always -- again, I wasn't privy to it. I wasn't

16 supposed to be part of management. I would hear it with a

17 delay either at water-cooler conversations or from lawyers. 

18 But I don't even -- I don't remember who.

19 Q So you don't remember who told you this and you don't

20 remember when you learned it. Is that fair?

21 A I'm saying a lot of the times it happened in second half

22 of '20.

23 Q So you learned about it in the second half. What did you

24 do when you heard this? Did you try to make sure that there

25 was somebody who was going to look out to make sure that the

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Dondero - Direct 14

1 contracts for the Advisors were properly administered when you

2 learned that Frank couldn't do it? What did you do?

3 A In the early, early summer of '20, nothing because I

4 assumed that with the monies we were paying from TSI and with

5 the staff -- accounting staff that was still at Highland, that

6 they would be administering and providing the services that we

7 were paying for. I didn't do anything until I found out we had

8 overpaid by $14 million and that the overpayments were continue

9 -- or they were continuing. That's the only time I did

10 something which was a couple -- three or four months later.

11 Q Do you know how that $14 million was calculated?

12 A It was -- part of the contracts with Highland were for

13 people, and I think people plus a five or ten percent

14 processing surcharge. And a lot of the people have left or the

15 percentage of time that they were spending on our stuff changed

16 such that we had been billed as if people were still there and

17 as if people were still working on our accounts when they

18 weren't.

19 Q So you controlled the Advisors. Correct?

20 A Yes. 

21 Q And you learned sometime early in the summer of 2020 that

22 Frank Waterhouse was no longer going to be able to perform his

23 function of administering the contracts on behalf of the

24 Advisors. You learned that in the early part of the -- in the

25 summer?

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Dondero - Direct 15

1 A No. That's not what I've said.

2 Q So when did you -- I thought you said early summer. When

3 did you learn it?

4 A I said his roles were diminished, but I didn't know what

5 his roles were diminished to, nor did I make the assumption

6 that in his diminished roles, no one would pick up the contract

7 administration if he wasn't. 

8 Q Did you --

9 A But he might still have been.

10 Q Did you ask Frank how did your role change?

11 A No.

12 Q Did you ask anybody in the world how did Frank's role

13 change?

14 A I wasn't supposed to be part of management. I wasn't

15 supposed to talk to anybody. Do you remember all the stupid

16 shit you put through? 

17 MR. MORRIS: I move to strike, Your Honor.

18 THE COURT: I will strike, and I'll ask you, Mr.

19 Dondero, to refrain from the profanity.

20 THE WITNESS: Excuse me. I apologize for that.

21 THE COURT: Okay. 

22 BY MR. MORRIS: 

23 Q You and I didn't have a court experience together until

24 December of 2020. Right?

25 MR. RUKAVINA: Your Honor, this really now is just a

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Dondero - Direct 16

1 point of badgering and repetitiveness. He has his answer and

2 now he's just haragging [sic] this witness just to intimidate

3 him on an irrelevant topic.

4 MR. MORRIS: I wish I had the ability to intimidate

5 Mr. Dondero, but the fact of the matter is I don't have an

6 answer yet as to who was responsible for administering the

7 contracts in accordance with their terms on behalf of the

8 Advisors after the Independent Board was appointed.

9 MR. RUKAVINA: He does.

10 MR. MORRIS: And that's what I'm trying to get to.

11 MR. RUKAVINA: He has his answer. Mr. Dondero

12 testified that it was Highland's responsibility. 

13 Mr. Waterhouse was here yesterday. He could have asked Mr.

14 Waterhouse these questions.

15 MR. MORRIS: And --

16 MR. RUKAVINA: He didn't.

17 THE COURT: All right. I'll overrule and give you a

18 little bit more latitude.

19 MR. MORRIS: Thank you. 

20 THE COURT: But I think he's --

21 BY MR. MORRIS: 

22 Q Did you make sure that there was a fiduciary for the

23 Advisors who was looking out for the Advisors' interest after

24 the time that you learned that Mr. Waterhouse's wings had been

25 clipped? 

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Dondero - Direct 17

1 A Not until 2021. Not until later.

2 Q Did you do anything to make sure that Highland was

3 actually doing what you now claim you expected? Did you do

4 anything to satisfy yourself that Highland was going to

5 administer the Advisors' contracts in accordance with their

6 terms or did you just assume that that was going to happen?

7 A I assumed Highland would honor the contracts we were

8 paying for --

9 Q But --

10 A -- and they were paying for.

11 Q But you didn't do anything other than make that

12 assumption. Right? You didn't have your lawyers write a

13 letter, you didn't pick up the phone and call anybody. You

14 were still in open communication with Mr. Seery at this time,

15 right, in the summer of 2020?

16 A It ended in the summer of 2020.

17 Q There was no prohibition for you to pick up the phone and

18 call Mr. Seery and say, hey, what's happening with Waterhouse,

19 are you guys going to just make sure you're doing this right?

20 A I don't know when the prohibition of talking to him

21 started. I don't remember. 

22 Q But you're not relying on that prohibition to excuse your

23 failure to call Mr. Seery to complain about this change. 

24 Right?

25 MR. RUKAVINA: Your Honor, it's been almost 30

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Dondero - Direct 18

1 minutes on the same topic which he has answered repeatedly. 

2 That Mr. Morris might not agree with that answer, doesn't

3 matter. And this is a matter for closing arguments, not to

4 take this witness for a two-hour road as to what Mr.

5 Waterhouse's clipped wings meant when he said he doesn't know.

6 THE COURT: Well, it hasn't been 30 minutes,

7 technically, but what is your response?

8 MR. MORRIS: I think this is an incredibly important

9 topic because our position, among many others, is that Mr.

10 Waterhouse did exactly the same thing after the petition date

11 as he did before the petition date. In fact, he testified to

12 it yesterday. Mr. Waterhouse testified very clearly that a new

13 process was put in place after the petition date where,

14 generally, he would have to approve all of the payments that

15 were made on behalf of the Advisors under these contracts. 

16 And now I have a witness here who is completely

17 contradicting the witness himself, Mr. Waterhouse. And I don't

18 understand -- I don't understand the basis for this testimony. 

19 We haven't heard anything about who told him, when he learned

20 of this, what he did in response. I just -- I'll move on.

21 MR. RUKAVINA: But the point is --

22 MR. MORRIS: I'll move on, Mr. Rukavina, okay?

23 MR. RUKAVINA: The point is, Your Honor, that 

24 Mr. Waterhouse is the best evidence of what Mr. Waterhouse did. 

25 And Mr. Morris opened a door to this just for the purpose of

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1 trying to badger my witness. 

2 MR. MORRIS: That's not fair. Mr. Dondero controls

3 these entities.

4 THE COURT: Okay. 

5 MR. MORRIS: He should know that there is somebody

6 looking out for the interests of these entities. He should

7 know that.

8 THE COURT: Okay. I overrule the objection.

9 MR. MORRIS: But I will move on.

10 THE COURT: Okay. 

11 BY MR. MORRIS: 

12 Q Mr. Dondero, in 2020, entities directly or indirectly

13 owned by you and Mr. Ellington made payments to Mr. Ellington,

14 Mr. Waterhouse, Mr. Surgent, and Mr. Leventon. Correct? 

15 A Yes. 

16 Q And did you decide to have those payments made to those

17 individuals in 2020?

18 A Yes. 

19 Q How much was paid to them in the aggregate?

20 A An amount equal to exactly what they would have been

21 entitled to if they had been rooked by Highland.

22 Q Do you understand that Highland made a motion to try to

23 have those bonuses paid to those individuals?

24 A Highland could have paid it at any time.

25 Q Didn't it need the Court's permission to do that? Are you

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1 aware of that?

2 A Not -- not in my opinion. Not for prior-year bonuses and

3 not for prior -- and not for earned bonuses and -- and not for

4 amounts that Seery told everybody he was going to pay them. 

5 Q So you don't have a recollection of Highland under Mr.

6 Seery's direction making a motion to this Court to have those

7 very bonuses paid? You don't remember that?

8 A No. 

9 Q Do you remember that every single person in the Highland

10 complex had their bonus paid except for those four individuals?

11 A No. That's not true.

12 Q Okay. So you paid them. And how much were the bonuses

13 that Mr. Seery stiffed them off?

14 A It's all in -- it's all in the Highland servers, the exact

15 amounts. I believe it was close to ten million bucks.

16 Q Okay. 

17 A You -- you guys have all this information.

18 Q Okay. But your recollection is that you caused entities

19 owned and controlled by you and Mr. Ellington to pay something

20 around $10 million to Mr. Waterhouse and Highland's most senior

21 legal and compliance officers. Correct?

22 A What was the first part of the question, please? I didn't

23 --

24 Q You caused entities owned and controlled by -- directly or

25 indirectly by you and Mr. Ellington to pay somewhere

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1 approximately $10 million in 2020 to Mr. Waterhouse and

2 Highland's senior legal and compliance officers -- 

3 Mr. Ellington, Mr. Leventon, and Mr. Surgent. Is that right?

4 A Yes. 

5 So I just want to emphasize it wasn't a targeted amount. 

6 It was an amount meant to be exactly what they would have been

7 paid if Highland had not been in bankruptcy and just paid

8 normal bonuses in the normal course. 

9 Q So -- 

10 A It's exactly that amount.

11 Q So -- and you didn't disclose that to the Court, did you? 

12 Those payments?

13 MR. RUKAVINA: Your Honor, I object to the

14 implication that Mr. Dondero had any requirement to disclose

15 anything to this Court. It would have been those individuals'

16 obligations. So that is an unfair question. Why would Mr.

17 Dondero have to disclose to this Court that he's paying

18 bonuses?

19 MR. MORRIS: If Your Honor thinks it's an irrelevant

20 question --

21 MR. RUKAVINA: I didn't say it's about relevant. I

22 said that the question was improperly phrased as assuming that

23 he had any legal obligation to inform the Court.

24 MR. MORRIS: I --

25 THE COURT: Overruled.

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1 BY MR. MORRIS: 

2 Q Mr. Dondero, did you or anybody on your behalf ever inform

3 the Court that entities owned, directly or indirectly, by you

4 and Mr. Ellington were going to pay approximately $10 million

5 to Mr. Waterhouse, Mr. Leventon, Mr. Ellington, and 

6 Mr. Surgent?

7 A I know we were counseled. I know counsel told us we had

8 no obligation.

9 Q Okay. Did you tell Mr. Seery?

10 A Seery knew. But I didn't tell him.

11 Q Okay. That's my question. My only --

12 MR. MORRIS: -- and I move to strike, Your Honor. He

13 ought to answer my question. 

14 BY MR. MORRIS: 

15 Q Did you tell Mr. Seery? That's the only question there

16 is.

17 A No. 

18 THE COURT: Okay. Strike what you asked.

19 MR. MORRIS: Thank you. 

20 BY MR. MORRIS: 

21 Q Do you know if anybody told Mr. Seery about these payments

22 at the time they were made?

23 A I know -- I know he knew from either Frank or from Thomas

24 Surgent. But I don't know from which party.

25 Q Did Thomas Surgent tell you that he had informed Mr. Seery

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Dondero - Direct 23

1 of these payments?

2 A No. 

3 Q Did Frank Waterhouse ever tell you that he had informed

4 Mr. Seery of these payments?

5 A I -- I can't recall specifically. 

6 And I -- I want to use that as the same answer on Thomas

7 Surgent. I can't recall specifically. But I know -- I know

8 one of the -- one of the two of them contemporaneously

9 discussed it with Seery. 

10 Q How did you learn that?

11 A From one or the other. I just can't specifically remember

12 --

13 Q Did they --

14 A -- a conversation.

15 Q Did they report to you what Mr. Seery said?

16 A No. 

17 Q Each of these individuals subsequently filed a proof of

18 claim in the bankruptcy court for their bonus. Isn't that

19 correct?

20 A Yes. 

21 Q And those claims were subsequently assigned to entities

22 owned, directly or indirectly, by you or Mr. Ellington. 

23 Correct?

24 A Yes. 

25 Q Sir, you personally knew how much the Advisors were going

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1 to pay Highland under the Payroll Reimbursement Agreement and

2 the Shared Services Agreement. Correct?

3 A No. 

4 Q Did you ever ask?

5 A No.

6 Q You determined in late 2017 that NexPoint would pay

7 Highland $6 million per year for subadvisory and shared

8 services effective January 1st, 2018. Correct?

9 A I -- I don't know the specific agreements from each year. 

10 There was an agreement each year. The agreements changed

11 from being a flat fee to a back-service -- back-office fee plus

12 a reimbursement of employees fee sometime more recently. But I

13 -- I don't know the exact dates on -- of specific contract.

14 Q Do you recall in late 2017 speaking with Mr. Klos and 

15 Mr. Waterhouse about having to get more money from the Advisors

16 to Highland because Highland was losing a lot of money?

17 A No. 

18 Q Do you recall discussing with them that Highland should

19 receive $6 million from NexPoint for services rendered?

20 A The -- no. All the efforts were to be fair and accurate

21 and compliant from a regulatory and tax standpoint. All the

22 centralized cost allocation things.

23 Q Was your personal tax liability ever a factor in

24 determining how much money would be paid from the Advisors to

25 Highland?

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1 A No. 

2 Q Do you recall that there was a substantial change in the

3 method and amount of money that was paid from the Advisors to

4 Highland on account for services rendered at the beginning of

5 2018?

6 A I recall there was an old agreement from '13, which was

7 neither best practices nor compliant from a regulatory or tax

8 standpoint, that had to be improved and made more specific. 

9 And a team from accounting, legal, and compliance re-crafted

10 the Shared Services Agreement and front-office allocation

11 appropriately in that 2017-'18 time period.

12 Q Are you aware that Frank Waterhouse signed the Payroll

13 Reimbursement Agreements, the Sub-Advisory Agreements, and the

14 New NexPoint Shared Services Agreement in 2018, in the first

15 half of 2018?

16 A I'm not specifically aware. It doesn't surprise me.

17 Q Did you ever review any of those agreements?

18 A No. Yeah, no.

19 Q Okay. You didn't participate in the drafting of those

20 documents. Correct?

21 A No. 

22 It was a typical shared services of a complicated

23 financial services firm that centralizes functions. It was a

24 -- it was a typical agreement that would be put together and

25 administered by accounting. 

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1 Q But people like Frank Waterhouse actually wore multiple

2 hats. Correct?

3 A Sure.

4 Q And he wore the hats of the Advisors and he wore the hats

5 of Highland at the exact same time. Right?

6 A Sure. It's possible to be fair doing that.

7 Q And you're the one who decided that he should wear these

8 multiple hats. Right? You're the one who appointed him to

9 these positions?

10 A Yes. 

11 Q Okay. Do you recall that you participated in annual

12 review meetings with Mr. Waterhouse and Mr. Klos and Mr. Okada?

13 A Yes. 

14 It would be multiple, generally. Sometimes there were tax

15 ones, sometimes there were budgeting, sometimes it was

16 performance reviews. Yeah. Yes. 

17 Q You know, I just want to go back to that issue of taxes

18 for just a moment. Do you recall that in 2017 and 2018, the

19 Advisors earned millions of dollars of income?

20 A Not specifically, but --

21 Q Do you recall that they earned positive income in those

22 years?

23 A I believe so.

24 Q And do you recall that Highland had negative income in

25 those years?

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1 A I don't know. 

2 Highland's a giant solvent pool of assets. So the

3 liquidity, it varies from year to year. But -- and, also, the

4 mark-to-marketing of those assets varied from year to year. So

5 whether or not Highland made money in a given year, I don't

6 know. There's some years it makes a lot but has limited cash

7 flow; other years, it has material cash flow and makes a lot. 

8 Some years it has material cash flow and loses a lot.

9 Q All right. Let me just focus on operating profits. On an

10 operating basis, Highland lost a lot of money in 2017 and 2018. 

11 Correct?

12 A I don't know. 

13 Q Okay. Can you grab your book there, please?

14 A Sure.

15 Q And turn to Exhibit 86. I think it's in Volume 2 of 2.

16 Mr. Dondero, if there's any portion of the book that you

17 in particular want to read, just let me know. But I'd ask you

18 to just turn to Page 2.

19 A Page -- I'm on Page 2.

20 Q Okay. And do you see near the top, it says, quote,

21 overall operating income projected at $900,000, but there's a

22 $12 million loss for HCMLP which doesn't account for some other

23 items? Do you see that?

24 A Yes. 

25 Q Does that refresh your recollection that Highland was

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1 projected to lose $12 million in 2018?

2 A Well, it actually refreshes my recollection on what I

3 said. 

4 And there's substantial underlies in expected investment

5 and investment commitments. There's a balance sheet that's

6 moving around that dwarfs the $12 million, which is what my

7 point was.

8 Q I'm not talking about assets, sir. I'm talking about

9 operating income, the ability to pay your bills.

10 A Right. 

11 What I'm talking about is if you have 650 million of

12 assets, which we still have today, you have more than enough

13 solvency to cover 12.

14 Q So this wasn't a problem from your perspective?

15 A Correct. 

16 Q Okay. 

17 A It never had been.

18 Q Okay. Let's go to Slide 29, please. 

19 A In the same book?

20 Q Yeah. 

21 THE COURT: I'm sorry, you said 29?

22 MR. MORRIS: 29, yeah.

23 BY MR. MORRIS: 

24 Q And if you could just -- I'm just going to ask you quickly

25 29, 30, 31, 32, that's all information about human resources. 

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Dondero - Direct 29

1 Correct?

2 A I'm sorry. Exhibit 29, the Shared Services Agreement?

3 Q No, no. I'm sorry. In 86, just Page 29.

4 A Oh, okay. 

5 Q Yeah. 

6 A Page 29, yes.

7 Q Okay. So if you look at 29, 30, 31, 32, you're given a

8 lot of -- this deck was presented to you by Mr. Waterhouse and

9 Mr. Klos. Right? If you look at the front?

10 A Okay. I don't know. I assume so.

11 Q Okay. So on that assumption, if you look at 29, 30, 31,

12 whether this is the exact book or not, you would agree that you

13 were presented with a lot of information about the Highland

14 platform's employees. Correct?

15 A Yes. 

16 Q And did you personally have to approve everybody who was

17 hired?

18 A No. 

19 Q But you were informed of everybody who was hired. 

20 Correct?

21 A Generally.

22 Q And you were generally informed about everybody who was

23 fired. Correct?

24 A Generally.

25 Q And everybody who was terminated? If you look at 32, for

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1 example, they tell you exactly the number of people who were

2 terminated and they identified by name the names of the

3 individuals who were terminated. 

4 Do you see that? If you look at 32.

5 A Sure. Okay. 

6 Q So there's no question that you were given that

7 information. Right?

8 A Once a year at the end of the year. Is that what you're

9 asking me?

10 Q In this deck.

11 A Right.

12 Q And you met with Brian Collins from time to time to

13 discuss personnel matters. Right?

14 A Yes. 

15 Q And you're the person who set the compensation for

16 everybody who worked for Highland. Right?

17 A No. Just generally.

18 Q Nobody got a raise without your approval. Did they?

19 A Yes. I mean I get told about it afterwards or something.

20 Q Who had the authority to give raises without your prior

21 approval? Who in the organization had the ability to hand out

22 money without your approval?

23 A Well, if it was a large amount, they would seek my

24 approval. But I'm saying small amounts, unit heads would have

25 that ability.

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1 Q Okay. So you had to approve -- let's -- can we use the

2 word "material?"

3 A Yeah. 

4 Q Okay. You had the authority and the responsibility for

5 approving all material changes in compensation for Highland's

6 employees. Right?

7 A Yes. 

8 Q Okay. Go to Slide 36, please.

9 Do you remember that these annual reviews included

10 forecasts?

11 A Yes. 

12 Q And those forecasts would contain assumptions, right?

13 A Yes. 

14 Q And in this particular forecast, if you look at the top,

15 you were told to assume that the material inter-company

16 arrangements remained unchanged and it specifically said that

17 NexPoint and its subsidiaries would pay $6 million per year for

18 subadvisory and shared services. Do you see that?

19 A Yes. 

20 Q Where did that number, six million, come from?

21 A I assume it was -- I don't know. 

22 It was -- these are the assumptions they're using. They

23 probably flatlined prior years. There were probably prior

24 years where five or six or based on growth, you know, of prior

25 years five. There's maybe a mixture of six. I don't -- I

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1 don't know the answer.

2 Q Did you play any role in determining how much money would

3 be paid by the Advisors to Highland for services?

4 A No. It was done via the shared services contracts that

5 are meant to be for a variety of regulatory and tax purposes

6 appropriate and fair.

7 MR. MORRIS: All right. I move to strike. I'm just

8 asking him about what he did.

9 THE COURT: Sustained.

10 BY MR. MORRIS: 

11 Q Did you play any role in establishing the fees that were

12 paid by the Advisors to Highland under any of the inter-company

13 agreements?

14 A Not the specifics, just the general direction to be

15 compliant in best practices.

16 Q Okay. But you were told here -- right? We don't really

17 have to debate the point. You were told, you will admit, in

18 the beginning of 2018 that the assumption was that NexPoint and

19 their subsidiaries would be paying $6 million a year for

20 subadvisory and shared services. Correct?

21 A Yes. That -- I was told here that they had to make an

22 assumption, and they made an assumption.

23 Q Okay. Can you turn to Page 46, please?

24 Do you see that that's the NexPoint three-year profit and

25 loss forecast?

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1 A Yes. 

2 Q And do you see that in the middle of the page, there's a

3 reference to subadvisor fees and shared service expenses?

4 A Yes. 

5 Q And do you see that if you add those two numbers up for

6 any of the years, it equals $6 million?

7 A Yes. 

8 Q So, again, the projections that you were given showed that

9 NexPoint would be paying Highland exactly $6 million for these

10 services for each of those three years. Is that right?

11 A That's the assumption in this forecast. 

12 They -- they missed the bankruptcy. They missed the fact

13 that the revenue wouldn't change, but they had to make some

14 assumptions that, you know -- whatever. But they don't know

15 what they don't know. But they had to make some assumptions,

16 so they -- they put a flatline assumption in there. 

17 Q Well, do you know that with the exception for -- with the

18 exception of December 2020, that assumption proved 100 percent

19 correct? That's exactly what NexPoint paid for the first 35

20 out of the 36 months on that forecast?

21 A We didn't have a lot of turnover before the bankruptcy,

22 and it was based on head count and it was based on percentages

23 of people. So, yeah, the assumption probably played out until

24 people started moving in and out and until the assets under

25 management changed. But, yeah, that makes sense.

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1 Q This is what you were told they would pay, and this is

2 exactly what, in fact, they did pay with the exception of

3 December 2020. Do you know that?

4 A I don't know that except for you're telling me that and

5 showing me that here. 

6 And I'm reluctant to give any credence to a projected

7 (indiscernible) forecast based on a lot of assumptions having

8 to have been -- happened to have been right in a year or two

9 somehow overrides the contracts that's very specific and very

10 clear.

11 Q Well, if you take $6 million a year and you divide it by

12 12, that's $500,000 a month. Right? Simple math.

13 A Roughly, sure.

14 Q Not even roughly. Exactly. Right?

15 A Okay. It's not exactly six million, but yes. Okay. 

16 Q Well, if you add 3,024,000 plus 2,976,000, you actually

17 come to exactly 6,000,000. Right?

18 A Okay. Yeah, then it's exactly 500,000.

19 Q It is.

20 A Yes.

21 Q And you were told in April of 2020 that NexPoint would pay

22 exactly $500,000 for each and every month through the end of

23 the year. Isn't that correct?

24 A No. No. 

25 And all I'm saying is there's a responsibility to

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1 administer a contract beyond the assumptions in a -- in a pro

2 forma. This is meant to be an overall year-end review. It's

3 not meant to be a detailed review of all contracts. It's --

4 it's meant to be approximate. It's summarizes everything to

5 six, seven line items instead of a hundred line items. It's

6 not a -- it's for planning purposes. That's -- that's what

7 this document is.

8 Q Are you aware that the corporate accounting group prepared

9 in the ordinary course of business 13-week forecasts?

10 A Yes. 

11 Q And do you understand that those 13-week forecasts

12 included the amount of money that the Advisors were going to

13 pay to Highland for the services?

14 A We have similar assumptions on a variety of things, also,

15 yes.

16 Q And were those forecasts given to you?

17 A Sometimes we -- we went over them periodically.

18 Q And when you say "we would go over them," you went over

19 the 13-week forecasts with Mr. Waterhouse and Mr. Klos. 

20 Correct?

21 A Generally.

22 Q And you continued to get forecasts after the bankruptcy. 

23 Correct?

24 A Not much. A little bit. I -- things changed with the

25 bankruptcy. 

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1 Q All right. So before the bankruptcy, there is no question

2 before the bankruptcy, you got the 13-week forecasts that

3 showed exactly how much the Advisors were projected to pay

4 under their contracts with Highland. Right?

5 A Yes. 

6 Q And after the bankruptcy filing, certainly before the

7 Independent Board was appointed, you continued to get the

8 13-week forecast. Right? 

9 A There was only a few weeks in between there. I don't know

10 if I saw anything in that few weeks.

11 Q And Highland filed disclosures on the docket showing how

12 much revenue they generated and the sources of their revenue. 

13 Right?

14 A Scant -- scant detail. But yes, a little bit regarding

15 revenue.

16 Q And even after Mr. Seery was appointed, Mr. Waterhouse and

17 Ms. Hendrix would still give you information about NexPoint and

18 the advisors and their projections. Right?

19 A I did get information on the advisors after the

20 bankruptcy, the advisors and entities that weren't part of the

21 bankruptcy.

22 Q Can you go to Exhibit 150, please, sir?

23 And do you see that this is an email that Ms. Hendrix sent

24 to you in April 2020, where she attached a NexPoint cash

25 forecast?

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1 A Yes.

2 Q And do you see that she invited you to discuss the

3 forecast if you had any questions?

4 A Yes.

5 Q And do you see the forecast is not a big document. Right? 

6 It's just a one pager?

7 A Yes.

8 Q It's a cash forecast?

9 A Yes.

10 Q And it shows that for every single month from May 2020

11 until December 2020, NexPoint was projected to pay Highland how

12 much?

13 A (No audible response)

14 Q $500,000. Right?

15 A Yes.

16 Q So, here they are in April 2020 repeating exactly what

17 they told you was going to happen, what they projected to

18 happen, back in January of 2018. Right?

19 A Okay. Those are projected numbers. They're not

20 reconciled. They're not trued up. They're part of contracts

21 that need to be administered. The fact that they're putting in

22 a flat line with an expectation to reconcile it later is not a

23 surprise.

24 People don't reconcile things on a daily basis or minute25 by-minute basis. It happens in due course when it's efficient. 

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Dondero - Direct 38

1 I don't know if -- I don't know when they normally reconcile,

2 if it's quarterly or monthly or yearly, but those are questions

3 for Frank and Klos. But you would never have a specific

4 contract that isn't reconciled when it has a lot of variables

5 in it.

6 Q At this point, Frank Waterhouse's wings had not been

7 clipped. Right? It's April.

8 A Correct.

9 Q And so he's still the person who is responsible for

10 administering the contracts in accordance with their terms. 

11 Right?

12 A He's the one -- he and his group are responsible for

13 administering the contract, due course, best practices, yes.

14 Q And he is telling you in April 2020 exactly what he told

15 you in January of 2018, and that is the cost of NexPoint's

16 contracts with Highland would be $500,000 a month. Correct?

17 A That was his -- for cash flow purposes, that was his

18 assumption, yes.

19 Q Okay. And do you understand, do you know that for every

20 single month from January 2018 until the end of November 2020,

21 NexPoint paid exactly $500,000?

22 A I don't know exactly when he told me to stop paying, but

23 hopefully they stopped paying when I told them to stop paying.

24 Q Well, you told them to stop paying after you got notice of

25 termination of the shared services agreements. Correct?

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Dondero - Direct 39

1 A No. I told them to stop paying once we realized we were

2 being over billed.

3 Q And that occurred after you got notice of termination of

4 the shared services agreements. Correct?

5 A I don't know. I have no recollection of that.

6 Q All right. We'll deal with Mr. Norris on that topic.

7 But there's no question -- you don't have any reason to

8 question the assertion that NexPoint paid exactly $500,000

9 every single month for 35 months until the end of November 2020

10 when you directed Mr. Waterhouse not to make any further

11 payments, fair?

12 A Yeah. I've no reason to know that they didn't.

13 Q All right. Okay. I want to go back in time a little bit.

14 Are you aware that in January 2018, Frank Waterhouse

15 signed a sub-advisory agreement on behalf of both advisors?

16 Do you know that?

17 A Not specifically. And, again, I knew there was a task

18 force that changed and improved it to be compliant. And I

19 assume that's what you're referring to.

20 Q It's not.

21 Can you grab Volume 1 of 2, please, and go to Exhibit 5.

22 Do you see that's a sub-advisory agreement?

23 A Yes.

24 Q And do you see, if you look at the end, that Mr. -- and

25 his signatures appear on the page ending in Bates Number 580.

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Dondero - Direct 40

1 Do you see Mr. Waterhouse signed this sub-advisory

2 agreement on behalf of both NexPoint and Highland?

3 A Yes.

4 Q Did you authorize him to do that?

5 A Not specifically.

6 Q No.

7 Do you have any knowledge that Mr. Waterhouse signed a

8 sub-advisory agreement effective as of January 1, 2018, on

9 behalf of both Highland and NexPoint?

10 A I have general awareness there was a tax legal compliance

11 accounting task force to make this agreement as accurate and

12 proper and best practices as possible. And this is their work

13 product that Frank, as leading the group signed, and I'm fine

14 with him signing it. But I was not specifically involved and I

15 don't have direct recollection.

16 Q Okay. That's fair.

17 Can you just turn to Page 3?

18 A 3 of this contract?

19 Q Yes.

20 Do you see it required a monthly fee of $252,000 in

21 Section 2(a)?

22 A I'm sorry. Section 2(a)?

23 Q Yes.

24 A Two dot zero one. Is that -- I'm sorry. Maybe I'm in the

25 wrong --

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Dondero - Direct 41

1 Q We're in Exhibit 5. It's Exhibit 5, Page 3.

2 A Hang on. I'm sorry. I was in Exhibit 6.

3 Q Take your time.

4 A Exhibit 6, Page 2. Okay.

5 Q Yeah, we're at Exhibit 5, Page 3.

6 A Page 3. Okay.

7 Q Do you see the compensation there is $252,000 a month?

8 A Yeah.

9 Q And do you see that it's a fixed fee?

10 A Yes.

11 Q And it doesn't have anything to do with costs, does it?

12 A Hold on a second.

13 Q Take your time.

14 A I think what's happening here is I think there's two

15 agreements. There's one for back-office people, or back office

16 function, in general, which has a fixed fee to it which is

17 probably what this is. 

18 And then, there's one that looks like the other one we

19 were looking at that has a list of people in the back and the

20 percentages of their time. And that's the one that's cost plus

21 and reimbursement. 

22 And this -- this one I believe was more fixed based on

23 just general services provided.

24 Q Okay. So would you agree that sub-advisory services are

25 what's commonly known as front-office services? They're

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Dondero - Direct 42

1 investment advisory services.

2 A Everybody uses different names. The front-office one is

3 generally a people-oriented one and, then, the other one is

4 generally a more fixed overhead.

5 Q Are you aware that this sub-advisory agreement was

6 replaced with the payroll reimbursement agreement five months

7 later? Do you know that?

8 A Well, that's what I had said earlier, that from 2013 on,

9 there was a general fixed structure one that wasn't best

10 practices, wasn't compliant from a regulatory or tax

11 standpoint, that was with a task force made to be compliant and

12 split into two. And if it happened six months after this one

13 was signed, I don't have specific knowledge, but I know the

14 compliant improved, enhanced one. Was enforced in '18.

15 Q All right. I'm really not trying to trick you.

16 A Well, that's how it feels.

17 Q So I want to clear this up because that's exactly what I'm

18 not trying to do. I'm trying to get your best recollection. 

19 And if you don't recall, you don't recall.

20 But if you look at Exhibit 3, you'll see that's the shared

21 services agreement for NexPoint as of January 1, 2018. And

22 that's a fixed fee contract.

23 Take your time and look at it. I don't mean to rush you.

24 A Right.

25 Q But if you take a look at -- right. That's the amended

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Dondero - Direct 43

1 and restated NexPoint agreement. It's a fixed fee agreement. 

2 If you take a look at Page 9, the consideration, its says "flat

3 fee of $168,000 per month."

4 A Yes. Okay. I understand what you're doing now.

5 Q Okay.

6 A NexPoint had the front-office people working at NexPoint

7 because we had public greets, people or officers there. There

8 were investment professionals there. NexPoint didn't have

9 investment professionals at Highland.

10 Q So you created a new sub-advisory agreement for that

11 purpose?

12 A Well, what I'm saying is the sub-advisory agreement should

13 be different for the -- or should be somewhat different, either

14 in amounts or mechanism, between Hfam and NexPoint. And I

15 don't know if that's --

16 Q No. I'm just not --

17 A And, again, I know you're trying to trick me, but if --

18 Q I'm not.

19 A -- you're saying there's one agreement here, and ah ha,

20 there's two agreements with Hfam, they're different entities.

21 Q I'm not even talking about HCMFA.

22 A Okay.

23 Q I'm really just focused on NexPoint.

24 Are you aware that on January 1, 2018, NexPoint entered

25 into two new agreements with Highland, one of which was a

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1 shared service agreement for back and middle office services

2 and one was a sub-advisory agreement for investment advisory

3 services. Do you know that?

4 A My general understanding is they both, Hfam and NexPoint,

5 signed two that were better and more accurate, appropriate to

6 reconcile, proper split, not art, more science-based on, on

7 formula, and they both did.

8 I was just -- I thought you were trying to go down a path

9 and only one of them did, or one of them was different than the

10 other.

11 I wasn't that involved in the process, but there were

12 great efforts made by the people involved to make them

13 appropriate and complaint.

14 Q Okay. And, in fact, HCMFA did not sign the sub-advisory

15 agreement at the beginning of 2018. Are you aware of that?

16 A No.

17 Q One was prepared, but they didn't sign it.

18 Do you know that?

19 A No. I have no awareness of that.

20 Q And are you aware that the sub-advisory agreement that was

21 signed by Mr. Waterhouse on behalf of NexPoint and the sub22 advisory agreement that was prepared for HCMFA but not signed

23 by anybody, were actually replaced by these payroll

24 reimbursement agreements.

25 Do you have any recollection of any of that or any

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Dondero - Direct 45

1 knowledge?

2 A Frank would be your person.

3 Q Okay.

4 A If the timing was so close, they might've held off on one

5 agreement because they knew it was coming. Maybe they signed

6 one in due course because an auditor needed it.

7 Q I don't want you to speculate.

8 A You know, I mean, I have no idea, but you ask him.

9 Q You're the person in control, so I'm asking you. If you

10 don't know, just say I don't know.

11 A I don't know. I have no idea.

12 Q Okay. Did you ever read the Payroll Reimbursement

13 Agreement before it was signed?

14 A No.

15 Q Have you read it today?

16 A No.

17 Q Do you ever look at that Exhibit A that was attached to it

18 cause you referred to it? Do you ever look at that Exhibit A?

19 A I saw it, but it was exactly what I expected, a list of

20 people and percentages.

21 Q Are you aware that some of those people had been

22 terminated from Highland before the agreement was even signed?

23 A The day I became aware of that, and we were still paying

24 for them, is the day we stop paying.

25 Q Oh, that's when you first learned?

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1 A No. I mean, I knew -- I mean, I knew people had left the

2 company, but the day I first knew that we were still paying for

3 people who had left the company was the day we stopped paying.

4 Q Ah, okay. But there's no question that you knew when the

5 people on that Exhibit A left the company. You knew that. 

6 Right?

7 A Sure.

8 Q Sure. Okay.

9 Was it your understanding that when one of the individuals

10 listed on Exhibit A was terminated that the amount of money

11 that NexPoint would pay to Highland would be reduced?

12 Was that your understanding?

13 MR. RUKAVINA: Your Honor, I'll object on

14 speculation. The witness said he did not read that payroll

15 reimbursement agreement, negotiate it, so this is all based on

16 speculation.

17 THE COURT: Overruled.

18 THE WITNESS: Absolutely. But when it was

19 reconciled, I don't know. I wasn't, you know --

20 BY MR. MORRIS:

21 Q So it's your understanding that every time a dual employee

22 left Highland, that NexPoint should have gotten a reduction in

23 the amount of money it paid under the payroll reimbursement

24 agreement. Do I have your understanding correctly?

25 Is that fair?

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1 A Yeah. Absolutely. Why would you have a list of people

2 and percentages otherwise?

3 Q Okay.

4 A You wouldn't have it.

5 Q Okay. And did you ever take any steps to make sure that

6 when dual employees left, there was a reduction in the amount

7 of money that NexPoint was paying to Highland?

8 A We relied on Highland for that in the fees we were paying

9 Highland. We didn't have the staff to do it in our entities.

10 Q Well, in fact, I think you testified, and I'll just ask

11 you to confirm, that until the summer of 2020, Frank

12 Waterhouse, as the treasurer or the CFO of the advisors, who

13 had a fiduciary duty, one of his responsibilities was to

14 administer the contracts in accordance with their terms.

15 Do I have that understanding correct? He was the one,

16 until the summer of '20, until Mr. Seery did what you contend

17 Mr. Seery did, until that moment, he is the one on behalf of

18 the advisors who had the responsibility of administering

19 contracts. Right?

20 A Yes. Administering.

21 MR. MORRIS: I have no further questions, Your Honor.

22 THE COURT: All right. Pass the witness.

23 CROSS-EXAMINATION

24 BY MR. RUKAVINA:

25 Q Mr. Dondero, what was your title at Highland in 2018 and

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1 2019?

2 A President.

3 Q Okay. Were you at the top?

4 A Yes.

5 Q For the record, what was the size of Highland at that

6 time, revenue, assets under management, employees?

7 A Very similar to today, really, in terms of asset size. 

8 About 650 million in assets.

9 Q Owned assets.

10 A Owned assets.

11 Q What about managed assets?

12 A Well, I can't -- I know it was bigger. The CLOs were

13 bigger.

14 Q Are we talking about billions?

15 A Yeah. It was --

16 Q And approximately how many employees in 2018?

17 A Boy, maybe 40, 50 more than today.

18 Q So how many in total?

19 A 150 maybe.

20 Q Okay. And just approximate annual revenue back then?

21 A I don't know.

22 Q Well, let me ask you this.

23 A Yeah, sure.

24 Q As the president of an entity that had hundreds of

25 millions of dollars in assets, billions of dollars under

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1 management, and hundreds of employees, would you expect that

2 you would know every detail about every contract or every

3 negotiation?

4 A No. No, we had a good accounting staff. We had a good

5 compliance staff. We had a good legal staff. And they did

6 their jobs respectively to administer things appropriately, the

7 way we were operating, which was typical of other asset

8 management firms.

9 Q So I take it you would get advice from subordinates from

10 time to time.

11 A Yeah, sometimes. Yeah, it --

12 Q Would you act on that advice?

13 A Yeah. And it was --

14 Q Would you receive instructions?

15 MR. MORRIS: Objection. Leading.

16 THE COURT: Overruled.

17 BY MR. RUKAVINA:

18 Q Would you receive instructions?

19 A Yes. And --

20 Q And who would execute those instructions?

21 A It would depend on the area. But, you know --

22 Q Would it be you?

23 A No, I wouldn't execute it. But, it would depend on the

24 area. If it, you know -- we would -- we act very quickly to

25 anything coming from compliance that was a concern. Anything

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1 from tax would also be a priority. And then, you know, the

2 accounting or GAAP accounting kind of caught up around the --

3 Q And let me interrupt you.

4 A -- annual audit.

5 Q Let me interrupt you because --

6 A Sure.

7 Q -- I really do want to move on.

8 And Mr. Waterhouse, he was a senior executive like

9 yourself. Is that accurate?

10 A Yes.

11 Q Would you have expected Mr. Waterhouse to know the details

12 of all contracts and all transactions?

13 A He had a staff, and he needed to have a significant staff. 

14 They were the --

15 Q Why did he need to have a significant staff?

16 A There were a lot of audits. There were a lot of public

17 company responsibilities. There were a lot of private equity

18 company expenses.

19 Q Were their contracts to manage?

20 A Yeah, there was lots of things. Everything from personnel

21 to --

22 Q Would you have expected --

23 A -- contracts to tax, you know.

24 Q Would you have expected Mr. Waterhouse to personally

25 manage or administer contracts?

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1 A No. He would have mechanisms set up for it. And, again,

2 you can't administer contracts every 15 minutes. You would

3 have some cost benefit to when you administered them or

4 reconciled them.

5 Q So how would you expect Mr. Waterhouse to learn of a

6 potential problem with administering a contract?

7 A Either one of his people would alert him to it or one of

8 the groups that were paying it would alert it to him -- alert

9 him to it or he would notice.

10 Q Would you have expected him to notice for each contract

11 being administered if there were hundreds of contracts?

12 A I mean, eventually. 

13 I mean, a lot of things catch up at year-end or at the

14 audit. But eventually, he or his team would -- or are

15 responsible for administering contracts. It's rare it's a

16 major gaff and it's not good for people's career if -- let's

17 say you have a lease contract that's supposed to escalate every

18 year and someone forgets to escalate the rents for five years.

19 You know, it's -- that's -- that would be a bad reflection

20 on a lot of people because then it's a project to go back and

21 try and get it and argue it and whatever.

22 Q Didn't Mr. Waterhouse, in fact, at some point in time,

23 inform you that he had learned of the overpayments.

24 MR. MORRIS: Objection. Leading. I just --

25 THE COURT: I didn't even hear the question --

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1 MR. RUKAVINA: I'm sorry, Your Honor.

2 THE COURT: -- to be honest.

3 BY MR. RUKAVINA:

4 Q Did Mr. Waterhouse, at some point in time, inform you that

5 he had learned of the overpayments?

6 A Yeah. That was in --

7 THE COURT: Oh, overruled. He can answer.

8 THE WITNESS: -- November or December of '20?

9 BY MR. RUKAVINA:

10 Q And was that -- and just to confirm, was that the first

11 time you learned of the overpayments?

12 A Yeah, the first time I had learned that there were

13 overpayments that weren't reconciled or that we weren't getting

14 credit for.

15 Q What do you mean by reconciled?

16 A Well, that there wasn't a -- either a reduction in future

17 payments or something for overpayments in the past. There's

18 lots of ways to --

19 Q Was there a -- but --

20 A -- satisfy a --

21 Q Was there a general --

22 A -- deficiency.

23 Q Was there -- and I'm sorry to keep interrupting you, sir. 

24 We just want to try to get done today.

25 Was there a general practice at Highland as far as

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1 reconciling or chewing up contracts?

2 A Not that I'm aware of. I'm sure they had one, but not

3 that I'm aware of.

4 Q Okay. Are you aware that the two payroll reimbursement

5 agreements were amended to provide $2.5 million of additional

6 cash from the advisors to Highland?

7 A In what year was that? Or that was --

8 Q At the end of 2018?

9 A Yeah. I believe there was a reconciliation of some sort

10 there, yes.

11 Q That's what I'm asking you.

12 A Yes.

13 Q What do you understand, if anything, about that

14 reconciliation?

15 A That they did the proper true-up in the accounting and,

16 whether it was based on assets under management, work, or

17 people, they made the proper adjustments.

18 Q Is that the only true-up to your understanding? Because I

19 asked you about a general practice, and you said that there was

20 not.

21 A I said I didn't know if there was. If they did it at

22 year-end and you're telling me they did it year-end '18, it

23 sounds like it was a year-end process.

24 Q Do you remember authorizing the advisors to pay $2.5

25 million in additional payroll reimbursement expenses at the end

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1 of 2018?

2 A I don't remember. I don't know if I would've had to

3 authorize it if it was part of the true-up process.

4 Q And you were also asked whether, in light of what you

5 described as Mr. Waterhouse's diminished role or clipped wings

6 -- whatever words were used -- you expected someone else to

7 administer the contracts with the advisors. I want to follow

8 up on that.

9 Do you know who Dustin Norris is?

10 A Yes.

11 Q And what's your understanding of who he is for the

12 advisors?

13 A That's a good question. I don't want to -- I don't want

14 to fumble this one.

15 Q Let me ask you this. Is he an officer?

16 A The broker-dealer, in some of the entities, yes. I don't

17 know if all of the entities.

18 Q Did you ask Mr. Norris to involve himself in any way with

19 these overpayments and these contracts?

20 A Well, we were trying to do an amicable split. After we

21 found out about the overpayments, Dustin was front and center

22 trying to have a soft landing instead of having everybody

23 kicked out of the building and then coming back and all that

24 nonsense.

25 But my recollection is in that November-December time

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1 frame, hearing about it from Frank, and then stopping excess

2 payments until we were trued up.

3 Q And also, you were asked about Frank's official titles

4 with the advisors. To your understanding, who was actually --

5 who actually employees Frank? What company is his employer?

6 A In the time frame we're talking about?

7 Q No. Today, sir. When you were asked about today.

8 A Today, he works for a Skyview.

9 Q And what's Skyview?

10 A Skyview is an amalgamation of the accounting staff and

11 legal staff in a separate entity.

12 Q Former Highland employees?

13 A Yes.

14 Q And is that why you're not technically sure as to whether

15 he's an officer because he's an employee of Skyview?

16 A That's right.

17 Q Okay. I think you've testified that whatever his role is,

18 he is in charge of accounting for the advisors?

19 A Yes.

20 Q Okay. Today?

21 A Yes.

22 Q Okay. And just for the record, the Court may or may not

23 know, but when you refer to Hfam, are you referring to HCMFA?

24 A Uh-huh. Yes.

25 Q Okay. Now, I don't think there's any point in showing you

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1 the payroll reimbursement agreements since I think you

2 testified you never read them. But there are amounts in those

3 agreements and those amounts total up to certain amounts per

4 year. Are you following me so far?

5 A Yes.

6 Q Do you know how those yearly amounts were determined for

7 the two payroll reimbursement agreements?

8 A Some of the fixed numbers are relevant to what's the fixed

9 expense base and then divided based on --

10 Q Well, let me pause you. Let me pause you. I apologize.

11 I'm talking about just the payroll reimbursement now, not

12 the shared services.

13 A Oh, the payroll --

14 Q The payroll of --

15 A Yeah.

16 Q -- the employees.

17 A Yeah, the payroll of the employees and they're, and I

18 don't want to call them unallocated, but some of the employees

19 are employees that represent various entities. And then,

20 there's a percentage allocation of their time.

21 Q And all that rolls up into a number.

22 Are you following me so far?

23 A That's right because the percentage of their time is then

24 a percentage of their total comp.

25 Q So what I'm asking you is, did you determine -- so

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1 remember, all those percentages and all that rolls up into a

2 number, okay? Let's call that number X. Are you with me?

3 A Yes.

4 Q Did you set or determine what X would be?

5 A No.

6 Q Do you know how X was determined?

7 A By having the relevant people on the list and that the

8 less would hopefully be comprehensive and complete. And the --

9 Q Do you know who prepared --

10 A And then, the percentage allocations would be appropriate.

11 Q Do you know who prepared X? X, again, being the number

12 that all this roles up into?

13 A Yeah. The starting -- the starting appendix with all

14 those people on it was that task force of legal, compliance,

15 and accounting to provide the starting point. And those

16 documents that are based on people and percentages are living

17 documents that change over time.

18 Q Do you know whose idea it was originally to have those

19 payroll reimbursement agreements? In other words, you talked

20 about how the prior agreements were changed for best practices.

21 Do you know whose idea that was?

22 A I believe it came from the auditors which came from -- the

23 auditors from a tax and a regulatory standpoint. You can't

24 just have whimsical numbers. There has to be a basis for the

25 allocations. And the more directly you can tie it to people

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1 and contribution and a percentage of overhead, the better. And

2 that's -- that's why the new contracts were presented best

3 practices.

4 Q Because they have to withstand regulatory and tax

5 scrutiny?

6 A Yeah. 

7 Q Okay. 

8 A Yeah -- or yeah, that's right. Scrutiny or challenge if

9 --

10 Q So if someone suggests that you pulled numbers out of thin

11 air, $5 million for HCMFA, on an annual basis, and $6 million

12 for NexPoint on an annual basis, would you agree with that?

13 A No.

14 Q Okay. And if someone suggests that you pulled those

15 numbers for a reason involving trying to get liquidity into

16 Highland, would you agree with that?

17 A No. I would say --

18 Q And if someone -- hold on, sir.

19 A Yeah.

20 Q And if someone suggested that you pulled those numbers in

21 order to get tax deductions for the Advisors, would you agree

22 with that?

23 A No.

24 Q Okay. 

25 A Yeah. 

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1 Q What were you going to say, sir? You were going to

2 explain.

3 A I was going to say that the purpose of best practices was

4 to avoid any assertions by regulatory or GAAP accountants or

5 tax accountants that it was tax fraud. 

6 What you're describing is tax fraud, which means the

7 people who did it, instead of -- if they did it and they said

8 they did it, and they said they did it because I told them,

9 then they committed tax fraud, and their defense is they didn't

10 do anything about it. Or --

11 Q That's the Nuremberg Defense I think, sir. But let me --

12 A -- or complained. And instead they just --

13 Q Let me --

14 A -- their defense is going to be I told them?

15 Q Let me interrupt you again. Let's assume it's the

16 Nuremberg Defense. How long have you known David Klos?

17 A Several -- you know, a bunch of years. Ten years,

18 probably.

19 Q Do you have an opinion of his professionalism?

20 A He's --

21 Q Prior to this litigation.

22 A Prior to him being co-opted by --

23 Q Yes.

24 A Okay.

25 MR. MORRIS: Move to strike, Your Honor.

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1 THE COURT: Sustained.

2 BY MR. RUKAVINA:

3 Q Prior to the confirmation of the bankruptcy plan, did you

4 have an opinion of Mr. Klos' professionalism?

5 A I would divide it into two portions. It was before he was

6 enticed --

7 Q Well, let me --

8 A -- to work for the --

9 Q Because we're going to have motions to strike. Let me ask

10 a different question.

11 MR. MORRIS: I move to strike the word enticed.

12 THE COURT: Sustained.

13 BY MR. RUKAVINA:

14 Q Let me ask a different question. In 2018, would you have

15 believed that David Klos could be -- could possibly create

16 deceptive documents for tax fraud or tax cheat purposes?

17 A No.

18 Q What about Mr. Waterhouse?

19 A No.

20 Q What about Ms., and I apologize, I count pronounce her

21 name, Thedford. You know who I'm talking about, Lauren.

22 A Right. No.

23 Q Okay. Anyone at Highland?

24 A No. We were a very compliant organization.

25 Q What about at the end of 2018 when the $2.5 million was

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1 paid as additional money under the payroll agreements. Can you

2 imagine of anyone at Highland that would have done that for

3 some kind of tax cheat or tax fraud purposes?

4 A No.

5 Q And if someone testified here that the whole purpose of

6 these contracts was for the Advisors to suck money out of

7 Highland, would you have an answer to that?

8 A I would say they're not telling the truth, and they're

9 incentivized to not tell the truth.

10 Q And before Mr. Klos -- well, before -- through the year

11 2020, would you have expected Mr. Klos to flag any potentially

12 deceptive or potentially unlawful activities or documents to

13 you?

14 A Yes.

15 Q You met with Mr. Klos, you met with him regularly, didn't

16 you back then?

17 A Yes.

18 Q Would you have expected Mr. Waterhouse to flag or raise

19 issues with you if there was anything deceptive or potentially

20 fraudulent?

21 A Yes.

22 Q And did either of those ever raise any issue to you, or a

23 red flag with respect to the Shared Services Agreements or

24 Payroll Reimbursement Agreements?

25 A Not to me, not to the auditors, not to compliance, not to

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1 HR, not to anybody.

2 Q Were you surprised when you learned towards the end of

3 2020 about the overpayments?

4 A Yes.

5 Q Were you angry?

6 A Yeah.

7 Q Why?

8 A Why. This has been a most unusual bankruptcy. Right? 

9 You have an initial assessment that after getting rid of a

10 couple people the first few months, that everybody else is

11 critical and needs to stay around. And then you work everybody

12 extremely hard, particularly legal and accountants, to really

13 do all the work that Pachulski and DSA filed, and take tens of

14 millions of dollars of fees out. But most of it was prepared

15 by our guys.

16 And then you get to the second half of '20, and the

17 decision is made that not only is there not going to be any

18 kind of key employee retention, but there's going to be an

19 attack on the employees, and they're not going to get paid

20 their '18 or '19 bonuses, or amounts for '20 either. And then

21 some people who were most critical for preserving the estate

22 get fired for cause. I mean, it's just crazy town.

23 Q But --

24 A So that's the backdrop.

25 Q That's the back drop. So --

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1 A So people were being paid and then --

2 Q Are you aware, sir --

3 A I have --

4 Q Pardon me. Pardon me. Pause.

5 A Sure.

6 Q Are you aware, sir, that during all that time, the

7 Advisors were actually paying to Highland bonuses for these

8 employees that didn't get bonuses?

9 A That's right. And so --

10 Q So were you angry about that?

11 A So I was angry we were -- we were overpaying. We were

12 having to make up rightful compensation to people from other

13 pockets to just keep people flat. And at the same time, we're

14 getting overpaid, or we're getting overcharged for the services

15 we are using from Highland.

16 Q Who are we being overcharged by?

17 A Highland.

18 Q And who was supposed to be monitoring our contracts for

19 appropriateness before we paid an invoice?

20 A Highland.

21 Q And who has maligned you for the last year and a half in

22 this court and everywhere else?

23 MR. MORRIS: Objection to the form of the question. 

24 This is just --

25 THE COURT: Sustained.

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1 BY MR. RUKAVINA:

2 Q We'll move on. You were asked about the I think you said

3 upwards of about $10 million of payments to the senior

4 executives?

5 A Yes.

6 Q And you were asked whether you authorized those, and you

7 said yes?

8 A Yes.

9 Q Why did you authorize those?

10 A Those were deferred payments that they were due. In any

11 other bankruptcy in any normal court, they would have been paid

12 multiples of that.

13 Q Well, whose idea was it to have those payments made?

14 A Whose idea? It was -- it was the employees who were

15 short-shifted.

16 Q Did they talk to you --

17 A I agree with -- yes. They did.

18 Q Okay. And did they make any representations to you as to

19 whether such payments would be above-board or not?

20 A We had legal -- like I said, we did check with legal --

21 Q Okay. 

22 A -- counsel.

23 Q Well, let's not get too --

24 A Yeah.

25 Q -- far into that. Okay. And you mentioned that you

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1 believe that Mr. Surgent or Mr. Waterhouse informed Mr. Seery

2 of those payments?

3 A Yes.

4 Q And what is the basis of your understanding on that?

5 A They were both having -- at that time, both having

6 negotiations with Mr. Seery regarding liability, severance, and

7 potentially staying on with Highland. So I know it was part of

8 those conversations.

9 Q Were those senior employees the core of your team at

10 Highland?

11 A Yeah. Part of it, for sure. Yeah.

12 Q Were you concerned about them disbursing to the wind, so

13 to speak?

14 A Well, I was concerned that they would be treated unfairly,

15 unprecedented in bankruptcy really, in terms of being deprived

16 of prior bonuses by an estate that's twice as solvent as its

17 debts. You know?

18 Q And Isaac Leventon was one of those people. Right?

19 A Yes.

20 Q And without going into a long sob story, did he have some

21 health issues with his children?

22 A Yeah. He's got a handicapped kid and a wife in a

23 wheelchair. And somehow they wanted to screw him out of his

24 '18 and '19 bonuses.

25 MR. MORRIS: I move to strike, Your Honor. This is

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1 just -- this is so irrelevant, and it's so --

2 MR. RUKAVINA: And Mr. Morris opened the door. 

3 Mr. Morris opened the door.

4 MR. MORRIS: To what?

5 MR. RUKAVINA: To the $10 million of bonuses.

6 THE COURT: Okay. Well, that is not the family

7 situation of Mr. Leventon.

8 MR. RUKAVINA: I'm developing the answers as to why

9 he authorized those bonuses. Mr. Seery was allowed, Your

10 Honor, respectfully, to pontificate for a long time. This

11 gentleman needs to have the ability to tell his story. People

12 are coming to your court saying that he paid $10 million under

13 the table in some nefarious plot to basically have moles and

14 cheats at Highland. Even though Mr. Surgent is still there, I

15 remind you. So I'm giving the man a chance to explain why he

16 authorized that. I'm not allowed to lead, which is why I'm

17 asking it this way.

18 THE COURT: I'll allow a little more on this topic,

19 that's it.

20 BY MR. RUKAVINA:

21 Q Did other of these senior executives also have issues such

22 that they needed money?

23 A Isaac's was the most acute. And --

24 Q But did that form a part of your reasoning for authorizing

25 the payments?

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1 A Yeah, absolutely. But again, they were entitled to it. 

2 They worked hard, they had maximized value in the estate, and

3 then the professionals in the estate decided to take the

4 estate.

5 Q Okay. And you mentioned a solvency, and twice the

6 solvency of the estate and liquidity. What did you mean? And

7 if you can, explain because you were also asked about whether

8 Highland was making or losing money in '18 or '19. Explain

9 what you meant when Mr. Morris was asking you those questions.

10 A The value of Highland estate today is $650 million. And

11 it's sitting on 200 million in cash. The Highland estate

12 really has not changed that much in terms of value. It's

13 really just gone up over the last two years. Okay? There were

14 great efforts to hide and deceive the value of, and not

15 disclose the value of relevant assets. But the value today is

16 650.

17 Q What was the value in 2018, 2019, to the best of your

18 recollection?

19 A Probably a low of 500. Maybe 550.

20 Q What prompted the bankruptcy filing?

21 A We one arbitration award that we wanted to term out in

22 Delaware. We wanted to term it out for -- into a one- or 

23 two- year note. And then that's it. But we had --

24 Q Was there --

25 A We had a settlement with UBS four months, five months

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1 before we -- before we filed for $7 million and 10 million of

2 future business. And HarbourVest was never really a liability.

3 Q Did Highland file because of solvency issues?

4 A No.

5 Q Did Highland file because of liquidity issues?

6 A No. Well, liquidity issues, we -- we had -- we needed

7 time to raise the money for the -- we needed time to raise --

8 Q And --

9 A -- the money for the arbitration award.

10 Q And sir, you're aware of certain promissory notes that

11 various affiliates and you have with Highland? Are you

12 generally aware of those?

13 A Yes.

14 Q And prior to bankruptcy, on occasion would Highland come

15 to you and ask that some of those notes be prepaid for

16 liquidity purposes?

17 A Yes. Often. And we generally did. Yeah.

18 Q Was that the primary way that if Highland needed to have a

19 pinch in a liquidity issue, it would raise money?

20 A Yes. I think once we were down to 50, 60 million. At one

21 point they were as high as 90. I think I paid 9 million in

22 notes in '19. Yeah.

23 Q Well, the point being can you think of why someone would

24 say that these contracts and the amendments, the 5, 6, and 2.5

25 million were used to finance Highland if Highland would come to

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1 you to prepay notes?

2 A They were incentivized. I have no idea why they would say

3 that.

4 Q Mr. Seery testified earlier, you weren't here, he

5 testified about negotiations in the -- now we can't talk about

6 what happened in mediation. Are you with me there?

7 A Sure.

8 Q But he testified generally that the mediation led to a

9 couple deals with the creditors. But as far as you and your

10 businesses, it didn't really go well. Without talking about

11 what was going on at the mediation, did you participate in

12 negotiations on a global or plot (phonetic) plan?

13 A Sure.

14 Q Did you participate in those discussions with the

15 principle creditors, the committee members?

16 A I tried. But the committee members had sold their claims

17 without telling the Court. And we didn't find that out until

18 later.

19 Q So in fact, they did file at some point in time notices of

20 transfer of their claim. Right?

21 A About eight months later.

22 Q What do you know about those transfers?

23 MR. MORRIS: Your Honor, I guess, like, it's his

24 witness, he can ask. But I'm just going to object on relevance

25 grounds. What on Earth does anything that he's testified to

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1 for the last 20 minutes have to do with overpays?

2 MR. RUKAVINA: Your Honor, Mr. Morris and Mr. Seery

3 went on at length about how all these were contrived contracts

4 to suck value out of Highland from their creditors. If you

5 look at their proposed findings, they're asking you for

6 findings on that, extraneous findings that will be used in

7 collateral litigation by the way.

8 So I think that just as that came in, even though I

9 objected on narrative, I objected on relevance, I think he has

10 the right for me to put on some evidence to rebut that. Or if

11 Mr. Morris agrees that all of this is irrelevant, then

12 Mr. Seery's testimony should be struck in toto.

13 MR. MORRIS: No, number one. Number two, I have

14 nothing to do with any litigation that's being prosecuted by

15 Mr. Kirschner. Let me make that very clear to the Court. I

16 don't communicate with them about what I do. They don't

17 communicate with me about what they do. Like, I don't know

18 what he's doing, but this is a waste of time.

19 THE COURT: Okay. Well, I think some of it has been

20 arguably responsive to Seery testimony. But things like the

21 claimants sold their claims and didn't disclose it for eight

22 months, I mean, clearly we're going down irrelevant trails

23 there.

24 MR. RUKAVINA: Okay. Well, we'll wrap it up.

25 THE COURT: Okay. 

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1 BY MR. RUKAVINA:

2 Q You mentioned that the assets of Highland are 600 million

3 today, including 200 mil in cash. What's the debt against

4 Highland today?

5 A There's just the claims. There's --

6 Q How much? How much in total?

7 A There's 260 million in class eight that were projected to

8 get 60 cents.

9 Q Just tell me how much in total.

10 A And there's another 85 of class nine. So it was about 370

11 of claims. There's 650 advance, there's 200 cash on the

12 balance sheet today. All the claims traded to Fairlawn and

13 Stonehill (phonetic) for $155 million. They were happy to buy

14 them because it was representative they were going to get

15 three --

16 Q We'll stop --

17 A -- plus others.

18 Q We'll stop there.

19 A Yes.

20 Q We'll stop there.

21 A Okay. 

22 Q We'll stop right there. But the point is that to your

23 understanding, there's more than enough assets at Highland

24 today to pay all creditors in full?

25 A Yes. And by the way -- 

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1 Q Let's talk --

2 A -- Highland could have paid the 150 million, retired all

3 the claims, and given us the keys.

4 Q I understand.

5 A Seery gave the claims to his friends that he used to work

6 for and with --

7 MR. MORRIS: You know, Your Honor, I'm just moving to

8 strike. This is ridiculous.

9 THE COURT: Sustained.

10 THE WITNESS: It's all going to be in the trustee

11 letter.

12 BY MR. RUKAVINA:

13 Q Mr. Dondero, it will all come up --

14 A It's what we were --

15 Q Hold on. Hold on.

16 A We're doing every recusal --

17 Q Please stop. Please stop.

18 A We're doing every --

19 Q Mr. Dondero, please stop.

20 A Okay. 

21 Q All this will come out --

22 A Okay. 

23 MR. RUKAVINA: -- into the light at the appropriate

24 time. Thank you, Your Honor. I'll pass the witness.

25 THE COURT: Okay. Redirect?

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Dondero - Redirect 73

1 REDIRECT EXAMINATION

2 BY MR. MORRIS:

3 Q You're really angry, aren't you? You're really, really

4 angry, aren't you?

5 A No. I'm trying to weigh the what should have been a

6 normal bankruptcy and it's turned into a financial mugging. We

7 had 50 million. Your firm was going to make 100 million.

8 Q I work pretty hard.

9 A Not enough.

10 MR. RUKAVINA: This is ridiculous, Your Honor. He's

11 taunting my witness. I mean, you're really, really angry. 

12 This is badgering, Your Honor. This has gone the point of

13 professionalism.

14 THE COURT: Okay. Sustained.

15 BY MR. MORRIS:

16 Q Frank Waterhouse told you about the overpayments?

17 A That's my --

18 Q That's how you learned. Right?

19 A That's my recollection.

20 Q Frank told you. Right?

21 A That's my recollection.

22 Q And when did he tell you?

23 A November, December.

24 Q He actually told you after December 8th, 2020. Correct?

25 A That's my recollection, yes.

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Dondero - Redirect 74

1 Q Okay. Take a look in the Advisor's binder, Exhibit Q.

2 A Exhibit which one?

3 Q Q. Do you see that's an email from Dave Klos to Frank

4 Waterhouse?

5 A Yes.

6 Q And attached to it is the analysis that purports to show

7 the overpayment?

8 A Yes.

9 Q So would you agree with me that you learned from

10 Mr. Waterhouse about the overpayment on or after

11 December 8th, 2020?

12 A No.

13 Q No? Even though Mr. Waterhouse is just receiving the

14 analysis as of this time?

15 A You're assuming this is the first analysis that was done,

16 and this is the first time Frank knew. I don't know those

17 things. My recollection is November, December.

18 Q So it's possible that it was on or after December 8th. 

19 It's at least possible, right, that it's December.

20 A I don't want to speculate.

21 Q What did he tell you?

22 A That we had been over billed for people that no longer

23 worked at the company.

24 Q Did he tell you when he learned that these people no

25 longer worked at the company?

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Dondero - Redirect 75

1 A No.

2 Q Did he share that analysis with you?

3 A No. Not that I recall. I don't remember seeing that

4 before.

5 Q Had you ever learned of this analysis?

6 A I know that detailed analyses were prepared. I just -- I

7 just don't recall receiving that one.

8 Q Did you speak with Mr. Waterhouse on the phone or in

9 person, or by email? How did he tell you? Do you recall?

10 A I don't remember.

11 Q Do you recall if anybody else was present when he told

12 you?

13 A I don't recall.

14 Q And is it your understanding that the basis for the

15 overpayment is that the Advisors were being charged for

16 employees who were no longer on the list that was attached to

17 the agreement?

18 A Yeah, I think that was the bulk of it. And then probably

19 percentages changed also.

20 Q Okay. Do you know how many people on the list were

21 terminated before the petition date?

22 A No.

23 Q Do you know -- so you were in control of both Highland and

24 the Advisors from January 1st, 2018 until the end of 2019. 

25 Correct?

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Dondero - Redirect 76

1 A Yes.

2 Q And Mr. Waterhouse was responsible during that period for

3 overseeing the administration of the Advisors' contracts. Is

4 that right?

5 A Yes.

6 Q And it's your -- the reason why you're so mad is because

7 the Advisors were paying for employees who were on that list

8 who had been terminated. Is that right?

9 A No. I'm mad because Seery's trying to steal the company

10 for his friends.

11 Q Listen. You're mad because -- I just want to focus on the

12 overpayments, okay? On the overpayments, you're mad because

13 Highland has charged the Advisors for employees that you

14 believe they shouldn't be doing because they've been

15 terminated. Right?

16 A I answered this question already. I was potentially angry

17 with the overpayments because the debtor decided not to pay

18 bonuses for people for '18 and '19, decided not to pay any

19 bonuses for senior people, and then rough handled and sued

20 hardworking employees that did most of your work out the door.

21 Q Can you open your exhibit binder please, sir, to Exhibit

22 14? And go to Page 12 of 18.

23 A Page 12 of 18?

24 Q Yes.

25 A Exhibit 18?

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Dondero - Redirect 77

1 Q It's Exhibit 14, Page 12 of 18.

2 A Exhibit 14. Page 12, yes.

3 Q Okay. Do you see there's a list of people there, and it

4 continues to the top of the next page with Scott Wilson?

5 A Sure.

6 Q Okay. Are you familiar with the concept of dual

7 employees?

8 A Yes.

9 Q And do you understand that the dual employees were listed

10 on the exhibits attached to the payroll reimbursement

11 agreement?

12 A If that's what it says. I'm not -- I know what dual

13 employees are. I don't know how this contract worked.

14 Q Okay. Do you see -- so you don't know how the contract

15 worked? But yet you think that there's overpayments. Right?

16 A I know generally how it works. I don't know specifically

17 on dual employees. But there are people who are allocated and

18 it's based on generally a percentage of time.

19 Q Okay. So I just want to really get your understanding and

20 to the heart of your allegation that there's an overpayment

21 here. Do you see that the interrogatory asked, and I'll

22 represent to you that these are interrogatories that were

23 answered by the Advisors. Okay?

24 We asked identify the date you believe each form of dual

25 employee identified on the exhibits to the Payroll

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Dondero - Redirect 78

1 Reimbursement Agreements departed the debtor. And do you see

2 that they've listed each of the dual employees with the dates

3 of departure?

4 A Yes.

5 Q Okay. And do you see for example that -- I want to pick

6 the right one here -- Michael Phillips (phonetic). Do you see

7 Michael Phillips was terminated in February 20, 2018?

8 A I don't know if he was terminated. But yeah, that's the

9 date. Right?

10 Q That's the date he left. Right?

11 A Yes.

12 Q And that's the date the Advisors admit knowing that he

13 left. Right?

14 A It appears so, yes.

15 Q And if you look at interrogatory number four on the next

16 page, it says the Advisors were generally aware of the

17 employee's terminations and departures as they occurred. Okay? 

18 So would you agree with me that the Advisors were generally

19 aware of Michael Phillips' departure on February 20th, 2018?

20 A Yes.

21 Q And is it your testimony that if the Advisors paid for

22 Mr. Phillips in March of 2018 there was an overpayment? Is

23 that the overpayment you're talking about that they shouldn't

24 have paid for Mr. Phillips in March because he had been

25 terminated?

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Dondero - Redirect 79

1 A I assume this is the last day that they were getting paid. 

2 Right? So I don't want to quibble on whether this was their

3 exit date and they got paid for severance or something else. 

4 But I think what the overpayment is is that most of these

5 people were continuing to be factored into the number nine,

6 ten, twelve months later.

7 Q They were factored into the number for every single month

8 in 2018 and 2019 when you were in control of the entities. Are

9 you aware of that?

10 A But then there should have been a true-up.

11 Q And Frank Waterhouse was responsible for that. Correct?

12 A Him and his group, yeah. There should have been a true13 up. Correct.

14 Q And do you know if a true-up was required by the contract?

15 A There always is in living, breathing contracts.

16 Q Let's turn to the contract and you point me to the

17 provision where you believe that there's an obligation --

18 MR. RUKAVINA: Your Honor, this is nonsense. He's

19 said that he's never read these contracts, that he has no

20 personal knowledge. He's badgering and it leads to legal

21 conclusions.

22 MR. MORRIS: Your Honor, he is testifying that he

23 believes that there is a contractual obligation to do a true24 up. If he wants to say that I'm not aware of anything but I

25 just assumed that one would happen, I'm happy to live with

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Dondero - Redirect 80

1 that. If that's --

2 THE WITNESS: I'm not aware, but I assume there would

3 be a true-up.

4 BY MR. MORRIS:

5 Q Okay. So you assumed that there would be a true-up. 

6 Right?

7 A Yes.

8 Q Did anybody ever tell you there was a true-up?

9 A I would assume there would be a true-up. No one told me

10 until November, December of '20.

11 Q Okay. Did you ever ask anybody at the end of 2018 if

12 there was a true-up?

13 A No, I never asked.

14 Q Did anybody tell you at the end of 2018 that there was a

15 true-up?

16 A I don't know if it was material. It might have been just

17 this one kid that left. I have no idea.

18 Q We can look at the whole list if you want to do that. 

19 Okay?

20 A No. But I don't know. And no one told me there was a

21 true-up.

22 Q That's my only question.

23 A Or no one told me there wasn't, either. I'm not aware.

24 Q Okay. So you didn't ask if there was a true-up, and

25 nobody told you there was a true-up at the end of 2018. 

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Dondero - Redirect 81

1 Correct?

2 A Correct.

3 Q You didn't ask if there was a true-up, and nobody told you

4 that there was a true-up at the end of 2019. Correct?

5 A I don't know.

6 Q Okay. In fact, you have no knowledge that there was ever

7 a true-up of any kind done with respect to the payroll

8 reimbursement agreements. Correct?

9 A I don't know. I don't know if it was material. You guys

10 were both implying a few minutes ago that there was a two and a

11 half million dollar true-up one year, an additional payment for

12 something.

13 Q Let --

14 A So, but I don't know the specifics. All I know is when

15 they alerted me at the end of 2020 that oh my God, we've been

16 overpaying, it's not reconciled, they're not cutting back the

17 payment, they had an expectation in the way they told me such

18 that I'd stop paying because we were paying over. They had an

19 expectation that there was some kind of true-up or they

20 wouldn't have told it to me to get a stop paying this

21 immediately out of me --

22 Q Who's they?

23 A -- which is what happened.

24 Q Who's they?

25 A Frank.

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Norris - Direct 82

1 Q Frank is they?

2 A Yeah, Frank is they. Yeah.

3 Q And did Frank tell you that the way that the methodology

4 for his decision that there was an overpayment was to say that

5 we were paying for employees who were no longer at Highland?

6 A We were overpaying based on the contract, based on largely

7 people weren't there. Now whether or not we were also paying

8 for people who the percentage was wrong, I don't know. But he

9 -- he expressed it with Umbridge (phonetic), and with Awe

10 (phonetic). Umbridge and Awe and that's where --

11 Q Umbridge --

12 A -- that's where we stopped paying.

13 Q Okay. And -- but is it fair to say at least your

14 understanding is that the bulk of the claim is that you were

15 paying for employees who were no longer employed at Highland? 

16 Is that basically it?

17 A My understanding is largely that.

18 MR. MORRIS: Okay. No further questions, Your Honor.

19 THE COURT: Recross?

20 MR. RUKAVINA: I have no follow up, Your Honor.

21 THE COURT: All right. You're excused from the

22 witness stand, Mr. Dondero.

23 THE WITNESS: Thank you.

24 (Witness excused)

25 THE COURT: All right. Shall we take a break and

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Norris - Direct 83

1 then --

2 MR. MORRIS: Yes, Your Honor. Yes.

3 THE COURT: Let's take a ten-minute break, please.

4 (Recess at 2:58 p.m./Reconvened at 3:09 p.m.)

5 THE CLERK: All rise. 

6 THE COURT: Please be seated. We're back on the

7 record in Highland. 

8 Mr. Morris, what do you have?

9 MR. MORRIS: Last witness. 

10 THE COURT: Okay. 

11 MR. MORRIS: Mr. Norris. I just need a second to

12 find my questions. 

13 THE COURT: Okay, we'll go ahead and get Mr. Norris

14 up here and sworn in. 

15 Please raise your right hand. 

16 DUSTIN NORRIS, PLAINTIFF'S WITNESS, SWORN

17 THE COURT: All right. Please be seated. 

18 DIRECT EXAMINATION

19 BY MR. MORRIS:

20 Q Good afternoon, Mr. Norris.

21 A Good afternoon. 

22 Q You've been here for the last couple of days. Right?

23 A I have.

24 Q I hope this is a little bit more low-key than the last

25 witness.

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Norris - Direct 84

1 A I hope so, too.

2 Q Okay. I don't expect this examination to be particularly

3 lengthy. So I would just ask you to listen carefully to my

4 questions. Do the best you can to -- to answer them. 

5 From 2000 and -- are you -- are you currently employed by

6 either of the Advisors?

7 A I'm employed by NexPoint Advisors.

8 Q And what's your title today?

9 A The title of the -- my operating title is Head of

10 Distribution and Chief Product Strategist.

11 Q Okay. And do you have a roll with HCMFA?

12 A I am an officer of HCMFA.

13 Q And do you have a title?

14 A Yes. Executive Vice-President.

15 Q Okay. And were you affiliated with those two entities as

16 of January 1st, 2018?

17 A I was.

18 Q And in what capacity did you serve for NexPoint as of

19 January 1st, 2018?

20 A The same capacity as I serve today.

21 Q And did you serve in the same capacity for HCMFA as of

22 that time?

23 A I believe so, yes.

24 Q Okay. So your role hasn't changed; your titles haven't

25 changed in the three or four years since 2018. Is that fair? 

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Norris - Direct 85

1 A I don't believe so.

2 Q Okay. You didn't -- you've listened to the testimony in

3 this trial so far?

4 A I have.

5 Q Okay. I'm just asking that question to try to speed this

6 up a little bit. 

7 You're aware that in late 2017 through May of 2018, there

8 were a number of new contracts and changes made in the way that

9 the Advisors compensated Highland for services. Is that right?

10 A Yes. I'm aware.

11 Q Okay. But you didn't personally participate in any of the

12 discussions during that time period about the changes that were

13 made and the methods and amounts that were going to be paid for

14 services. Fair?

15 A No. I did not participate.

16 Q Okay. And you played no role in formulating, drafting, or

17 administering the sub-advisory agreements that were prepared

18 for NexPoint and HCMFA in March of 2018. Correct?

19 A Correct.

20 Q In fact, were you even aware that sub-advisory agreements

21 were prepared for those two entities at that time?

22 A I don't remember being involved or having any -- any

23 awareness.

24 Q Okay. 

25 A At that time.

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Norris - Direct 86

1 Q Okay. And you played no role in the replacement of those

2 sub-advisory agreements with the payroll reimbursement

3 agreements as of May 1st, 2018. Right?

4 A I -- I played no role.

5 Q So you didn't -- you didn't participate in discussions

6 about what that document was intended to do. Correct?

7 A That's correct.

8 Q And you didn't participate in any review of the language

9 that was going to be used in the document. Correct?

10 A Correct.

11 Q And you didn't review Exhibit -- the Exhibits A that I

12 think you're familiar with, that were attached to those

13 agreements. Correct?

14 A Not at that time.

15 Q And you had no basis of knowing whether the allocations

16 that were used as of May 28th -- as of January 1st 2018 were

17 accurate in any way. Right?

18 A Well, based on my working knowledge and my interaction

19 with employees at HCMLP and the Advisors, I can see the

20 allocations and have assumption on the reasonableness. But I

21 was not involved at that time in assessing the reasonableness. 

22 Q When did you learn that Exhibit -- Exhibits A existed?

23 A Over -- I don't remember exactly.

24 Q Do you remember what year it was?

25 A Probably '19 or '20.

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Norris - Direct 87

1 Q Okay. And do you know -- kind of --

2 A Maybe '18. It was sometime after it was drafted.

3 Q Okay. 

4 A And signed.

5 Q All right. So we've used the definition called "relevant

6 time period" to mean from January 1st, 2018 until the end of

7 2020. Okay. Is that fair?

8 A Yes.

9 Q Okay. Do you remember at all where within the relevant

10 time period you first learned that these Exhibit As existed?

11 A I don't remember the exact time, no.

12 Q Do you remember if it was before or after the bankruptcy?

13 A I don't remember.

14 Q Do you remember if it was before or after the Independent

15 Board was appointed?

16 A I don't remember.

17 Q Okay. Did you form an understanding at some point -- no,

18 withdrawn. We'll get there. 

19 So you didn't participate in any discussions at any time

20 in the spring of 2018 about what the Payroll Reimbursement

21 Agreements were intended to accomplish. Correct? 

22 A I did not.

23 Q And you didn't play -- are you aware that NexPoint entered

24 into a new Shared Services Agreement as of January 1st, 2018?

25 A At that time was I aware --

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Norris - Direct 88

1 Q Yes.

2 A -- or am I aware now?

3 Q Were you aware at the time?

4 A I was not.

5 Q And you didn't play any role in the drafting, in the

6 formulation, or the administration of the NexPoint Shared

7 Services Agreement. Correct?

8 A No, I did not.

9 Q And even though it wasn't signed at that time, you played

10 no role in the drafting or the formulation or the

11 administration of the HCMFA Shared Services Agreement. 

12 Correct?

13 A That's correct.

14 Q Okay. Do you know now that there were amendments to the

15 Payroll Reimbursement Agreements at the end of 2018?

16 A I do.

17 Q You didn't play any role in drafting, or administering, or

18 making any decisions in connection with those amendments. 

19 Correct?

20 A No. I have no personal knowledge.

21 Q And so you have no personal knowledge as to how those

22 amounts were calculated. Correct?

23 A Correct.

24 Q You have no personal knowledge that any true-up was done

25 that formed the basis of the numbers in those amendments. 

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Norris - Direct 89

1 Correct?

2 A At that time, no. But I was told there was a true-up that

3 was done.

4 Q Okay. But you have no personal knowledge that a true-up

5 was done. Right? Somebody told you that?

6 A Somebody told me there was a true-up, yes.

7 Q And who told you that?

8 A Mr. Klos.

9 Q And when did Mr. Klos tell you that?

10 A December -- December 2020.

11 Q So you were speaking with Mr. Klos --

12 A Uh-huh.

13 Q -- in December 2020. And it's your testimony that he said

14 that the amendments that were done in 2018 were the result of a

15 true-up?

16 A He didn't tell me about the amendments. He told me that a

17 true-up had been done in 2018, but we didn't discuss the

18 specific amendments.

19 Q Okay. Do you have an understanding of what a true-up is

20 in that context?

21 A I do.

22 Q And what's your understanding of what a true-up is?

23 A Well, based on the conversation we were having, which was

24 around the actual payments and the employees that were on

25 Schedule A, all right, we saw the emails earlier that Mr. --

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Norris - Direct 90

1 Mr. Klos discussed. 

2 We were talking about those overpayments. And as we were

3 -- you know, Mr. Sauter and I were trying to discover what had

4 actually happened. He told us there was a true-up done in

5 2018. There was no similar true-up done in 2019 or 2020

6 because of the bankruptcy filing in October 2019.

7 Q Okay. Are you aware that as of the date of the

8 amendments, I think the number is nine of the employees, the

9 dual employees on the Exhibit A were terminated?

10 A I'm aware that there are employees that as of that date

11 that have been terminated.

12 Q Can you tell Judge Jernigan why you believe that with the

13 loss of approximately a third of the dual employees why you

14 think a true-up would result not in the diminution in the

15 amounts owed, but an increase by $2.5 million in amounts owed;

16 how does that make sense?

17 A Yeah, I don't have any personal knowledge, as I mentioned

18 on what the calculations, how they were done, what went into

19 it. I would just be speculating if I said here is how or why.

20 I know Mr. Klos testified that percentages aren't of time spent

21 aren't perfect. 

22 There could be compensation. Right. That one person

23 received due to Fund performance. Again, I'm -- I would be

24 speculating. I don't know. 

25 Q So it's possible that even though employees left, that

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1 Highland would be entitled to even more money if the people who

2 remained pick up the slack. Is that fair? And got paid more. 

3 That's possible. Right? That's what he told you.

4 A Do you want to repeat the question? 

5 Q You want to repeat the question?

6 A He told you, if I understand you correctly, that even

7 though almost a third of the employees left, Highland was still

8 entitled to get millions of dollars more money because the

9 services that had been provided by those dual employees, were

10 just picked up by other people?

11 A No. 

12 He didn't tell me that. He said a true-up was done. He did

13 say it resulted in a slight payment to Highland. But he didn't

14 go into any of the calculations or the why. 

15 Q Okay. But you do understand that more than -- that

16 approximately a third of the employees had been terminated

17 before this -- these amendments were entered into. Correct?

18 A I'd have to see the specific names, but there were a

19 number of them had been terminated, yes.

20 Q Okay. And even though the number of employees went down,

21 the payments when up by $2.5 million. Correct?

22 A I have no reason to question the amendments or the wording

23 in the amendments. 

24 Q Okay. You had access to headcount information at all

25 times. Correct?

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1 A Not at all times, but I would receive a monthly report

2 that's been shown in the emails.

3 Q And we looked at that, and you got that headcount report

4 every single month for the three year period that we're talking

5 about. Right?

6 A I believe so. And I don't know for sure that I -- when I

7 was added, I was added at some point over the last few years,

8 but I did receive it.

9 Q We're certainly not going to look at every one of them.

10 Let's see if --

11 A If you go to January 2018, that's probably the quickest

12 way to rule it out. Because I never got removed once I was

13 added.

14 MR. MORRIS: Just one moment, Your Honor. I

15 apologize. 

16 THE WITNESS: Is there an exhibit I should be looking

17 at?

18 MR. MORRIS: Not yet.

19 THE WITNESS: Okay.

20 BY MR. MORRIS: 

21 Q So if you can go to Exhibit 88. Do you see that this is

22 the headcount report that was delivered on February 1st for the

23 month of January 2018?

24 A It is.

25 Q And your name is on it. Right?

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1 A It is.

2 Q And so your understanding is that for every month covering

3 the headcount report, from January 2018 until the end of 2020,

4 those are headcount reports that would have been delivered to

5 you. Right?

6 A That's correct.

7 Q So you're not sure when you learned of the existence of

8 Exhibit As, but whenever that was, you could have figured out

9 yourself, who on Exhibit A was no longer employed at Highland. 

10 Right?

11 A Absolutely. 

12 And -- but the key assumption was that we were reimbursing

13 for only employees that were still employed. And that was

14 always my expectation, once I learned about Exhibit A.

15 Q Did you talk about that with Frank?

16 A What part?

17 Q Did you tell Frank -- when did you develop that

18 expectation? In December 2020?

19 A No. 

20 At some point between the actual creation of the

21 agreement, when I first saw it, and understood it was a payroll

22 reimbursement agreement. And there was an exhibit that had

23 percentage allocation of employees that were one, serving as

24 dual employees, and two, providing investment advisory

25 services. That was the actual purpose of the agreement, right,

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1 was for reimbursement.

2 Q Did you ask Frank, Frank, how come you kept paying the

3 money when all these people left.

4 A I did.

5 Q What did he say?

6 A He told me there was nothing he could do because of the

7 automatic stay. He and Dave Klos were in a meeting. That was

8 the first time I had heard the word automatic stay.

9 Q Uh-huh.

10 A And that he had brought it. They -- they had

11 calculations. And that he had brought it to the attention of

12 DSI. And the told him -- and he said inside and outside

13 counsel. And there was nothing he could do because of the

14 automatic stay.

15 Q He did not say outside counsel.

16 A He did. Well, I should say in his December -- in our

17 December meeting he said counsel. We talked again over

18 multiple times. And at the end of January on a call, he said

19 inside and outside counsel. 

20 Q January of 2021?

21 A Yes, I --

22 Q Did you hear him testify yesterday that he never told me

23 or anybody in my firm?

24 A I did, yes.

25 Q So -- so maybe you misheard him?

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1 A I may have misheard him, but I --

2 Q Okay.

3 A -- I -- I did take -- after that call I did take notes. 

4 And I wrote down inside and outside counsel. I could have mis5 remembered. But I had written that down. 

6 Q Did you ask him why he didn't make any change from January

7 18 until the petition date?

8 A January 18th of which --

9 Q Let me restate the question. Did you say hey, Frank,

10 okay, you've given me your answer after DSI comes along. But

11 what about the two years before that? Why didn't you make any

12 adjustments for the two years before that, when nobody ever

13 heard of Fred Caruso or Jim Seery. 

14 A Yeah. 

15 They told me there was a true-up done in December of 2018. 

16 And then I actually was trying to figure out, make any sense of

17 the fact that there were employees had been -- many of them,

18 like 20 employees that were no longer there. And so discussing

19 this with Dave and Frank, I -- I realized and learned from them

20 they were in a tough situation. Why didn't they do anything. 

21 Well, when they told me, it made sense. They said December

22 2018 there was an annual true-up. 

23 Fast forward to the bankruptcy filing in October 2019 and

24 to this point I wasn't really involved in all of the bankruptcy

25 time lines or process. I'm separately running my business. So

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1 they tell me that okay, October it was filed. There was put in

2 place something they couldn't change in the agreements. 

3 Because of the automatic stay. 

4 Again, I'm not an attorney. It's the first time I'm

5 learning of the bankruptcy law. But in 2019 there was no true6 up done. Nor in 2020. Right. So there was something done,

7 and it would have been done at the end of '19 and '20, had

8 there not been a bankruptcy in place. 

9 So -- and to me -- and the reason I remember that

10 specifically is a light bulb went off to me and said that makes

11 sense. Okay. They were trying to do what was right. They

12 understood it. They would have made a true-up or an

13 adjustment. Whatever you want to call it for the proper people

14 that were serving under these agreement.

15 But they were told that they couldn't. And at that point

16 we had to, you know, go our way of actually filing an admin

17 claim for that.

18 Q Did you hear Frank Waterhouse testify yesterday that he's

19 not aware of any true-up?

20 A I don't remember specifically. But it was David Klos that

21 told me about the true-up. Told me and Mr. Sauter.

22 Q Did you hear him testify yesterday that there was no

23 analysis of any kind done to support the $2.5 million?

24 A I don't know if he said he didn't -- there wasn't an

25 analysis, or if he said he didn't recall. Because I know a lot

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1 during that he didn't recall.

2 Q He actually said that Jim Dondero said the number. Does

3 that refresh your recollection?

4 MR. RUKAVINA: Your Honor. 

5 THE WITNESS: I think that was Mr. Klos.

6 MR. RUKAVINA: Your Honor, I'm --

7 BY MR. MORRIS: 

8 Q That -- that is who I'm talking about. 

9 A You said Mr. Waterhouse.

10 Q Oh, I apologize.

11 A Did he not?

12 MR. RUKAVINA: Yes, he did. 

13 THE WITNESS: Okay, sorry.

14 MR. MORRIS: Okay. Thank you.

15 THE COURT: Let's ask again and make sure we're

16 clear.

17 MR. MORRIS: Sure.

18 BY MR. MORRIS: 

19 Q Okay, so it's your testimony that -- was it just Mr. Klos

20 or was it Mr. Klos and Mr. Waterhouse who told you that there

21 was a true-up at the end of 2018?

22 A Mr. -- it came from Mr. Klos. I believe Mr. Waterhouse

23 was there. Mr. Sauter, as well was told, along with me. By

24 Mr. Klos.

25 Q Okay. You did a damage calculation for purposes of this

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1 case. Right?

2 A I did.

3 Q And what you did is you took the amounts paid and reduced

4 it by --

5 MR. RUKAVINA: Your Honor, let me just object now. 

6 Are you going to agree to the admission of the damage

7 calculation?

8 MR. MORRIS: Sure, I'll agree.

9 MR. RUKAVINA: Okay. Your Honor, that's going to be

10 -- Thomas is that H and I? It is what it is. Your Honor, it's

11 Exhibit G is the PDF printout. That's the one we had the

12 stipulation on yesterday about the math. Is that right?

13 MR. MORRIS: Yes. 

14 MR. RUKAVINA: And then the electronic version is H. 

15 Is H. So I'll move to admit G and H. 

16 THE COURT: And you agree to it?

17 MR. MORRIS: Yeah.

18 THE COURT: Okay, they're admitted.

19 (Defendants' Exhibits G and H admitted into evidence.) 

20 BY MR. MORRIS: 

21 Q There's no expertise. There's no special skill that you

22 brought to that analysis. Right?

23 A It's simple math.

24 Q It's simple math. Right? And I think that's what you

25 told me in the deposition. All you did was you took the money

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1 that was paid, and you reduced it by the compensation for the

2 dual employees who were terminated. Fair?

3 A I -- I took month by month the employees that were

4 employed.

5 Q Uh-huh.

6 A And their total compensation multiplied by the allocation

7 percentages. And as employees dropped off, so did the

8 compensation.

9 Q Okay. And once --

10 A Or the reimbursement, I would say.

11 Q And once you had the data, how long does it take you to

12 run them all?

13 A If I -- say if I wanted to change assumptions?

14 Q Sure.

15 A You could do it fairly easily if you know Excel.

16 Q Five minutes?

17 A To make sure that it's accurate, maybe longer. I mean it

18 --

19 Q Maybe ten.

20 A Not -- again, the math part is easy.

21 Q Okay.

22 A It's --

23 Q And so is there any reason that anybody on behalf of the

24 advisors, couldn't have done that analysis on February 1st,

25 2018 to take into account the employee who left in January of

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1 2018? Any reason at all that they couldn't have done it then?

2 A We had relied and outsourced that to Highland. 

3 Q Okay. 

4 Okay. And the person who would have overseen what you

5 assumed would have happened -- right? Because you assumed that

6 Highland was making these changes. Right? 

7 That's your testimony. Your testimony is that you sat

8 back for three years and you assumed Highland was only charging

9 what you thought they should charge. Right?

10 A Yeah. 

11 And a key component of that -- if there's payroll data

12 involved, we didn't have access to that. There was a very

13 limited number of people. Highland employees only. That's an

14 important component of this. So yeah, we had relied on

15 Highland. We didn't have an accounting function. 

16 Why was I -- I say it's simple math. I had to create the

17 spreadsheet. I'm a CPA. I worked at a big four accounting

18 firm. I worked in Highland's back office when I started as a

19 fund accountant. I managed. I was a senior accounting

20 manager.

21 Q You have-huh.

22 A So -- so but that was -- ended in 2013. So there's a

23 number of Excel skills. We didn't maintain that. I shifted

24 roles. Focused more on the growth and marketing. But we -- we

25 outsourced those functions to Highland.

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1 Q How long did it take you to create the model? A day or

2 two? Less? Once you had the data. 

3 A Yeah, it was just a couple few days.

4 Q So why didn't the advisors just create a contact that said 

5 every time a dual employee left, let's just reduce the amount

6 that's paid by their compensation, in real time? You could

7 have created the model, and in five minutes, instead of doing

8 this true-up at the end of the year, why didn't they do that?

9 A The people that helped create the contract were Highland

10 employees. The ones that knew about the calculations. The

11 ones that had access to the data. We didn't have a separate

12 team saying well, let's shadow everything that Highland is

13 doing, for contracts. That is what they were doing. That was

14 their function.

15 Q And they all reported to Frank Waterhouse. Correct?

16 A Yes.

17 Q Can you identify one person who you assumed would be

18 administering the contract, who didn't report to Frank

19 Waterhouse?

20 A No.

21 Q Thank you. 

22 MR. MORRIS: I have no further questions, Your Honor.

23 THE COURT: All right. Pass the witness. 

24 CROSS EXAMINATION

25 BY MR. RUKAVINA: 

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1 Q This might be a bit, so if you need some water, let me

2 know.

3 A I got -- I still have some. Thank you.

4 Q So I think Mr. Morris has gone through some of these

5 issues. But do tell the Judge, please about your educational

6 background. On a high level.

7 A Yeah, I have a master's degree in accounting from Brigham

8 Young University and a bachelor's degree in accounting and I

9 have a CPA license.

10 Q Okay. Any other professional licenses?

11 A Yeah, I have a FINRA Series 7, 63 and 24 licenses.

12 Q How old are you?

13 A 38 years old.

14 Q Have you ever been disciplined professionally with respect

15 to any of these licenses?

16 A Never.

17 Q Okay. Are you a family man?

18 A I am.

19 Q Are you a religious man?

20 A I am.

21 Q Do you swear?

22 A I don't.

23 Q Do you drink?

24 A I never have.

25 Q Any trouble with the law?

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1 A No.

2 Q When did you first join Highland?

3 A 2010, June of 2010.

4 Q Before that you mentioned you were with some other

5 accounting --

6 A I was at Deloitte and Touche.

7 Q What did you do there?

8 A I was an auditor, an outside auditor, auditing large

9 corporations.

10 Q And when you joined Highland, what was your role?

11 A I was a fund accountant in the Hedge Fund and Private

12 Equity Fund Accounting Group.

13 Q And tell me about your progression at Highland and how you

14 ended up coming to the Advisors and when? Again, at a high

15 level.

16 A Yeah. So when I joined Highland, I started out overseeing

17 accounting and operations, cash management for several of the

18 large hedge funds, private equity funds, and separate accounts. 

19 Worked there for two years, got great training, and was given

20 the opportunity to then manage for our retail complex, the

21 accounting and operations team.

22 So I moved employers to Highland Capital Management Fund

23 Advisors around July of 2012. At that time Highland HCMLP, the

24 hedge fund side of the business or institutional had a separate

25 accounting and operations team than the retail side. And so I

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1 moved over and I was managing accounting, operations, trade

2 settlement, cash management, as well as the broader accounting

3 functions for about 22 mutual fund and closed-end funds. 

4 I did that for a little while and then transitioned into

5 what we call product strategy or product development. So

6 developing new funds, merging funds, acquiring funds, launching

7 training sales people and, at that time, somewhat transitioned

8 the services from our retail funds to the Highland's back

9 office, merging those in. And my employees moved over, and

10 became employed by HCMLP, as well. 

11 So, yeah, I have had experience in several different parts

12 of the business. Then from there I -- I worked on our 

13 closed-end funds and continued to manage, became director of

14 product strategy, and then chief product strategist, and then

15 took over our sales team and became the president or

16 broker/dealer managing all of the marketing and relationship

17 management --

18 Q This is still while at Highland?

19 A -- inside sales. This is all at Highland Capital

20 Management Fund Advisors/NexPoint.

21 Q Okay. 

22 A From 2012 until the present day.

23 Q Okay. And in those ten years, I take it, you've

24 interacted with Highland Capital Management LLP, repeatedly?

25 A Yes, extensive.

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1 Q At a high level in '18, '19, '20, what did the debtor do? 

2 What was the debtor's business?

3 A '18, '19 and '20? The debtor's business?

4 Q Yes.

5 A Largely -- obviously, they had a services business where

6 they provided shared services. But that was a function of,

7 they were providing it for various advisory entities. They

8 managed assets, largely credit, private equity, some at-public

9 equities and included providing services to our advisors.

10 Q And in that same time frame, '18, '19 and '20, what did

11 the advisors do? I mean what was their core business and did

12 it change at all over that time?

13 A Yeah.

14 So when I moved over to the advisors in 2012, we were

15 largely focused on public equities and credit, which was a

16 specialty of Highland. And so we relied heavily on those

17 services from a back-office and front-office perspective over

18 the coming years.

19 But we started -- in -- in 2012 our advisors had almost no

20 real estate assets. And as we shifted from 2012 into '15 to

21 '18, the real estate business grew significantly. And so we

22 just started developing a real estate business in-house. Our

23 investment professionals.

24 And if you look at the assets today, approximately maybe

25 three-quarters are real estate assets. Where less than a

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1 quarter are credit and equity and private equity.

2 Q And on that point, you heard Mr. Powell, and we talked

3 about the retail board some this morning, the $3 billion. Did

4 you hear all that?

5 A I did.

6 Q Generally, what percentage of either the advisor's

7 business or assets under management, whatever the appropriate

8 metric is --

9 A Uh-huh.

10 Q -- you tell us. How much of that whole pie do those

11 retail funds represent?

12 A Yeah.

13 So we today, NexPoint Advisors and HCMFA manage

14 approximately $11 billion in assets. And the retail funds as

15 Ethan testified are approximately 3 billion. So less than 30

16 percent.

17 Q Would that also be fair to say that that's about how much

18 of your internal time -- the Advisors time an employee is? 

19 Servicing the funds is 25 or 30 percent? Or would the fraction

20 be different?

21 A Meaning the Advisor employees?

22 Q Yes.

23 A It depends. 

24 There's some of them that spend 100 percent in non-retail

25 products. But a number of people do spend -- maybe it's an

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1 approximate amount of time, yeah. So we have you know publicly

2 listed reads; we have private reads; we have 1031 exchange

3 vehicles. So there's -- there's a lot of other businesses

4 outside of that.

5 Q You know, we've heard talk about so-called front office. 

6 How do you, in your mind define or how do you understand front7 office personnel to mean or to be?

8 A Yeah. So it is someone providing investment advisory

9 services. 

10 Q Are the front-office employees different back ten years

11 ago when the Advisors were doing more debt and equity than they

12 would be today, when they're doing more real estate?

13 A Actual employees at the Advisors?

14 Q Or -- of the actual professionals that would be providing

15 those front-office services.

16 A Yes. 

17 Historically we did rely a lot more on Highland. Right. 

18 Given their credit expertise. Given the assets that we

19 managed. And that's part of the, you know, payroll

20 reimbursement agreements. 

21 Today, you know, from call it maybe 2018 to today, we've

22 gone from maybe 5 NexPoint, for example, investment

23 professionals to around 25. And that has been -- and those are

24 almost all real estate focused individuals. 

25 Q So let's zero in on that. Turn to Exhibit A. That's one

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1 of the Payroll Reimbursement Agreements. 

2 MR. RUKAVINA: And, Your Honor, they have the same

3 Exhibit A. It's just different percentages. 

4 BY MR. MORRIS: 

5 Q So are you familiar with these 25 people here?

6 A I am.

7 Q Okay. I'm going to avoid that first name. I tried and I

8 did not do a good job. 

9 MR. MORRIS: Mr. Rukavina, I apologize. Which

10 exhibit are you?

11 MR. RUKAVINA: I'm sorry. My Exhibit A and Exhibit A

12 to my Exhibit A. Which is the list of employees.

13 MR. MORRIS: And is it NexPoint or is it -- because I

14 don't think I have it. You may have the --

15 MR. RUKAVINA: I'm sorry. It's HCMFA.

16 MR. MORRIS: Okay, thank you. 

17 BY MR. RUKAVINA: 

18 Q Did you at one point in time know all of those 25 people?

19 A Yes.

20 Q Did you know what they did?

21 A Yes.

22 Q And tell us either on a high level or zero in how many --

23 or group in how many of them did the debt and equity front24 office services vis-a-vis real estate services.

25 A Sohan was the credit guy. Cameron being the private

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1 equity -- 

2 Q And private equity is that -- did you include that when

3 you're talking about debt and equity. Is that the same thing

4 as equity?

5 A Equity and private equity. Yes.

6 Q Keep going. Keep going.

7 A Mete (phonetic) Burns, credit. He's a credit expert. 

8 Hunter Covitz, CLOs, which is collateralized loan obligations,

9 made up of credit. Neil, another CLO guy. Jim, as you know. 

10 Eric Fedorshin (phonetic), worked on the credit team; Matthew

11 Gray was a credit analyst; Sanjay Gulati 100 percent of his

12 time was allocated to HCMFA. He was 100 percent associated

13 with our main clone, ETF, which was a credit fund that was

14 around 5 or $5 million at one point, and is $30 million today.

15 Chris Hayes (phonetic) was a loan or credit trader;

16 Bobby Hill (phonetic) bounced between teams. Brendan McFarland

17 (phonetic) was on the credit research team. Carl Moore

18 (phonetic) with Private Equity; Igor (phonetic) was credit. 

19 David Owens (phonetic) I believe was a credit trader.

20 Trey Parker (phonetic) was head of credit research

21 and then became co-CIO and ran the credit and equity investment

22 process.

23 Q CIO, chief investment officer?

24 A Chief investment officer. Andrew Parmenter (phonetic) was

25 brought in. He started in around 2017. Was a partner of the

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1 firm. Michael Phillips (phonetic) was a credit guy. John

2 Pavlish (phonetic) was head of credit research after -- after

3 Trey Parker was promoted to co-CIO. 

4 Philip Ryder (phonetic) I believe he was -- yeah, I don't

5 know the specific, either credit trader or credit. Kunal was

6 a credit. Allen Smallwood ( phonetic) was a credit guy. Mara

7 (phonetic) was public equities, maybe private equity.

8 Jake Tomlin (phonetic) was managing director on the credit

9 team. Ann Seager (phonetic), I believe, was a par credit

10 analyst who ran credit. 

11 Q And you mentioned that in that same period of time -- '18,

12 '19, '20 -- the advisors went from having 5 in-house investment

13 employees to, what did you say, 25 or 27?

14 A Approximately, yes.

15 Q Okay. And were -- so the delta is whatever, 20, let's

16 just say. That increase?

17 A Yes.

18 Q Okay. Were those new employees -- were any of those new

19 employees any of these employees?

20 A As speaking today number of employees?

21 Q Yeah.

22 A So one of them did come over when -- actually two. But

23 he's no longer there. Hunter Covitz after February 2021 and

24 Sohan. 

25 I don't believe any of the others. Most of them were gone

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1 by then. I think there may have only been five come February.

2 Q Well, that's my question.

3 A Yeah.

4 Q That's my next question. Did it matter to the Advisors

5 for purposes of their business that 20 of these employees over

6 a period of time were no longer there?

7 A It didn't. 

8 As our business had morphed into much more real estate

9 focused. We did rely some on them. Right. We still had the

10 five or six that were still there. But it -- it wasn't a -- a

11 big part of our business at that point.

12 Q Because there's been some implication made by Mr. Klos

13 that as these employees fell off, Highland made up for them

14 with other employees. Do you agree with any such assertion?

15 A I don't. I -- I -- I believe they hired one front-office

16 investment professional. The existing professionals may have

17 pitched in some. But a lot of those functions were at our

18 advisors. And I -- I mentioned the real estate professionals. 

19 But there were -- there were a couple other in professional

20 HCMFA, Joe Sowin who became co-CIO when -- when Trey Parker was

21 promoted to co -- head of private equity. 

22 He was an HCMFA employee. When Mark O'Connell (phonetic)

23 left and then Trey Parker left, Joe Sowin and Jim Dondero were

24 co-CIO's. Both employees of our Advisors.

25 Q So I think it's important for Your Honor to understand the

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1 relationship between the PRAs and the shared services

2 agreements. 

3 So still looking at this Exhibit A, were these the only

4 Highland employees that provided services to the Advisors?

5 A Any services or front-office services?

6 Q Any services.

7 A No.

8 Q There were a number of Highland employees providing 

9 back-office and middle-office services. Is that correct?

10 A That's correct.

11 Q And do you have an understanding pursuant to what

12 agreement those employees were being used?

13 A That was according to shared services agreements.

14 Q So is it important to clearly delineate between the two

15 types of agreements?

16 A It is.

17 Q If we want to find out what services were being provided?

18 A Yes.

19 Q Okay. And just while we're on here, so that Her Honor

20 understands the rest of our discussion, go to Page 1 of this

21 exhibit, Exhibit A. And Section 2.01. 

22 A Yes.

23 Q I think you mentioned earlier, Mr. Morris was asking you

24 that it shouldn't just be a dual employee, but needs to be

25 providing investment services. Do you remember mentioning

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1 something like that?

2 A Yes. They -- they need to be a dual employee --

3 Q So that's --

4 A -- and then they must be able to provide advice to any

5 investment company, investment related service, I think how I

6 explained it in -- provide advice to any investment company.

7 Q So if some Highland back-office employee or middle-office

8 employee is providing services to the Advisors, would you

9 consider them to fall within this contract?

10 A If they're providing any services, or if they're providing

11 --

12 Q No, if they're --

13 A -- advice?

14 MR. MORRIS: Your Honor, I object to this whole line

15 of questioning. He's asking a witness to interpret contracts

16 that he has no personal knowledge of. And this is what I

17 warned the Court about in my opening statement yesterday. The

18 witness must testify about personal knowledge and should not be

19 here to interpret contracts that he didn't negotiate, he didn't

20 participate in drafting, and that he never read until recently. 

21 THE COURT: Response?

22 MR. RUKAVINA: Your Honor, he's not interpreting a

23 contract. We're trying to explain -- first of all, we're going

24 to work to his damages model. So his understanding of what an

25 employee falls in here. He's not -- he's reading the language

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1 and he's going to tell you which employee provided that

2 investment advice. He's not going to tell you what this

3 contract means. So --

4 MR. MORRIS: He -- with all due respect, Your Honor. 

5 That's exactly what he's doing. Because now he's saying that

6 even though people who were dual employees were providing these

7 services, Highland's entitled to no compensation because they

8 just were providing the services under the shared services

9 agreement. He can't do that.

10 MR. RUKAVINA: That's not what I'm asking. That's

11 not what -- and Your Honor will decide these contracts as a

12 matter of law. I'm asking for him -- for his understanding of

13 what human being that provided services, for that human being,

14 whether that human being would fall under the payroll

15 reimbursement agreement or the shared services agreement.

16 And all he has to do is to read simple English and

17 then he'll tell you as a question of fact what he thinks. And

18 you'll decide as a question of law if that's correct.

19 MR. MORRIS: I'm just going to try one more time.

20 MR. RUKAVINA: It's a --

21 MR. MORRIS: It's not fair because the example that

22 I'm going to give and we saw six different exhibits yesterday,

23 where people's titles changed in order to give them the

24 responsibility for doing exactly this service. And they're now

25 going to take the position that because they were in the legal

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1 department and they paid for legal services that's it. We get

2 nothing more. We're providing the exact same service. This is

3 an argument he can make in closing, but he can't use a witness

4 to do this.

5 THE COURT: All right. I sustain. He can't testify

6 about what terms of the agreement mean. 

7 BY MR. MORRIS: 

8 Q Okay, so let's talk about shared services a little bit.

9 You heard Mr. Powell testify and you've heard a lot of

10 people testify. Are the Advisors complaining to this Court

11 that they did not get the services contracted for under the

12 shared services agreements?

13 A Generally, no, with the exception of legal compliant

14 services. 

15 Q Are the Advisors complaining that they did not get the

16 employees that they were paying for under the payroll

17 reimbursement agreements?

18 A Yes. We're -- we're -- we're saying we're reimbursing for

19 employees that were no longer there and we were not receiving

20 the services that were being paid for.

21 Q So we looked at a lot of those board minutes, meetings,

22 and you've heard Mr. Powell, he said, "Can one conclude that if

23 we say we are getting the services we contracted for, can one

24 conclude from that, that we're somehow waiving rights under the

25 payroll reimbursement agreements?"

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1 MR. MORRIS: Objection, legal conclusion.

2 MR. RUKAVINA: It's not a legal conclusion.

3 THE COURT: Sustained. 

4 BY MR. RUKAVINA: 

5 Q Okay. So let's talk about those back- and middle-office

6 services. 

7 Prior to the bankruptcy, did the Advisors have their own

8 employees who provided back and middle office services?

9 A Not the services that we contracted for with Highland.

10 Q Okay. And do your understanding, what were the services

11 that Highland should have been providing pursuant to the shared

12 services agreement?

13 A Yeah, in the shared services agreement --

14 MR. MORRIS: Objection. The witness has no knowledge

15 of the contracts. I don't understand how he gets to testify as

16 to what services we were supposed to be providing when he has

17 no knowledge of the contract. 

18 MR. RUKAVINA: Your Honor, the fact that he didn't

19 negotiate the contract doesn't mean that he can't read it and

20 apply its statements. It's the same as if the contract says

21 I'm buying a Mercedes and he's telling you whether that car is

22 a Mercedes or a Nissan. 

23 He's not interpreting the contract, he's giving the

24 Court facts in which the Court will ultimately determine

25 whether the contract fits or not.

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1 THE COURT: Okay. I don't -- I can read the

2 contracts.

3 MR. RUKAVINA: Okay.

4 THE COURT: I can read the contracts. So how is this

5 necessary? 

6 MR. RUKAVINA: Very well.

7 THE COURT: Okay.

8 MR. RUKAVINA: One moment, Your Honor.

9 THE COURT: Okay. 

10 BY MR. RUKAVINA: 

11 Q Go to Exhibit 36, please. It's in the big binders. 

12 A 36?

13 Q Yes, sir. 

14 A Uh-huh.

15 Q So this is to Mary Irving. Are you familiar with a Mary

16 Irving?

17 A I know who she is, yes.

18 Q Okay. Does she provide any services in any capacity to

19 the Advisors?

20 MR. MORRIS: Objection. Just time frame. 

21 THE COURT: Object -- I'm sorry. Objection, time

22 frame?

23 MR. MORRIS: Yeah, the question was just vague

24 because as -- as of time frame.

25 THE COURT: Okay.

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1 MR. MORRIS: He just said does she provide.

2 THE COURT: If you could be more specific, Mr.

3 Rukavina?

4 MR. RUKAVINA: I will.

5 BY MR. RUKAVINA: 

6 Q Did Mary Irving ever provide any services to the Advisors?

7 A I had very little interaction with her.

8 Q Okay.

9 A Over the last decade.

10 Q Okay. Mary Irving, we can look at it, but she's not on

11 the payroll reimbursement agreements.

12 A She's not.

13 Q Okay.

14 A She's part of the legal team.

15 Q Did Mary Irving ever provide front-office or investment

16 advice services to the Advisors?

17 A Not that I'm aware of.

18 Q Okay. Let's go look at 37. Are you familiar with

19 Stephanie Vitialo (phonetic)?

20 A I am.

21 Q Did Ms. Vitialo ever provide any services to the Advisors?

22 A She provided some legal services.

23 Q Okay. Is she on the payroll reimbursement agreements?

24 A She's not.

25 Q Does she provide any so-called front-office or investment

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1 advice -- advisory services?

2 A Over what time frame?

3 Q At any point -- well, post-petition.

4 A None that I'm aware of.

5 Q Okay. Exhibit 38. Are you familiar with Matthew Diorio

6 (phonetic)?

7 A I am.

8 Q Is he on Exhibit A to the payroll reimbursement

9 agreements?

10 A He is not.

11 Q Okay. Did he ever provide any services at any point in

12 time to the Advisors?

13 A Not that I'm aware of.

14 Q Okay. Do you know what Mr. Diorio did at Highland?

15 A He worked on the Legal and Compliance Team. I don't think

16 he's an attorney. Something with business development, which I

17 never interacted with Matthew.

18 Q Did he ever provide any investment advisory or front19 office services to the Advisors?

20 A Not that I'm aware of.

21 Q Post petition?

22 A Not that I'm aware of.

23 Q Would you be aware of that post petition, since you're the

24 head of Business Development?

25 A Well, I frequently interact with the investment

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1 professionals. I sit in on investment committee meetings. And

2 then the weekly global investment committee meeting. As part

3 of my role as Chief Product Strategist, I'm a liaison between

4 investors and the investment team. And so I interacted daily

5 with investment professionals to determine what they're doing,

6 why they're doing it. So -- 

7 Q So you wouldn't --

8 A -- I'm not going to say I would have knowledge of every

9 single person providing investment services. But I generally

10 had an idea particularly related to our advisors.

11 Q Okay. Well, that's all I'm asking about our advisors.

12 A Yeah, I --

13 Q The next one, Exhibit 39, Mr. Leventon. I think we all

14 know Mr. Leventon. But just for the record, Mr. Leventon, is

15 he on the payroll reimbursement agreements?

16 A He's not.

17 Q And what kind of services, or what did he do at Highland?

18 A He was an attorney.

19 Q Okay.

20 A Worked on litigation and other legal things.

21 Q Did he ever, to your understanding provide any front22 office or advisory services to the Advisors?

23 A Not that I'm aware of.

24 Q Okay. So we've just gone -- well, let's do Exhibit 42. 

25 With Timothy -- how do you pronounce that? Canorlier

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1 (phonetic)? 

2 A I wish I knew. Canorlier -- I've never been able to

3 pronounce it. 

4 MR. MORRIS: Canorlier.

5 THE WITNESS: Canorlier, yes. I know I've heard it

6 many times. 

7 MR. RUKAVINA: 

8 Q Was Mr. Canorlier on the payroll reimbursement agreements?

9 A He's not.

10 Q Okay. Do you know what he did at Highland?

11 A He -- he was an attorney on the legal team. 

12 Q Did he ever provide any investment advisory or front13 office services to the Advisors post petition?

14 A Not that I'm aware of.

15 Q Okay. So if there's an argument made -- I think we've

16 gone through five or six employees, if there's an argument made

17 that these five or six employees replaced dual employees that

18 were dropped over time, would you agree with that argument?

19 A I wouldn't have any basis to agree with that. I -- I

20 don't have -- I didn't have interaction with them providing

21 those services.

22 Q Because, again, we looked at the contract, and the

23 contract has two elements. Correct?

24 A That's right. They need to be dual employees and they

25 need to be providing advice to registered investment companies. 

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1 Q Okay. Now some of these employees, if they provided

2 services to the Advisors, would that have been pursuant to the

3 shared services agreements? Like legal?

4 MR. MORRIS: Objection. Same -- exact same. He

5 shouldn't be telling the Court what contract people were

6 providing services pursuant to.

7 THE COURT: Response?

8 MR. RUKAVINA: I'll move on.

9 THE COURT: Okay. 

10 BY MR. RUKAVINA: 

11 Q The list of employees on Exhibit A on the payroll

12 agreements, do you have any understanding as to whether any of

13 those employees, once they were terminated by Highland, were

14 replaced by Highland, with respect to their roles for the

15 Advisors?

16 A I --

17 Q I think you might have mentioned one earlier. I don't

18 know if you put it in the record, the name. It's in the small

19 binder, Dustin. The smaller binder to your right.

20 A Oh, yes.

21 Q Just Exhibit A.

22 A So I know there was one individual who was hired to help

23 with healthcare, but he helped with the private equity fund,

24 that wasn't related to our Advisors in HCMLP owned fund. And

25 he did a little bit for our Advisors. His name was Michael

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1 Jueng (phonetic). And I think he was hired in 2019. So he was

2 the only front-office person that I'm aware of that -- that was

3 hired.

4 Now, yet, there -- when some left there was, you know,

5 some reallocation of duties. However, at that point, as I

6 mentioned our assets in credit and private equity had been

7 diminishing significantly over the last several years. So many

8 of these people left, but they had seen the writing on the

9 wall. Right.

10 They knew we weren't focused on credit. They knew we had

11 growth in real estate and that wasn't their expertise. And you

12 know, they're a lot of good people and they went and started

13 other businesses. They went to other companies. 

14 Q Would you have offered them employment for the Advisors

15 upon them leaving Highland, had the Advisors a need for them?

16 A If we had a need, I -- we made an offer to those that --

17 and there were some even that were left to us, we didn't extend

18 an offer to, for various reasons. 

19 Q Okay.

20 A We didn't need them. You know, and -- and at this point

21 our assets are very different. We don't need the large credit

22 team.

23 MR. RUKAVINA: Your Honor, I think the clock is one

24 hour off, but that's no big deal. 

25 THE COURT: It's two minutes to 4:00. I don't know 

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1 what that says.

2 MR. RUKAVINA: It says two minutes to 3:00. Mr.

3 Berdman (phonetic) if you'll please put Exhibit CC up? Your

4 Honor, CC is an Excel spreadsheet. This is the underlying data

5 that rolls up into the David Klos December chart, if you

6 recall.

7 THE COURT: Okay. 

8 MR. RUKAVINA: So Your Honor will recall that Exhibit

9 Q. Exhibit Q is the PDF of the summary.

10 THE COURT: Okay.

11 MR. RUKAVINA: And Exhibit CC, the way we look at

12 Exhibit CC is unfortunately on the -- on the screen. 

13 THE COURT: Okay.

14 MR. RUKAVINA: So that's what Mr. Berdman is trying

15 to pull up. He says it's loading. And Mr. Berdman, if you'll

16 go to the employee listing. 

17 Your Honor, one moment. So Your Honor, we're just

18 trying to figure out why the screen is so blurry here. So can

19 you see Mr. Norris, or is it --

20 THE WITNESS: I can see it.

21 MR. RUKAVINA: -- again my eyes.

22 BY MR. RUKAVINA: 

23 Q Okay, so this is Mr. Klos's analysis. And I'd just like

24 to talk about some of these employees here. So let's look at

25 Chris Rice (phonetic).

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1 A Yes.

2 Q See 2019 hired. Do you see that?

3 A I do.

4 Q Did Chris Rice provide so-called front-office investment

5 office services to the Advisors?

6 A No. He's in the accounting department.

7 Q Okay.

8 A As it says there accounting, finance and back office. 

9 Q So rather than me go through each one of these, you just

10 go through them and tell the Court -- so start at line, what is

11 that, 60?

12 A Uh-huh.

13 Q And go down. Those are the new hires that Mr. Klos

14 included. Tell the Court, for each one of those, whether they

15 would or would not be providing investment services front16 office services to the Advisors. 

17 A Yeah, Chris Rice, no. It's accounting and back-office

18 services.

19 Q Joey?

20 A No, it was accounting and finance --

21 Q Just say yes or no. Just say yes or no.

22 A Yeah. No, no on Kelly. Michael Young, yes. Brad McKay,

23 no. Andrew, no. Brendan, no. Tina, no. Bridget, no. Sarah,

24 no. Michael, no. Austin, no. Erberto (phonetic), no. 

25 MR. RUKAVINA: Okay. You can close that, Mr. Berman

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1 (phonetic). 

2 BY MR. RUKAVINA:

3 Q So if Mr. Klos used those employees as far as the

4 profitability of the payroll reimbursement agreements in his

5 analysis, would you disagree that those employees should have

6 been included?

7 MR. MORRIS: Objection to the extent it calls for

8 legal conclusion.

9 THE COURT: Overruled. 

10 THE WITNESS: So if he -- say it one more time. If

11 he included in the payroll reimbursement --

12 BY MR. RUKAVINA: 

13 Q Yeah.

14 A With Michael, or a percentage allocation, I wouldn't

15 necessarily disagree. The others I would disagree because they

16 would be captured as a back-office employee that was not duly

17 employed in providing investment advice to our registered

18 investment --

19 Q Okay.

20 A -- companies.

21 Q And I think we've discussed this before, and Mr. Morris

22 asked you. But you were generally aware, more or less

23 contemporaneously with when certain employees left Highland. 

24 Is that accurate?

25 A I was.

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1 Q Okay. So why didn't you or someone else immediately pound

2 the table and say we've got to stop paying for that employee?

3 A Well, I had no knowledge that we were continuing to pay or

4 reimburse for their bonuses, comp, and benefits when they were

5 no longer employed. Had I know that, I would have reacted the

6 same way when I found that out.

7 Q What did you think -- pardon me, I'm having a hard time

8 phrasing this. 

9 Who did you think should have been doing that job? Or as

10 an officer of the Advisors, who did you expect would be doing

11 that job? 

12 A Yeah, so we -- we outsourced agreement review, payments,

13 payment processing to Highland and they -- they actually had a

14 very robust process. And it was actually challenging to get

15 agreements through them, and invoices. If there wasn't an

16 agreement tied to an invoice, they would ask for the agreement. 

17 If the agreement didn't match the invoice, they would let us

18 know.

19 And they would go back and either tell the vendor or

20 renegotiate. So there was a very thorough process that I had

21 dealt with for a decade with them. And -- and that's who we

22 relied on to administer our agreements and payments across the

23 board. 

24 Q Okay. Now before we flip to your damages --

25 A And I don't know if it's helpful. There was an accounts

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1 payable person. There was a corporate accounting team --

2 Q Whose -- 

3 A -- who handled this.

4 Q -- whose employee was accounts payable?

5 A Who was the employee?

6 Q No, whose --

7 A It was Highland Capital Management, L.P.

8 Q And everyone else that you mentioned?

9 A And all the other corporate accounts, or HCMLP. 

10 Q So let's look at Exhibit G. 

11 MR. RUKAVINA: Your Honor, Exhibit G, I don't think

12 we've looked at yet, at least not in detail. Exhibit G is a

13 PDF printout of Mr. Norris's damages calculation. And Exhibit

14 H is, again, the native form Excel spreadsheet. 

15 BY MR. RUKAVINA: 

16 Q Mr. Norris, will you please tell us if you need the native

17 file pulled up for any reason, okay? 

18 A Okay. 

19 Q What -- tell the Court what you’re trying to do here in

20 Exhibit G?

21 A Yeah. 

22 So what I do is very simple. I know there’s a lot of

23 numbers on the page, but just to simplify it is I took what are

24 the actual payments made, which we have heard --

25 Q Payments made from whom to whom?

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1 A Payments made by Highland on our behalf to HCMLP from our

2 Advisor accounts for --

3 Q So, so, so just hold on.

4 A Yeah.

5 Q So payments from the Advisors to Highland.

6 A My Advisors to Highland.

7 Q Only that Highland was processing the advisor.

8 A That’s correct.

9 Q Okay.

10 A Regarding the payroll reimbursement agreements. So there

11 was each month $252,000 for NexPoint Advisors and $416,000 for

12 Highland Capital Management Advisors, Fund Advisors, that was

13 paid each month. And we’ve heard all about how those amounts,

14 the actual payments didn’t change. And so, that $9 million

15 represents the period from the court filing to the end of

16 November. Nine million dollars is what was actually paid.

17 Q Why did you stop at the end of November?

18 A Because that’s when payments stopped as we heard from

19 Frank and Mr. Dondero.

20 Q Okay. So the $9 million, 9 million 18, that’s just the

21 cumulative of HCMFA and NPA. Right?

22 A That’s correct.

23 Q Okay. The next line is cost of dual employees --

24 A That’s right.

25 Q -- as stated in the original agreement from 2018.

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1 A That’s right. So here’s the simple math. I took the

2 total compensation numbers which came from Highland and

3 combined and multiplied them going month by month. I took each

4 employee that was still employed. I utilized their termination

5 dates from the filings as well as the monthly -- compared to

6 the monthly termination sheet. So I went month by month and

7 said who was still employed, multiplied their total

8 compensation times the percentage allocation, and that’s where

9 it’s broken out between NexPoint Advisors and HCMFA.

10 So, assuming these employees were still employed and

11 providing investment advisory services and a new employee, the

12 $2.8 million during that period is what we would have

13 reimbursed, actual costs of those employees, actual

14 reimbursement costs.

15 Q Okay. So just so we’re clear, we saw from Mr. Klos

16 yesterday that his analysis was a snapshot point and time

17 December 2020. Correct?

18 A Correct.

19 Q Is yours also a snapshot of a given point and time?

20 A It’s not. The allocation percentages are because in the

21 beginning --

22 Q So I was going to -- I was going to ask you that. Which

23 allocation percentages did you use?

24 A I used the ones from scheduling.

25 Q Why?

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1 A There was obviously a lot of thought. It was at that

2 point -- I didn’t want to make assumptions here. Right? I’m

3 taking the math that was provided on Schedule A. And then

4 looking at them, you know, they appeared reasonable or should

5 have been lower. To be conservative, I took the exact same

6 percentages and ran them through the calculation.

7 Q Okay. Now just so that the Court is understanding this,

8 if an employee is no longer there, does his or her allocated

9 percentage matter?

10 A It doesn’t.

11 Q It only matters --

12 A If there is -- if it’s 100 percent of 0, it’s 0. So

13 that’s why, yeah, it doesn’t matter.

14 Q So for 20 of the 25 employees, would it matter what

15 allocated percentage they had?

16 A Allocated percentages doesn’t matter. Compensation

17 doesn’t matter. And you’ll see in my second tab that that is

18 NA. I didn’t even need to put their compensation numbers

19 because if they weren’t employed as of the bankruptcy filing,

20 they didn’t matter.

21 Q Because we’re paying for someone that doesn’t exist.

22 A Or reimbursing for some compensation that was never paid.

23 Q Just so again the Court is clear, we’re talking about the

24 snapshot. You did a walk forward on a post petition month by

25 month basis?

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1 A Correct. And I divided that into three segments.

2 Q Well, let me pause you there.

3 A Yeah.

4 Q So if there was an employee that was employed some point

5 and time post petition, but then fell off, how did you treat

6 that employee?

7 A Yeah. So the month -- I had them the month that they

8 stayed. The month later, I dropped them off. And you can see

9 that on the third and fourth pages. I can draw your attention

10 to, for example, John Poglich (phonetic), simple on the third

11 page. John Poglich, you see a monthly allocation and --

12 Q On 53,066?

13 A On 53,000. And the first month is half of that because

14 the petition date or the bankruptcy filing date was the 15th of

15 October, I believe. And then he was here through September and

16 he drops off. Right? You wouldn’t expect to be paying for

17 someone that’s no longer there. And you can see that through

18 various other employees. Mr. Dondero, I kept him on there. He

19 was a -- he was there until he became a non-paid employee of

20 Highland. You see Morrow (phonetic), Stall Tarry (phonetic). 

21 Same thing. He was employed until December 2020, and then he

22 drops off. Same thing, Mr. Parker, until February 2020, and he

23 drops off. And in all these with zeroes, they just were not

24 employed on the bankruptcy filing date and so they’re zeroes.

25 Q So what is your conclusion from the petition date through

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1 the date that we stopped paying as to how much we paid, or

2 rather, reimbursed Highland for employees who were no longer

3 there?

4 A The difference is the $6.2 million right here.

5 Q So that’s even a little less than Mr. Klos’ 6.6, isn’t it?

6 A It is.

7 Q Okay. Now, what about the next block there? You say

8 additional two months billed by HCMLP, et cetera, for December

9 ‘20 through January ‘21. Why did you include those additional

10 two months?

11 A I included those because the services should -- the

12 agreements had not been terminated, right. So we were paying. 

13 And I broke them out separately because the Advisors were no

14 longer paying. And so this can’t be -- this first line isn’t

15 total amount reimbursed or paid. It’s what the billings were. 

16 And they’re -- I think in their damages claim is that the

17 amount is equal to the amount listed in the agreement for those

18 two months, which I put in that top line. That’s simply the

19 amount the --

20 Q So the top line, the 1336, where are we paying according

21 to their damages, that’s how much we would have paid?

22 A I believe so. It’s $252,000 a month for NexPoint Advisors

23 and $416,000 a month for NPA.

24 Q And according to your calculation for those months at that

25 point and time, how much should we have paid if the Court

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1 accepts our view of this case?

2 A $264,000 should have been what we paid with a million

3 dollar difference for that two months.

4 Q So if the Court agrees with us, then the damages just on

5 these two contracts, not shared services, for those two months

6 should be how much? How much should we have to pay for those

7 two months if the Court agrees with our theory of the case?

8 A Two hundred and sixty-four thousand dollars, nine eighty9 eight based on this calculation.

10 Q And you mentioned that the payroll termination agreements

11 weren’t terminated. Did you ever discuss that with Mr. Klos or

12 Waterhouse or Seery?

13 A I did.

14 Q What did they tell you?

15 A We had an email exchange with Mr. Klos and Mr. Waterhouse

16 and they didn’t know. This is like when we found out and Mr.

17 --

18 Q So let’s go back.

19 A Uh-huh.

20 Q November 30th we get termination notices, 60-day clock

21 ticking on the search services. Right?

22 A Correct.

23 Q Did we get termination notices for payroll reimbursement?

24 A We did not.

25 Q Did that surprise you or?

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1 A It did.

2 Q What did it cause you to do?

3 A It caused us to ask why because we knew we were --

4 Q Well, what was the ultimate answer that you got from

5 either Mr. Klos, Waterhouse, or Seery?

6 A Mr. Waterhouse said maybe it was overlooked. That’s all

7 we got.

8 Q Okay. No discussion about that why would we terminate if

9 it’s still profitable?

10 A Well, I was --

11 MR. MORRIS: Your Honor, that’s the kind of leading

12 question that he used to -- he asked him the question, he got

13 an answer, and now he’s fishing for the answer he wants by

14 suggesting the answer in his question. Exactly what he took me

15 to task for.

16 THE COURT: Sustained.

17 BY MR. RUKAVINA:

18 Q Did you ever discuss the profitability or lack thereof of

19 the payroll reimbursement agreements with Mr. Klos?

20 A The profitability of them, yes.

21 Q Yes. What did you discuss with Mr. Klos?

22 A Yeah. So, and maybe I should back up to that November

23 30th date we received the notices. December 1st, I had been,

24 along with Mr. Sauter, tasked with transitioning the services,

25 even prior to that, making sure there was a smooth transition. 

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1 But at that point there was still the understanding or hope

2 that things would come to a peaceful resolution. 

3 At that point we knew, all right, we need to make sure the

4 businesses can continue, that we can continue the shared

5 services through another entity or hiring those employees. 

6 What agreements were there that we needed? And so the shared

7 services and payroll reimbursement agreements were two of

8 those. D.C. Sauter and I had been discussing them over the

9 previous month or two, but then when this happened, we went to

10 Dave Klos and Frank and said -- I sent Dave Klos an email and

11 said, hey, I need to understand these amounts. What are we

12 paying? What are we paying for? 

13 And there was a response from Mr. Klos and that email was

14 -- went through with Mr. Klos where I said, you know, hey, what

15 are these the proper amounts? He came back. Maybe we can go

16 through the email, but his response was that they had continued

17 to pay the same amounts. And I had pointed out several

18 employees that were large dollar amounts that were no longer

19 employed and was asking, are we still paying for these or

20 reimbursing these employees that are no longer employed? And

21 his answer is the amounts had not changed.

22 And so after that conversation, we had a call with Mr.

23 Klos and Mr. Waterhouse and we dug into the why, the how much,

24 the profitability. Mr. Waterhouse was very aware that we were

25 overpaying, used the word overpayment. That’s when I learned

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1 about the automatic stay. I think I discussed that. Mr. Klos

2 had -- was involved in that discussion as well. So we had a

3 couple of discussions. Mr. Klos called me separately. We had

4 another conversation with Mr. Waterhouse. That was in early

5 December. I don’t know if you want me to keep going on that,

6 but.

7 Q Sure. Yes. What other discussions did you have with Mr.

8 Klos about the problem?

9 A Yeah. So at that time too, I asked Mr. Klos and Mr.

10 Waterhouse. They told me there was a schedule that laid out

11 the payments and the overpayments. And me and Mr. Sauter asked

12 for it. We said, give it to us. And I learned a little bit

13 more about the hesitancy that they had in doing anything that

14 would harm or cause damage to the Debtor.

15 Q Did Mr. Klos tell you anything about that in particular?

16 A Mr. Klos and Mr. Waterhouse both did.

17 Q What did they say?

18 A They had said, and this is the first I had learned about

19 it, that they had been warned that if they did anything that

20 was -- that would harm or be adverse to the Debtor that they

21 would be fired on the spot, and that they would be held

22 personally liable. And they were -- I mean, they were trying

23 to do what was right in both regards, right. We know Mr.

24 Waterhouse was wearing two hats, but -- and they expressed

25 their concern. And so --

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1 Q So their concerned about being fired?

2 A Fired on the spot and held personally liable.

3 Q Did they share -- did they share that analysis you

4 mentioned with you?

5 A So Mr. Klos said, I’ll check, but I don’t think Seery will

6 allow it.

7 Q Okay.

8 A So fast forward, we ask multiple times to Frank and Dave. 

9 We never got it. In mid December, it’s an important time

10 period, Jim got hit with a temporary restraining order. And so

11 as we were starting to have these conversations with Dave and

12 Frank, now all the sudden, you know, I for the first time was

13 involved in the court. That was the first time I ever appeared

14 in court. We had this restraining order for Jim. And so we

15 were all very cautious about what we could and couldn’t say to

16 any employees. And so this negotiating or discussion we had

17 had with Dave and Frank kind of paused for several weeks and

18 the discussions then just went with counsel. Fast forward to

19 around January 13th or so, maybe 12th.

20 Q Of 2021?

21 A Of 2021. Dave Klos, Frank Waterhouse, JP Sivvy

22 (phonetic), and Brian Collins called me and said, Mr. Seery has

23 allowed us to talk to you about the transition of services

24 because both sides --

25 Q Who was JP Sivvy?

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1 A JP Sivvy was part of the legal team at HCMLP.

2 Q And who was Mr. Collins?

3 A Mr. Collins is HR, was a HR director at -- so he chose --

4 and up to that point, we had -- I, in particular, I didn’t want

5 to get involved in a restraining order. So very little

6 discussion, especially around this. So only around funds,

7 operations.

8 Q And just again so the Court understands, what were you

9 trying to discuss or negotiate at that point and time?

10 A Yeah. Starting January 13th was let’s divide the

11 agreements. Let’s divide the services. Let’s have a peaceful

12 transition. We were receiving a number of back-office

13 functions that were critical to our business. And so, you

14 know, we also had dated information stored on their systems, on

15 their servers. We were in their office still.

16 Q So as part of these -- and the Court may remember. We had

17 an emergency trial on a mandatory injunction February 16th or

18 something like that. Ultimately, was there a transition of

19 services done?

20 A We had the permanent injunction. Ultimately, the shared

21 services agreements ended. They were extended. Highland

22 worked with us for an extension of around three weeks.

23 Q But that’s my question.

24 A Yeah.

25 Q As of what -- as of actually what period of time, what

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1 day? How do I put this? As of what day were the shared

2 services agreements actually terminated to your understanding

3 after these extensions?

4 A Yeah. I believe it was February 20th.

5 Q Okay.

6 A Maybe 19th.

7 Q February 28th or 20th?

8 A Twentieth.

9 Q Twentieth.

10 A And the employees were terminated on the 28th of February. 

11 And there was a difference and they moved the date of

12 termination of employees back a week --

13 Q And then --

14 A -- beyond each of our termination dates, so we had this

15 issue.

16 Q What happened? What happened to the employee? I mean,

17 did the Advisors do anything with the employees that were

18 terminated?

19 A So we hired a few of the actual terminated employees and

20 then most of them went to Skyview Group, which had a different

21 name at the time, which we entered into shared services

22 agreements for those, with those entities.

23 Q So during those extensions that we discussed did the

24 Advisors pay the debtor for those extensions in January and

25 February 2021?

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1 A We did. And that’s that third box here, the third section

2 of the damages. It’s $453,286 is what was paid for the payroll

3 reimbursement. And that’s just the -- it was based on the

4 exact dollar amounts and --

5 Q Why did we pay the exact dollar amounts if we knew that we

6 were overpaying?

7 A Yeah. 

8 So we had discussions on this. And backing up to the

9 first extension, my conversations with this group of four

10 Highland employees starting January 13th was let’s work

11 together. Let’s get a real -- let’s get a great solution. We

12 don’t want any disruption in the business. 

13 To that point, no one had talked to me about you need to

14 pay these past due amounts or the amounts that they were

15 claiming we owed until January 28th. I got an email that said,

16 these amounts are -- all these, Highland or NexPoint and HCMFA

17 related entities or Jim-related entities, some were -- I had no

18 relationship to -- will need to be paid. 

19 And at this point we had already negotiated and agreed on

20 most of the material terms related to the transition of

21 services. And so we were waiting on a term sheet at that

22 point. And they said, these have to be paid or we’re pulling

23 the plug on everything you have. And so then I had a call with

24 JP Sivvy, Frank Waterhouse, and Dave Klos. 

25 Again, I reiterated this, you know, asking for the

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1 schedules related to the payroll reimbursement agreements. But

2 at that point in time, they gave us an ultimatum of you’re

3 going to pay the extension fee or you’re going to have the plug

4 pulled on you. And at that point, we weren’t ready for that. 

5 And so we said we’re going to -- we will pay it, but we’ll

6 reserve all our rights.

7 Q And did Highland agree to that?

8 A They did.

9 Q Okay.

10 A And we put the -- that in our actual signed agreement. 

11 And when we did -- made our second extension, had multiple

12 conversations, same thing. We would reserve our rights.

13 Q And just an order of magnitude, how much did we pay

14 Highland for those two extensions, just ballpark?

15 A The payroll reimbursement agreement amount was $453,000. 

16 The shared services was maybe $2-, or $300,000, so $7-, or

17 $800,000 for 20 days.

18 Q Okay. So --

19 A I may not be perfect on my math, but that’s --

20 Q So if the Court agrees with our theory of the case, how

21 much are we saying we should get back from those extension fees

22 we paid Highland there in February 2021?

23 A Yeah. So related to the payroll reimbursement agreements,

24 it’s $453,286, is what was paid. If you take the same

25 calculation I had been doing on all the other months, $81,000

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1 is the appropriate, the actual employees that were employed

2 providing advisory services, so that the difference is

3 $372,000. That’s the overpayment amount.

4 Q So you mentioned that Mr. Klos used a word overpayment

5 when having the discussions with you. Is that correct?

6 A Well, I know that was a word that Frank Waterhouse used.

7 Q Okay.

8 A Dave may have, but he frequently used it as you were

9 paying for employees that were no longer employed or

10 reimbursing for employees that were no longer employed.

11 Q So Mr. Klos said you were reimbursing for employees you no

12 longer had?

13 A Again, I don’t remember the specific wording, but it was

14 very clear that the payments were more than what we were

15 contractually obligated.

16 Q Did he say it to you more than once?

17 A He did.

18 Q Did Mr. Waterhouse say it to you more than once?

19 A He did.

20 Q Did any other employee or agent of Highland ever say that

21 to you?

22 A Yes.

23 Q Who?

24 A On a call with JP Sivvy and Frank Waterhouse and Dave

25 Klos. JP Sivvy also acknowledged it.

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1 Q Okay. Anyone else?

2 A I had conversations with Fred Caruso where we -- I brought

3 this up in January and asked for the schedule, what we were

4 paying. He said, I know what you’re talking about, but let me

5 check on it. He did acknowledge. Same thing in early February

6 with Mr. Sharp, Bradley Sharp. We brought up the discussion. 

7 There were attorneys on the line as well. We had a phone call. 

8 I asked for the schedule. He said -- I told him we knew that

9 we were paying for employees that were no longer there. 

10 There had been an analysis provided. We’ve asked for it

11 on multiple occasions. And he said, I’ll check. I don’t know

12 that we can provide that. And I said, I’m not asking. I’m not

13 asking for something unreasonable. We’re asking to pay for the

14 employees that are currently here. And he said, well, I’m --

15 you know, I’m a representative of the Debtor and we have an

16 obligation to the Debtor.

17 Q And when you said schedule, were you referring to the

18 David Klos analysis?

19 A Well, I don’t know if it was that. I didn’t see this

20 analysis from Dave Klos, the ones that have been in the Court,

21 until discovery. We had been asking for it. I didn’t see it

22 until February. Actually, I think after my deposition. We saw

23 the main schedule. We hadn’t received the Excel files. And so

24 I’m assuming because Dave and Frank had told me there had been

25 calculations, I’m connecting an assumption here that that is

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1 the schedule, but I don’t know. I don’t know if they had

2 another one. They didn’t provide it.

3 Q Is that something we requested in discovery?

4 A It is.

5 Q So if they didn’t provide it, can we conclude that there

6 is no other one?

7 MR. MORRIS: Objection to the form of the question. 

8 I mean, this is just -- this is -- you can’t -- I object. It

9 is not -- it’s complete speculation. How about that?

10 MR. RUKAVINA: Well, let me rephrase the question.

11 THE COURT: Sustained. Uh-huh.

12 BY MR. RUKAVINA:

13 Q We requested all internal calculations of profitability. 

14 Correct?

15 A We did.

16 Q And did we receive from the Debtor anything other than Mr.

17 Klos’ December 2020 and December 2019 analysis?

18 A We did not.

19 Q Okay. Well, and I’m sorry. There were two in late 2019,

20 so let me just clarify. I think there --

21 A There were two iterations.

22 Q Two iterations. So --

23 A I think I only saw one of them, but yeah.

24 Q So technically we might have gotten three, but they would

25 have been the ones from December 2019 and December 2020?

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1 A Correct.

2 Q Okay. Now let’s -- let me just ask you something while we

3 are still on your Exhibit G. So, at the end of the day there

4 were only a handful of the original employees left from Exhibit

5 A. Correct?

6 A Correct.

7 Q Now what would happen to your damages model if instead of

8 using the original percentage allocations you bumped it to 100

9 percent such that 100 percent of those five employees would be

10 reimbursed by their Advisors? What’s the resulting number?

11 A Yeah. So using these existing plays, I actually plugged

12 this in at 100 percent and it’s, I believe, approximately $4.4

13 million would still be the damages.

14 Q So --

15 A Applying 100 percent of their time.

16 Q So if the Court agrees with our theory of the case but

17 says that we should have done a separate analysis of the

18 allocated percentages, even if we bumped that up to 100 instead

19 of 18 percent of 42 percent or whatever, it still results in

20 how much in damages? Overpayments.

21 A $4.4 million.

22 Q Okay.

23 A Approximately.

24 Q If you’ll flip to Exhibit P, please, as in Paul. Is this

25 the email exchange that you just referenced with Mr. Klos where

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1 you were asking for data and et cetera, et cetera?

2 A Yes.

3 Q Okay. And in the bottom email there where he’s writing to

4 you on December 1st at 9:12 a.m. he says that given the changes

5 in head count and along with not paying insider bonus

6 compensation, that has increased the profitability of the

7 contracts. Do you see that?

8 A I do.

9 Q Did you ever separately from this discuss the

10 profitability of the contracts with Mr. Klos other than your

11 communications that there were -- we were paying for employees

12 we didn’t have?

13 A We had a phone call with just he and I. We had a phone

14 call with he and Frank, multiple discussions, again in January

15 as we were talking about transition of services, discussed it

16 again on a call with the group at the end of January, so there

17 were multiple conversations.

18 Q Okay. Did the Debtor ever terminate, to your

19 understanding, the payroll reimbursement agreements?

20 A Yes, I believe so.

21 Q And was -- why do you -- did you do anything, to your

22 memory, to prod the Debtor to do so?

23 A Yes.

24 Q What did you do?

25 A So we asked DC Sauter and our team work with their legal

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1 team, hey, is this going to be -- we wanted to ensure that we

2 weren’t continuing to overpay for employees that were no longer

3 there. And so DC, as a condition of signing, I believe signing

4 the transition services agreement, they made us terminate the -

5 - we asked them to terminate the payroll reimbursement

6 agreement.

7 Q So we didn’t terminate the payroll reimbursement

8 agreements. The Debtor did.

9 A I believe so, yeah.

10 Q Okay.

11 A Yeah.

12 Q Because we require that as a condition.

13 A Yes.

14 Q Okay. Other than that, were you aware of any attempts by

15 the Debtor to terminate the payroll reimbursement agreements?

16 A I’m not.

17 Q Okay. Can you think of any reason why the Debtor wouldn’t

18 have done that?

19 A Yes.

20 Q What?

21 MR. MORRIS: Objection, Your Honor. He can’t

22 speculate as to the Debtor’s motivations here.

23 THE COURT: Speculation. Response?

24 MR. RUKAVINA: I’ll withdraw the question.

25 THE COURT: Okay.

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1 BY MR. RUKAVINA:

2 Q And just to clarify what Mr. Morris was asking you, did

3 Mr. Klos use the word true up when he described what happened

4 at the end of 2018?

5 A He did.

6 Q Did he tell you whether money changed hands as a result of

7 that “true up”?

8 A He did.

9 Q What do you remember about that?

10 A He said there had been a -- I don’t remember if it was

11 small or immaterial -- it wasn’t immaterial, but a small -- a

12 payment actually resulted in paying to Highland from both

13 Advisors.

14 Q Okay. Did -- and you mentioned that he didn’t --

15 A And actually, I don’t think he said he both Advisors. He

16 said the Advisors, but didn’t specify how much of each.

17 Q But did he actually tell you about the fact of the

18 amendments?

19 A No.

20 Q So just the result.

21 A Yes.

22 Q Okay. Did Mr. Klos ever -- first of all, do you have an

23 opinion on Mr. Klos’ -- prior to this litigation, Mr. Klos’

24 ethics and professionalism?

25 A I do. Yeah.

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1 Q And what was your opinion?

2 A I thought highly of him. I worked with him for over a

3 decade. His work product was always fantastic. He was

4 thorough. I went to him for a lot. I trusted he would put out

5 an accurate and honest analysis. He worked closely on board

6 matters, fund matters, advisor matters, and yeah, I thought

7 highly of him.

8 Q And he was trusted enough to be presented to the retail

9 board?

10 A Absolutely.

11 Q Did Mr. Klos, in all of your discussions, ever tell you

12 anything like, geez, Dustin, there’s something fishy about

13 these payroll reimbursement agreements or amendments or shared

14 services agreements?

15 A The way he went about it, he was concerned, right. And

16 the way he prefaced our conversations was with concern.

17 Q How so?

18 A He said we’re being -- he didn’t say threatened, warned,

19 almost daily that we can’t do anything to damage or provide

20 something that would hurt the Debtor. And so, yeah. He

21 basically was like kind of you’re on your own in figuring out,

22 but I -- he knew the numbers.

23 Q I don’t think you understood my question. Did Mr. Klos

24 ever tell you that there was -- did he ever flag for you any of

25 the issues? Well, strike that. Were you here when Mr. Klos

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1 testified yesterday?

2 A I was.

3 Q And he testified as to what he thought the $2.5 million

4 number came from and other things. Remember that?

5 A Uh-huh.

6 Q Did he ever tell you anything like that before?

7 A No.

8 Q Did he ever tell you anything -- that there was anything

9 potentially deceptive or suspicious about the payroll

10 reimbursement agreements?

11 A Got it. No.

12 Q Did he ever tell you anything, that there was anything

13 suspicious or deceptive about the amendments to the payroll

14 agreements?

15 A No.

16 Q What about the shared services agreements?

17 A No.

18 Q What about potential tax -- I don’t want to use the word

19 fraud because I’m not a tax lawyer -- potential tax

20 shenanigans?

21 A No.

22 Q Potential Mr. Dondero trying to get tax questions for

23 himself?

24 A No, he didn’t.

25 Q Potential that these were used as a method of financing

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1 how --

2 A No.

3 Q That the payroll reimbursement agreements were intended to

4 be monthly fees regardless of actual cost?

5 A No.

6 Q Let’s go to Exhibit OO real quick. We’re almost done. 

7 And I really -- I really need to go to the optometrist. 

8 Do you know what Exhibit AA is? There’s a bunch of

9 individual ones.

10 A Yes.

11 Q Okay. What are these?

12 A These are the shared services invoices that, as required

13 by the shared services agreement for Highland Capital

14 Management Fund Advisors are to be provided, as this is a cost

15 plus 5 percent agreement. So they’re laying out, if you look

16 in column, the number column 1, it has --

17 Q Well, let me pause you.

18 A Yeah.

19 Q Just so that the Court follows. We’ve heard before that -

20 -

21 A Yeah.

22 Q -- under certain services NexPoint paid a different

23 methodology than HCMFA. Right?

24 A They did.

25 Q NexPoint was just a flat monthly fee. Right?

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1 A Correct.

2 Q And HCMFA was a bit of a work up.

3 A Cost plus 5 percent.

4 Q So who prepared these invoices on Exhibit AA?

5 A Highland, Highland’s accounting back-office group.

6 Q And would they then send us these invoices?

7 A I didn’t see these invoices until discovery.

8 Q Okay. You heard Mr. Morris talk about how -- how it was

9 only $10,000 a month for legal. Did you hear that?

10 A I did.

11 Q You see there it says legal, $10,000. Right?

12 MR. MORRIS: Excuse me, Your Honor. I didn’t testify

13 to that. Mr. Klos did.

14 MR. RUKAVINA: Well, I apologize. I just remember

15 someone talk -- I apologize, Mr. Morris.

16 BY MR. RUKAVINA:

17 Q You heard something about that yesterday. Right?

18 A I did.

19 Q Okay. Is that the whole picture?

20 A It’s not.

21 Q Why not?

22 A When you peel back to what is underlying these numbers,

23 $10,000 was a standard legal services. However, in the

24 compliance bucket, it says general compliance. If you look to

25 the schedules, that includes Thomas Surgent, an attorney,

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1 including his base and bonus and benefits and Lauren Thedford,

2 who is an attorney, providing officer and other functions for

3 us. So that $92,000 a month -- this is a monthly invoice --

4 includes those two adjacent posts, which is two out of the

5 three attorneys.

6 Q What about retail operations and finance and accounting?

7 A Retail operations and finance and accounting includes --

8 it doesn’t include attorneys. It includes back-office

9 accountants. Frank Waterhouse, I assume did Klos. We have --

10 we have the Excel spreadsheets that break it out --

11 Q We do.

12 A -- by individual, but --

13 Q But can you tell me how it is that Highland could

14 calculate and bill us for the services of these employees if

15 Mr. Klos testified correctly yesterday that there is no way in

16 the world to do so?

17 A Yeah. On a monthly basis, they would calculate the

18 employees and the percent of time that they spent related to

19 Highland Capital Management Fund Advisors. They had a schedule

20 attached to that spreadsheet.

21 Q Yep.

22 A Which then detailed their total comp, salary, bonus,

23 taxes. There’s several columns. And their percentage

24 allocation. That was updated monthly. I looked at the

25 schedules they provided in discovery and they -- when there was

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1 a new employee added, they would add that employee. When an

2 employee left, they would take the employee away.

3 Q And the --

4 A There was approximately 20 people underlying --

5 Q And we paid --

6 A -- this schedule.

7 Q And we paid these invoices, well, other than late in the

8 game. Right?

9 A Yes.

10 Q The Advisors or HCMFA paid those invoices.

11 A Yes. Highland submitted the payments on behalf of our

12 Advisors.

13 Q Okay. So can you conclude from that that there must have

14 been some methodology to allocate employee time per advisor?

15 A They managed to do it.

16 Q Or is it -- or is it a fraud?

17 MR. MORRIS: Your Honor, this is really --

18 MR. RUKAVINA: Is there any alternative?

19 MR. MORRIS: He’s leading.

20 MR. RUKAVINA: Is there any alternative, sir?

21 THE COURT: Sustained.

22 BY MR. RUKAVINA:

23 Q Is there any alternative? I’ll strike that, Your Honor. 

24 I’ll just deal with it in closing. Thank you, Mr. Norris.

25 THE COURT: All right. Pass the witness. Mr.

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1 Morris.

2 MR. MORRIS: I just have a few follow-up.

3 THE WITNESS: A few is three. Right?

4 MR. MORRIS: No.

5 THE WITNESS: Oh, okay.

6 MR. MORRIS: No.

7 REDIRECT EXAMINATION

8 BY MR. MORRIS:

9 Q You understand that we completely disagree that you -- the

10 Advisors are entitled to any damages. Right? 

11 You understand that that’s the position that we’ve taken

12 in this case. Right?

13 A I believe so, yes.

14 Q Okay. Can you turn to Exhibit G, please?

15 A Yes.

16 Q Okay. Do you see -- so you understand that we don’t agree

17 you’re entitled to anything. Right? 

18 You understand that’s our position. Correct?

19 A If you represent that, I’ll take your word for it.

20 Q I do. And you’ve got the million -- so with that

21 understanding though, you’ve got the $1,336,000 for the

22 December 20th -- December ‘20 and January 2021 on your chart. 

23 Do you see that?

24 A Yes.

25 Q And it’s your testimony that your recollection is that the

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1 Advisors actually paid the amounts that were due under the

2 payroll reimbursement agreement subject to a reservation of

3 rights in connection with the extensions?

4 A No. Not the January and December payments. We paid in

5 February. Yeah.

6 Q Did the Advisors ever make the December and January

7 payments?

8 A I don’t believe so.

9 Q So why is that number here? Why are you suffering damages

10 that you didn’t even pay?

11 A Yeah. 

12 So I think the reason for including it is it says

13 additional two months billed. We know that we’ve been billed

14 those. We’re not arguing that there shouldn’t be anything

15 paid. You’re saying we actually owe the full amount. Here is

16 the amount we owe. So the difference is the million dollars,

17 right. So you’re claiming we owe you the full 1.3. We’re

18 saying it’s 264.

19 Q But you’re seeking damages for the difference. Aren’t

20 you?

21 MR. RUKAVINA: Your Honor, that’s not -- that wasn’t

22 the testimony, you know.

23 MR. MORRIS: Just look at -- I’m just asking. This

24 is math, right. It’s your analysis.

25 MR. RUKAVINA: It says total over billing. Our

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1 damages, Your Honor, are the $6.2 million, as he testified, and

2 then the $372,000.

3 MR. MORRIS: Then how could --

4 THE COURT: Overruled. He can ask question about it.

5 BY MR. MORRIS:

6 Q Those two numbers don’t add up to $7.6 million, do they?

7 A Yeah. And I don’t know the legal ramifications here, but

8 the math is you’re asking for -- I can’t remember the number --

9 three million. We’re saying here is this. The three million

10 should be offset by million dollars.

11 Q Sir? Sir, let’s just take this one piece at a time

12 because I --

13 A Uh-huh.

14 Q -- I just want to make sure this isn’t inflated. You

15 agree that the Advisors paid zero for December and January

16 under the payroll reimbursement agreement. Correct?

17 A Well --

18 Q Just simple question.

19 A The argument I think Jim made was we’ve overpaid. There

20 should be a true up to those amounts.

21 MR. MORRIS: I move to strike. Can you please -- I

22 want to get this done.

23 BY MR. MORRIS:

24 Q You admit that the Advisors paid zero in December 2020 and

25 January 2021 under the payroll reimbursement agreement. 

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1 Correct?

2 A We made no payments in January --

3 Q Okay.

4 A -- or December.

5 Q But your analysis that you did says that if you were to

6 pay something it would be $264,998. Right?

7 A Correct.

8 Q But instead of adding that number to the $6.2 million, you

9 added the difference between that number and what we’ve

10 invoiced as the damage calculation. Is that -- that’s a

11 mistake. Right?

12 A We wouldn’t add the 264 as additional damages.

13 Q So what’s the damage --

14 A That’s the amount we would have paid.

15 Q That’s the amount. So --

16 A Versus what was billed. You billed us $1.336 million and

17 --

18 Q Okay. So would the proper damages here be 6.206, 891. 

19 I’m just trying to do it from your perspective.

20 A Uh-huh.

21 Q Plus the $372,040 in the bottom. Right? 372? Do you

22 agree with that? Those two were parts of your damage

23 calculation.

24 A Those are part damages, correct.

25 Q And you would add those two together and then you would

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1 deduct $264,000. Right?

2 A No.

3 Q Because that’s the value that you should have paid that

4 you didn’t.

5 A I wouldn’t necessarily say you’d deduct it from that. It

6 would be offset from whatever you’re seeking from us, right. 

7 That’s separate.

8 Q No. 

9 If you win this case, and again, right, it’s an assumption

10 that I positively don’t agree with. But I you were to win this

11 case, right, your theory is that you would be entitled to 6.2

12 plus $372,000, right, because that’s the overpayment. And then

13 the 264 is what you should have paid under your theory, so that

14 should be deducted because you didn’t pay it.

15 A Yeah. Assuming that your three million goes to zero as

16 well or it was reduced. It’s the same way at getting at the

17 same answer.

18 Q Okay. Right? Because -- are we in agreement? It’s if

19 you want to know under your theory if you win under the

20 methodology you’ve adopted, it would be 6.2 plus 372 minus 264. 

21 Right? Because the 264 is your valuation that you didn’t pay.

22 A Yeah. And assuming that your numbers are also go away,

23 that there’s no -- there’s no damages there.

24 Q I’m going to lose under this hypothetical.

25 A Yeah. Yeah.

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1 Q Right? So it’s not $7.6 million. Right? It’s something

2 closer to 6. Again, just using your numbers. I’m just trying

3 to correct the mistake that I think you made.

4 A I don’t think it’s necessary a mistake. I think it’s just

5 thinking at it holistically.

6 Q Okay. Can you go to Exhibit 27 in Binder Number 1? And

7 this is that email that you just looked at with Mr. Rukavina. 

8 Right?

9 A Correct.

10 Q And if we start on the right page, the one with Bates

11 number 730, do you see that you wrote to Mr. Sauter at 7:08

12 p.m. on November 30th and said, time for a call?

13 A No. That --

14 Q At the bottom of the page.

15 A Oh, at the bottom. On October 6th, time -- it was time

16 for a call.

17 Q Right. But at the bottom of Page 730, there’s an email

18 from you to Mr. Norris on November 30th at 7:08 p.m. where

19 you’re forwarding the same email.

20 A Yes.

21 Q And that’s the title of the email. Right?

22 A Yes.

23 Q And you sent that because you just learned that Highland

24 had terminated -- given notice of termination of the shared

25 services agreements. Right?

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1 A I believe so, but I’m not certain.

2 Q And then you walked into the office early the next morning

3 and started to think about what all of this meant. Right?

4 A Yes.

5 Q And so, at 8:53 a.m., you sent an email to DC, to Frank,

6 and to Klos about the topic of the intercompany agreements. 

7 Right?

8 A Yes.

9 Q And you gave them the amount of money that was paid under

10 all of the agreements between the companies. Correct?

11 A I took from the income statement, which isn’t necessarily

12 a cash flow statement, but it’s the actual amount bill or

13 recorded as expenses.

14 Q So the Advisors own books and records reflected all of the

15 payments that were made by the Advisors to Highland under the

16 various intercompany agreements. Right?

17 A The HCMLP employees were the ones that prepared these very

18 numbers.

19 MR. MORRIS: I move to strike, Your Honor.

20 THE COURT: Sustained.

21 BY MR. MORRIS:

22 Q Okay. I’ll ask my question again. The Advisors books and

23 records reflected all payments that they made to Highland on

24 account of the intercompany agreements. Correct?

25 A Sorry. One more time.

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1 Q The Advisors books and records reflect every payment they

2 ever made to Highland under the intercompany agreements during

3 the relevant period. Correct?

4 A I believe so, yes.

5 Q And you were able to go in there and to get the

6 information about the amounts that were paid. Right? You got

7 it. You got it. It’s in your email. Right?

8 A I got it from the board materials, yes.

9 Q From the board materials. So even the board was given the

10 details about the amounts that were being paid. Who gave it to

11 the board?

12 A And I’d say not details, but one line, right. There’s no

13 underlying details.

14 Q But the board was told how much the Advisors paid under

15 the intercompany agreements on an annualized basis. Is that

16 fair?

17 A Yes.

18 Q And that information came form the Advisors own books and

19 records. Correct?

20 A From the Highland employees, yes.

21 MR. MORRIS: I move to strike.

22 THE COURT: Sustained.

23 BY MR. MORRIS:

24 Q That information came from the Advisors books and records. 

25 Correct?

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1 A Yes.

2 Q Thank you. 

3 And you told -- you told Mr. Sauter and 

4 Mr. Waterhouse and Mr. Klos, among other things, that you need

5 to make sure these agreements are fully understood in the

6 context of the notices, in the context of the termination

7 notices. Do you see that?

8 A I do.

9 Q So after you receive notice of termination, that’s when

10 you decided that you thought it was the appropriate time to

11 make sure the agreements were fully understood in the context

12 of HCMLP’s termination notices. Right?

13 A That was a continuation. 

14 If you go back in the email of October 6th, there’s an

15 email asking for a conversation on shared services and other

16 agreements. I had an attachment with those agreements, then

17 sent them on October 6th to DC Sauter. This is when I started

18 to be involved more in the transition of services and was

19 already trying to kind of understand what was going on. And

20 there wasn’t a need at that point to do anything specific.

21 Q Okay. So it was after? Can you just agree with me that

22 what you wrote on the day after you found out that there was a

23 termination notices, that you need -- that you “need to make

24 sure these agreements are fully understood in the context of

25 HCMLP’s termination notices for the shared services agreement”. 

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1 Did you see that?

2 A I did.

3 Q When you use the phrase, shared services right there, you

4 also meant the payroll reimbursement agreement. Right?

5 A I may have, but I don’t -- I don’t know.

6 Q Well, that’s what sub advisory fees are. Right? The

7 column that you have there under sub advisory fees, it doesn’t

8 say payroll reimbursement agreement. It says sub advisory

9 fees. Correct?

10 A It says sub advisory fees, yes.

11 Q And those are the amounts that were paid not under the sub

12 advisory agreements, but the contract that is now called the

13 payroll reimbursement agreement. Correct?

14 A Yes.

15 Q And what you wanted to do is not make sure you fully

16 understood the shared services agreements. What you wanted to

17 do on December 1st is make sure you fully understood the shared

18 services agreements and the payroll reimbursement agreements. 

19 Correct?

20 A Worth noting the sub advisory fees were higher than the

21 shared services fees, so need to make sure these agreements are

22 fully understood in the -- well, here -- they only terminated

23 the shared services agreement, so and going back my previous, I

24 wasn’t sure. 

25 They only sent shared services agreement terminations. 

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1 And so you needed to understand the shared services agreements,

2 the sub advisory agreements. Yeah. We wanted to understand

3 them, but they hadn’t terminated them. So this specifically

4 was related to the shared services agreement.

5 Q Sir, the rest of the email train that you’re relying on is

6 about the sub advisory fees. Do you see Mr. Klos’ response to

7 you?

8 A Yeah.

9 Q It’s only about sub advisory fees. Correct?

10 A What’s only about sub advisory fees?

11 Q The first paragraph is about sub advisory fees.

12 A Yeah. Because he -- he clarified. I was learning at this

13 point.

14 Q Uh-huh.

15 A And he clarified and then it went into a deeper discussion

16 about the sub advisory fees.

17 Q And is it fair to say that you also needed to fully

18 understand the payroll reimbursement agreements at that time?

19 A Absolutely. We should. Yeah.

20 Q At that time. Right?

21 A Because they didn’t terminate them.

22 Q That’s right. And you hadn’t undertaken that exercise at

23 any time before this time. Is that fair?

24 A Other than my discussions with outside counsel and DC

25 Sauter that are laid out in the email below about which we had

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1 had discussions, but we didn’t dive into all the details.

2 Q You’re telling me that back in October this email that

3 says nothing doesn’t mention payroll reimbursement agreement. 

4 Right?

5 A It says shared services and other agreements with HCMLP.

6 Q And what was the issue at that time? Did you know back in

7 October?

8 A Did I know what back in October?

9 Q About the alleged overpayments.

10 A I didn’t.

11 Q Were you looking at the agreements in October?

12 A We were.

13 Q So you had the agreement in your hand in October and you

14 didn’t make any conclusions about overpayment at that time. 

15 Right?

16 A I looked at the schedule and saw that there’s a percentage

17 allocation of employees and assumed that Highland is -- let me

18 step back. We relied on Highland and were assuming that they

19 were making payments in accordance with the agreement.

20 Q In the two months before you sent this email to Mr. Sauter

21 and Mr. Waterhouse, did you make any effort to try to figure

22 out if your assumption was accurate?

23 A No.

24 Q And you looked at Exhibit A and you said, well, there’s a

25 lot of employees who have been terminated, but I just assumed

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1 Highland is doing the right thing.

2 A Yeah.

3 Q Okay. You said that you were not aware of the

4 overpayments, but I believe you said Mr. Waterhouse was very

5 aware of the overpayments. Do I have that right?

6 A He was.

7 Q And did he tell you when he first learned of the

8 overpayments?

9 A Well, in our discussion in December, he said -- he didn’t

10 say when he had learned, but in our call at the end of January,

11 which I had taken notes on, he had said -- and I was surprised

12 by this because I thought it was newer knowledge to him in

13 December, but he had said over a year ago he had discussions

14 with Counsel and DSI. So he had told me it had been over a

15 year.

16 Q And did -- and that’s when he told you? So other than

17 what Mr. Waterhouse told you about his conversation with Isaac

18 Leventon, Scott Wellington, and Fred Caruso, are you aware of

19 any other conversation that ever took place before November 30,

20 2020, concerning whether or not there should be any

21 modification to the amounts being paid under the payroll

22 reimbursement agreements?

23 A So I’ll correct the -- you said other than him telling his

24 conversation with Fred Caruso and Isaac. Other than their

25 testimony, he didn’t tell me that at the time. He said he had

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1 spoke to DSI and to -- to counsel. So just --

2 Q Meaning that he didn’t identify who the counsel was.

3 A He didn’t identify who counsel was.

4 Q Fair enough.

5 A I didn’t know who Fred Caruso was at the time.

6 Q Okay.

7 A Again, I wasn’t involved. So he told me general. So

8 that’s the first part of the question, so didn’t want to agree

9 to that part by answering. So then you said was there any

10 other discussion that they should be amended prior to November

11 30th. Not with me.

12 Q Okay. And you’re not aware of any. Correct?

13 A Other than -- I’m not aware of any, no.

14 Q Thank you. 

15 Nobody’s ever told you -- other than this one conversation

16 that Frank had with Fred Caruso and counsel, nobody has ever

17 informed you of any discussion of any kind where the Advisors

18 asked to modify the amounts that were being paid under the

19 payroll reimbursement agreements. Correct?

20 A I mean, other than my conversations where I asked for the

21 scheduled, demanded that they be done the right way, but you’re

22 saying that -- 

23 Q Let me rephrase the question.

24 A Yeah.

25 Q Because I want to use that November 30th timeline.

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1 A Yeah.

2 Q Other than the conversation that Mr. Waterhouse told you

3 he had with Fred Caruso and counsel, you have no knowledge of

4 any request to modify the amounts that were charged under the

5 payroll reimbursement agreement at any time prior to November

6 30, 2020. Correct?

7 A I don’t.

8 Q Thank you. 

9 You went through a whole lot of testimony with Mr.

10 Rukavina about the change in the advisor’s business model. Do

11 I have that right?

12 A Correct.

13 Q And none of those changes ever caused the Advisors to make

14 a request to modify the amounts that were being paid under the

15 payroll reimbursement agreement. Correct?

16 A They should have. And again, Highland -- we thought

17 Highland was doing that, but there’s -- yeah. The people

18 changed. It should have resulted in a modification.

19 Q Okay. And every -- it was the last question I asked and I

20 just want to emphasize the point.

21 A Uh-huh.

22 Q Every single person that you believe should have

23 unilaterally made this change reports to Frank Waterhouse. 

24 Right?

25 A Those that had knowledge of this, yes.

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1 Q Okay.

2 A And you said unilaterally, I think the contract is clear

3 and says that if either party, right, will negotiate in good

4 faith.

5 MR. MORRIS: I’m going to move to strike that part

6 because the contract speaks for itself and --

7 THE COURT: Sustained.

8 MR. MORRIS: -- you have no knowledge of what that

9 means.

10 May I just have one moment, Your Honor?

11 THE COURT: You may.

12 MR. MORRIS: I have nothing further here.

13 THE COURT: All right. Any recross?

14 MR. RUKAVINA: Briefly, Your Honor.

15 THE COURT: Okay.

16 RECROSS-EXAMINATION

17 BY MR. RUKAVINA:

18 Q Briefly because I think Mr. Morris might make his flight. 

19 Exhibit W. Is that the notes that you referenced to yourself,

20 just so that I can use it in closing?

21 A Yes. Those are them.

22 Q Okay. And were those kept contemporaneously or right

23 after by you?

24 A I started typing them up shortly after the call ended.

25 Q It’s Exhibit W. I think it’s been admitted.

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1 A And it was sent -- the call happened that evening and I

2 sent it later that night after I had wrapped up work. I sent

3 it to myself.

4 Q Going back to your damages analysis, where did you get the

5 dates of termination of the employees from?

6 A So I received them from the interrogatories.

7 Q So let me point you. Exhibit I. Exhibit I, Page 9. 

8 Yeah. You might not know what an interrogatory is. Exhibit I,

9 Page 9. Your Honor, these are the Debtors’ responses to my

10 interrogatories. Do you see that, sir?

11 A I do.

12 Q Okay. Is that the source information for dates of

13 termination?

14 A It is. And I also compared that to the schedule from HR

15 at Highland Kelly Stevens.

16 Q And just to round off this discussion of damages, back to

17 your Exhibit G.

18 A Yes.

19 Q We’re claiming the 6.2 million. Correct? Go back to

20 Exhibit G.

21 A Yes.

22 Q We’re claiming the 372,000. Correct?

23 A Yes.

24 Q Then we’re claiming -- I’ll discuss it in closing -- some

25 $1.3 million from the David Klos analysis for the shared

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1 services agreements. Right?

2 A Yeah. And that’s different than this 1.3. It’s 1.3 in

3 shared services.

4 Q That’s what I wanted to clarify.

5 A Yes. Yes.

6 Q You did not --

7 A Additional damages.

8 Q You did not calculate the underlying overcharges under the

9 shared services. We’re just going with Mr. Klos’ analysis --

10 A Going off --

11 Q -- if the Court agrees with us.

12 A That’s correct.

13 Q And then 425,000 in cover damages.

14 A That’s correct.

15 Q And that’s for Robert Harris and Jason Post?

16 A Correct.

17 MR. RUKAVINA: Your Honor, thank you.

18 THE COURT: All right. Mr. Norris, before I excuse

19 you, I have two or three questions.

20 THE WITNESS: Yes. Yes.

21 THE COURT: Okay. That was it. That was recross.

22 MR. MORRIS: Oh, I had a couple -- I have a couple of

23 questions on that.

24 THE COURT: But that was it. We went you, you, you,

25 you.

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1 MR. MORRIS: Right. But can I cross now on the very

2 limited testimony? It’s limited to the questions that he just

3 asked.

4 THE COURT: Okay. Well, don’t --

5 MR. MORRIS: If you don’t want me to, it’s fine.

6 THE COURT: Yeah. I don’t want you to.

7 MR. MORRIS: Okay.

8 EXAMINATION

9 BY THE COURT:

10 Q All right. My brain thinks in timelines. And so I just

11 -- I want to be reminded of a couple of things. NexPoint, NPA,

12 was formed when?

13 A Yeah. NexPoint Advisors was formed in 2011 or 2012. I

14 believe it was 2011.

15 Q Okay. So after you started at the Highland complex. And

16 the other one, HCMFA. It was --

17 A Yes. 

18 It was formed somewhere between 2007 and 2009 as Highland

19 Funds Asset Management. That’s where Jim got the H fam from

20 and has carried it. It then became Axis Capital. And then it

21 changed its name again to Highland Capital Management Fund

22 Advisors in, I believe, February 2013.

23 Q Okay. So when did each of these entities begin hiring

24 their own employees? I’m not 100 percent clear. I think I

25 heard the answer, but you tell me.

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1 A Yeah. So they have -- they had their own employees

2 throughout the whole time period, but --

3 Q Since 2011, since 2007?

4 A That’s right. And the -- they have -- and I mentioned the

5 shared services agreements. When I started working for

6 Highland Capital Management Fund Advisors, there were a lot of

7 those in house services that were actually at the Advisors.

8 Q Right. Yeah.

9 A So part of the transitioning those services was with my

10 moving to a different role in around 2013 or so where we merged

11 those services. We were receiving some services from Highland,

12 back-office services, maybe some --

13 Q Okay. I’m more interested in front office.

14 A Yeah. Front-office services.

15 Q Uh-huh.

16 A So the Retail Advisors have always had front-office

17 personnel. And we did rely and we had the payroll

18 reimbursement agreements for certain investment professionals. 

19 Prior to the 2018 agreement, I believe the shared services

20 agreement had investment advisory services in it. 

21 So -- but there was -- you know, we have had investment

22 professionals the whole time. However, as I mentioned, the

23 shift from being real -- from credit focused to real estate

24 focused really started in 2015, ‘16, ‘17, ‘18, and really into

25 ‘19 and ‘20. So our real estate assets in 2012 or ‘13 were

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1 close to zero and today it’s around nine or ten billion.

2 Q Okay.

3 A And I think if you go back to 2008, it was almost

4 primarily credit and a long-short equity fund from our advisors

5 and a mostly credit focused funds.

6 THE COURT: Okay. Thank you.

7 THE WITNESS: Yes.

8 THE COURT: You’re excused.

9 THE WITNESS: Thank you.

10 (Witness excused)

11 THE COURT: All right. That concludes our witnesses. 

12 Right?

13 MR. RUKAVINA: It does, Your Honor. And Mr. Morris

14 and I discussed a proposal.

15 MR. MORRIS: Yeah. Let me just confer with my client

16 --

17 MR. RUKAVINA: Sure. Sure.

18 THE COURT: Okay.

19 MR. MORRIS: -- to make sure my client is okay with

20 this.

21 All right. You can --

22 MR. RUKAVINA: You’re okay? 

23 Your Honor, we were -- if agreeable to the Court

24 since they could then make their flights and we’re all tired,

25 we can do closing by Webex at the Court’s convenience rather

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1 than go now until probably quite -- we’re not going to have, I

2 don’t think, huge, long closings, but we’re going to have quite

3 some time.

4 THE COURT: You had an hour opening.

5 MR. MORRIS: Yeah. I mean, I actually --

6 MR. RUKAVINA: I was a lot less than an hour.

7 THE COURT: Okay.

8 MR. MORRIS: I don’t want to impose my will at all. 

9 I’d like to do it consensually, but I think it might be

10 appropriate to just set some time limits and find a day. We do

11 have a pretty big day next week for the summary judgment motion

12 on the Notes (phonetic) litigation. 

13 But at the Court’s convenience, I think it would be

14 helpful to review the record because it’s been a busy couple of

15 days and I know personally I’d like to read actually the

16 testimony instead of just telling the Court what I think

17 witnesses testified to because people get a little loose with

18 that sometimes.

19 THE COURT: Okay. So we’ll let you do closing by

20 WebEx. We’ll limit you to an hour each. We’ll do it some day

21 next week, but I need to check with Traci. I don’t have my

22 final calendar for next week --

23 MR. RUKAVINA: MSJ is the 20th?

24 THE COURT: -- to know when the best day is.

25 MR. MORRIS: It is the 20th, yeah.

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1 THE COURT: What day is your Note?

2 MR. MORRIS: I think it’s the 20th. Yeah.

3 MR. RUKAVINA: That would be a week from today. 

4 Right?

5 MR. MORRIS: Yeah. You know, and it may not be

6 feasible to do it next week. It may wait until the week after.

7 THE COURT: Okay.

8 MR. MORRIS: I’ll do it whenever the Court wants, but

9 --

10 THE COURT: Okay. We’ll do it either next week or

11 the following week, okay?

12 MR. MORRIS: Yeah. Fair enough. Fair enough.

13 THE COURT: Yeah. I just need to get with Traci --

14 MR. MORRIS: Yeah.

15 THE COURT: -- and see what is the best day. So

16 she’ll reach out to you tomorrow.

17 MR. MORRIS: Perfect.

18 THE COURT: And let you know.

19 MR. MORRIS: Perfect.

20 THE COURT: Okay.

21 MR. MORRIS: Thanks so much, Your Honor.

22 THE COURT: All right.

23 MR. RUKAVINA: So just, I guess, to be clear. 

24 Plaintiff has closed. I have closed because we did it

25 simultaneously, and the evidence is concluded.

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1 THE COURT: The evidence is closed.

2 MR. RUKAVINA: Thank you.

3 MR. MORRIS: Thank you.

4 THE COURT: I’m not listening to anything else. And

5 the briefing is closed, as well. So we’ll just have closing

6 oral arguments again next week or the following week. Traci

7 will reach out tomorrow.

8 MR. MORRIS: Okie doke.

9 (Proceedings concluded at 5:04 p.m.)

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1 C E R T I F I C A T I O N

2 We, DIPTI PATEL, KAREN WATSON, MICHELLE ROGAN, PATTIE

3 MITCHELL, and, CRYSTAL THOMAS, court approved transcribers,

4 certify that the foregoing is a correct transcript from the

5 official electronic sound recording of the proceedings in the

6 above-entitled matter, and to the best of our ability.

7

8 /s/ Dipti Patel /s/ Crystal Thomas 

9 DIPTI PATEL, CET-997 CRYSTAL THOMAS, CET-654

10

11 /s/ Karen K. Watson /s/ Pattie Mitchell 

12 KAREN K. WATSON, CET-1039 PATTIE MITCHELL

13

14 /s/ MICHELLE ROGAN 

15 MICHELLE ROGAN

16 LIBERTY TRANSCRIPTS DATE: April 14, 2022

17

18

19

20

21

22

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24

25

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF TEXAS (DALLAS)

IN RE: . Case No. 19-34054-11(SGJ)

 .

HIGHLAND CAPITAL . Earle Cabell Federal Building

MANAGEMENT, L.P., . 1100 Commerce Street

 . Dallas, TX 75242-1496

 .

Debtor. . 

. . . . . . . . . . . . . .

 . Adv. No. 21-AP-03010(SGJ) 

HIGHLAND CAPITAL .

MANAGEMENT, L.P., 

 .

Plaintiff, .

 .

 v. . 

 .

HIGHLAND CAPITAL, . 

MANAGEMENT FUND ADVISORS .

L.P., et al., . 

 .

Defendants. . Wednesday, April 27, 2022

. . . . . . . . . . . . . . 1:34 p.m.

TRANSCRIPT OF HEARING ON CLOSING ARGUMENTS

BEFORE HONORABLE STACEY G. JERNIGAN

UNITED STATES BANKRUPTCY COURT JUDGE

TELEPHONIC APPEARANCES:

For Plaintiff Highland Pachulski Stang Ziehl & Jones LLP

Capital Management, BY: JOHN MORRIS, ESQ.

L.P.: 780 3rd Avenue, 34th Floor

New York, New York 10017

For Defendant Highland Munsch, Hardt, Kopf & Harr

Capital Management BY: DAVOR RUKAVINA, ESQ.

Fund Advisors, L.P.: THOMAS DANIEL BERGHMAN, ESQ.

500 North Akard Street, Suite 3800

Dallas, Texas 75201

Audio Operator: Michael F. Edmond

Proceedings recorded by electronic sound recording, transcript

produced by a transcript service.

_______________________________________________________________

LIBERTY TRANSCRIPTS

7306 Danwood Drive

Austin, Texas 78759

E-mail: DBPATEL1180@GMAIL.COM

(847) 848-4907

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1 THE CLERK: All rise. The United States Bankruptcy

2 Court for the Northern District of Texas Dallas Division is now

3 in session. The Honorable Stacey Jernigan presiding.

4 THE COURT: Good afternoon. Please be seated.

5 All right. We are here for closing arguments in the

6 Highland Capital versus Advisors matter, Adversary 21-3010. 

7 Let's get appearances first on the record for Highland first.

8 MR. MORRIS: Good afternoon, Your Honor. This is

9 John Morris, Pachulski Stang Ziehl & Jones, for Highland

10 Capital Management, L.P., and I'll be handling today's closing

11 argument on behalf of my client.

12 THE COURT: All right. Thank you. 

13 Now for the Advisors, who do we have appearing?

14 MR. RUKAVINA: Your Honor, good afternoon, Davor

15 Rukavina and Thomas Berghman here for the Advisors, NexPoint

16 Advisors, L.P., and Highland Capital Management Fund Advisors,

17 L.P.

18 THE COURT: All right. Thank you. 

19 All right. That should be all the appearances. We

20 have lots of observers, I'm sure. I believe we allocated one

21 hour each to Highland and then the Advisors collectively. 

22 Correct?

23 MR. MORRIS: That's right, Your Honor. And as the

24 plaintiff, I'm hoping that I don't use my full hour. And

25 whatever time remains from my allotted time, I'll reserve for

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1 rebuttal.

2 THE COURT: All right. We will allow rebuttal if you

3 have time.

4 All right. Well, with that, let's begin. It's 1:35

5 per the Court's clock. So, Mr. Morris, I'll hear your closing.

6 MR. MORRIS: All right. And I would ask Ms. Canti

7 (phonetic) to put up our deck, our PowerPoint presentation that

8 we sent to the Court and to Mr. Rukavina in advance of today's

9 --

10 THE COURT: Okay.

11 MR. MORRIS: -- argument. So, okay, I'll begin the

12 clock, Your Honor.

13 And thank you for hearing us this afternoon. Thank

14 you for your patience the week before last in accommodating our

15 travel schedules and allowing us to complete a pretty grueling

16 two days of testimony. I think it was helpful.

17 And I'd like to begin if we could just turn the deck

18 to the next slide and just remind the Court that at Docket

19 Number 91, Highland filed its proposed findings of fact and

20 conclusions of law. We stand by every work in that 68-page

21 filing. I'm hoping to use my time here this afternoon to

22 simply highlight certain facts that came out of the trial, as

23 well as to kind of summarize where I believe the evidence

24 landed and where I believe the Court ought to rule.

25 Just to quickly go through the claims, Highland's

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1 claims are awfully straightforward. There's no dispute that

2 the Advisors stopped paying for their services under the

3 various agreements at very specific points in time. There's no

4 dispute as to the amounts that are owed under those agreements. 

5 And so unless the Advisors can prove that Highland was in

6 breach of one or more of the agreements, I think that there's

7 an undisputed issue as to Highland's claim and as to the

8 Advisors' liability under that claim.

9 We believe that the Advisors' claims are meritless,

10 Your Honor. We believe that -- and I think there was kind of a

11 sea change during the hearing. I think the Advisors kind of --

12 and we'll talk about this more in a moment -- shifted their

13 theory of the case. And I believe that we now have an

14 agreement that the contracts are indeed unambiguous. 

15 As I'll talk about a little bit more, there really is

16 no such thing, at least in the context of this case, of an

17 overpayment. Even if the Court were to find there was an

18 ambiguity, and I'll go through the evidence again as quickly as

19 I can, the parole evidence --

20 THE COURT: Okay. Just a moment. My court

21 reporter's saying we need to stop.

22 (Court and Clerk confer briefly)

23 THE COURT: I apologize. We are having a technical

24 sound issue. I didn't observe it, but the court reporter

25 equipment -- just bear with us a moment.

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1 (Pause)

2 THE COURT: Okay. Just so we can let the lawyers

3 know, how long do you predict this is going to take?

4 UNIDENTIFIED SPEAKER: Testing, testing. 

5 THE CLERK: It's not coming through.

6 UNIDENTIFIED SPEAKER: Still not coming through.

7 THE CLERK: How long do you think it's going to take?

8 UNIDENTIFIED SPEAKER: I have no earthly idea. I'm

9 not sure what's going on. Give me five minutes.

10 THE COURT: Okay. Lawyers, I apologize. They say

11 give them five minutes. They hope they can get this sound

12 issue. I greatly apologize, but give it five minutes.

13 (Off the record to handle technical issues with audio

14 equipment)

15 (Back on the record)

16 THE CLERK: All rise.

17 THE COURT: All right. Please be seated. We're back

18 on the record in the Highland closing arguments in Adversary

19 21-3010. All right. 

20 Mr. Morris, we're just going to start the clock over

21 in light of a disruption less than five minutes into your

22 closing. So you may begin.

23 MR. MORRIS: Okay. Thank you, Your Honor. And

24 again, John Morris, Pachulski Stang Ziehl & Jones for Highland.

25 As I had mentioned earlier, for the record, Highland

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1 had filed at Docket Number 91 its proposed findings of fact and

2 conclusions of law. We continue to believe that that document

3 fairly sets forth and describes a mountain of documentary

4 evidence that supports its claims and that defeats the

5 Advisors' claims.

6 Just to summarize kind of where we are, we believe

7 that there's no dispute as to Highland's claim. We don't

8 believe there's any dispute as to the time in which the

9 Advisors failed to pay for services or the amounts that were

10 due under those contracts, so that unless the Advisors can

11 prove that Highland is in breach, I believe that there's no

12 dispute that Highland would be entitled to a judgment.

13 Highland believes that the Advisors' claims are

14 frivolous. After some back and forth, I believe that the

15 parties are in agreement now that the contract is unambiguous

16 and that, as I'll discuss further, there really is no such

17 thing as an overpayment under the circumstances that we find

18 ourselves here.

19 Even if the contracts were ambiguous in any way, we

20 believe the evidence firmly establishes that Highland's

21 interpretation is the only fair and reasonable interpretation. 

22 That evidence includes parole evidence that led up to the

23 execution of the relevant agreements, and it also includes the

24 parties' course of dealing and the surrounding circumstances.

25 We believe the evidence will establish and has

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1 established that Highland has fully performed, that the

2 substance of the advisor's claims has changed so radically over

3 time that the credibility of the claim itself is called into

4 question, and their last-minute hail Mary to Frank Waterhouse

5 is nothing but a fumble or an incomplete pass at best. 

6 Mr. Waterhouse's story will not withstand scrutiny.

7 If we can go to the next slide just to summarize and

8 to highlight a couple of additional provisions of the relevant,

9 and I'm focused here on the Payroll Reimbursement Agreement

10 because that is the bulk of the Advisors' claims. Again,

11 Section 2.01 of the agreement provided that not just NexPoint

12 but HCMFA because the documents are identical, and they can be

13 found at Exhibits 6 and 8, provided that the Advisors would

14 reimburse Highland for the actual cost of certain employees,

15 again with a capital A and a capital C.

16 Capital A and capital C actual cost is defined in the

17 agreement to be a flat fee absent a change pursuant to Section

18 2.02. There's really no dispute about that. It's plain

19 language (indiscernible) applied as such. Section 2.02 states

20 that the parties may agree to modify the terms and conditions

21 of the reimbursement. They may agree, they may not agree. 

22 Nobody can act unilaterally.

23 I believe earlier in this case there was a suggestion

24 that Highland had some obligation to do something on its own. 

25 You can't find Highland's name in Section 2.02 because nobody

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1 has the right or the obligation or the ability to act

2 unilaterally.

3 Section 4.02 emphasizes that if somebody does want to

4 make a modification, they have to notify the other party before

5 the last business day of the calendar month. And that's

6 critical, Your Honor, because it shows that the parties agreed

7 that any change would be prospective. There wouldn't be a

8 retroactive change because if there could be a retroactive

9 change then you've just rendered the definition of actual cost

10 absolutely meaningless. Right?

11 If at any time somebody can say, oh, I didn't like

12 what I paid for the last three years, or in this case the last

13 12 months, then why even have a definition of actual cost. 

14 Right? So you've got to read the agreement together. Section

15 4.02 clearly establishes that any request for change under

16 Section 2.02 is going to be prospective only.

17 Section 6.02 says that the agreement can only be

18 amended by a writing of the parties. The parties knew that. 

19 We know that the evidence in dispute indisputably establishes

20 that they exercised their right. They did agree to modify

21 under Section 2.02 in December 2018, and we'll talk about that

22 more. So the parties know exactly what they're doing.

23 And if you remember in my opining, Your Honor, I

24 suggested that the definition of actual cost, we could have

25 called it hamburger, we could have called it tofu if that's

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1 your preference. And the reason that I said that, Your Honor,

2 is because Section 6.07 exists. And Section 6.07 says the

3 descriptive headings are for convenience, and they don't

4 constitute a part of the agreement.

5 So again, you know, everything that I think the

6 Advisors are relying upon are all of these headings. The only

7 thing that matters is the definition of actual cost,

8 Section 2.02, and that any agreement has to be prospective, not

9 retroactive. We believe that that's what the Payroll

10 Reimbursement Agreement shows.

11 If you go to the next chart, Your Honor, it's really

12 just a summary of Mr. Klos' damage analysis. It is really

13 incredibly straightforward. Under the next point, agreements,

14 no payment was made in December or January. All three

15 agreements were flat-fee agreements. We've simply multiplied

16 the flat fee by the period of time that remained unpaid to get

17 to the total.

18 The only wrinkle here is the HCMFA Shared Services

19 Agreement. If Your Honor recalls, there's one -- that's the

20 only contract of the five that isn't a fixed fee. But it

21 stayed within a very narrow band of 300,000 to 310. So we just

22 took an average because they didn't pay. And that's how we got

23 to the 915 because they didn't pay. If you recall the

24 testimony from Mr. Klos, they didn't pay November either for

25 that particular contract because Highland had not yet prepared

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1 the invoice. Okay?

2 So that's the damage calculation. We're entitled to

3 costs, fees, and expenses. You know, in the joint pretrial

4 order, the parties agreed that that issue would be resolved

5 subsequent to the entry of a judgment, if one is entered on

6 Highland's behalf. We'll just follow Rule 54 and come back in

7 a couple of weeks for a calculation of our costs, fees, and

8 interest.

9 If we can go to the next slide, I mentioned, Your

10 Honor, from, you know, I think any fair reading of the

11 Advisors' pleadings, you know, always changing, always trying

12 to adapt to the evidence instead of coming in with a consistent

13 story. You know? But we adapt and we respond. And this is

14 where we are.

15 Their original claim which was filed over a year ago

16 said, alleged that Highland stopped providing services in

17 July 2020. Obviously, that makes no sense. It's contradicted

18 by every single report to the Retail Board. They in fact

19 relied on the wrong contract in their original administrative

20 claim. They said that the NexPoint Shared Services Agreement

21 was an actual cost sharing agreement. And they cited not to

22 the applicable agreement, the one from January 2018, but they

23 cited to the wrong agreement, the one from 2013.

24 And their entire argument on overpayment was simply

25 that it was an overpayment because there were employees on that

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1 Exhibit A were no longer employed by Highland, and it was

2 incredibly outdated. This is just, if you just look at

3 Paragraphs 16, 17, and 18 of their administrative claim, that's

4 all they said.

5 We responded in the fall of 2021. The Advisors filed

6 a response. They didn't really change their tune much on the

7 overpayments. But they insisted that they could not possibly

8 have waived any rights under any of the agreements because the

9 issue didn't crystalize for them until November 2020. Okay? 

10 So they've shifted from July 2020 when we stopped providing

11 services. One would hope that they would have known if we'd

12 actually done that, to the issue not really crystalizing until

13 November 2020.

14 And then on the eve of trial, we got a completely new

15 and different story, a very contradictory theory. Instead of

16 saying that the issue didn't crystalize until November 2020,

17 all of a sudden we came up with Frank Waterhouse, not

18 Dave Klos, but Frank Waterhouse noted the overpayments. 

19 There's no evidence that Frank Waterhouse did this.

20 But in any event, Frank Waterhouse noted the

21 overpayments in late 2019 and asked Fred Caruso, then allegedly

22 the CRO of Highland, to, quote, change the reimbursement

23 amounts, but was told nothing could be done because of the

24 automatic stay. Dustin Norris, right, he's quoted as having

25 repeatedly discussed the matter with Highland's controller

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1 starting in late summer or early fall of 2020.

2 I don't know how you can make that statement when

3 just a couple of minutes before in your response you told the

4 Court that the issue didn't crystalize until November 2020. 

5 Based on the pleadings, I don't think there's any way to

6 actually figure out when they learned what because it just

7 conflicts, all of the statements just conflict with each other.

8 But be that as it may, the important point is that on

9 the eve of trial, they were forced into the 2.02 corner. 

10 Right? They had started out by saying Highland had the

11 obligation to change the amounts that were due because they

12 were in control under the Shared Services Agreement. When, you

13 know, that become untenable because of the language of

14 Section 2.02, they tried to go with the overpayment and just

15 say the interpretation of the contract was that they shouldn't

16 pay for employees who weren't there.

17 Now they're kind of, you know, last stop, last call. 

18 The agreement, Highland breached the agreement because it

19 didn't negotiate in good faith under 2.02. Last call. Third

20 try, last call.

21 Your Honor, we believe everything I'm about to say is

22 irrelevant, if I can humbly say that, because the contract is

23 clear and unambiguous. But to the extent that the Court has a

24 different view, or to the extent the Court wants to get

25 comfortable that the plain and unambiguous terms of the

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1 contract mean exactly what they say, we're going to just

2 summarize what the evidence was that led up to the execution of

3 the Payroll Reimbursement Agreements.

4 I don't think there's any dispute that 2017 was a

5 difficult year for Highland. In December of that year, if you

6 look at Exhibit 30, Sean Fox and Tim Cournoyer discussed

7 shifting NexPoint Shared Services Agreement to a flat monthly

8 fee. It's a very significant development, has nothing to do

9 with Dave Klos. I'm sure we're going to hear a lot of

10 criticism of Dave Klos. But understand that Dave Klos was not

11 involved at this point.

12 The following month, in January, Klos does get

13 involved. And he testifies that he gets instructions from

14 Mr. Dondero to increase from $1.2 million to $6 million the

15 total paid by the Advisors to Highland. And they come up with

16 an allocation for the services among NexPoint and its

17 affiliates. And that is also in the Exhibit 130. And that

18 happens on January 4th.

19 Within seven days, Frank Waterhouse executes on

20 behalf of Highland and NexPoint three agreements, a subadvisory

21 agreement, the new Shared Services Agreement, and the NexPoint

22 Real Estate Advisors Shared Services Agreement. And when you

23 add up the flat fees, there's no dispute, there can't be any

24 dispute that these are three flat-fee agreements that when you

25 add them up, it's $500,000. When you multiply it by 12 --

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1 THE COURT: Mr. Morris, could you maybe close your

2 email box? Every time you get an email, we get that tone, and

3 it's kind of distracting.

4 MR. MORRIS: Sure. Okay. I'm just going to stop my

5 watch for a second and I'll do just that. Give me just a

6 moment, Your Honor.

7 (Pause) 

8 MR. MORRIS: Okay. Can you hear me now?

9 THE COURT: Yeah. It's a little faint, but --

10 MR. MORRIS: Okay. But I think I solved the problem. 

11 Okay. So --

12 THE COURT: Okay. Good.

13 MR. MORRIS: So they've got this $6 million. It's

14 three contracts, and they're all signed. If you look at

15 Exhibit 30, you have three signed agreements, right? And we're

16 going to hear criticism about Dave Klos and he's lying. But it

17 doesn't matter because there's no dispute that three agreements

18 are created. They equal the $6 million.

19 And Jim Dondero is told that because on January 26th

20 at Exhibit 86, you have the deck from the annual review

21 meeting. And Mr. Dondero and Mr. Okada are given a ton of

22 information, including the fact that the Acis CLOs will be

23 reset so that their useful life is extended for two more years,

24 they're projected to generate more than approximately $10

25 million of revenue which is the second largest source of

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1 revenue.

2 They're told explicitly that the assumption in the

3 projections is that NexPoint and its subsidiaries will play a

4 flat $6 million per year for subadvisory and shared services. 

5 And but that notwithstanding these changes, notwithstanding all

6 of this, Highland is still going to lose $12 million in 2018. 

7 But that is the deal.

8 January 26th ends. They've got three signed

9 agreements. It's $6 million flat. They're looking forward to

10 getting this income from Acis. And if we turn the page, that's

11 when the wheels start to come off. And this is all very

12 important, right? This is both parole evidence as well as the

13 surrounding circumstances because within days, Josh Terry

14 commences the involuntary against Acis. That puts into -- that

15 puts at risk the $10 million that was projected for the

16 Highland complex in 2018.

17 So Mr. Fox and Mr. Cournoyer, not Mr. Klos, respond

18 by creating a flat-fee agreement for HCMFA, a subadvisory

19 agreement. Not a payroll reimbursement agreement. Nobody has

20 ever uttered those words at this point. It is a flat fee

21 subadvisory agreement based on the NexPoint template. And that

22 can be found at Exhibit 87. This is the best parole evidence

23 you can possibly have.

24 The wheels come off again. They think they solved

25 the Acis problem. But on March 15th, Lauren Thedford informs

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1 Fox, Surgent, Cournoyer, and Post, right? Mr. Post is a chief

2 compliance officer for the Advisors. Ms. Thedford is not only

3 a lawyer, she's an officer of the Advisors. She's the

4 secretary of the Advisors. Dave Klos isn't even on this email

5 chain yet. He's aware of this, but he's not participating in

6 these conversations directly.

7 And Ms. Thedford informs the team, because this is a

8 team approach, that these subadvisory agreements are not viable

9 because they can't be retroactive, and they need Retail Board

10 approval and an in-person meeting. There was some testimony

11 from Mr. Norris I think about how -- I think he testified or

12 maybe the Retail Board representative did that the Retail Board

13 wasn't interested in front office services, or that they didn't

14 need investment advisory services, or that, you know, Highland

15 didn't supply.

16 Please. Look at Ms. Thedford's email. Why would

17 they need to obtain the Retail Board's approval at an in-person

18 meeting to enter into a subadvisory agreement if there was no

19 expectation and intention that Highland would be providing

20 subadvisory services to the advisors? It makes no sense. But

21 that's going to be the theme of this presentation.

22 So after coming to that conclusion that you can't go

23 retroactive and that you need the Retail Board's consent at an

24 in-person meeting, they come up with the concept for the

25 Payroll Reimbursement Agreement because it needs neither of

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1 those things. Right? And otherwise, Highland is going to get

2 no revenue through June. I think Mr. Klos testified that that

3 number was about $4 million.

4 So she sends the draft of the PRA to Mr. Fox. And

5 this is the coincidence, Your Honor. The only reason that

6 Dave Klos gets involved is because Mr. Fox is on vacation. And

7 you can just look at Exhibit 87. And he adds Mr. Klos to the

8 email chain because Mr. Fox is out of the office. That's how

9 Mr. Klos gets involved. He's not there thinking that in two

10 years, Highland's going to be in bankruptcy and Jim Seery is

11 going to come along.

12 He's doing his job as a loyal employee to this

13 enterprise. And he tells Ms. Thedford that this isn't going to

14 work, and this is in writing, Your Honor. It's just crystal

15 clear. All of this analysis of actual costs involves

16 subjective assumptions. It creates a ton of internal work that

17 isn't adding any value to the overall complex. And that's how

18 they viewed this.

19 It's part of the overall complex. And that's a word

20 that we're going to hear a few times this afternoon. Mr. Klos

21 suggests having a schedule as of January 1st, 2018 and say that

22 Actual Cost with an uppercase A and C, shall be set out in the

23 schedule, paid monthly in installments so that the exercise is

24 only performed once. And then if nobody likes it, they can

25 terminate or they can renegotiate.

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1 That's exactly what happened. That's what the

2 agreement now says. And Mr. Klos does create this $252,000

3 schedule, right? But again, that $252,000, that's just taken

4 from the subadvisory agreement that has already been signed on

5 behalf of NexPoint. Right? He says I backed into the number

6 and I did the best I could using that number. No debate about

7 that. You can't come up with those numbers, and we'll talk

8 about that in a minute. It can't be an accident.

9 I'll say, Your Honor, that's kind of -- that's how we

10 get to the agreement. And so on May 5th, I think, they signed

11 these Payroll Reimbursement Agreements. I don't think there's

12 any dispute that they do not exist. If Ms. Thedford doesn't

13 give the legal advice that the subadvisory agreements, the

14 flat-fee subadvisory agreements that have nothing to do with

15 costs, that don't identify anybody, right, would never exist if

16 those things were viable.

17 If we can go to the next slide, I've created some

18 issues, Your Honor, that I think are just we ask the Court to

19 consider because I think these issues and the testimony and the

20 evidence establish that Highland's testimony and the case that

21 we're presenting here is consistent, it is logical, and it is

22 completely corroborated in contrast to the Advisors.

23 And just to go through some of the issues, why did

24 NexPoint, why did their Shared Services Agreement change from a

25 variable contract to a fixed contract as of the beginning of

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1 2018? Mr. Klos testified that it was to fit within the realm

2 of the $6 million. And remember, this is a 500 percent

3 increase in the amount that NexPoint is paying. They're going

4 from $1.2 million to $6 million. Okay?

5 The Advisors, I don't think, have much of an

6 explanation as to why they went from variable to fixed. 

7 Mr. Dondero testified something about wanting to be compliant. 

8 I don't know if that's an acknowledgment that for the six years

9 before that they weren't in compliance. But I don't understand

10 how the basis on which it's paid, whether it's actual cost or

11 assets under management or flat-fee, I don't see how one of

12 those is compliant and one isn't. In any event, they don't

13 really have any explanation as to why all of a sudden they went

14 to a flat fee.

15 They have no explanation as to where the $6 million

16 came from. Right? Mr. Dondero -- Mr. Klos stated that it came

17 from Mr. Dondero. And you know, this is, you know, part of the

18 burn the house down and not think about the consequences of

19 what you're saying. There was a suggestion during the trial

20 that somehow this was a fraudulent document.

21 We're not taking that position, Your Honor. We're

22 not saying that Mr. Dondero did anything fraudulent. We're

23 saying that there's business substance to this contract. 

24 Highland needed cash. They were providing services. 

25 Mr. Dondero had the opportunity to get a tax break. And so

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1 they established a price.

2 Nobody's suggesting this is an arm's length

3 negotiation. Nobody's suggesting that the Advisors went out

4 and shopped this. There's no evidence to that. But there is

5 economic substance of it. And I really -- I really caution the

6 Advisors in throwing out things like tax fraud because you may

7 try to undermine Mr. Klos, but he reported to Mr. Waterhouse. 

8 And Mr. Dondero is the ownership of the enterprise.

9 Mr. Waterhouse's signatures are on these documents. 

10 And there's so many other people involved when you take that

11 kind of reckless approach. Right? Ms. Thedford, she's the

12 drafter of the documents. She's a lawyer. Mr. Cournoyer,

13 another lawyer, Mr. Fox. There are so many people involved in

14 this that it is just reckless to suggest that this is tax

15 fraud. We don't believe it. We want to enforce the contract,

16 Your Honor.

17 The Acis bankruptcy, we say that that had a huge

18 impact. And the undisputed evidence shows that because if you

19 look at the annual review, there is absolutely no expectation

20 on January 26th that HCFMA is going to pay any money for a

21 subadvisory agreement. It's just not there. It's not in the

22 projections, it's not in the assumptions. And the only reason

23 that HCMFA winds up first with the subadvisory agreement and

24 then with the Payroll Reimbursement Agreement is because of the

25 Acis bankruptcy.

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1 They don't have an explanation as to why HCFMA didn't

2 sign one in January. They don't have an explanation as to why

3 they suddenly signed one in May, right? We do. It's because

4 of Acis. The surrounding circumstances we think are critical

5 here, Your Honor.

6 The flat-fee subadvisory agreement, right, it was the

7 subadvisory agreement signed by NexPoint, prepared by HCMFA. 

8 There's no question that that was flat-fee. There's no

9 question it had nothing to do with actual cost. Why was it

10 abandoned in favor of these Payroll Reimbursement Agreement? 

11 Not because somebody woke up one day and said oh, I only want

12 to pay for actual costs, but for the reasons that Ms. Thedford

13 said. Not Mr. Klos, Ms. Thedford, right, her email, can't be

14 retroactive, need Retail Board approval at an in-person

15 meeting.

16 They have no explanation as to why they -- they'll

17 just ignore. I don't think you'll hear anything in the

18 Advisors' presentation about the subadvisory agreement and why

19 it was abandoned, and what's the genesis of the Payroll

20 Reimbursement Agreements.

21 Dual employees, why weren't dual employees -- if

22 costs were so paramount to the Advisors, why isn't there a

23 provision that says dual employees should keep track of their

24 time because we only want to pay for the time that they expend

25 on the Advisors' matters. Nobody thought about it, nobody

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1 cared about it. There's no evidence that it was ever done.

2 There is no infrastructure in place to calculate,

3 other than subjective, and I think you heard this not from

4 Mr. Klos, not just from Mr. Klos but from Mr. Waterhouse too,

5 there is no way to do this except subjectively because nobody

6 created the infrastructure that would actually allow somebody

7 to figure out the actual costs. Very important point when

8 you're here saying I should only pay for actual costs.

9 If we can go to the next slide, was it a coincidence

10 that the actual costs under the Payroll Reimbursement

11 Agreements matched the flat monthly fees under the subadvisory

12 agreements? We say no. Right? Mr. Klos testified that the

13 parties kept the flat fee the exact same, and backed into the

14 number while, quote, trying to find a reasonable estimate that

15 would also validate the outcome that was already known.

16 So you're trying to put a shoe, so you need a

17 shoehorn. Okay. People use shoehorns, right, just like

18 there's nothing wrong with taking tax issues into account. 

19 This is an agreement. Nobody's pretending it's an arm's length

20 agreement, but it is an agreement of economic substance. There

21 is no question that Highland is providing services. There's no

22 question they're entitled to get paid for those services. 

23 Okay? And that's all that's happening here.

24 The Advisors have absolutely no explanation as to how

25 the numbers in the Payroll Reimbursement Agreements, why they

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1 match to the penny, the numbers that are in the subadvisory

2 agreements. The December 2018, you know, was that a result of

3 a true up? Again, the undisputed evidence is that it's not. 

4 Mr. Klos said there was no true up. Mr. Waterhouse says there

5 was no true up. And it makes no sense if you just look at the

6 economics. We'll look at this more in a few minutes. But I

7 think nine of the dual employees ad already been terminated as

8 of this time, and yet the advisors are paying substantially

9 more money. Okay?

10 Mr. Norris said that Frank and Dave Klos told him

11 that it was the result of a true up. I think Mr. Klos was

12 probably hitting the nail on the head when he just said I think

13 Mr. Norris is mistaken, okay, because the people who were

14 actually involved, and Mr. Norris candidly admitted he has no

15 personal knowledge about anything that happened in

16 December 2018.

17 Why did the Advisors pay the flat fee in each of the

18 Payroll Reimbursement Agreements for 35 consecutive months from

19 January 2018 until November 2020, knowing that the dual

20 employees were being terminated? We say it's because they

21 understood that's what the agreement provided. They say I

22 don't know. I don't know. I don't know. It's a mistake. I

23 don't know. They have no explanation.

24 They didn't even file a proof of claim for the two

25 years before the bankruptcy. Right? If their theory of the

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1 case were right, where was their pre-petition claim? Right? 

2 Why didn't they move to amend for leave to file a pre-petition

3 claim for the two years under Mr. Dondero's watch when Highland

4 did exactly what they did in 2020.

5 Did the Advisors know the amounts that were being

6 paid? The evidence is overwhelming. It includes the annual

7 review. It includes the advisor's books and records. It

8 includes the fact that the advisors gave the amounts paid to

9 the Retail Board. It includes, remember all the testimony from

10 Mr. Waterhouse about the 13-week forecast that included all of

11 the payments that were anticipated to be paid.

12 And my favorite may be Exhibit 150, Your Honor. 

13 That's the April 14th, 2020, one-page cash-flow statement that

14 was given to Mr. Dondero that showed in April, May, June, July,

15 August, September, October, November, and December of 2020,

16 NexPoint would pay, you got it, $500,000 or $6 million a year,

17 the same number that was in Dave Klos' January 4th email, the

18 same number that was in the contracts themselves, the same

19 number that was in the annual review. No mystery here, Your

20 Honor.

21 Did the advisors know when each dual employee left? 

22 Of course they did. Exhibits 88 to 127, every single month,

23 all of the Advisors' officers, m. Waterhouse, Ms. Thedford,

24 Mr. Norris, they're all getting these monthly reports that

25 highlight all of the terminations.

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1 So what do they do? They manufacture a dispute. If

2 we can go to the next slide. Highland gives notice of

3 termination of the Shared Services Agreements on November 30th. 

4 And this is where the rubber meets the road. Everybody knows

5 what's happening now. Highland has just had its plan and its

6 disclosure statement approved by the Court.

7 Everybody knows that Highland is going to be winding

8 down. Everybody knows that if confirmed, right, all of these

9 employees are going to be terminated. And they're supposed to

10 be working toward shifting them to a new platform so that they

11 can service the Advisors and the other non-debtor entities that

12 Mr. Dondero owned and controlled.

13 And the very next morning at 8:53, Mr. Norris walks

14 into the office and he starts sending the emails. And he

15 states it's worth noting that the subadvisory fees were higher

16 than the Shared Services fees. So need to make sure these

17 agreements are fully understood. So on December 1st, this is

18 Mr. Norris' task after notice of termination is given. Let's

19 make sure we understand the agreements.

20 A couple of days later, Your Honor will recall,

21 Highland filed a motion for a temporary restraining order and

22 injunctive relief against Mr. Dondero to enjoin the threats

23 that he was making, to enjoin the interference with Highland's

24 business. And the next day, according to the document anyway,

25 Mr. Klos sent Mr. Waterhouse what became the basis for this

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1 claim here today.

2 Mr. Klos asked Mr. Waterhouse point blank, are you

3 going to use this for an adverse purpose, and he was sure that

4 he wouldn't. Mr. Waterhouse, to his credit, wouldn't take

5 Mr. Klos on that. He simply said I don't have a basis to say

6 one way or the other. I don't remember. Right? He didn't

7 deny that.

8 Remember my questioning of Mr. Waterhouse? Why did

9 you prepare this document? And he said that Mr. Dondero and

10 Mr. Norris told him there were negotiations going on. And I

11 pressed him harder. But you weren't involved in the

12 negotiations. So why were you asking for this document. And

13 he wound up saying because I like numbers. That was the story

14 that Mr. Waterhouse told as to why he asked Mr. Klos to do this

15 on December 8th.

16 Two days later, we obtained our TRO. And the next

17 day, K&L Gates sent their letter. And they didn't send this

18 letter under 2.02. Sure, they wanted to talk. The notes are

19 discussed in there. The Shared Services Agreements are

20 discussed in here. And what they're demanding in that letter,

21 if you read it, Your Honor, isn't, you know, how can we, you

22 know, change this going forward. They're trying to renegotiate

23 the deal.

24 They're demanding exactly what the Advisors are

25 demanding now, and that is we want to just pay for the services

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1 of the employees who are on Exhibit A. That's not a 2.02 good

2 faith negotiation. That's a demand that ultimately led to

3 litigation very shortly thereafter.

4 By January 6th, in fact, we had commenced the lawsuit

5 against the Advisors and against the funds for declaratory and

6 injunctive relief. That was filed -- that's the adversary

7 proceeding 21-03000.

8 So this is where we are. It's pretty tense. If Your

9 Honor recalls, the notice of termination was the end of

10 January. And Highland hadn't gotten paid in a couple months. 

11 And they told the Advisors that if you don't pay up, we're

12 cutting you off. You haven't paid in months. And so

13 Mr. Norris participated in a conversation with Mr. Waterhouse,

14 Mr. Klos, and some others.

15 And he wrote a note to himself. And I think it's

16 such a critical piece of evidence, Your Honor. I would have

17 objected to it, but I think it's so good for Highland that I

18 would rather actually have it into the record. At 2:22 a.m. in

19 the wee hours of the morning, Mr. Norris sent a note to himself

20 at a Gmail account in which he purports to record, as he said,

21 true and accurately everything he remembered about this

22 conversation.

23 Remember the moment in time. It's January 28th. 

24 We've already sued them for injunctive relief. They've already

25 filed their administrative claim. We are two days away from

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1 the confirmation hearing. Highland is telling the advisors if

2 you don't pay, we're shutting you off. And let's look what

3 Mr. Norris' notes say because they are priceless.

4 The overall tone was not friendly. It was

5 adversarial from the beginning as J.P., that's J.P. Sevilla

6 (phonetic), dove in with a very adversarial tone and a take it

7 or leave it or lose your business approach. And there was a

8 contentious back and forth throughout. Think about the tone of

9 this meeting. Think about the tension.

10 I hope the Court, you know, has read the whole

11 document because before you get to the next piece that I've

12 highlighted, Mr. Norris makes a point of writing that he

13 reminded Mr. Waterhouse that he was the signer of the Payroll

14 Reimbursement Agreements on behalf of the Advisors. And then

15 it continues in the highlighted, I reminded Frank that the only

16 people paying the amounts each month had been Frank and Dave,

17 and that no one else that I know of has the ability to process

18 the payments.

19 And here is where Frank reached for the lifeline. 

20 Frank said they have known that these amounts were overpayments

21 for over a year and tried to update them, but they couldn't due

22 to the automatic stay. I pressed him. Imagine being pressed

23 by Mr. Norris in this conversation under these circumstances,

24 adversarial, not friendly, contentious. You're being told you

25 signed the contracts. You're being told you messed up. I

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1 pressed him on this. I was not aware at all of this fact.

2 So this is the first time Frank -- this is the

3 circumstance under which Frank makes the disclosure. He said

4 they had discussed it with inside and outside counsel, and

5 there was nothing they could do now due to the automatic stay. 

6 Think about that, Your Honor. Where are the words Fred Caruso?

7 Frank Waterhouse was not afraid of Jim Seery. He was

8 afraid of Jim Dondero. Frank Waterhouse had taken at least

9 $500,000, but probably more of that $10 million undisclosed

10 payment. The finger is being pointed at him. He signed these

11 agreements. He approved the payments. And he says I told

12 them. I told them. They said there was nothing they could do

13 because of the automatic stay.

14 He doesn't mention Fred Caruso. Right? And remember

15 when I cross-examined Mr. Waterhouse and I said Mr. Waterhouse,

16 I was here with you in December of 2019. I was defending you

17 in a deposition. You didn't tell me anything about this, isn't

18 that right? And he said that's right. Did you tell anybody at

19 my firm about this? No.

20 Mr. Norris pressed him. Right? He reminded him,

21 reminded him of his obligations, reminded him of signatures on

22 here, reminded him that he was in charge of the payments,

23 pressed him on this new story that he'd never heard before. 

24 And this is what Frank came up with.

25 If we can go to the next slide, Mr. Waterhouse's

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1 story, and you know, I feel badly for Mr. Waterhouse. He was

2 put in a terrible position. And I'm not running over him,

3 right? I think Mr. Waterhouse did his job. I think he did --

4 he signed the contract. The lawyers for the advisors,

5 Ms. Thedford, drafted the contract.

6 The contract reflected the back and forth and the

7 intent of the parties. Mr. Waterhouse was the fiduciary. He

8 did his job. But they didn't like the result. They didn't

9 like the result when they saw everything moving away from

10 Mr. Dondero, when they saw the disclosure statement get

11 approved, when they saw the entry of the TRO, when they saw the

12 termination of the Shared Services Agreements.

13 And so now they're coming after Mr. Waterhouse. And

14 Mr. Waterhouse says what he says, and it just makes no sense. 

15 It just makes no sense. His story is that in December 2019, he

16 claims that he heard from Mr. Klos that the Advisors were

17 overpaying under the Payroll Reimbursement Agreements, that he

18 raised the issue with Mr. Leventon, Mr. Ellington, and

19 Mr. Caruso and was told nothing could be done because of the

20 automatic stay.

21 That is the story. That's their 2.02 you failed to

22 negotiate in good faith because they raised the issue with

23 Mr. Caruso. Let's look, let's test that theory just a little

24 bit. If Your Honor remembers, Frank Waterhouse had nothing to

25 do with the creation of the analysis in December of 2019. That

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1 was Mr. Leventon and Mr. Klos.

2 Mr. Klos testified that he was trying to create an

3 analysis that painted the agreements in their most positive

4 light because the UCC was pressing on the inter-company

5 relationships. If Mr. Klos had an analysis that showed that

6 these contracts were wildly profitable, wouldn't he have given

7 that to the UCC? Wouldn't he have shown it to Mr. Seery the

8 next month?

9 Mr. Seery testified about the pressure he was under

10 from the UCC for months. He testified about a conversation he

11 had with the Committee in March where Josh Terry pressed him on

12 these agreements. He didn't know anything about this amazing

13 profitability of the PRAs.

14 Mr. Waterhouse never told anybody? Is that credible

15 that Mr. Waterhouse never told a soul other than Mr. Ellington,

16 Mr. Leventon, and Mr. Caruso? Never told the independent

17 board, never told Mr. Dondero, never told an officer of the

18 Advisors? Is that really possible? And when you hear his

19 explanation when I cross-examined him, he said I had 20,000

20 other things to do. Really?

21 Mr. Ellington and Mr. Leventon never told

22 Mr. Dondero? You have to believe that. If you buy their

23 story, you must believe that Mr. Ellington and Mr. Leventon

24 never told Mr. Dondero that they had been informed that the

25 Advisors were overpaying the debtor because otherwise, it would

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1 have appeared in the administrative claim. It would have

2 appeared in the response. Maybe Mr. Dondero would have

3 testified to it.

4 There's no evidence of that at all. And I'll remind

5 the Court that in December 2020, even after the TRO was

6 entered, Mr. Ellington and Mr. Dondero had free-flowing

7 communications. But a year earlier, Mr. Ellington didn't raise

8 this with Mr. Dondero? Makes no sense.

9 Mr. Waterhouse knew that Fred Caruso was not the CRO. 

10 It's crazy that they even suggest that. All they have to do is

11 look at the documents. Mr. Waterhouse's name appears on 24

12 different monthly operating reports as the preparer of those

13 documents. And right above every report, I did make a mistake

14 in my deck here because I wrote until January 2021. It's

15 actually until July 2020. But from October 2019 until

16 July 2020, whose name appears above Frank's? Brad Sharp

17 (phonetic) because Brad Sharp is the CRO.

18 Fred Caruso was an employee of DSI. So the whole

19 notion that Fred Caruso was the CRO is just wrong. 

20 Mr. Waterhouse's testimony is obviously contradicted by

21 Mr. Norris' notes because Mr. Norris' notes don't mention

22 Frank Waterhouse. It -- Fred Caruso. It mentions inside and

23 outside counsel.

24 Do you really believe that if Mr. Waterhouse knew

25 that there were overpayments being made, he wouldn't write it

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1 down, he wouldn't make a memo to himself, he wouldn't look to

2 confirm what he was told, he wouldn't do -- there's no

3 evidence. How is that possible?

4 But here's the best part, Your Honor. Fred --

5 according -- right? Jim Dondero testified Frank was the

6 fiduciary. He's the person in charge for administering the

7 contracts. And this Court has to believe, if you're going to

8 buy the Advisors' position that Frank Waterhouse learned in

9 December 2019 of the overpayments. And you know what he did? 

10 Not only didn't he tell anybody, but he just kept authorizing

11 those payments month after month after month after month.

12 I don't know why they're putting Frank into this

13 vice. This is the burn the house down strategy. They don't

14 care. They'll take no prisoners here, Your Honor. This is

15 just, it's wrong. It's just wrong.

16 I just want to finish by pointing to the evidence

17 that shows that Highland fully performed here. If we can go to

18 the next page, what I've done here, Your Honor, is the Payroll

19 Reimbursement Agreements were in effect for three years, 2018,

20 '19, and '20. Right? Each year has 12 months. 2018, 2019,

21 undisputed evidence Mr. Dondero was in control of the whole

22 enterprise. He was actually in control until

23 January 9th, 2020.

24 And what I've done here is I've taken Exhibit 14

25 which is the Advisors' responses to the interrogatory and I've

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1 overlaid the month in which each of the employees on -- the

2 dual employees on Exhibit A was terminated. And the red

3 signifies an important event so that you can see May 2018,

4 that's when the Payroll Reimbursement Agreement is entered

5 into.

6 From the minute that Frank Waterhouse puts his ink on

7 the signature, right, with the advice of Ms. Thedford, the

8 Advisors' secretary, officer, and a lawyer, and fiduciary, the

9 minute he puts his name on the document they're already

10 overpaying according to them. Right, because four people have

11 been terminated and yet they're paying a flat fee based on

12 January 1st, 2018.

13 By the end of the year, four more people have left. 

14 They enter into the amendments, right? No adjustment at all to

15 the flat monthly fee. Instead, they pay more money even though

16 there's nine people gone. By the time you get to the petition

17 date, five more people are gone. They're still paying the flat

18 monthly fee. For two consecutive years, the Advisors paid

19 millions and millions and millions of dollars to Highland for

20 services rendered because they were getting front office

21 advisory services.

22 Let's go to the next slide. And here's the proof. 

23 You only need three documents, Your Honor. Right? You're

24 going to hear probably, you know, a reliance on Mr. Norris'

25 uncorroborated testimony about how they didn't, you know, they

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1 had a change in business model and they didn't need the

2 advisory services, and the retail funds didn't need the

3 advisory, and nobody needed anything.

4 They kept paying, right? Just I don't know who's

5 more negligent here. But somebody was. Somebody on behalf of

6 the Advisors if they continued to pay all of this money for

7 services they don't need. The truth of the matter is, Your

8 Honor, that's all a fiction. There's not a single document

9 that's going to support any of that testimony, any of that

10 argument.

11 The documents that actually completely contradict it

12 are three. You start with Exhibit 14. In the right-hand

13 column, those are the dates of departure that the Advisors have

14 admitted to. You next go to Exhibit 85. Exhibit 85 is -- it

15 was a request from the Retail Board in January of 2020. So

16 Mr. Dondero has just stepped aside. The independent board is

17 put in place. And the Retail Board sends a request to

18 Highland, please provide an updated organizational chart

19 relating to the Highland complex. Right?

20 They want to know the whole complex because the whole

21 complex, there's that word again, the whole complex is serving

22 the Advisors. The whole complex is serving the retail funds. 

23 The retail funds wouldn't be asking for organizational charges

24 and information relating to the Highland complex if they didn't

25 rely on the Highland complex. And there would be no reason to. 

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1 There would be no reason for the Advisors to provide

2 information about the Highland complex if the Highland wasn't

3 serving the retail funds.

4 And what information did they provide? They

5 provided, you'll see at Exhibit 85, Your Honor, a list of every

6 single employee in the Highland complex. And they specifically

7 delineate whether the employee was back office, or investment

8 professionals. And you won't be surprised to learn, Your

9 Honor, that every person on this list in front of you was

10 identified as an investment professional, not providing back

11 office services.

12 So the Advisors told the Retail Board in January of

13 2020 these are the people in the Highland who are providing --

14 these are the investment professionals. That's one moment in

15 time. And the best is that eight months later in August, the

16 Retail Board follows up and they ask again who was doing what

17 work, what's happening.

18 And if you look at Exhibit 17, one of the questions

19 the Retail Board asks is what's happening with the bankruptcy. 

20 And you'll see at Page 2 of this memo the Advisors describe the

21 bankruptcy, and then they say -- and this is dated August 13. 

22 It's in response to a 15(c) request. And the Advisors say,

23 quote, we continue to treat HCMLP and its affiliates as the

24 Advisors' affiliates for purposes of discussions with the

25 board.

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1 Okay? So the Advisors are telling the Retail Board

2 that Highland and its affiliates are still affiliates of the

3 Advisors for purposes of discussions with the Retail Board. 

4 But wait, there's more. They identify every one of the

5 investment professionals again. And it's all footnoted here. 

6 And not only every single one of these investment professionals

7 who the Retail Board was told in January was an investment

8 professional, every one of them in January was still there in

9 August with the exception of Trey Parker.

10 And what's also interesting, Your Honor, and

11 consistent with both Mr. Waterhouse's emails and Mr. Klos'

12 testimony, you'll see that there are several people there that

13 weren't identified as dual employees. They weren't identified

14 on Exhibit A. But they're still providing investment

15 professionals. And do you know why they aren't on Exhibit A? 

16 Because they were hired after the Payroll Reimbursement

17 Agreements were signed. It's that simple.

18 And so people's responsibilities changed. And if you

19 note, even Trey Parker, a dual employee, it shows that he left

20 on February 28th, 2020. There's a whole -- I don't have the

21 Exhibit numbers handy, Your Honor. But there's a whole slew of

22 title changes where a whole bunch of people got elevated to

23 investment advisory-type positions.

24 And that's what's happening here. He leaves and his

25 responsibilities are divvied up among other Highland employees. 

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1 This is what they're telling the Retail Board. These are not

2 our documents. These documents were produced by the Advisors

3 and by the retail funds. So don't take my word for it, take

4 their word for it.

5 There is a reason that the Advisors are telling the

6 Retail Board that these are our investment professionals in

7 January, these are our investment professionals in August,

8 because these are the people in the Highland complex who are

9 doing work for you, because otherwise, this makes no sense and

10 I'll be waiting patiently to hear an explanation as to why all

11 of this information is being provided to the Retail Board if

12 the Advisors don't need these people, the Retail Board doesn't

13 need these people, and that everything's changed.

14 At the end of the day, Your Honor, again, whacking

15 moles. I'm just whacking moles. Highland performed, the

16 contracts are unambiguous, the Frank Waterhouse story is beyond

17 belief. It's contradicted by Mr. Norris' own notes. And we

18 respectfully request that the Court grant Highland a judgment

19 in the amount set forth in the slide up above subject to a

20 collection of attorneys fees, and deny the Advisors' claims in

21 all respects. Thank you, Your Honor.

22 I believe that's 48 minutes by my count.

23 THE COURT: Let me check with my law clerk. He had

24 49. Okay. We'll call it 48 and a half. All right. 

25 Mr. Rukavina, I'll hear from you.

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1 MR. RUKAVINA: Thank you, Your Honor. 

2 And, Mr. Berghman, if you'll please put up my slides.

3 Your Honor just heard 49 minutes of irrelevancies,

4 misdirection, and smear. Now let's look at some facts and law. 

5 Overall, there are two facts and conclusions that cannot be

6 contradicted.

7 First is that there is no support for the allegation

8 that the Payroll Agreements were, quote, pay for services

9 agreements. You heard that in opening, that they were pay for

10 services, meaning that we have to pay them because the services

11 are allegedly being provided regardless of the terms of the

12 agreements.

13 The only possible evidence on that was from Mr. Klos

14 when he was testifying about how the numbers were arrived at. 

15 And as you can see there, it's on his transcript. I asked him

16 very clearly about that. And he said it would be just

17 speculation. So, Your Honor, there is no support for any pay

18 for service agreements, $5 million and $6 million per year as a

19 funding mechanism.

20 And more importantly, you heard Mr. Morris state that

21 we agree there is no ambiguity in these contracts. Mr. Morris

22 took you what he admitted was parole evidence after parole

23 evidence. He called one document the best parole evidence. 

24 That is not admissible to contradict the terms of these

25 contracts. Next slide, please.

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1 On the issue of the bona fides of the contracts --

2 THE COURT: All right. I am not -- I'm not seeing

3 the shared content. Are other WebEx participants seeing it?

4 MR. MORRIS: I am, Your Honor.

5 THE COURT: Mr. Morris? I'm sorry, you said yes you

6 have it?

7 MR. MORRIS: Yes. I can see it on the screen. I

8 didn't receive a copy, but I can see it on the screen.

9 THE COURT: Yeah. We have a frozen picture of

10 Mr. Rukavina's face on what's supposed to be the shared screen. 

11 Mike, do you have it? Yeah. Okay. Well --

12 MR. RUKAVINA: You know what, this happened -- can

13 you hear me, Your Honor?

14 THE COURT: Yes. I can hear you and see you fine on

15 my screen.

16 MR. RUKAVINA: Yeah, this happened before. This

17 happened before. Can you see it now?

18 THE COURT: Oh, wait. Now something is happening. 

19 It's --

20 MR. RUKAVINA: This happened to Mr. Morris last week. 

21 And I think Ms. Alaysia (phonetic) would just close the

22 PowerPoint and reopen it. Can the Court see?

23 THE COURT: Okay. Yeah. Right now I've just got a

24 blank screen, a black screen. So is Ms. Canti turning

25 something off?

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1 MR. RUKAVINA: No. Mr. Berghman just turned it off

2 and -- try again, Thomas. Just close the screen share and then

3 restart the screen share. 

4 Can the Court see it?

5 THE COURT: I can't see it. No. But everyone else

6 can see it apparently, except me, right? 

7 Mr. Morris, you see it?

8 MR. MORRIS: I do, Your Honor.

9 THE COURT: Okay. Do we have a hard copy of this? 

10 Was it --

11 MR. RUKAVINA: We do not. I emailed it to Mr. Morris

12 an hour a go. Let me email it, Your Honor, if you would

13 like --

14 THE COURT: Ms. Ellison.

15 MR. RUKAVINA: Yeah, Ms. Ellison. Let me just --

16 THE COURT: Okay. If you'll email it to her, then

17 she can email it to me and I'll pop it up on my other screen.

18 MR. MORRIS: And just to be clear, it was emailed to

19 me 14 minutes ago at my request. Thank you.

20 (Pause)

21 MR. RUKAVINA: I sent it to you at 1:49, John. But

22 it doesn't matter. Ms. Ellison should have it momentarily.

23 THE COURT: Okay. Traci, are you out there on the

24 WebEx?

25 UNIDENTIFIED SPEAKER: Yes, Your Honor. I'm here.

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1 THE COURT: Okay. While we're waiting, Mr. Rukavina,

2 just to confirm, we don't have a dispute that the agreements

3 are ambiguous. You don't think they're ambiguous. You just

4 have a different interpretation of what they mean. Correct?

5 **Crystal

6 MR. RUKAVINA: I don't know that I have a different

7 interpretation. They are unambiguous, and I think Mr. Morris

8 and I agreed on the four provisions or so that govern. My

9 argument is that we properly and timely trigger those

10 provisions. 

11 Mr. Berghman, can you --

12 THE COURT: Oh, I've got it now. I've got it now. 

13 The shared screen is working now. Go ahead.

14 MR. RUKAVINA: Just let me --

15 MR. BERGHMAN: Your Honor, it's in a PDF as opposed

16 to a PowerPoint. Maybe that's the technology issue, so I think

17 this may work.

18 THE COURT: Okay. Good deal.

19 MR. RUKAVINA: Okay. Maximize the deck, Thomas,

20 because we're seeing your other stuff on there. No. No. Your

21 Honor, I'm going to mute this and call my partner.

22 (Pause)

23 THE COURT: Yeah. Mr. Rukavina, I don't know if

24 you're on hold or you can hear me. I've got the PowerPoint

25 version up that you emailed to Traci which she emailed to me,

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1 so if --

2 MR. RUKAVINA: Okay.

3 THE COURT: -- that helps what you're doing, I've got

4 a PowerPoint version up.

5 MR. RUKAVINA: Okay. Thank you then. Let's resume. 

6 Mr. Berghman, please pull it up like you had it originally. 

7 Everyone else can see it and Judge Jernigan, we'll just follow

8 Your Honor manually. I would ask you to advance it.

9 THE COURT: Uh-huh. Okay.

10 MR. RUKAVINA: So, Your Honor, the first slide, we

11 are now in the second slide called Advisors' administrative

12 claim.

13 THE COURT: Okay.

14 MR. RUKAVINA: And you see I have a listing of eight

15 points. So, you know, what I was discussing is to go back to

16 the bonifieds of these contracts. Mr. Klos testified very

17 clearly that he prepared the underlying reimbursement

18 allocations in good faith and reasonably. Yes, there's some

19 subjectivity, but accountants and controllers and financial

20 types know how to take those account.

21 Both Waterhouse and Dondero testified that those

22 amounts were arrived at through a good faith process by

23 Highland's team. And let me just add something to what Mr.

24 Morris keeps mentioning here, somehow that Highland always

25 wears the white hat and the Advisors always wear the dark hat

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1 here. Let's not forget that this is the same Debtor that

2 participated in the drafting of these contracts. Its employees

3 drafted these contracts. As we said, these are not arms length

4 negotiations. 

5 So for him to say or ask questions like, the Advisors

6 have no explanation for this or the Advisors can't explain that

7 and I can't wait for an explanation. He should ask that of his

8 own client, of his own self. It takes two to tango, Your

9 Honor, and they stand in the shoes of the Debtor.

10 You know for a fact that Highland was actually able

11 to track employee time because you saw in my Exhibit 88 that

12 every month they sent invoices under the HCMFA Shared Services

13 Agreement where they tracked Highland time. Ms. Thedford would

14 not have used outside counsel to advise on these contracts if

15 there was something funny about these contracts.

16 Mr. Waterhouse and Mr. Dondero both testified that

17 outside auditors and legal advise was used. At no time until

18 he testified did Mr. Klos raise any red flag regarding any of

19 what he did or his analyses or these contracts. And you heard

20 from him that -- and from everyone else -- that he was the most

21 credible man in that trial.

22 So, again, all that is just to say there is no

23 ambiguity. There is no red flag. The contracts are what they

24 are and they should be interpreted according to their terms. 

25 If we can advance the slide, Your Honor, please.

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1 The second main fact that the Court should consider

2 is that the fact of overpayment is incontestable. There can be

3 -- we can argue under the law whether we're allowed to get the

4 overpayments, but the fact of overpayment is incontestable. We

5 all know what reimbursement means. We all know what actual

6 cost is defined at. You can only be reimbursed for your actual

7 out of pocket costs for the employees. There is no profit. 

8 There's no dispute that many employees were not

9 there. We were paying for 20 employees out of 25 that were not

10 there. Please don't fall for the misdirection, Your Honor,

11 that, well, four of the employees weren't there when the

12 contracts were signed. Recall from Mr. Klos that he was

13 preparing that list as of January 1, 2018, which was the

14 effective date. 

15 So, yes, those four employees weren't there in May,

16 but they were there in January. And again, Mr. Klos prepared

17 the list of 20 employees. If there was something funny about

18 this, he, the most credible man in the courtroom, would not

19 have done that.

20 You have the December 2019 analysis. This is post21 bankruptcy. The Debtor is a fiduciary. The Debtor has an

22 outside financial advisor. Mr. Klos, that financial advisor,

23 and Mr. Waterhouse, internally calculate that the Debtor is

24 making a $3 million profit that's a snapshot in time under

25 these contracts. And they shared that information with the

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1 committee. That's their own work product. There's no funny

2 business there. There's no funny math.

3 Mr. Klos' December 2020 analysis shows that the

4 profit as a snapshot in time had ballooned to $6.6 million. It

5 doesn't matter why Mr. Waterhouse asked him to prepare that

6 analysis. It doesn't matter. Mr. Klos can invent whatever

7 reason he thinks Mr. Waterhouse did. Mr. Waterhouse prepared a

8 professional analysis for his bosses. And he calculated $6.6

9 million.

10 His current attempt to discredit his own work is

11 unbelievable. He doesn't like the conclusion that he reached. 

12 He doesn't like the fact of overpayment because now he's the

13 Debtor's CFO, so he tries to discredit himself. That was not

14 credible at all. And his evasiveness on my cross-examination

15 was disturbing. The assumptions that Mr. Klos used were

16 utterly reasonable. He used the actual number of employees at

17 that point and time and he used the fact that there were no

18 bonuses being paid.

19 Now Mr. Norris, in hindsight, calculated the $2.6

20 million delta as opposed to 6.6 million. Now, let's look at

21 very briefly why Mr. Norris' calculations are accurate and

22 reliable. Highland stipulated that his underlying source of

23 data and his math were correct. Your Honor will recall that

24 whereas Mr. Klos assumed no bonuses, it's true that certain

25 bonuses were paid to non-insiders. Well, Mr. Norris took that

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1 into account. He didn't give you an artificially inflated

2 number. He said, okay. Some bonuses were paid, so the number

3 is going to go down.

4 Mr. Norris' calculation is cumulative. What Mr. Klos

5 did was a snapshot in time, but not all the employees were gone

6 at the same time. So Mr. Norris, as I told you, went month by

7 month and looked at which employees were there and how much

8 were they actually paid.

9 Another very important thing, Your Honor, Mr. Klos'

10 analysis included certain replacement employees, again, under

11 this theory that Payroll Reimbursement Agreements are actually

12 service agreements in addition to the service agreements. So

13 Mr. Klos, I think there were six or seven employees who he

14 unilaterally replaced. Well, that can't be. As Mr. Norris

15 testified, none of those employees were front office investment

16 advisory employees.

17 So you have -- oh, and Mr. Norris used David Klos

18 allocations. Mr. Klos again testified that those allocations

19 were reasonable. That was not rebutted. And Mr. Norris

20 confirmed that those allocations were reasonable. But even if

21 the Court says for those five employees it should have somehow

22 been 100 percent allocation, we still overpaid $4.4 million,

23 but the Court shouldn't do that. The fact of the matter is

24 that Mr. Norris' calculations were never rebutted. He wasn't

25 even cross-examined about them. If we could go to the next

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1 slide, please.

2 And Highland knew of the overpayments. Again, we

3 have the facts of DSI. We have the fact of the committee. We

4 have Mr. Klos' email where he writes to my client that the fact

5 that there's fewer employees has increased the profitability of

6 these contracts from Highland's perspective. 

7 You have multiple other admissions from Mr. Klos of

8 the overpayments and you have a very strong item of

9 circumstantial evidence that you got no explanation for from

10 anyone, which was why did Highland terminate the Shared

11 Services Agreements right around December 1, but did not

12 terminate the Payroll Agreements until the very end of

13 February, and only after being demanded to do so by my client. 

14 Because they were making a profit that they knew that they

15 shouldn't have been making.

16 Your Honor should expect more of a fiduciary, more of

17 a debtor-in-possession, more of people that my client was

18 paying big money to every month to perform services. They

19 can't just stick their head in the ground, make millions of

20 dollars of profit extra contractually, and not do anything

21 about it. Next slide. Your Honor, if we can go to the next

22 slide.

23 So my first argument, Your Honor, is that we don't

24 have to look at the contract. We look at what is an

25 administrative claim. Basically, if my clients provided value

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1 to the estate that they did not receive return consideration

2 for, then that is an administrative claim. That's the Supreme

3 Court. That's Judge -- former Judge Lynn in the Northern

4 District. And you also have the fact that these were unassumed

5 and unrejected contracts. And the breach of contract, separate

6 and apart from an overpayment, a breach of contract is an

7 administrative claim unless and until the contract is rejected.

8 So that is our most simple argument. We provided

9 value in the form of cash money to the Debtor post petition for

10 which we did not receive services. As we've always pled,

11 there's been no changing of our story as has been alleged. 

12 That's absurd. There's been a refinement of our numbers

13 through discovery, which is how the process should work. 

14 If we can go to the next slide, please, Your Honor.

15 If the Court concludes that you actually have to look

16 at the contracts, you can't just rely on what is an

17 administrative claim, you have to look at the contracts, then

18 the fundamental purpose of these contracts is to reimburse for

19 actual costs. Again, I think we agree on that, Mr. Morris and

20 I. That is the overriding purpose. And the word reimbursement

21 is used many times in here.

22 It is true that those contracts define what actual

23 cost is on a monthly basis unless those number are changed as

24 set forth in Section 2.02. That is true. So, as long as no

25 change is made, then the preset numbers control. And that's

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1 okay. 

2 Your Honor will recall from Mr. Klos' and Ms.

3 Thedford's email exchange that it was very cumbersome to figure

4 this out. So Mr. Klos is the one who suggested, well, let's

5 just make it a monthly amount and if we have to change it,

6 we'll change it. We can go to the next slide, Your Honor,

7 please.

8 The problem now is, as Mr. Morris correctly pointed

9 out, it's Section 2.02. So Section 2.02 needs to be triggered

10 in order to modify the pre-settlements. And Section 4.02 also

11 bears a role. But let's not forget what Section 2.02 says, the

12 last line. The parties will negotiate in good faith the terms

13 of such modification. The Debtor very conveniently ignores

14 that. 

15 And Section 4.02 says that either party may make a

16 request for a modification. It doesn't say how that request

17 must be made. It doesn't say it must be formal, in writing. 

18 It says either party may make a request for a change.

19 Therefore, I think the contractual analysis is very,

20 very simple. Unless and until a request for a change is made

21 by either party such as to trigger the requirement for good

22 faith negotiation under Section 2.02, the preset monthly

23 amounts control. If we can go to the next slide, Your Honor,

24 please.

25 Now there are three reasons that we maintain why we

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1 comply with these contracts, with these requirements. First

2 you have the course of conduct. Course of conduct is not

3 parole evidence. As we briefed, whether a contract is

4 ambiguous or unambiguous, the Court can look at the course of

5 conduct to determine how the parties interpreted their own

6 contract. 

7 Second, you have Mr. Waterhouse and later Mr. Norris

8 and others actually saying, hey, we’ve got to revise these

9 numbers. And Highland did not negotiate in good faith. As Mr.

10 Seery testified, there was zero negotiation. And then our

11 third argument is that under the Shared Services Agreements

12 Highland was the one obligated to monitor and review and advise

13 us with respect to our payables. And if we can go to the next

14 slide, Your Honor, please.

15 THE COURT: Okay.

16 MR. RUKAVINA: So Your Honor has the December 2019

17 amendments, the ones pursuant to which my clients ended up

18 paying Highland $2.5 million. Those are unambiguous. There’s

19 no reason, fact, or logic as to why the Court can or should

20 look behind them. And they expressly state that upon reviewing

21 the actual costs, my clients underpaid and they owed more. It

22 doesn’t matter that there might have been fewer employees

23 there. 

24 Frankly, no one has told us why my clients ended up

25 paying more even though there were fewer employees, but you

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1 heard that it’s possible, that because of everything that was

2 going on, certain employees were devoting far more of their

3 time to my clients than Mr. Klos had estimated they would.

4 It doesn’t matter. The contracts say we underpaid

5 after an annual review and we ended up paying more. Those

6 contracts cannot be swept under the rug, or those amendments,

7 by the Debtor. They can’t be ignored. Those contracts or

8 those amendments are evidence of an annual true up. 

9 Mr. Waterhouse testified to this. It’s on Page 140

10 of the transcript that there was a general policy at Highland

11 to review long term contracts on an annual basis. As he said,

12 it was just too onerous to true up agreements on less than a

13 yearly basis. So yearly is kind of more the practice. And if

14 we can please go to the next slide, Your Honor.

15 This is also --

16 THE COURT: Okay.

17 MR. RUKAVINA: If the Court wants to look at the

18 formation emails, this is what Mr. Klos wrote to Ms. Thedford. 

19 This is Exhibit K. And he writes, this is where he says, look,

20 this is going to be really cumbersome. Let’s have a predefined

21 amount payable every month. Then he says, beyond a year. 

22 So again we’re -- he’s thinking, just like Mr.

23 Waterhouse said, of an annual review. After a year either

24 party could terminate and or renegotiate for an amended

25 agreement. Well, that’s exactly what they did at the end of

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1 2018.

2 So regardless of the fact that the contract talks

3 about a monthly analysis, the parties, both of them, changed it

4 or they understood it to actually be a one year analysis, at

5 least with respect to a retrospective analysis as opposed to a

6 prospective change. 

7 And that’s something that’s very important as well,

8 Your Honor. In Section 2.02, Mr. Morris is correct. It

9 applies prospectively. But nothing in these agreements

10 prevents a retrospective analysis or a true up or a refund,

11 nothing. The only reason why a true up wasn’t done in 2019 was

12 because of the bankruptcy. If we can please go to the next

13 slide.

14 THE COURT: Okay.

15 MR. RUKAVINA: Now let’s talk about Mr. Waterhouse’s

16 testimony. Mr. Waterhouse testified that he told Mr. Caruso,

17 clearly an agent of the Debtor, and that he told the Debtor’s

18 other officer, general counsel, that there were these

19 overpayments. The overpayments were discovered, as Your Honor

20 will recall, because the committee requested an analysis of

21 intercompany contracts. All of these men, Mr. Caruso and Mr.

22 Klos, in good faith performed that analysis.

23 So there is circumstantial evidence, Your Honor, to

24 confirm that what Mr. Waterhouse said is true. His testimony

25 was never rebutted, for one thing. You know, Mr. Morris was

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1 always fond of saying, well, why isn’t someone else here? Why

2 isn’t someone else here? Mr. Caruso could have rebutted this

3 testimony. He made millions of dollars in this case. He never

4 testified here and said, whoa, whoa, whoa, Frank never told me

5 that.

6 And why wouldn’t Mr. Waterhouse say to Mr. Caruso

7 what he did? The gentleman had just performed the analysis. 

8 It’s not, Your Honor, like I’m trying to suggest that

9 Waterhouse just called up Caruso one night over a glass of wine

10 and said, oh, I just got this idea in my head. They just

11 performed this analysis. And the fact at that time of $3

12 million in annual overpayments was learned. 

13 Isn’t it logical that the CFO and the treasurer would

14 go to the general counsel and a financial advisor and say,

15 guys, we’ve got to do something about this?

16 So this is credible testimony. And what Mr.

17 Waterhouse did triggered Section 2.02, the duty to negotiate in

18 good faith. The Debtor said, we can’t because of the automatic

19 stay. Whether that’s right or wrong as a matter of law is

20 irrelevant. 

21 Mr. Waterhouse was entitled to rely on what the

22 financial advisor, a bankruptcy expert of 30 years, and of what

23 the internal lawyers told him. He reasonably relied on that

24 and what more was he to do? He talked to the lawyers. He

25 talked to the bankruptcy experts.

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1 We also have to point out that the Payroll

2 Agreements, Your Honor, contain anti-waiver provisions. So not

3 only is there no set method by which a request to modify must

4 be made, there’s anti-waiver provisions. Even if Your Honor

5 does not find Mr. Waterhouse’s testimony and what he did to

6 rise to the level of flagging the issue and requesting a

7 change, you have beginning in October of 2020 -- I’m sorry. 

8 Yes, October of 2020. 

9 Mr. Norris and Mr. Klos having numerous discussions

10 regarding these matters as Mr. Norris became involved with the

11 process. Mr. Norris was very credible, very credible. And of

12 course he and Mr. Klos discussed this. And you see even in

13 that email where Mr. Klos is admitting that these contracts

14 have become even more profitable for Highland. 

15 So, yes, Mr. Klos admitted to Mr. Norris that

16 Highland was making profits, that there were overpayments. Mr.

17 Norris was upset. He said, we’ve got to change it. Again, the

18 message came back automatic stay. It’ll be dealt with in due

19 course.

20 If the Court doesn’t find that credible or rising to

21 the level of anything, you have the absolute fact of the

22 December 11, 2020 letter from K&L Gates, who at that point and

23 time represented the Advisors saying it looks like there’s

24 about $5 million in overpayments. We’ve got to do something

25 about that. If we can go to the next slide please, Your Honor.

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1 THE COURT: Okay.

2 MR. RUKAVINA: So what we have, Your Honor, right or

3 wrong, legally appropriate or not, Highland not negotiating a

4 change in the reimbursement rates, whether from late 2019 or

5 October 2020 or December 2020. 

6 What is my client supposed to do? Again, it takes

7 two to tango. If they’re required to negotiate in good faith

8 and they know and they don’t, Mr. Morris is right. My client

9 can’t unilaterally change the reimbursement rates, but the

10 requirement to negotiate in good faith is in these contracts. 

11 The Court cannot read that out of the contracts. And the

12 Debtor, for whatever reason, did not negotiate in good faith. 

13 The Debtor breached Section 2.02 and it’s a frustrational

14 purpose.

15 How are we supposed to change the reimbursement rates

16 when the counter-party breaches an obligation to negotiate in

17 good faith? Well, it becomes a little bit circular here, Your

18 Honor, because the damages from that breach or the fact that

19 you didn’t change the reimbursement rates, but it doesn’t even

20 matter because once a party breaches, as the Debtor did here,

21 it cannot insist on the strict application prospectively of

22 that contract.

23 What happened, Your Honor, is that once my clients

24 raised the issue, when they triggered the process, the preset

25 reimbursement rates no longer controlled. The parties were

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1 required to figure out what the actual costs were in good

2 faith. If you can go to the next slide please, Your Honor.

3 THE COURT: Okay.

4 MR. RUKAVINA: And then our third theory, Your Honor,

5 is under the shared services. You heard -- well, you saw --

6 that in these Shared Service Agreements the Advisors were

7 paying Highland to monitor contracts, monitor payables, ensure

8 that appropriate payable amounts were being paid. 

9 Mr. Waterhouse confirmed that these services -- I

10 mean, you can look at the contract. You don’t need his

11 testimony. But that these services included scrubbing the

12 Advisors bills to make sure that the bills were proper, that

13 there weren’t refunds due, that there weren’t overpayments. 

14 And Highland certainly knew of the overpayments. Again, we

15 have the December 2019. You have the report from DCI going to

16 the committee. Highland knew.

17 We go back to the Payroll Agreements which provided

18 should either party -- that’s key -- should either party

19 determine that a chance is appropriate, then either party may

20 request a modification. Consistent with its duties to assist

21 and advise the Advisors, Highland should have done so. As

22 we’ll talk in a moment, no employee of the Advisors or agent of

23 the Advisors knew of the overpayments who was not at the same

24 time also an employee or an agent of Highland.

25 Does the Court really believe or can anyone really

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1 believe that these people, Klos, Waterhouse, Caruso, that they

2 all just really did nothing about this, ignored it, that

3 Highland sat back there and knowingly was taking $6.2, $6.6

4 million from my clients? 

5 Or is it far more likely that, in fact, they all

6 believed in good faith that the automatic stay prevented any

7 kind of negotiation or modification? It goes back again to the

8 truth. The most credible explanation is that Klos and

9 Waterhouse knew what was going on, but were told by the

10 bankruptcy experts, we can’t do anything about it, because of

11 the bankruptcy stay.

12 The alternative is, again, that they sat there,

13 violated their duties under the Shared Services Agreements,

14 acted ridiculously as a debtor-in-possession by knowingly

15 taking millions of dollars in profits not entitled to under the

16 contract. 

17 Either way, Highland knew about it, had an obligation

18 to do something about it, and did nothing about it. It cannot

19 now exploit any delay or any advantage as a result of its own

20 fault. Your Honor, if we can advance to the next slide,

21 please.

22 THE COURT: Okay.

23 MR. RUKAVINA: What does Highland say back? Well,

24 you waived your rights. Okay. We might have over billed you

25 by $6.6 million. We might have known about it. We might have

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1 had an obligation to tell you about it, but you waived your

2 rights. Well, the contracts contained anti-waiver provisions. 

3 Waiver has to be knowing and intentional. 

4 Mr. Waterhouse is the only person who is an agent of

5 the Advisors that knew of the overpayments, but as we briefed,

6 under Texas law when you’re an agent to two principals, his

7 knowledge cannot be imputed to one to be used against the

8 other. The other people involved, Mr. Klos, DSI, Mr. Caruso,

9 they were never agents of the Advisors. 

10 So the Advisors -- there’s no evidence that the

11 Advisors knew of the overpayments in order to be able to make a

12 knowing and intentional waiver. Of course the Advisors knew

13 that certain employees weren’t there. That’s a given. Mr.

14 Norris was very clear about that. But that is a separate issue

15 from knowing that every month, every month, Highland was

16 billing us for those employees that were no longer there. Only

17 Highland employees knew that.

18 Also, Your Honor, these statements to the board, the

19 funds boards, again, misdirection. All those communications,

20 all those board minutes, we went through a dozen of them one by

21 one with Mr. Powell. All of those are referring to the Shared

22 Services Agreements in which case, yes, Highland was providing

23 services to us under the Shared Services Agreements. None of

24 those talked about the Payroll Reimbursement Agreements.

25 And the fact, Your Honor, that we stopped paying

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1 right after Mr. Norris learned about it was further evidence

2 that there was no waiver. And when I talk about waiver, Your

3 Honor, I mean, common law waiver. I mean, contractual

4 interpretation waiver. That’s separate from whether we sat by

5 and did nothing under Section 2.02 and 4.02 of the contract. 

6 We’re going to go to the next slide please, Your Honor. 

7 THE COURT: Okay.

8 MR. RUKAVINA: Likewise, the voluntary doctrine

9 payment does not apply. As we briefed, it doesn’t apply in

10 Texas to the contract claims. It only applies where there’s

11 full knowledge of material facts. And again, we did not know

12 of the overpayments. The only one who did was Waterhouse and

13 he did what he could. 

14 And it’s also a critical factor here, Your Honor, as

15 you’ve heard, that we did not actually write a check or

16 initiate a wire transfer for these payments. Highland

17 employees did so. Highland employees, pursuant to the services

18 they were providing, had access and control to our bank account

19 and Highland employees paid themselves.

20 Mr. Waterhouse approved those payments. That is

21 true. But he approved them as the CFO of Highland. It’s very

22 clear. You have Ms. Hendrix’s emails to him. She’s writing to

23 his -- to her boss, pardon me -- saying, hey, boss, under all

24 these obligations, under all these contracts, the following

25 Advisor fees and bills are due. And he says approved. 

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1 Even if he was wearing his Advisor hat, again,

2 there’s no voluntary payment because he was told that the

3 automatic stay prevents anything from being done about this. 

4 And we all know that a legal disability, like the automatic

5 stay, for example, tolls limitations. A legal disability is

6 not voluntary. It is not a waiver.

7 So, Your Honor, that rounds off the discussion on why

8 the Advisors have legitimate administrative claims. They have

9 been quantified by Mr. Norris in a calculation where the Debtor

10 has conceded that his numbers and his math are correct. His

11 number is not dissimilar from Mr. Klos’ number, which should

12 add further support and credibility. 

13 And really, it just comes down to the contract and

14 how the Court interprets the contract in light of the parties’

15 prior annual true up and in light of Mr. Waterhouse’s

16 discussions with Highland personnel saying, there’s

17 overpayments. We’ve got to do something about those

18 overpayments, which triggered the requirement to negotiate in

19 good faith, which never happened. If you can go to the next

20 slide, please.

21 Now I’d like to discuss Highland’s claims back

22 against us. So first, let’s discuss the claim for attorney’s

23 fees because I don’t think I am being absurd when I smell that

24 it’s going to be a huge number, given that they had five

25 lawyers during this trial in Court and on the video.

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1 These contracts surprisingly -- and this has not been

2 addressed by Highland -- have no fee shifting provision. They

3 don’t. Now, we know in Texas that’s not fatal because even if

4 your contract doesn’t have a fee shifting provision, Section

5 38.001 still allows you to recover attorney’s fees under a

6 written contract. 

7 But you have to comply as a condition precedent with

8 Section 38.002 which requires that you give presentment of the

9 claim and that the Advisors do not pay a just amount owing

10 prior to 30 days after that. And we know as a matter of law

11 that the filing of a suit is not a presentment of the claim.

12 Also, the PRAs and SSAs, all four contracts, contain

13 mandatory notice provisions. And these -- this is a very

14 similar case, Your Honor. That’s not true. It’s not a similar

15 case. It’s a similar principle. This City of Alamo vs. Garcia

16 case -- in that case, Your Honor, there was -- well, it was an

17 arbitration provision and the arbitration provision required

18 that notice to arbitrate be sent in a particular form to a

19 particular person. And that provision was not complied with.

20 In this court, the Texas Appellate Court said, okay,

21 well, is that requirement of notice following the notice

22 provision? Is that a condition precedent or is that just a

23 covenant where you get a breach of contract? And that Court

24 said that, no, when the notice provision itself, meaning notice

25 shall be sent to this person by such means by such date, when

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1 it’s a condition precedent then it defeats the condition for

2 failure to follow.

3 So because Section 38.002 is a condition precedent to

4 recovering the 38.001 and because Highland did not follow the

5 notice provisions in the contracts, they have no claim under

6 38.001. If we can please advance to the next slide, Your

7 Honor.

8 THE COURT: Okay.

9 MR. RUKAVINA: There is -- first of all, it’s

10 amazing. There is no evidence in front of you of any

11 presentment of the claim at all. I understand maybe because

12 New York lawyers aren’t familiar with Section 38.002, but I

13 would have thought there’d be a letter from Mr. Seery just like

14 we’ve seen in all the note cases saying, hey, you bad guys,

15 you’re not paying. You owe me money. Pay now or we’ll sue.

16 I’ve actually had to scrub Highland’s exhibits for an

17 scintilla of any evidence of a presentment. And all that you

18 have is the Highland Exhibit 28. This is an email. It’s a

19 part of negotiations. It’s an email to Mr. Norris. It’s not

20 even from the Debtor. It’s from DSI or I’m not even sure who.

21 The Court has it. It’s Exhibit 28. And here he says

22 -- I’m not even sure I know who this man is -- you guys owe the

23 following amounts. It’s an email. It is done prior to filing

24 suit, but again it does not follow the notice requirements in

25 the contracts, meaning it’s not sent to the proper party. It’s

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1 emailed to Mr. Norris. It’s not sent as the contracts require. 

2 And interestingly, when you read the email in

3 chambers, Your Honor, this gentleman is saying, you Advisors

4 have to pay all of these funds, $5.4 million, in order --

5 that’s how much you owe us. Notice there’s no demand that

6 there will be suit filed. There’s no demand for attorney’s

7 fees. 

8 Now, it is true that when the Court studies Section

9 38.002 the Court will find that there’s no prescribed method

10 for the notice that has to be provided unless the contract

11 provides the method, right? 

12 So, all things being equal, this email might suffice

13 as a presentment of the claim. I’ve already argued why it

14 doesn’t because it didn’t follow the notice provisions of the

15 contract, but there’s another reason, as Judge Rhoades

16 explained in this case I cite down here before. And you have

17 to go back to Section 38.002.

18 It can’t just be a presentment of a claim. It has to

19 be a presentment of the just amount owed. Why in the world is

20 this person who sent this email requiring Mr. Norris to pay

21 alleged amounts owing by all these other people? You’ll see

22 when -- you’ll see, Your Honor, when you read this email. Mr.

23 Norris writes back and he says, what is this? I don’t even

24 represent or know about most of these entities. 

25 So there’s no presentment because this isn’t

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1 sufficient. If it is sufficient, it didn’t follow the

2 condition precedent notice requirement of the contracts. 

3 Therefore, Section 38.002 is not complied with. And even if it

4 did, this is not a claim for a just amount. Why in the world

5 would the Advisors pay amounts from Dugaboy and NexBank, Ohio

6 State Life Insurance.

7 The Debtor, Your Honor, just messed up. And as a

8 result, we revert to the American rule and it does not get its

9 attorney’s fees. If we can advance to Slide 6, Your Honor.

10 THE COURT: Okay.

11 MR. RUKAVINA: This is now, unlike Mr. Klos’ broad,

12 sweeping statements, oh, you owe all this money. And unlike

13 Mr. Norris -- I’m sorry, Mr. Morris -- just going over this. 

14 Let’s look at the facts of the matter when we’re talking about

15 millions of dollars in alleged damages.

16 So first, HCMFA they say didn’t pay for the November,

17 December, and January amounts. Your Honor will recall that

18 that agreement is different than the rest. It requires -- it’s

19 not a set amount. It requires that an analysis be done, a

20 calculation. It requires a statement. And I’ve only taken

21 part of Section 5.01 there, Your Honor, because honestly I’m

22 not good with PowerPoint. I don’t know how the take the rest

23 of it. Certainly the Court can and will read the whole Section

24 5.01.

25 But notice the language. Each service provider --

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1 Highland shall furnish the other parties hereto with a written

2 statement in which they detail the actual costs. Highland

3 never did that for January. And Highland, by the way, never

4 gave you the evidence for November and December. I did in my

5 Exhibit AA. Highland did give us an invoice for November and

6 December, but never for January.

7 So, Your Honor, they lose the January argument for

8 two reasons: one, the form of this contract because they never

9 provided the invoice; two, more importantly, because there’s no

10 evidence of what the actual cost is. We’re now talking about

11 their claims against us. 

12 It’s their burden of proof. They never came. Mr.

13 Klos never said, you know what? I did the analysis and it’s

14 $300,000. There is no evidence as to what the actual cost for

15 January is. If we can go to the next slide, please.

16 THE COURT: Okay.

17 MR. RUKAVINA: Now I want to discuss the Payroll

18 Agreements again. We can discuss them at the same time. It

19 ties into my argument on the administrative claim. 

20 Whether it’s early -- I’m sorry. Whether it’s late

21 2019 or October 2020 or December 2020, Highland never

22 negotiated in good faith. As I’ve argued, that means that the

23 preset amounts no longer control. We revert to what is the

24 actual cost. We are only required to reimburse for actual

25 cost. It’s Highland’s burden of proof. They never even

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1 attempted for the months of December and January to quantify

2 their actual costs. They never even attempted to do so, Your

3 Honor, on their burden of proof.

4 Even if the Court considers the December 11th letter

5 as the last or as the only trigger, that would still negate

6 then the January numbers. So it is our argument that Highland,

7 for lack of evidence at this trial, for lack of even trying to

8 quantify actual costs in December and January, fails, lack of

9 evidence. Those discussions from Mr. Waterhouse, Your Honor,

10 and that letter from K&L Gates must have had some impact on

11 Highland’s duty under these contracts.

12 Again, all that we have to do is request a change and

13 then the parties shall -- not may -- shall negotiate in good

14 faith. And Mr. Seery told you there was no negotiation. So,

15 again, the argument is the monthly amounts do not control and

16 there’s an utter lack of evidence on what the actual costs are.

17 Now it is true that we did not pay under the NexPoint

18 Shared Services. That’s $168,000 per month. We owe them

19 $336,000. We do. Now, Klos testified that it’s $500,000. 

20 Please don’t fall into that trap, Your Honor. Mr. Klos was

21 very intentionally, and I believe manipulatively, including a

22 subsidiary of Highland, a subsidiary of NexPoint called -- I

23 think I have it in here -- called NexPoint Real Estate

24 Advisors. 

25 That’s not in the contract, Your Honor. The NexPoint

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1 Shared Services Agreement spells out it’s $168,000 per month,

2 so we owe them $336,000, not 500. And then if we can go to the

3 final slide, Your Honor.

4 This is what the Court should conclude -- pardon me. 

5 You should award us the $6.2 million in overpayments. You

6 should award us the million dollars in Shared Services

7 overpayments. This, Your Honor will recall, is Mr. Klos’

8 analysis. Mr. Klos, from December 2019 -- I’m sorry --

9 December 2020, at that point and time recall, Your Honor, that

10 the Debtor was not providing legal services anymore to the

11 Advisors. The Advisors had hired their own, at least one of

12 their own, regulatory and compliance people.

13 Mr. Klos calculated $1 million in profit under the

14 Shared Services Agreements, which again do not permit of a

15 profit. HCMFA does have a provision for a 5 percent markup. 

16 NexPoint does not, but that’s different from profit. Your

17 Honor should award us $425,000 in cover damages, as Mr. Norris

18 testified to. We had to go out and hire two employees. That’s

19 three months worth of their -- or maybe four months. I don’t

20 remember right now. Mr. Norris testified about that. Of their

21 compensation.

22 The Court should deny all parties’ attorney’s fees. 

23 Again, these contracts do not provide for attorney’s fees

24 provisions and Section 38.002 was not complied with. The Court

25 should deny the claim for the January HCMFA Shared Service

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1 Agreement because, again, the Debtor did not calculate actual

2 cost or present an invoice. There’s no evidence of what the

3 proper amount payable for January of 2021 should have been.

4 The Court should deny the Debtor amounts unpaid under

5 the Payroll Reimbursement Agreements because the Debtor refused

6 to negotiate in good faith and the Debtor, again, presented no

7 evidence on what actual cost for those months should be on what

8 is the Debtor’s burden of proof. 

9 We admit that we owe -- that HCMFA did not pay Shared

10 Services in November and December. There are those invoices. 

11 Again, I was so kind as to provide evidence of that. The

12 Debtor didn’t even provide evidence of that. We admitted we

13 owe that. That’s -- and I’m ignoring dollars, Your Honor. I’m

14 rounding to the thousand. We admit that we owe $596,000. And

15 we admit that NexPoint owes for December and January, $336,000,

16 for a net resulting administrative claim after nettings and set

17 offs of $6,693,000.

18 Your Honor, I will leave you with this final thought

19 that I also mentioned. 

20 You can close that now, Mr. Berghman. 

21 I’ll leave you with this final thought that I

22 mentioned during opening. This has been a contentious case. 

23 We all know that. Your Honor has mentioned that numerous

24 times. We know that the Court might not think highly of Mr.

25 Dondero. The Court has sanctioned Mr. Dondero. We know that

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1 the Court may think very highly of Mr. Seery and the Debtor. 

2 Certainly the Court has found Mr. Seery very credible in the

3 past.

4 But this is a court of equity. It ought to bother

5 this Court some, if not a lot, that an entity under your

6 Court’s, under Your Honor’s protection, with duties of candor

7 and fiduciary duties was billing my client monthly for 20

8 employees that were not there and they knew about it and they

9 did nothing about it. There has to be a remedy for that harm. 

10 Thank you, Your Honor.

11 THE COURT: All right. Thank you.

12 Mr. Morris, you have, what did we say, 11-1/2 minutes

13 of rebuttal.

14 MR. MORRIS: Okay. So as quickly as I can, Your

15 Honor, Number 1, I’m not prepared to address attorney’s fees. 

16 We’ll do that if and when the Court enters a judgment. I

17 promise we’ll file our motion and we’ll address these matters. 

18 With respect to damages, we did offer all the proof

19 we needed to, Your Honor, and they’re the contracts because

20 they’re all fixed rate contracts with the exception of the

21 HCMFA contract. 

22 And I appreciate Mr. Rukavina putting in the exhibits

23 because if you take a look at them, if you take a look at

24 Exhibit AA, you’ll see that Highland actually reduced the

25 amount it was charging for compliance services in November and

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1 December precisely because Mr. Post transferred from Highland

2 to the Advisors. 

3 You’ll see that in October -- in September, the

4 compliance fee was $92,819. That’s in Exhibit AA at Bates

5 Number 590. And that the same is true in October. But yet in

6 November, that amount is reduced to $66,900, right? The legal

7 fees are still the same $10,000 they had been for years. 

8 They’re paying $10,000 a month. Yes, it’s an actual cost on

9 track. And the same $66,000 is charged in December. Highland

10 has already taken into account the transfer of Mr. Post from

11 one side to the other.

12 Quickly, Mr. Klos didn’t raise any red flags in his

13 testimony. In fact, he did just the opposite. What he

14 testified to was that here was a rational basis for the numbers

15 in the documents. What he testified to was that Highland

16 provided services and that they were entitled to get paid for

17 it. So I don’t know what red flags Mr. Rukavina was referring

18 to. They continually refer to profits and the profits that

19 Highland was making. Completely irrelevant under the contract.

20 If they wanted a contract that limited Highland’s

21 profits or that protected Highland from the down side, right? 

22 We’re only concerned about profits here. They’re only

23 concerned -- they aren’t concerned about all the money we were

24 losing, I guess, under the same analysis that we’re relying on,

25 that they’re relying on frankly, right?

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1 If they wanted, they know how to do that because the

2 HCMFA Shared Services Agreement is cost plus 5 percent. Their

3 whole theory is kind of suspect for the simple reason that

4 they’re trying to say that Highland somehow agreed to give the

5 employees to the Advisors for cost. What business would do

6 that? Why would anybody be in business to simply have somebody

7 pay for their employees? It makes no sense to me. The whole

8 theory makes no sense to me.

9 And that brings me to a very big point, Your Honor. 

10 I absolutely do not agree that the contract is to be a

11 reimbursement for cost. I absolutely will never agree to that. 

12 That’s not what the contract says. That’s what they’re trying

13 to get you to do. They’re trying to rewrite the very plain

14 terms of the agreement. 

15 The very plain terms of the definition of actual cost

16 is that it’s a fixed amount unless the parties agree otherwise,

17 period, full stop. Hamburger, tofu, call it whatever you want. 

18 It’s a fixed amount until the parties agree otherwise. I have

19 absolutely no agreement with Mr. Rukavina that the purpose of

20 the contract is to pay actual costs.

21 Annual true up, Your Honor, he pointed to some

22 generalized statement from Mr. Waterhouse. The fact of the

23 matter is there’s absolutely no evidence that the December 2018

24 amendments were the result of any true up. In fact, I asked

25 Mr. Waterhouse the question. This is at Page 140 of the

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1 afternoon, I guess, of the first day hearing. 

2 "Q Do you have any specific recollection that it was an

3 annual true up like the -- just like for the two Payroll

4 Reimbursement Agreements? 

5 "A I don’t. From what I recall, I don’t think there was a

6 true up in the agreements."

7 This is his testimony about the agreements at issue. 

8 Mr. Rukavina may point to some generalized statement about true

9 ups. This is his testimony at the bottom of Page 140, the top

10 of Page 141, that he has no knowledge of any true up ever being

11 done with respect to the Payroll Reimbursement Agreements.

12 The notion that they didn’t get services. I think

13 there was a suggestion that somehow they didn’t get services. 

14 Again, Your Honor, we’d refer to the retail board minutes. The

15 attempt to somehow slice this so fine to say the retail board

16 minutes was only referring to Shared Services and it didn’t

17 have anything to do with front office. 

18 There’s numerous places in those minutes that refer

19 not to Shared Service Agreements, but shares services

20 arrangements. And you heard no explanation as to why the

21 Advisors are repeatedly telling the retail board throughout

22 2020, here are our investment professionals.

23 They did it in January. They did it in August. And

24 they don’t do it for no reason. They do it in response to the

25 retail board’s specific request for information as to who was

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1 providing services to them, okay. The evidence is just -- it’s

2 beyond dispute. Mr. Rukavina threw out somehow that Highland

3 was a fiduciary. A fiduciary to whom? 

4 The only fiduciaries that matter in this case are Mr.

5 Dondero, Mr. Waterhouse, Ms. Thedford, and Mr. Norris. They’re

6 the fiduciaries of the Advisors. Highland had a contract. It

7 did not owe a fiduciary duty to the Advisors. And it’s just --

8 I don’t know where this stuff comes from, but there’s no basis

9 to find that Highland owed anybody on the Advisors side a

10 fiduciary duty.

11 Anti-waiver. He points to the waiver provision. We

12 have ample case law in our briefing, Your Honor, that you can

13 waive even a waiver provision. And why does it apply here? 

14 Because they waived it 35 times. Every single month from the

15 beginning of 2018 until the end of November 2020, 35

16 consecutive times, Frank Waterhouse authorized the payment of

17 the fixed fee under the Payroll Reimbursement Agreement with

18 knowledge that many of the dual employees had been terminated.

19 That is a waiver. That is a waiver 35 times. That

20 is a waiver so strong that it overcomes anything the Advisors

21 might come up with here.

22 Mr. Rukavina suggests, oh, what can we do? Poor us. 

23 They wouldn’t negotiate. No. As Mr. Klos said, as the

24 contract provides, if you don’t like what’s happening, you can

25 terminate without cause on 60 days notice, period, full stop. 

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1 That’s why that provision is in there. There’s no requirement

2 that somebody agree. There’s certainly no requirement that

3 somebody agree to a retroactive change. In fact, that would

4 read out of the whole contract the definition of actual cost.

5 Again, you’re trying to rewrite an agreement that

6 they lived with for two years under the Dondero regime. We

7 just want to be treated the way Highland was treated for the

8 two years that Jim Dondero was in control. Why do the rules

9 change? Because Dustin Norris wakes up on December 1st after

10 we give notice of termination and they freak out and they say,

11 oh, my gosh. We’ve got to do something here. That’s not a

12 basis to change the terms of the parties’ agreement.

13 No mention of Lauren Thedford, right? Where is Ms.

14 Thedford? Mr. Rukavina keeps saying, it’s the Highland

15 employees. It’s the Highland employees. Mr. Dondero gave all

16 of these people multiple hats. I’ve heard Mr. Rukavina refer

17 twice now to some case law that says if you wear multiple hats

18 you can’t impute knowledge from one to the other. Is that

19 really true when the same person is giving them multiple roles? 

20 How does Mr. Dondero get to hide behind the fact that he put

21 Mr. Waterhouse and Ms. Thedford into these conflicting

22 positions? 

23 And then he gets to say, oh, he was acting on behalf

24 of Highland, not the Advisors. That cannot possibly be the

25 law, Your Honor. That would be the biggest injustice of all,

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1 that they get now to decide which hat Mr. Waterhouse and Ms.

2 Thedford was wearing. And please don’t forget Ms. Thedford. 

3 An officer, a fiduciary, a secretary, a lawyer, the person who

4 drafted the contracts. 

5 Bankruptcy experts. Again, now we’ve moved away from

6 Mr. -- we keep pushing them into the corner even further. Now

7 Mr. Caruso is no longer referred to as the CRO. Now he’s just

8 an agent. He’s a so-called agent, right? He’s not a

9 bankruptcy expert, as humbly as I can say it, my colleagues and

10 me. This is what we do for a living, right. If Mr. Waterhouse

11 was with us all the time. The testimony is clear. Looked him

12 right in the eye. Frank, you didn’t tell me, did you? No, I

13 didn’t tell you, John. I didn’t tell you.

14 Yeah. I’ll just end where Mr. Rukavina ended and

15 that is the notion that this is a court of equity. It may be a

16 court of equity, but it’s also a court of law. And we want the

17 Court to simply enforce the contract as it’s drafted. And on

18 an equitable basis, there’s absolutely positively nothing wrong

19 with that. Why is there nothing wrong with that? Because we

20 provided the services. We’re entitled to get paid. The

21 contracts are unambiguous. 

22 And I just showed you in Exhibit AA, in the Advisors

23 AA, we even went so far as to reduce the cost of the compliance

24 services when Jason Post was moved from one side to the other. 

25 We even went so far as to do that. 

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1 That’s equity. Equity says you reward people who are

2 abiding by the rules. We abided by the rules. We shifted Mr.

3 Post from one side to the other and we eliminated the cost for

4 him. They don’t get to double dip. They have no claim here,

5 Your Honor. 

6 Their whole case is based on Frank Waterhouse’s story

7 that he made up at the very last second that isn’t -- that, as

8 recorded by Mr. Norris, doesn’t even mention Fred Caruso. And

9 then, of course, we have the K&L Gates letter sent the day

10 after the TRO was entered, right, that’s based on the analysis

11 that Frank Waterhouse gave to Mr. Dondero the day before. This

12 is all manufactured.

13 And let me just finish on this point. Highland did

14 not breach its obligation to negotiate in good faith because

15 there was no reason or opportunity to do that. We don’t

16 believe what Frank Waterhouse testified to has any truth to it,

17 but even if it did, an offhand statement to Fred Caruso isn’t

18 all of a sudden going to get them some kind of windfall. 

19 That’s Number 1. Number 2, this K&L Gates letter, think about

20 the circumstances that existed at the time. 

21 And, finally, Your Honor, even if the Court were to

22 find that Highland failed to negotiate in good faith, which I

23 don’t think it can under the circumstances, even if you found

24 that, how are there damages a complete rewriting of the

25 contract? Because we had no obligation to agree to their

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1 theory. 

2 Why do they get their theory now? We could have

3 negotiated in good faith and said, Frank, we’re not doing -- I

4 mean, we’re not doing anything retroactive. The contract

5 doesn’t require us to do anything retroactive. 

6 At best, maybe they can make a claim for January. I

7 don’t know. I don’t think it makes any sense. I don’t want it

8 to be seen as a concession, but they had no obligation. 

9 Highland had no obligation to agree to their theory. And now

10 they’re going to get their theory that completely rewrites the

11 contract. It makes no sense. Thank you, Your Honor.

12 THE COURT: Okay. Thank you.

13 All right. Well, this one is going to be second in

14 the queue. We were working on the note adversary proceedings

15 report and recommendation. So we will try not to keep you

16 waiting too long on a ruling on this. 

17 You could make my life easier in one regard. If you

18 all will send to me, send to Traci Ellison a Word version of

19 your proposed findings of fact and conclusions of law, each of

20 you, that way I can copy and paste where I want to copy and

21 paste in my ruling. So if you could do that.

22 MR. RUKAVINA: Your Honor, may I interject? The

23 scheduling order didn’t require a proposed findings. It

24 contemplated trial briefs. I filed a trial brief. The Debtor

25 filed proposed findings.

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1 THE COURT: Right.

2 MR. RUKAVINA: I’m happy to draft proposed findings

3 if you want me to. I just want you to be aware of that.

4 THE COURT: Okay. Well, so I get Mr. Morris referred

5 to his at Docket Entry 91. 

6 So send me, Mr. Rukavina, your trial brief, the

7 Advisors’ trial brief. I say send me -- send it to Traci. 

8 And then, Mr. Morris, you can send me your findings

9 and conclusions which have obviously both facts and law. And

10 so, again, that will speed up our process here in chambers, I

11 hope, tremendously if I can copy and paste where I think it

12 makes sense to copy and past in my ruling, all right.

13 All right. Well, I wish I could give you a date by

14 which this will be done, but all I can say is we’re working as

15 fast as we can back here on our different projects, and so

16 we’ll try not to keep you waiting too late. All right.

17 MR. MORRIS: Thank you, Your Honor.

18 THE COURT: Thank you. We’re adjourned.

19 MR. RUKAVINA: Thank you.

20 THE CLERK: All rise.

21 (Proceedings concluded)

22 * * * * *

23

24

25

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1 C E R T I F I C A T I O N

2 We, DIPTI PATEL, CRYSTAL THOMAS, and MICHELLE ROGAN,

3 court approved transcribers, certify that the foregoing is a

4 correct transcript from the official electronic sound recording

5 of the proceedings in the above-entitled matter, and to the

6 best of our ability.

7

8 /s/ Dipti Patel 

9 DIPTI PATEL, CET-997

10

11 /s/ Crystal Thomas 

12 CRYSTAL THOMAS, CET-654

13

14 /s/ Michelle Rogan 

15 MICHELLE ROGAN

16 LIBERTY TRANSCRIPTS DATE: May 5, 2022

17

18

19

20

21

22

23

24

25

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