UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF 

TEXAS, DALLAS DIVISION 

In Re: Highland Capital Management, L.P. § Case No. 19-34054-SGJ-11 

The Charitable DAF Fund LP § 

 Appellant § 22-03052 

vs. § 

Highland Capital Management, L.P. § 

 Appellee § 3:22-CV-02280-S

[43] Order granting amended motion to dismiss adversary proceeding with prejudice (related 

document # 19) Entered on 9/30/2022 

APPELLANT RECORD 

VOLUME 22 

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collateral attack on these orders under the doctrine of res 

judicata. 

 Similarly, as the Court remarked on June 8th, the Supreme 

Court's Espinosa decision, which rejected an attack based upon 

Federal Rule of Civil Procedure 60(b)(4) to a prior order that 

may have been unlawful, prohibits the Court from now 

reconsidering the January 9th and July 16th orders. 

 But even if Your Honor rules that res judicata does not 

apply, there are two independent reasons why the orders were 

not an unlawful extension of the Court's jurisdiction. The 

first is because the Court had jurisdiction to enter both of 

those orders as the ability to determine the colorability of 

claims is within the jurisdiction of the Court. The second is 

because the orders are justified by the Barton doctrine. 

 Lastly, Your Honor, Movants' argument that the Court may 

not act as a gatekeeper to determine the colorability of a 

claim for which it may not have jurisdiction is incorrect, and 

as Your Honor has mentioned and as Mr. Bridges unconvincingly 

tried to distinguish, the Fifth Circuit Villegas v. Schmidt 

case is a case on point and resolves that issue. 

 Turning to res judicata, Your Honor, it prevents the Court 

from revisiting these governance orders. CLO Holdco had 

formal notice of the Seery CEO motion and the opportunity to 

respond. It failed to do so. It is clearly bound. 

 As reflected on Debtor's Exhibit 4, CLO Holdco is a 

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wholly-owned subsidiary of the DAF. The DAF is its sole 

shareholder. There is no dispute about that. Importantly, at 

the time of both the January and July orders, Grant Scott was 

the only human being authorized to act on behalf of CLO Holdco 

and the DAF. The DAF did not respond to the Seery CEO motion, 

either. 

 And why is that important, Your Honor? It's because 

Movants argue in their reply that the DAF cannot be bound by 

res judicata because they did not receive notice of the July 

16th order. However, Your Honor, that is not the law. Res 

judicata binds parties to the dispute and their privies, and 

the DAF is bound to the prior orders even though it did not 

receive notice. 

 There are several cases, Your Honor, that stand for this 

unremarkable proposition. First I would point Your Honor to 

the Fifth Circuit's opinion of Astron Industrial Associates v. 

Chrysler, found at 405 F.2d 958, a Fifth Circuit case from 

1968. In that case, Your Honor, the Fifth Circuit held that 

the appellant was barred by the doctrine of res judicata from 

bringing a claim because its parent, which was its sole 

shareholder, would have been bound by res judicata. 

Astron is consistent with the 1978 Fifth Circuit case of 

Pollard v. Cockrell, 578 F.2d 1002 (1978). And the Northern 

District of Texas in 2000 case of Bank One v. Capital 

Associates, 2000 U.S. Dist. LEXIS 11652, found that a parent 

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and a sole shareholder of an entity couldn't assert res 

judicata as a defense when those claims could have been 

brought against its wholly-owned subsidiary. 

 And lastly, Your Honor, the 2011 Southern District of 

Texas case, West v. WRH Energy Partners, 2011 LEXIS 5183, held 

that res judicata applied with respect to a partnership's 

general partner because the general partner was in privity 

with the partnership. 

 These cases are spot on and make sense. DAF is CLO 

Holdco's parent. Grant Scott was the only live person to 

represent these entities in any capacity at the relevant 

times. Accordingly, just as CLO Holdco is bound, DAF is 

bound. 

 Allowing DAF to assert a claim when its wholly-owned and 

controlled subsidiary is barred would allow entities to 

transfer claims amongst their related entities in order to 

relitigate them and they would never be finality. And, of 

course, Jim Dondero, as we know, consented to the January 9th 

order, which provided Mr. Seery protection in a variety of 

capacities. 

 And as Your Honor has pointed out, and as Mr. Bridges 

didn't have an answer for, neither CLO Holdco nor the DAF or 

any other party appealed any of the governance orders. And 

nobody challenged the validity of these orders at the 

confirmation hearing, where the terms of these orders were 

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front and center. 

 And importantly, Your Honor, the orders are clear and 

unambiguous. They require a Bankruptcy Court [sic] to seek 

Bankruptcy Court approval before they commence or pursue an 

action against the independent board, the CEO, CRO, or their 

agents. And they clearly and unambiguously set the standard 

of care for actions prospectively: gross negligence or 

willful misconduct. 

 The Bankruptcy Court had jurisdiction to enter the 

governance orders, which, as expressly indicated in the 

orders, were core proceedings dealing with the administration 

of the estate. No one challenged this finding of core 

jurisdiction. And as I will discuss later, the failure to 

challenge core jurisdiction is waived under applicable Supreme 

Court and Fifth Circuit precedent. 

 Your Honor, the Court [sic] does not argue that Movants 

have waived their right to seek adjudication of a lawsuit that 

passes through the colorability gate by an Article III Court. 

The issue is not before the Court, but the changes to the 

order that the Debtor agreed to make clearly -- clearly will 

provide Mr. Bridges' clients the ability to make that 

determination. 

 The Debtor is, however, arguing that the Movants have 

waived their right to contest the core jurisdiction of the 

Bankruptcy Court to make the determination that the claims are 

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colorable in the first place, and to challenge the exculpation 

provisions provided to the beneficiaries of those orders. 

 Accordingly, Your Honor, the elements of res judicata are 

satisfied. Both proceedings involve the same parties. The 

prior judgment was entered by a court of competent 

jurisdiction. The prior order was a final judgment on its 

merits. And they involved the same causes of action. 

 Importantly, the members of the independent board, 

including Jim Seery, relied on the protections contained in 

the January 9th and July 16th orders and would not have 

accepted these appointments if the protections weren't 

included. And how do we know this? Because each of them, 

both Mr. Seery and Mr. Dubel, both testified at the 

confirmation hearing on this very topic. 

 And I would like to put up on the screen an excerpt from 

Mr. Seery's testimony at confirmation, which is testimony 

included in the February 2nd, 2021 transcript, which is 

Exhibit 2 of the Debtor's exhibits. 

 THE COURT: Okay. 

 MR. POMERANTZ: And I would like to just read this, 

Your Honor. 

"Q Okay. You mentioned that there were certain 

provisions of the January 9th order that were important 

to you and the other independent directors. Do I have 

that right?" 

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 MR. POMERANTZ: A little bit later on, Mr. Seery 

testifies: 

"A And then ultimately there'll be another provision 

in the agreement here, I don't see it off the top of my 

head, but a gatekeeper provision. And that provision" 

-- 

"Q Hold on one second, Mr. Seery." 

 MR. POMERANTZ: Please scroll. 

"Q So, Paragraph 4 and 5, were those -- were those -- 

were those provisions put in there at the insistence of 

the prospective independent directors? 

"A Yes. 

"Q Okay. Can we go to Paragraph 10, please? There 

you go." 

 Mr. Morris: Is this the other provision that you were 

referring to? 

"A This is -- it's become to be known as the 

gatekeeper provision, but it's a provision that I 

actually got from other cases -- again, another very 

litigious case -- that I thought it was appropriate to 

bring it into this case. And the concept here is that 

when you are dealing with parties that seem to be 

willing to engage in decade-long litigation and 

multiple forums, not only domestically but even 

throughout the world, it seemed important and prudent 

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to me and a requirement that I set out that somebody 

would have to come to this Court, the Court with 

jurisdiction over these matters, and determine whether 

there was a colorable claim. And that colorable claim 

would have to show gross negligence and willful 

misconduct -- i.e., something that would not otherwise 

be indemnifiable" -- 

 MR. POMERANTZ: Hold on one second. 

"A So, basically, it set an exculpation standard for 

negligence. It exculpates the directors from 

negligence, and if somebody wants to bring a cause 

against the directors, they have to come to this Court 

first to get a finding that there's a colorable claim 

for gross negligence or willful misconduct." 

"Q Would you have accepted the engagement as an 

independent director without the Paragraphs 4, 5, and 

10 that we just looked at? 

"A No, these were very specific requests. The 

language here has been smithed, to be sure, but I 

provided the original language for Paragraph 10 and 

insisted on the guaranty provisions above to ensure 

that the indemnity would have some support. 

"Q And ultimately did the Committee and the Debtor 

agree to provide all the protections afforded by 

Paragraphs 4, 5, and 10? 

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"A Yes." 

 MR. POMERANTZ: So, Your Honor, these -- this 

testimony also applied to as well as the CEO. 

 The testimony was echoed by Mr. Dubel, another member of 

the board. And I'm not going to put his testimony on the 

screen, but it can be found at Pages 272 to 281 of Exhibit 2, 

which is the February 2nd transcript. 

 Movants argue, however, that res judicata doesn't apply 

because the Court didn't have jurisdiction to enter these 

orders. And they argue that the order stripped the District 

Court of this jurisdiction. As I previously described, the 

Debtor is prepared to modify the governance orders to provide 

that the Court shall retain jurisdiction to -- on claims that 

pass through the gate only to the extent legally permissible. 

The modification does not appear to be good enough for the 

Movants. They continue to argue that the Bankruptcy Court 

can't even act as the exclusive gatekeeper to determine 

whether such actions are colorable as a prerequisite for 

commencing or pursuing an action. 

 The problem Movants run into is the Fifth Circuit's 

opinion of Republic v. Shoaf and various Supreme Court 

decisions, including Espinosa. 

 In Shoaf, the Fifth Circuit held that a party cannot 

subsequently challenge a confirmed plan that clearly and 

unambiguously released a third party, even if the Bankruptcy 

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Court lacked jurisdiction to approve the release in the first 

place. Movants' proper recourse was to appeal the governance 

orders, not to seek to collaterally attack them. 

 In Shoaf, the Fifth Circuit held that the confirmed plan 

was res judicata with respect to a suit by the creditor 

against the guarantor. And in so ruling, the Fifth Circuit 

says that the prong of res judicata standard that requires an 

order, prior order to be made by a court of competent 

jurisdiction is satisfied regardless of whether the issue was 

actually litigated. This is because whenever a court enters 

an order, it does so by implicitly making a finding of its 

jurisdiction, a determination that can't be attacked. And in 

fact, in the January 9th and the July 16th orders, it wasn't 

implicit, the Court's jurisdiction; it was set out that the 

Court had core jurisdiction. 

 Movants try to brush Shoaf aside, arguing that is the only 

case the Debtor cites to support res judicata argument and is 

a narrow opinion that has been questioned and distinguished. 

That's just not correct, Your Honor. Movants ignore that we 

have cited two United States Supreme Court cases, Stoll v. 

Gottleib and Chicot County Drainage District, upon which the 

Fifth Circuit based its Shoaf decision. In each case, the 

U.S. Supreme Court gave res judicata effect to a Bankruptcy 

Court order that made a ruling party -- that a ruling party 

later claimed was beyond the Court's jurisdiction to do so. 

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In Stoll, it was a release of guaranty without jurisdiction, 

like Shoaf. In Chicot, it was an extinguishment of a bond 

claim without jurisdiction. 

 Similarly, Your Honor, the U.S. Supreme Court held in 

Espinosa that a party was not entitled to reconsideration of a 

Bankruptcy Court order under Federal Rule of Civil Procedure 

60(b)(4) discharging a student loan without making the 

required statutory finding of undue hardship in an adversary 

proceeding. And the Supreme Court reasoned in that opinion as 

follows: A judgment is not void, for example, simply because 

it may have been erroneous. Similarly, a motion under 

60(b)(4) is not a substitute for a timely appeal. Instead, 

60(b)(4) applies only in the rare instance where a judgment is 

premised either on a certain type of jurisdictional error or a 

violation of due process that deprives a party of notice or 

the opportunity to be heard. 

 Federal courts considering Rule 60(b)(4) motions that 

assert a judgment is void because of a jurisdictional defect 

generally have reserved it only for the exceptional case in 

which the court that rendered the judgment lacked even an 

arguable basis for jurisdiction. This case is not the 

exceptional -- exceptional circumstance that was referred to 

by Espinosa. 

 In addition, we argue in our brief, and I'll get to in a 

few moments, that both of the orders are justified under the 

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Barton doctrine. 

 Actually, before I go to that, Your Honor, I think Movants 

are really trying to distinguish Espinosa by arguing that the 

Court's order exculpating Mr. Seery for negligence liability 

did not provide people, mom-and-pop investors, with the due 

process informing them that they would not be able to assert 

duty claims based upon mere negligence. I think that's the 

core of Mr. Bridges' argument, that, hey, you entered an 

order, you gave this exculpation, it was inappropriate, and it 

couldn't be done. 

 There are several problems with Movants' argument. First, 

Movants mischaracterize both the facts and the law in 

connection with the Debtor's relationship with its investors. 

The Debtor is the registered investment advisor for HCLOF as 

well as approximately 15 to 18 CLOs. The only investor in 

HCLOF other than the Debtor is CLO Holdco. The investors in 

the CLOs are the retail funds advised by the Dondero advisors 

and the other -- and other institutional investors. 

Accordingly, the thousands of investors, the mom-and-pop 

investors whose due process rights have allegedly been 

trampled by the January 9th and July 16th orders, are not 

investors in any funds managed by the Debtor. 

 And, of course, I have mentioned, as I've mentioned 

before, no non -- non-Dondero investor, be it a mom-and-pop 

investor, another institutional investor, anyone unrelated to 

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Mr. Dondero, has ever appeared in this Court to challenge the 

Debtor's activities. 

 But more fundamentally, Your Honor, the Debtor does not 

owe fiduciary duties to investors in any of the funds that the 

Debtor advises. The fiduciary duty that the Debtor owes is to 

the funds themselves, not the investors in the funds. 

 And while Movants point to Mr. Seery's prior testimony to 

support the argument that the Debtor owes a duty to investors, 

Mr. Seery was not testifying as a lawyer and his testimony 

just cannot change the law. 

 As to each of the funds that the Debtor manages, HCLOF and 

the CLOs, they were each provided with actual notice of the 

January 16th -- the July 16th order and didn't object. And as 

Your Honor will recall, the Trustees for the CLOs, the party 

that could potentially have claims for breach of fiduciary 

duty, they participated in the January 9th hearing. They came 

to the Court and were concerned about the protocols that the 

Debtor was agreeing to with the Committee. We revised them. 

The Trustees didn't object. They didn't object then; they 

didn't object now. And, in fact, they consented to the 

assumption of the contracts between the Debtor and the CLOs. 

 So the argument that the orders, by having this 

exculpation for future conduct, violated due process rights of 

anyone and is the type -- essentially, the type of order that 

Espinosa would have contemplated could be attacked, is -- 

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relies on faulty legal and factual premises. No duty to 

investors. No private right of action. And both -- and all 

the funds received due process. 

 In addition, Your Honor, as we argue in our brief and I'll 

get to in a few moments, both of the orders are justified 

under the Barton doctrine, as Mr. Seery is entitled to 

protection based upon how courts around the country have 

interpreted the Barton doctrine. As such, Mr. Seery is 

performing his role both as an agent of the independent board 

under the January 9th order, as a CEO under the July 16th 

order, as a quasi-judicial officer. And as Your Honor 

examined in the Ondova opinion which you mentioned, trustees 

are entitled to qualified immunity for damage to third parties 

resulting from simple negligence, provided that the trustee is 

operating within the scope of his duties and is not acting in 

an ultra vires manner. 

 So, exculpating the independent directors, their agents, 

and the CEO in the January 9th and July 16th orders was a 

recognition by this Court that they would be entitled to 

qualified immunity, much in the same way trustees are. 

 No doubt that Movants contend that this was error and that 

the Court overreached. However, the remedy for that overreach 

was an appeal, not a reconsideration 16 months later. The 

Court's orders based upon the determination that in this 

highly contentious case that these court officers needed to be 

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protected from negligence suits is not the exceptional case 

where the Court lacked any arguable basis for jurisdiction. 

Accordingly, this Court must follow Espinosa, Shoaf, Stoll, 

and Chicot and reject the attack on the prior court orders. 

 The only case Movants cite to challenge the Supreme 

Court's decision -- to challenge the Supreme Court precedent I 

mentioned and the Fifth Circuit's Shoaf decision is the 

Applewood case. Applewood is totally consistent with Shoaf. 

Applewood also involved a plan that purported to release a 

guaranty claim that the guarantor argued was res judicata in 

subsequent litigation regarding the guaranty. The Fifth 

Circuit held in that case that the plan was not res judicata. 

It made that ruling because the plan did not contain clear and 

unambiguous language releasing the guaranty. In that way, the 

Fifth Circuit distinguished Shoaf. 

Applewood and Shoaf are consistent. A Bankruptcy Court 

order will be given res judicata effect, even if the Court 

didn't have jurisdiction to enter it, if the order was clear 

and unambiguous. In Shoaf, the release was. In Applewood, it 

wasn't. 

 Movants argued on June 8th and argue now that the 

Applewood case really argues -- really deals with prospective 

exculpation of claims. I went back and read Mr. Bridges' 

comments carefully of June 8th. He said Applewood, 

exculpation. Well, that's just not correct. Applewood is all 

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about requiring specificity of a (garbled) to give it res 

judicata effect. Claims that existed at that time, were they 

described clearly and unambiguously? Yes? Shoaf applies. 

No? Applewood does -- applies. 

 So how should the Court apply these principles here? The 

Court approved a procedure for certain claims in the 

governance orders. The procedure: come to Bankruptcy Court 

before pursuing a claim against the independent directors and 

Seery or their agents so that the Court can make a 

colorability determination. Clear and unambiguous. The 

governance orders each provide that the Bankruptcy Court had 

jurisdiction to enter the orders, and the orders were not 

appealed. 

 Movants attempt to confuse the Court and argue Applewood

is on point because the January 9th and July 16th orders do 

not clearly identify specific claims that Movants now have 

that are being released. And because they're not specific, 

then basically it's an ambiguous release and Applewood

applies. 

 The problem with the Movants' argument is that neither the 

January 9th or July 16th orders released claims that existed 

at that time. If they did, and if there wasn't an adequate 

description, I might agree with Mr. Bridges that Applewood

applied. But there were no claims. It was prospective. It 

was a standard of care. The Court clearly and unambiguously 

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said what the standard of care would be going forward. 

Clearly, under Shoaf and Supreme Court precedent, they are 

entitled to res judicata because it's a clear and unambiguous 

provision. Applewood just simply doesn't apply. 

 Mr. Phillips at the last hearing made an impassioned plea 

to the Court for a narrow interpretation of the exculpation 

provisions in the January 9th and July 16th orders, and he 

argued that the Court could not possibly have intended for the 

exculpation for negligence to apply on a go forward basis. He 

thus argued to the Court that the Court should construe the 

exculpation narrowly and only apply it to potential claims of 

harm caused to the Debtor, as opposed to harm caused to third 

parties, which he said included thousands of innocent 

investors. 

 Of course, Mr. Phillips made those arguments unburdened by 

the actual facts and the prior proceedings which led to the 

entry of these orders, because, as he was the first to admit, 

he only became involved in the case a month ago. 

 As the Court recalls, and as reinforced by Mr. Seery's and 

Mr. Dubel's testimony I just mentioned, the exculpation 

provisions were included precisely to prevent Mr. Dondero, 

through any one of the entities he's owned and controlled, the 

Movants being two of those, from asserting baseless claims 

against the beneficiaries of those orders, exactly the 

situation Mr. Seery now finds himself in. 

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 And, again, it bears emphasizing: throughout this case, 

not one of the purported public investors Mr. Phillips 

lamented would be prevented from holding Mr. Seery responsible 

for his conduct has ever appeared in this case to object about 

anything. And none of the directors of the funds, the funds 

where the Debtor acts as an investment adviser, have ever 

stepped foot in this court, either. 

 Even if the Court declines to apply res judicata, Your 

Honor, to prevent challenges to the governance orders, the 

Court has the jurisdiction, had the jurisdiction to include 

the gatekeeping provisions in those orders. The Bankruptcy 

Court derives its jurisdiction from 28 U.S.C. Section 157, and 

bankruptcy jurisdiction is divided into two parts: core 

matters, which are those arising in or arising under Title 11, 

and noncore matters, those matters which are related to a 

Chapter 11 case. 

 Bankruptcy Courts may enter final orders in core 

proceedings, and with the consent of parties, noncore 

proceedings. If a party does not consent to a final judgment 

in the noncore matters or waives its right to consent, then 

the Bankruptcy Court -- or does not waive its right to 

consent, then the Bankruptcy Court issues a report and 

recommendation to the District Court. 

 The seminal Fifth Circuit case on bankruptcy court 

jurisdiction is the 1987 case of Wood v. Wood, 825 F.2d 90. 

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There, the Fifth Circuit held that the Bankruptcy Court has 

related to jurisdiction over matters if the outcome of that 

proceeding could conceivably have any effect on the estate 

being administered in the bankruptcy. 

 More recently, the Fifth Circuit, in the 2005 case, in 

Stonebridge Tech's, elaborated on when a matter has a 

conceivable effect on the estate such as to confer Bankruptcy 

Court jurisdiction. There, the Fifth Circuit held that an 

action is related to bankruptcy if the outcome could alter the 

debtor's rights, liabilities, options, or freedom of action, 

either positively or negatively, and which in any way impacts 

upon the handling and the administration of the bankruptcy 

estate. It is against this backdrop, Your Honor, that the 

Court should evaluate its jurisdiction to have entered the 

orders. 

 So, again, what did the orders do? They established 

governance over the Chapter 11 debtor with new independent 

directors being approved. They established the procedures and 

protocols of how transactions were going to be presented to 

and approved by the Committee. They vested in the Committee 

certain related-party claims, and they provided for the 

procedures parties would have to follow to assert any claims 

against the independent directors and the CRO and the agents 

and advisors. 

 Your Honor, it's hard to imagine that there is a more core 

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order than the entry of these orders. At the time the orders 

were entered, the Court was well aware of the potential for 

acrimony from Mr. Dondero and his related entities, and 

included the gatekeeper provisions to prevent the Debtor's 

estate from being embroiled in frivolous litigation against 

the board and the CEO. 

 Such protections were clearly within the Court's 

jurisdiction, both to protect the administration of the estate 

but also under applicable Fifth Circuit law dealing with 

vexatious litigants, as set forth in the Baum and Carroll

cases that the Court cited in its confirmation order. 

 Not that it was hard to predict, but the last several 

months have reinforced how important the gatekeeping 

provisions in the order are and how important similar 

provisions in the plan are. 

 The Court heard extensive testimony at the confirmation 

hearing regarding the havoc continued litigation by Mr. 

Dondero and his related entities would cause, which 

predictions have unfortunately been borne out by the 

unprecedented blizzard of litigation involving Mr. Dondero and 

his related entities that has consumed the Court over the last 

several months and caused the estate to incur millions of 

dollars in fees that could have been used to pay its 

creditors. 

 And these attacks are continuing. As I mentioned before, 

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in addition to the DAF lawsuit, Sbaiti & Co. filed an action 

against the Debtor on behalf of PCMG, another related entity, 

alleging postpetition mismanagement of the Select Fund. 

 And to complete the hat trick, they are the lawyers 

seeking to sue Acis in the Southern District of New York for 

allegedly post-confirmation matters. 

 The Court knew then and certainly knows now that the 

potential for sizable indemnification claims could consume the 

estate. The Court used that as the potential basis for 

determining that the orders were within its jurisdiction, just 

as it used that potential to justify the exculpation 

provisions in the plan as being consistent with Pacific 

Lumber. 

 Movants also ignore the cases -- and we cited in our 

opposition -- where courts in this district, including Judge 

Lynn in Pilgrim's Pride in 2010 and Judge Houser in the CHC 

Group in 2016, approved gatekeeper provisions that provided 

the Bankruptcy Court with exclusive jurisdiction to adjudicate 

claims against postpetition fiduciaries. 

 Movants also ignore cases outside this district, including 

General Motors and Madoff, which we cited in our brief as 

examples of cases where Bankruptcy Courts have been used as 

gatekeepers to determine if claims are colorable or being 

asserted against the correct entity. 

 And there's another reason, Your Honor, why Movants may 

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now not contest the Court's jurisdiction to have entered those 

orders. Each of those orders, as I said before, include a 

finding that the Court had core jurisdiction to enter the 

orders. No party contested that finding or refused to consent 

to the core jurisdiction. 

 Under well-established Supreme Court precedent, parties 

can waive their right to challenge the Bankruptcy Court's 

jurisdiction, core jurisdiction, by failing to object. In 

Wellness v. Sharif in 2015, the Supreme Court expressly held 

that Article III was not violated if parties knowingly and 

voluntarily consented to adjudication of Stern v. Marshalltype alter ego claims, and that the consent need not be 

express, so long as it was knowing and voluntary. 

 And Wellness confirmed the pre-Stern opinion of the Fifth 

Circuit in the 1995 McFarland case, which held that a person 

who fails to object to the Bankruptcy Court's assumption of 

core jurisdiction is deemed to have consented to the entry of 

a final order by the Bankruptcy Court. 

 Your Honor, I'd now like to turn to the Barton doctrine. 

The Court also has jurisdiction to have entered the orders 

based upon the Barton doctrine. The Barton doctrine dates 

back to an old United States Supreme Court case and provides 

as a general rule that, before a suit may be brought against a 

trustee, consent from the appointing court must be obtained. 

 Movants essentially make two arguments why the Barton

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doctrine doesn't apply. 

 First, Movants, without citing any authority, argue that 

it does not apply to Mr. Seery because he is not a trustee or 

receiver and was not appointed by the Court. Although the 

doctrine was originally applied to receivers, it has been 

extended over time to cover various court-appointed 

fiduciaries and their agents in bankruptcy cases, including 

debtors in possession, officers and directors of the debtor, 

and the general partner of the debtor. And although Mr. 

Bridges says he couldn't find one case that applied the Barton

doctrine to a court-retained professional, I will now talk 

about several such cases. 

 In Helmer v. Pogue, a 2012 case cited in our brief, the 

District Court for the Northern District of Alabama 

extensively analyzed the Barton doctrine jurisprudence from 

the Eleventh Circuit and beyond and concluded that it applied 

to debtors in possession. The Helmer Court relied in part on 

a prior 2000 decision of the Eleventh Circuit in Carter v. 

Rodgers, which held that the doctrine applies to both courtappointed and court-approved officers of the debtor, which is 

consistent with the law in other circuits. 

 And subsequently, the Eleventh Circuit again considered -- 

and in that case, the distinction of a court-appointed as a 

court-retained professional was -- was not persuasive to the 

Court, and the Court held that a court-retained professional 

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can still have Barton protection, notwithstanding that he 

wasn't appointed, the argument that Mr. Bridges tries to make. 

 And subsequently, -- 

 THE COURT: I wonder, was that -- was that Judge 

Clifton Jessup, by chance? Or maybe Bennett? 

 MR. POMERANTZ: Your Honor, this was -- this was the 

Eleventh Circuit Carter v. Rodgers, so I think Judge Jessup 

was -- 

 THE COURT: Oh, I thought you were still talking 

about the Alabama case. No? 

 MR. POMERANTZ: Yeah, the Alabama -- well, the 

Alabama case referred to the Eleventh Circuit case, Carter v. 

Rodgers, -- 

 THE COURT: Okay. 

 MR. POMERANTZ: -- and the appointment and -- or 

retention issue was discussed in the Carter v. Rodgers case. 

 THE COURT: Okay. 

 MR. POMERANTZ: And subsequently, the Eleventh 

Circuit again considered the contours of the Barton doctrine 

in CDC Corp., a 2015 case, 2015 U.S. App. LEXIS 9718. In that 

case, which Your Honor referenced in your Ondova opinion, 

which I will discuss in a few moments, the Eleventh Circuit 

held that a debtor's general counsel who had been approved by 

the Court, who was appointed by a chief restructuring officer 

who was also approved by the Court, was covered by the Barton

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doctrine for acts taken in furtherance of the administration 

of the estate and the liquidation of the assets. 

 And the Eleventh Circuit last year, in Tufts v. Hay, 977 

F.3d 204, reaffirmed that court-approved counsel who function 

as the equivalent of court-appointed officers are entitled to 

protection under Barton. While the Court in that case 

ultimately ruled that counsel could be sued without first 

going to the Bankruptcy Court, it did so because it determined 

that the suit between two sets of lawyers would not have any 

effect on the administration of the estate. 

 So, Your Honor, not only is there authority, there is 

overwhelming authority that Mr. Seery is entitled to the 

protections. 

 In Gordon v. Nick, a District -- a case from 1998 from the 

Fourth Circuit, the Court that the Barton doctrine applied to 

a lawsuit against a general partner who was responsible for 

administering the bankruptcy estate. 

 And as I mentioned, Your Honor, and as Your Honor 

mentioned, Your Honor had reason to look at the Barton

doctrine in length and in depth in the 2017 Ondova opinion. 

And in the course of the opinion, Your Honor discussed one of 

the policy rationales for the doctrine, which you took from 

the Seventh Circuit's Linton opinion, and you said as follows: 

"Finally, another policy concern underlying the doctrine is a 

concern for the overall integrity of the bankruptcy process 

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and the threat of trustees being distracted from or 

intimidated from doing their jobs. For example, losers in the 

bankruptcy process might turn to other courts to try to become 

winners there by alleging the trustee did a negligent job." 

 Here, the independent board was approved by the Court as 

an alternative to the appointment of a Chapter 11 trustee. 

And it and its agent, including Mr. Seery as the CEO, even 

before the July 16th order, were provided protections in the 

form of the gatekeeper order and exculpation. 

 I'm sure the Court has a good recollection of the January 

9th hearing -- we've talked about it a lot in the proceedings 

before Your Honor -- where the Debtor and the Committee 

presented the governance resolution to Your Honor. And as 

Your Honor will recall, the appointment of the board was a 

hotly-contested issue among the Debtor and the Committee and 

was heavily negotiated. And the appointment of the 

independent board was even contested by the United States 

Trustee at a hearing on January 20th, 2020. 

 I refer the Court to the transcripts of the hearings on 

January 9th and January 20th of 2020, which clearly 

demonstrate that appointing this board and giving it the 

rights and protections and its agents the rights and 

protections was not your typical corporate governance issue, 

but it was essentially the Court's alternative to appointing a 

trustee. And recognizing that the members of the independent 

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board were essentially officers of the Court, the Court 

approved the gatekeeper provision, requiring parties first to 

come and seek the Court's permission before suing them, in 

order to prevent them from being harassed by frivolous 

litigation. 

 And the independent board was given the responsibility in 

the January 9th order to retain a CEO it deemed appropriate, 

and it did so by retaining Mr. Seery. 

 Recognizing the Barton doctrine as it applies to Mr. Seery 

is consistent with a legion of cases throughout the United 

States, and Movants' argument that Mr. Seery is not courtappointed is just wrong. 

 Second, Your Honor, Movants cite without any authority, 

argue that even if the Barton doctrine applied there is an 

exception which would allow it to pursue a claim against Mr. 

Seery without leave of the Court. 

 The Debtor agrees the 28 U.S.C. § 959 is an exception to 

the Barton doctrine. Section 959(a) provides that trustees, 

receivers, or managers of any property, including debtors in 

possession, may be sued without leave of the court appointing 

them with respect to any of their acts or transactions in 

carrying on business connected with such property. 

 As the Court also pointed out at the June 8th hearing, and 

Mr. Bridges alluded to in his argument, the last sentence of 

959(a) provides that such actions -- clearly referring to 

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actions that may be pursued without leave of the appointing 

court -- shall be subject to the general equity power of such 

court, so far as the same may be necessary to the ends of 

justice. 

 And Mr. Bridges made a plea, saying you can't take away my 

jury trial right there. You just cannot do that. Well, I 

have two answers to that, Your Honor. One, they relinquished 

their jury trial right. We've established that. Okay? 

 The second is allowing Your Honor to act as a gatekeeper 

has nothing to do with their jury trial right. Allowing Your 

Honor to act as a gatekeeper allows you to determine whether 

the action could go forward, and it'll either go forward in 

Your Honor's court or some other court. 

 And the argument that the exculpation was essentially a 

violation of 959 is just -- is just -- it just is twisting 

what happened. You have an exculpation provision. We already 

went through the authority the Court had to give an 

exculpation. With respect to these litigants who are before 

Your Honor -- we're not talking about anyone else who's coming 

in to try to get relief from the order; we're talking about 

these litigants -- we've already established that they were 

here, they're bound by res judicata. So their 959 argument 

goes away. 

 And as the Court -- and separate and apart from that, the 

issue at issue in the District Court litigation is -- is not 

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even subject to 959. 

 Mr. Bridges says, well, of course it is because it deals 

with the administration of the estate. I'd like to refer to 

what the Court said -- this Court said in its Ondova opinion: 

The exception generally applies to situations in which the 

trustee is operating a business and some stranger to the 

bankruptcy process might be harmed, such as a negligence claim 

in a slip-and-fall case, and is inapplicable to suits based 

upon actions taken to further the administering or liquidating 

the bankruptcy estate. 

 And your Ondova opinion is consistent with the Third and 

Eleventh Circuit opinions Your Honor cited in your opinion, as 

well as numerous other -- 

 (Interruption.) 

 MR. POMERANTZ: -- from the -- from around the 

country, including cases from the First, Second, Sixth, 

Seventh, and Ninth Circuits. And I'm not going to give all 

the cites to those cases, but it's not a -- it's not a 

remarkable proposition that Your Honor relied on in Ondova. 

 In addition, several of these cases, including the 

Eleventh Circuit's Carter opinion, have been cited with 

approval by the Fifth Circuit in National Business Association 

v. Lightfoot, a 2008 unpublished opinion for this very point. 

The Barton exception of 959 does not apply to actions taken in 

the administration of the case and the liquidation of assets 

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in the estate. 

 Suffice it to say that it's clear that the Section 959 

exception to Barton has no applicability in this case. 

Movants, hardly strangers to the bankruptcy case, want to sue 

Mr. Seery for acts taken relating to a settlement of very 

complex and significant claims against the estate. They want 

to sue a court-appointed fiduciary for doing his job, 

resolving claims against the estate and his management of the 

bankruptcy estate. And they want to do this outside of the 

Bankruptcy Court. 

 Settlement of the HarbourVest claim, which is where this 

claim arises under -- whether it's a collateral attack now or 

not, and we say it is, is for another issue -- but it clearly 

arises in the context of settlement of the HarbourVest claim, 

is the quintessential act to further the administration and 

liquidation of the bankruptcy estate, and certainly doesn't 

fall within the 959 exception. 

 Movants seem to be arguing that 959(a) makes a distinction 

between claims against Mr. Seery that damaged the Debtor and 

claims against Mr. Seery that damaged third parties. However, 

the Movants make up that distinction, and it's not in the 

statute, it's not in the case law. The focus is not on who 

the conduct damages, but it's rather on whether the conduct 

was taken in connection with the administration or the 

liquidation of the estate. 

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 And even if the Debtor is wrong, Your Honor, which it's 

not, the savings clause allows the Court to determine whether 

leave to be -- sue will be granted. Given that these claims 

are asserted by Dondero-related entities, if not controlled 

entities, no serious argument exists that the equities do not 

permit this Court to determine if leave to sue is appropriate. 

 Accordingly, Movants' argument that the orders create this 

tension with 959 is simply an over-dramatization. And in any 

event, Your Honor, there's a basis independent of Barton that 

supports the jurisdiction to enter the orders, as I mentioned. 

 But even if the orders only relied on Barton, there is an 

easy fix to Movants' concerns: let them come to court and 

argue that the type of suit they are bringing allegedly falls 

within the exception of 959. 

 Your Honor, Movants argue that the Bankruptcy Court may 

not act as a gatekeeper if it would not have jurisdiction to 

deal with the underlying action. They essentially argue that 

an Article I judge may not pass on the colorability of a 

claim, that it should be decided by an Article III judge. 

This is the same argument, Your Honor, that Your Honor 

rejected in connection with plan confirmation and which I 

touched on earlier. 

 And the reason why Your Honor rejected it is because 

there's no law to support it. In fact, there is Fifth Circuit 

law that holds to the contrary. And we talked about a little 

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bit the Fifth Circuit case decided is Villegas v. Schmidt in 

2015. And Villegas is a simple case. Schmidt was appointed 

trustee over a debtor and liquidated its estate and the 

Bankruptcy Court approved his final fees. Four years later, 

Villegas and the prior debtor sued Schmidt in District Court, 

the district in which the Bankruptcy Court was pending, 

arguing that he was negligent in the performance of his 

duties. The District Court dismissed the case because 

Villegas failed to obtain Bankruptcy Court approval to bring 

the suit under the Barton doctrine. 

 On appeal, Villegas argued Barton didn't apply for two 

reasons. First, that Stern v. Marshall created an exception 

to the Barton doctrine for claims that the Bankruptcy Court 

would not have the jurisdiction to adjudicate. And second, 

that Barton did not apply if the suit is brought in the 

District Court, which exercises supervisory authority over the 

Bankruptcy Court that appointed the trustee. Pretty much the 

argument that was made by Movants at the contempt hearing. 

 The Fifth Circuit rejected both arguments. It held that 

the existence of a Stern claim does not impact the Bankruptcy 

Court's authority because Stern did not overrule Barton and 

the Supreme Court had cautioned circuit courts against 

interpreting later cases as impliedly overruling prior cases. 

 More importantly, the Fifth Circuit pointed to a postStern 2014 case, Executive Benefits v. Arkison, 573 U.S. 25 

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(2014), which held that Stern does not decide how a Bankruptcy 

Court or District Courts should proceed when a Stern creditor 

is identified, as support for the argument that Barton is 

still good law, even dealing with a Stern claim. 

 Second, the Fifth Circuit, joining every circuit to have 

addressed the issue, ruled that the District Court and the 

Bankruptcy Court are distinct from one another and the 

Bankruptcy Court has the exclusive authority to determine the 

colorability of Barton claims and that the supervisory 

District Court does not. 

 Movants didn't address Villegas in their reply. Briefly 

tried to distinguish it, unconvincingly, today. The bottom 

line is Villegas is directly applicable. Your Honor cited it 

in the Ondova opinion for precisely the proposition that 

Barton applies whether or not the Court has authority to 

adjudicate the claim. 

 Accordingly, Your Honor, it was within the Court's 

jurisdiction to require a party to seek approval of Your Honor 

on the colorability of a claim before an action may be 

commenced or pursued against the protected parties, even if 

Your Honor wouldn't have authority to adjudicate the claim at 

the end of the day. 

 In fact, some courts have even addressed the proper 

procedure for doing so, requiring the putative plaintiff to 

not only seek leave of Bankruptcy Court but also to provide a 

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draft complaint and a basis for the Court to determine if the 

claim is colorable. 

 Movants have done neither, and they should not be 

permitted to modify the final orders of the Court as a 

workaround. 

 Your Honor, that concludes my presentation. I'm happy to 

answer any questions Your Honor may have. 

 THE COURT: All right. Not at this time. All right. 

I'm going to figure out, do we need a break or not, depending 

on what Mr. Bridges tells me. I assume we're just doing this 

on argument today. I think that's what I heard. No witnesses 

or exhibits. 

 MR. BRIDGES: That is correct, Your Honor. 

 THE COURT: Okay. Mr. Bridges, how long do you 

expect your rebuttal to take so I can figure out does the 

Court need a break? 

 MR. BRIDGES: Fifteen minutes plus whatever it takes 

to submit agreed-to exhibits. 

 THE COURT: Okay. Let's take a five-minute bathroom 

break. We'll come back. It's -- what time is it? It's 1:11 

Central time. We'll come back in five minutes. 

 THE CLERK: All rise. 

 (A recess ensued from 1:11 p.m. until 1:17 p.m.) 

 THE CLERK: All rise. 

 THE COURT: All right. Please be seated. We're 

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going back on the record in the Highland matters. 

 Mr. Bridges, time for your rebuttal. I want to ask you a 

question right off the bat. Mr. Pomerantz pointed out 

something that was on my list that I forgot to ask you when 

you made your initial presentation. What is the authority 

you're relying on? You did not cite a statute or a rule per 

se, but I guess we can probably all agree that Bankruptcy Rule 

9024 and Federal Rule 60 is the authority that would govern 

your motion, correct? 

 MR. BRIDGES: I don't agree, Your Honor. I don't 

believe this is a final order that we're contesting here. And 

I think that's demonstrated by the Court's final confirmation 

-- plan -- plan confirmation order that seeks to modify this 

order or will modify this order upon being -- being effective. 

So I don't think so. 

 In the alternative, if we are challenging a final order, 

then I think you're right as to the rules that would be 

controlling. 

 THE COURT: All right. Well, let me back up. Why 

exactly do you say this would be an interlocutory order as 

opposed to a final order? 

 MR. BRIDGES: Because of its nature, Your Honor. 

While the appointment in the order or the approval of the 

appointment in the order might, as a separate component of the 

order, have -- have finality, the provisions -- the provisions 

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in it relating to gatekeeping and exculpation are, we think, 

by their very nature, quite obviously interlocutory and not 

permanent. They don't seem to indicate an intention by any of 

the parties that, 30 years from now, if Mr. Seery is still CEO 

at Highland, long after the bankruptcy case has ended, that 

nonetheless parties would be prohibited from bringing claims, 

strangers to this action would be prohibited from bringing 

claims related to his CEO role. 

 I think the nature of it demonstrates that, the 

modifications to it, and even the inclusion of it in the final 

plan confirmation, as well as -- can't read that. 

 THE COURT: Can you give me some authority? Because 

as we know, there's a lot of authority out there in the 

bankruptcy universe on what discrete orders are interlocutory 

in nature that a bankruptcy judge might routinely enter and 

which ones are final. You know, it would just probably, if I 

flipped open Collier's, I could -- you know, it would be mindnumbing. 

 So what authority can you rely on? I mean, is there any 

authority that says an employment order is not a final order? 

That would be shocking to me if you have cases to that effect, 

but, I mean, of course, sometimes we do interim on short 

notice and then final. But this would be shocking to me if 

there is case authority to support the argument this is not a 

final order. But I learn something new every day, so maybe I 

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would be shocked and there is. 

 MR. BRIDGES: Your Honor, I'd point you to In re 

Smyth, 207 F.3d 758, and In re Royal Manor, 525 B.K. 338 

[sic], for the proposition that retaining a bankruptcy 

professional is an interlocutory order. 

 THE COURT: Okay. Stop for a moment. The Smyth 

case. Which court is that? 

 MR. BRIDGES: Fifth Circuit. 

 THE COURT: Okay. So tell me the facts. I'm 

surprised I don't know about this case. But, again, I don't 

know every case. So, it held that an employment order is an 

interlocutory order? 

 MR. BRIDGES: Appointing counsel. A professional in 

the bankruptcy context, Your Honor. 

 THE COURT: Counsel for a debtor-in-possession? An 

order approving counsel was an interlocutory order? 

 MR. BRIDGES: Yes, or the Trustee's counsel. 

 THE COURT: Or the Trustee's counsel? Okay. What 

were the circumstances? Was this on an expedited basis and 

there wasn't a follow-up final order, or what? 

 MR. BRIDGES: Your Honor, I don't have -- I don't 

have that at the tip of my memory. I'm sorry. 

 THE COURT: Okay. And the other one, 525 B.R. 338, 

what court was that? 

 MR. BRIDGES: It's a Bankruptcy Court within the 

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Sixth Circuit. I'm not certain which district. 

 THE COURT: All right. Well, maybe one of you two 

over there can look them up and give me the context, because 

that is surprising authority. Or other lawyers on the WebEx 

maybe can do some quickie research. 

 Okay. We'll come back to that. But assuming that this 

was a final order, which I have just been presuming it was, 

Rule 60 is the authority you're going under? 9024 and Rule 

60, correct? 

 MR. BRIDGES: Your Honor, we have not invoked those 

rules. Alternatively, I think you're right that they would 

control if we are wrong about the interlocutory nature of the 

order. 

 THE COURT: Well, you have to be going under certain 

-- some kind of authority when you file a motion. So I'm -- 

 MR. BRIDGES: As an alternative -- 

 THE COURT: I'm approaching this exactly, I assure 

you, as the District Court or a Court of Appeals would. You 

know, you start out, what is the legal authority that is being 

invoked here? 

 MR. BRIDGES: Well, -- 

 THE COURT: So I just assume Rule 60. I can't, you 

know, come up with anything else that would be the authority. 

 MR. BRIDGES: Yes, Your Honor. You also have 

inherent power to modify orders that are in violation of the 

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law. And we pointed you to -- 

 THE COURT: Now, is that right? Is that really 

right? Why do we have Rule 60 if I can just willy-nilly, oh, 

I feel like I got that wrong two years ago? I can't do that, 

can I? Rule 60 is the template for when a court can do that. 

Parties are entitled to rely on orders of courts. And that's 

why we have Rule 60, right? So, -- 

 MR. BRIDGES: Your Honor, I think -- I think that 

we're miscommunicating. I'm trying not to rely on Rule 60 in 

the first instance because in the first instance we view this 

as not a final order. So, in the first instance, -- 

 THE COURT: I got that. And I've got my law clerks 

looking up your cases to see if they convince me. But I'm 

asking you to go to layer two. Assuming I don't agree with 

you these are final orders, what is your authority for the 

relief you're seeking? 

 MR. BRIDGES: Yes, Your Honor. Rule 60 would apply 

in the alternative. 

 THE COURT: All right. 

 MR. BRIDGES: That's correct. 

 THE COURT: So, which provision? Which provision of 

Rule 60? (b) what? 

 MR. BRIDGES: Your Honor, I'm not prepared to concede 

any of them. I don't have the rule in front of me. 

 THE COURT: You're not prepared to concede what? 

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 MR. BRIDGES: Any of the provisions of Rule 60. Just 

(b)(1), (b)(2), especially, but I'm -- I'm -- Rule 60 is our 

basis, as is the particulars (b)(1), (2), (6) -- 

 (Garbled audio.) 

 THE COURT: Okay. You're breaking up. Can you 

restate? 

 MR. BRIDGES: (b)(1), (2), and (6), as -- as well as 

any other provision, Your Honor, of Rule 60. 

 THE COURT: Okay. Well, so (1), mistake, 

inadvertence, surprise, excusable neglect. Which one of 

those? 

 MR. BRIDGES: All of the above, Your Honor. 

 THE COURT: Surprise? Who's surprised? 

 MR. BRIDGES: Your Honor, I think every potential 

litigant who discovers that your order purports to bar 

prospective unaccrued claims at the time the order issued 

would be surprised. 

 Frankly, I think Mr. Seery would be surprised, given his 

testimony that he owes fiduciary duty -- duties that he must 

abide by and that he appears to have, as I continue to 

represent to clients, to advisees, and to the SEC, that those 

duties are owing. 

 THE COURT: Okay. I'm giving you one more chance 

here to make clear on the record what provision of Rule 60(b) 

are you relying on, okay? I need to know. It's not in your 

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pleading. 

 MR. BRIDGES: Your Honor, -- 

 THE COURT: So tell me specifically. I can only -- 

 MR. BRIDGES: -- (b)(1) -- 

 THE COURT: -- come up with a result here if I know 

exactly what's being presented. 

 MR. BRIDGES: Your Honor, (b)(1), (b)(2), and (b)(6) 

-- 

 THE COURT: Which, okay, there are multiple parts to 

(1). You're saying somebody's surprised by the ruling. I 

don't know who. Really, all that matters is your client, the 

Movants. You're saying, even though they participated, -- 

 MR. BRIDGES: Yes, Your Honor. 

 THE COURT: -- got notice, they're somehow surprised? 

Why are they surprised? 

 MR. BRIDGES: Yes, Your Honor. 

 THE COURT: Do you have evidence of their surprise? 

 MR. BRIDGES: Your Honor, our brief shows the 

intentions of all involved were not the interpretation of that 

order being advanced at this -- at this point in time. And 

so, yes, I believe that is evidence. The transcripts of the 

hearings I believe evidence that as well, that the 

understanding of everyone involved was not that future --

unspecified future claims that had not accrued yet would be 

released under (b)(1). Yes, Your Honor. 

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 THE COURT: Okay. 

 MR. BRIDGES: Under (b)(2), -- 

 THE COURT: I don't have any evidence of that. All I 

have is the clear wording of the order. Okay. Let me just -- 

just let me go through this. 

 Assuming Rule 60 (1) through (6) are what you're arguing 

here, what about Rule 60(c): a motion under Rule 60(b) must 

be made within a reasonable time? We're now 11 months -- 

 MR. BRIDGES: Your Honor, -- 

 THE COURT: We're now 11 months past the July 2020 

order. What is your authority for this being a reasonable 

time? 

 MR. BRIDGES: Yes, Your Honor. If I may back up one 

step before answering your question. Under (b)(2), we're 

relying on newly-discovered evidence that was discovered in 

late March and caused both the filing of this motion and the 

filing of the District Court action. 

 Under (b)(4), we believe that the order is -- 

 THE COURT: Let me stop. Let me stop. What is my 

evidence that you're putting in the record that's newly 

discovered? 

 MR. BRIDGES: The evidence is detailed in the 

complaint that is in the record. You know, -- 

 THE COURT: That's not evidence. 

 MR. BRIDGES: -- honestly, Your Honor, -- 

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 THE COURT: That is not evidence. Okay? A lawyerdrafted complaint in another court is not evidence. Okay? 

 MR. BRIDGES: Your Honor, I think, to be technical, 

that there is not a record yet, that we have evidence yet to 

be admitted on our exhibit list. I believe in this 

circumstance -- I understand that, in general, allegations in 

a pleading are not evidence. In this instance, when we're 

talking about whether or not new facts led to the filing of a 

lawsuit, I do believe that the allegations in the lawsuit are 

evidence of those new facts. 

 THE COURT: All right. Go on. 

 MR. BRIDGES: Under (b)(4), we believe the order is, 

in part, void. It is void because of the jurisdictional and 

other defects noted in our argument. 

 And also, under (b)(6) (garbled) ground for relief that 

we're appealing to the equitable powers of this Court to 

correct errors and manifest injustice towards not just the 

litigants here but to correct the order of the Court to make 

it comply with -- with the law, with the statutes promulgated 

by Congress and to respect the jurisdiction of the District 

Court. 

 THE COURT: All right. Do you agree with Mr. 

Pomerantz that the case law standard for Rule 60(b)(4) is 

exceptional circumstances? It's only applied so that a 

judgment is voided in exceptional circumstances. Do you 

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disagree with that case authority? 

 MR. BRIDGES: I would -- I would agree, in part, that 

unusual circumstances is not the ordinary case. I'm not 

entirely sure what you mean by exceptional, but I think we're 

on the same page. 

 THE COURT: Okay. It's not what I mean. That's just 

the case law standard. And I'm asking, do you agree with Mr. 

Pomerantz that that is the standard set forth in case law when 

applying 60(b)(4)? There have to be some sort of exceptional 

circumstances where there's just basically no chance the Court 

had authority to do what it did. 

 MR. BRIDGES: Out of the ordinary would be the phrase 

I would use, Your Honor. 

 THE COURT: Okay. So I guess then I'll go from 

there. Is it your argument that gatekeeping provisions in the 

bankruptcy world are out of the ordinary? 

 MR. BRIDGES: The exculpation of Mr. Seery for 

liability falling short of gross negligence or intentional 

wrongdoing in connection with his continuing to conduct the 

business of the Debtor as an investment advisor subject to the 

Advisers Act, yes, I would say that is out of the ordinary, 

that it is extraordinary, that it is -- 

 THE COURT: Okay. What is your authority or evidence 

on that? Because this Court approves exculpation provisions 

regularly in connection with employment orders, and pretty 

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much every judge I know does. In fact, I'm wondering why this 

isn't just a term of compensation. You know, he's going to do 

x, y, z in the case. His compensation is going to be a, b, c, 

d, e. And by the way, we're going to set a standard of 

liability for his performance as CEO or investment banker, 

financial advisor, whatever, so that no one can sue him 

regarding his performance of his job duties unless it rises to 

the level of gross negligence, willful misconduct. 

 It's a term of employment that, from my vantage point, 

seems to be employed all the time. So it would be anything 

but exceptional circumstances. Do you have authority or 

evidence -- 

 MR. BRIDGES: Your Honor, frankly, -- 

 THE COURT: -- to the contrary? 

 MR. BRIDGES: Your Honor, frankly, I'm astonished at 

your view of that situation, that it would merely be a term of 

his employment, that vitiates the entire fiduciary duty 

standard created by the Advisers Act that tells him, with 

hundreds of millions of dollars of assets under management for 

people he's advising as a registered investment advisor, 

people he's advising who believe that he has a fiduciary duty 

to them and that it's enforceable, that the SEC, who monitors, 

believes he has an enforceable fiduciary duty to those people, 

and that he's testified that he has fiduciary duties to those 

people, and that Your Honor is saying no, just as a regular 

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term of employment we have undone the Advisers Act's 

imposition of an unwaivable fiduciary duty. 

 Your Honor, the order is void to the extent that it 

attempts to do so. 

 This is not an ordinary employment agreement, Your Honor. 

This is an attempt to exculpate someone from the key thing 

that our entire investment system depends upon, regulation by 

the SEC and the requirement in investment advisors to act as 

fiduciaries when they manage the money of another. 

 It would be the equivalent of telling lawyers who are 

appointed in a bankruptcy proceeding that they don't have any 

duties to their client, or at least not fiduciary duties. 

That the lawyers merely owe a duty not to be grossly negligent 

to their clients. That's not an ordinary term of employment, 

Your Honor. 

 THE COURT: All right. So I guess we're back to my 

question, was this brought within a reasonable time under Rule 

60(c)? 

 MR. BRIDGES: It was brought very quickly after the 

new evidence was discovered at the end of March, Your Honor, 

yes. 

 THE COURT: Okay. Well, I guess I'll just ask you 

one more question before you continue on with your rebuttal 

argument. I mean, again, I want your best argument of why 

Villegas doesn't absolutely permit the gatekeeping provisions 

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that you're challenging. And many cases were cited by Mr. 

Pomerantz in his brief where courts have extended the Barton

doctrine to persons other than trustees. And so what is your 

best rebuttal to that? 

 MR. BRIDGES: Your Honor, we've already given it. 

I'm afraid -- 

 THE COURT: Okay. If you don't want to say more, -- 

 MR. BRIDGES: -- what I have is not -- 

 THE COURT: -- I'm not going to make you say more. 

 MR. BRIDGES: I -- 

 THE COURT: I'm just telling you what's on my brain. 

 MR. BRIDGES: I do. I want to -- I am apologizing in 

advance for repeating, but yes, Villegas, Villegas, however 

that case is pronounced, says that Stern is not an exception 

to the Barton doctrine. 

 THE COURT: Uh-huh. 

 MR. BRIDGES: 959(a) is an exception to the Barton

doctrine. You are not operating under the Barton doctrine 

here. Even counsel's brief, the Debtor's brief, doesn't say 

Barton applies. It says it's consistent with Barton. 

 Your Honor, in our previous hearing, you directed me to 

the second sentence of 959(a) because you believe it's what 

empowers you to do the gatekeeping. It limits the gatekeeping 

that you can do by protecting jury rights, the right to trial, 

says you cannot discharge, undo, deprive a litigant of their 

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right to a trial, a jury trial. 

 THE COURT: Well, you mentioned it again, jury trial 

rights. Do you have any argument -- 

 MR. BRIDGES: Yes, Your Honor. 

 THE COURT: -- of why that hasn't flown out the 

window? 

 MR. BRIDGES: Yes, Your Honor. I am told that 

Section 14(f) that counsel for the Debtor referred to is not a 

waiver of jury rights at all. It is an arbitration agreement. 

Your Honor is probably familiar how arbitration agreements 

work, is that they need not be elected. They need not be 

invoked by the parties. When they are, they create a 

situation where arbitration may be required. But a waiver of 

a jury right outside of arbitration is not part of this 

arbitration clause, or of any. The issue is not briefed or in 

evidence before the Court. We're relying on representations 

of counsel as to what that provision contains. That Mr. Seery 

wasn't even a party to that agreement, the advisory agreement, 

with the Charitable DAF. The arbitration agreement is subject 

to defenses that are not at issue here before the Court. That 

Movants' rights, their contractual rights to invoke the 

arbitration clause, also appear to be terminated by the 

orders' assertion of sole jurisdiction in this matter. 

 Your Honor, yes, our jury rights survive Section 14(f) in 

the advisory agreement with the DAF for all of those potential 

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reasons. 

 On top of that, it doesn't go to all of our causes of 

action. It goes to the contract cause of action. And to the 

extent they can argue that the other claims are subject to 

arbitration, that also is a defense and -- defensible and 

complex issue requiring the application of the Federal 

Arbitration Act, requiring consideration of the Federal 

Arbitration Act, which this Court doesn't have jurisdiction to 

do under 157(d). 

 THE COURT: What? Repeat that. 

 MR. BRIDGES: Yes. This Court does not have 

jurisdiction to determine whether or not arbitration -- 

arbitration is enforceable due to the mandatory withdrawal of 

the reference provisions of 157(d). 

 THE COURT: That's just not consistent with Fifth 

Circuit authority. National Gypsum. What are some of these 

other arbitration cases? I've written an article on it. I 

can't remember them. That's just not right. Bankruptcy 

courts look at arbitration clauses all the time. Motions to 

compel arbitration. 

 MR. BRIDGES: Your Honor, under 157(d), in the 

circumstances of this case, if the Court is going to take into 

consideration an arbitration clause under the Federal 

Arbitration Act, when that clause is not in evidence and is 

not before the Court, then Movants respectfully move to 

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withdraw the reference of your consideration of that issue and 

of any proceeding and ask that you would issue only a report 

and recommendation rather than an order on that issue. 

 THE COURT: Okay. I regret that we even got off on 

this trail. I'm sorry. So just proceed with your rebuttal 

argument as you had envisioned it, Mr. Bridges. 

 MR. BRIDGES: Thank you, Your Honor. 

 Debtor's counsel says there's no private right of action 

under the Advisers Act. That is both inaccurate and 

misleading. The Advisory Act creates, imposes fiduciary 

duties that state law provides the cause of action for. It is 

a state law breach of fiduciary duty claim regarding -- 

regarding fiduciary duties imposed as a matter of law by the 

Investment Advisers Act that is Count One in the District 

Court action. 

 Furthermore, that Act does create a private right of 

action for rescission. That would be rescission of the 

advisory agreement with the Charitable DAF, not rescission of 

the HarbourVest settlement. 

 Second, Your Honor, the notion that this Court has related 

to jurisdiction is irrelevant and beside the point. I would 

like to note for the record that the District Court civil 

cover sheet that omitted to state that this was a related 

action has been corrected, has been amended, and that that has 

taken place. 

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 Counsel for the Debtor also appears to agree with us that 

the order ought to be modified for having asserted exclusive 

jurisdiction over colorable claims to the extent it's not 

legally permissible to do. And in trying to invoke the 

discussions between us as to how the orders might be fixed, 

what counsel does is tries to cabin the legally-permissible 

caveat to just the second half of the paragraph at issue. It 

is both -- both portions, the gatekeeping and the subsequent 

hearing of the claims, that should be limited to the extent it 

would be impermissible legally for this Court to make those 

decisions. 

 On top of that, Your Honor, merely stating "to the extent 

legally permissible" would result in a considerable amount of 

ambiguity in the order that would lead it, I fear, to be 

unenforceable as a matter of law. 

 Next, Your Honor, when Debtor's counsel talks about the 

authority in this case, it feels like we're ships passing in 

the night. He says that we're wrong in asserting that no case 

we can find involves both the Barton doctrine and the 

application of the business judgment rule where the Court is 

asked to defer, and he mentions cases that apply the Barton

doctrine to an approval rather than an appointment. The Court 

is asked to -- 

 (Garbled audio.) 

 THE COURT: I lost you for a moment. Could you 

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repeat the last 30 seconds? 

 MR. BRIDGES: Thank you, Your Honor. Yes. He points 

-- opposing counsel points us to case law where the Barton

doctrine has been applied despite the Bankruptcy Court having 

merely approved rather than appointed the trustee or the, I'm 

sorry, the professional. But in doing so, he doesn't 

reference any case that has done so in the context of business 

judgment rule deference. It's like we're ships passing in the 

night. 

 What we're saying isn't that a mere approval can never 

rise to the level of the Barton doctrine. What we're saying 

is that, in combination with the business judgment rule 

deference, the two cannot go together. There's no authority 

for saying that they do. 

 We -- I further feel like we're ships passing in the night 

when he talks about Shoaf. Counsel says that in Shoaf there 

was a confirmed final plan and it specifically identified the 

released guaranty. And yeah, that distinguishes it from this 

case, just as it distinguished -- just as the Applewood Chair

case distinguished it when there's not that specific 

identification. And here, we don't even have a final plan 

confirmation at the time these orders are being issued. 

Without that express -- express notion of what the claims are 

being discharged, Shoaf doesn't apply. 

 There, there was a guaranty to a party on a specific 

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indebtedness that was listed, identified with specificity, and 

disappeared as a result of the judgment, as a result of the 

judgment in the underlying case. Here, we're talking about 

any potential claim that might arise in the future. As of the 

July order's issuance, it didn't apply on its -- either it 

didn't apply to future claims that had not yet accrued or else 

in violation of Applewood Chair, it was releasing claims 

without identifying them. 

 Who does Seery owe a fiduciary duty to? Is it, as 

Debtor's counsel says, only to the funds and not to the 

investors, or does he also owe those duties to the investors 

as well? Your Honor, that is going to be a hotly-contested 

issue in this litigation, and it involves -- it requires 

consideration of the Advisers Act and the multitude of 

accompanying regulations. To just state that his fiduciary 

duties are limited in a way that couldn't affect anyone that 

is -- whose claims are precluded by the July order is both 

wrong on the law and is invoking something that will be a 

hotly-contested issue that falls under 157(d), where, again, 

this Court doesn't have the jurisdiction to decide that, other 

than in a report and recommendation. 

 The order is legally infirm because it's issued without 

jurisdiction for doing that as well. 

 Finally, Your Honor, I think (garbled) wrong direction 

with a statement that suggests that Mr. Seery is an agent of 

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the independent directors under the January order. He is, in 

fact, not an independent agent -- not an agent of any of the 

independent directors, but, at most, of the company that is 

controlled by the board, not -- not of individual directors 

who could confer on him -- who could confer on him any 

immunity that they have obtained from the January order just 

by having appointed him. 

 The proposed order from the other side failed to address 

either the ambiguity in the order or its attempt to exculpate 

Mr. Seery from the liability, including liability for which 

there is a jury trial right, and it is not a fix to the 

problem for that reason. 

 In order to make the order enforceable and to fix its 

infirmities, the Court would have to do significantly more. 

It would have to both apply the caveat from the final 

confirmation plan order, rope that caveat to the first part of 

the relevant paragraph, as well as the second part, and it 

would have to provide directive clarity to be enforceable 

rather than too vague. 

 Your Honor, I think that's all I have. 

 THE COURT: Okay. Just FYI, my law clerk pulled the 

Smyth case from 21 years ago from the Fifth Circuit. And 

while it more prominently deals with the issue of whether 

trustees -- in this case, it was a Chapter 11 trustee -- could 

be subjected to personal liability for damages to the 

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bankruptcy estate -- 

 (Echoing.) 

 THE COURT: Someone, put your phone on mute. I don't 

know who that is. 

 It dealt with, you know, the standard of liability, that 

the trustee could not be sued for matters not to the level of 

gross negligence. 

 But it does say, in the very last paragraph, to my shock 

and amazement, that -- it's just one sentence in a 10-page 

opinion -- orders appointing counsel -- and it was talking 

about the trustee's lawyer he hired to handle appeals to the 

Fifth Circuit -- orders appointing counsel under the 

Bankruptcy Code are interlocutory and are not generally 

considered final and appealable. And it cites one case from 

1993, the Middle District of Florida. Live and learn. There 

is one sentence in that opinion that says that. But I don't 

know that it's hugely impactful here, but I did not know about 

that opinion and I'm rather surprised. 

 All right. You were going to walk me through evidence, 

you said? 

 MR. BRIDGES: Well, do I -- Your Honor, do you want 

to do that first before I submit -- 

 THE COURT: Yes, please. 

 MR. BRIDGES: -- my rebuttal argument? 

 THE COURT: Please. 

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 MR. BRIDGES: Okay. 

 THE COURT: Uh-huh. 

 MR. BRIDGES: Your Honor, we would submit and offer 

Exhibits 1 through 44, with the exception of those that have 

been withdrawn, that are 2, 13 -- 

 THE COURT: Okay. Slow down. Slow down. I need to 

get to the docket entry number we're talking about. Are we 

talking -- are your -- the Debtor's exhibits are at 2412. But 

Nate, I misplaced my notes. Where are Charitable DAF and 

Holdco's? 

 THE CLERK: I have 2411. 

 THE COURT: 2411? Is that it? 

 MR. BRIDGES: 2420, Your Honor. 

 THE COURT: 2420? Okay. Give me a minute. (Pause.) 

2420? 

 MR. BRIDGES: Yes, Your Honor. 

 THE COURT: Okay, I'm there. And it's which 

exhibits? 

 MR. BRIDGES: It's Exhibits 1 through 44, Your 

Honor, with four exceptions. We have agreed to withdraw 

Exhibit 2, 13, 14, and 29. 

 THE COURT: All right. 

 MR. BRIDGES: Also, Your Honor, we'd like to submit 

Debtor's Exhibit 1, which is under Exhibit 49 on our list, 

would be anything offered by the other side. But we'd like 

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to make sure that Debtor's Exhibit 1 gets in the record as 

well. 

 THE COURT: Let me back up. When I pull up the 

docket entry you just told me, I have Exhibits 44, 45, and 46 

only. Am I misreading this? 

 MR. BRIDGES: I have a chart showing Exhibits 1 

through 49 titled Docket 2420 filed 6/7/21. 

 THE COURT: Okay. The docket entry number you told 

me, 2420, it only has three exhibits: 44, 45, and 46. So, 

first off, I understand -- are you offering 45 and 46 or not? 

 MR. BRIDGES: No, Your Honor. 

 THE COURT: Okay. So you said you were offering 1 

through 44 minus certain ones. 44 is here. 

 MR. BRIDGES: Yes. 

 THE COURT: But I've got to go back to a different 

docket number. 

 THE CLERK: It's actually 2411. 

 THE COURT: It's at 2411. That has all the others? 

 THE CLERK: Yes. 

 THE COURT: Okay. 

 So, Mr. Pomerantz, do you have any objection to Exhibits 

1 through 44, which he's excepted out 2, 13, 14, and 29, and 

then he's added Debtor's Exhibit 1? Any objection? 

 MR. POMERANTZ: I don't believe so. I just would 

confirm with John Morris, who has been focused on the 

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exhibits, just to confirm. 

 THE COURT: Mr. Morris? 

 MR. MORRIS: No objection, Your Honor. It's fine. 

 THE COURT: Okay. They're admitted. 

 (Movants' Exhibits 1, 3 through 12, 15 through 28, and 30 

through 44 are received into evidence. Debtor's Exhibit 1 is 

received into evidence.) 

 THE COURT: So, any -- 

 MR. BRIDGES: Thank you, Your Honor. 

 THE COURT: Anything you wanted to call to my 

attention about these? 

 MR. BRIDGES: Your Honor, the things that we 

mentioned in the argument, for sure, but especially that the 

word "trustee" is not used in the January hearing's 

transcript, nor is it under discussion in that transcript 

that it would be a trustee-like role being played by the 

Strand directors, as well as the transcript of the July 

hearing on the order at issue here, Your Honor, where you are 

asked to defer both in that transcript and in the motion, the 

motion that was at issue in that hearing, you are asked to 

defer to the business judgment of the company. 

 And finally, Your Honor, I'd ask you to look at the 

allegations in the District Court complaint. 

 THE COURT: All right. 

 Mr. Pomerantz or Morris, let's see what exhibits you're 

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wanting the Court to consider. Your exhibits, it looks like, 

are at Docket Entry 2412. 

 MR. MORRIS: As subsequently amended at 2423. 

 THE COURT: Oh. All right. So which ones are you 

offering? 

 MR. MORRIS: We're offering all of the exhibits on 

2423, which is 1 through 17. 

 (Echoing.) 

 THE COURT: Whoops. We got some distortion there. 

Say again? 

 MR. MORRIS: Yeah. All of the exhibits that are on 

2423, which are Exhibits 1 through 17. But I want to make 

sure that, as I did earlier, that that has the exhibits that 

we're relying on. Does that -- 

 (Pause.) 

 THE COURT: Okay. Let me make sure I know what's 

going on here. You're double-checking your exhibits, Mr. 

Morris? 

 MR. MORRIS: Yes, Your Honor. 

 THE COURT: Okay. 

 (Pause.) 

 MR. MORRIS: Your Honor, we start with Docket No. 

2419, -- 

 THE COURT: Okay. 

 MR. MORRIS: -- which was the amended exhibit list. 

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And that actually had Exhibits 1 through 17. And then that 

was amended at Docket 2423. So, the exhibits on both of 

those lists. 

 THE COURT: Well, they're one and the same, it looks 

like, right? 

 MR. MORRIS: Yes. 

 THE COURT: Okay. So you're offering those? 

 MR. MORRIS: I think -- yeah. 

 THE COURT: Any objection? 

 MR. BRIDGES: No objection. 

 THE COURT: All right. They're admitted. 

 (Debtor's Exhibits 1 through 17 are received into 

evidence.) 

 MR. POMERANTZ: Your Honor, if I may take a few 

moments to respond to Mr. Bridges' reply? 

 THE COURT: All right. Is he still within his hour 

and a half? 

 THE CLERK: At an hour and one minute. 

 THE COURT: Okay. All right. You have a little 

time left, so go ahead. 

 MR. POMERANTZ: Thank you, Your Honor. 

 So look, I -- it sort of was really not fair to us. Mr. 

Bridges was really making things up on the fly. He was 

changing the theories of his case and responding to Your 

Honor. But I'm going to do my best to respond to the 

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arguments made, many of which I sort of anticipated. 

 I'll first start with the issue that Your Honor raised, 

which was whether this is under Rule 60 or not. Mr. Bridges 

identified a couple of cases, said that the order was 

interlocutory, said that somehow the orders have anything to 

do with a plan confirmation order. They do not. Your Honor 

didn't hear that argument at the plan confirmation. The 

January 9th and July 16th orders are old and cold. There's 

an exculpation provision in the plan. There's a gatekeeper 

in the plan. The provisions do not overlap entirely. The 

gatekeeper applies prospectively. The exculpation provision 

includes additional parties. 

 So the arguments that basically the plan had anything to 

do -- and the fact that the plan is not a final order -- has 

anything to do with the January 9th and July 16th orders is 

just wrong. It's just wrong. 

 More fundamentally, Your Honor, as Your Honor pointed 

out, the Smyth case is a professional employment order. And 

ironically, if you abide by the Smyth case, that order is 

never appealable because it's interlocutory. 

 But more fundamentally, Your Honor, that's dealing with 

327 professionals. And again, there's not much analysis in 

the Smyth case, but we're not dealing with a 327 

professional. We're dealing with orders that were approved 

under 363. 

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 So the premise of the argument that Rule 60(b) -- 60 

doesn't apply and they have other arguments just doesn't make 

any sense. 

 Okay. So now that gets us to Rule 60. And Your Honor, 

Your Honor hit the nail on the head. They haven't presented 

any evidence. Allegations in a complaint aren't evidence. 

They can't stand up there and say surprise evidence. They 

had the opportunity -- and this hearing's been continued a 

few weeks -- they had the opportunity to bring it up, and 

it's -- they had the opportunity to claim that there was 

surprise, but they just didn't. Okay? 

 So to go on to the Rule 60 arguments. Surprise. 

Surprise and reasonable delay are really -- go hand in hand 

with Mr. Bridges' argument. He says, well, we didn't find 

out that -- months after the order was entered that he 

violated a duty to us, so we are surprised by that, and it's 

a reasonable time. Well, Your Honor, the order provided for 

an exculpation. CLO Holdco and DAF knew that it applied to 

an exculpation. They were bound. They knew based upon that 

order that they would not be able to bring claims for normal 

negligence. There is no surprise. 

 If you take Mr. Bridges' argument to its conclusion, he 

could wait until the end of the statute of limitations after 

an order and have come in four years from now and say, Your 

Honor, we just found out facts so we should go back four 

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years before. That, Your Honor, that's not how the surprise 

works. That's not how the reasonable time works. 

 Mr. Bridges did not contest that they're bound by res 

judicata. He did not contest that the exculpation itself was 

clear and unambiguous. Of course he argued Your Honor 

couldn't enter an order saying there was exculpation, again, 

with no authority. And he seemed surprised, as I suspect he 

should, since he's not a bankruptcy lawyer, that retention 

orders, whether it's investment bankers, financial advisors, 

include exculpations all the time. So there's no grounds 

under surprise. 

 There's no grounds -- the motions are late under 60(c). 

 And they're not void. I went through a painstaking 

analysis, Your Honor, and I described in detail what the 

Espinosa case held, and the exceptional circumstances which 

Mr. Bridges tried to get away from as much as he could. 

Maybe he can try to get away from language in a district 

Court opinion, in a Bankruptcy Court opinion, in a Circuit 

Court opinion. You can't get away from language in a Supreme 

Court opinion. The Supreme Court opinion said exceptional 

circumstances, where there was arguably no basis for 

jurisdiction for what the Court did. They have not even come 

close to convincing Your Honor that there was absolutely no 

basis. 

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faith disagreement, but they haven't come close to 

establishing the Espinosa standard, so their motion under 60 

does not -- it fails. 

 And I don't think -- look, these are good lawyers. Mr. 

Bridges and Mr. Sbaiti are good lawyers. They didn't just 

inadvertently not mention Rule 60. They never mentioned it 

because they knew they had no claim under Rule 60. 

 Your Honor, Mr. Bridges has made comments about the 

fiduciary duty of Mr. Seery, about what the Investor's Act 

provides. He's just wrong on the law. Now, Your Honor 

doesn't have to decide that. Whichever court adjudicates the 

DAF lawsuit will have to decide it. But there is no private 

cause of action for damages. There are no fiduciary duties to 

the investors. 

 And what Mr. Bridges doesn't even mention, in that the 

investment agreement that's so prominent in his complaint, 

they waived claims other than willful misconduct and gross 

negligence against Highland. They waived those claims. So 

for Mr. Bridges to come in here and argue that there's some 

surprise, when he hasn't even bothered to look at the document 

that's underlying the contractual relationship between the DAF 

and the Debtor, is -- you know, I'll just say it's 

inadvertence. 

 Your Honor, Mr. Bridges tried to argue that Mr. Seery is 

not a beneficiary of the January 9th order. He's not an 

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agent. Well, again, Your Honor, Mr. Bridges wasn't there. 

Your Honor and we were. On January 9th, an independent board 

was picked, and at the time Mr. Dondero ceased to become the 

CEO. So you have three gentlemen coming in -- Mr. Seery, Mr. 

Dubel, and Mr. Nelms -- coming in to run Highland, in a very 

chaotic time. They had to act through their agents. There 

was no expectation that this board was going to actually run 

the day-to-day operations of the Debtor. Of course not. They 

needed someone to run. And they picked Mr. Seery. And the 

argument that well, he's an agent of the company, he's not an 

agent of the board, that just doesn't make sense. The 

independent board had to act. The directors had to act. And 

the directors, how do they deal with that? They acted through 

Mr. Seery. So he is most certainly governed by the January 

9th order. 

 Your Honor, I want to talk about the jury trial right. 

Mr. Bridges said that Paragraph 14 is an arbitration clause 

and not a jury trial waiver. Now, again, I will forgive Mr. 

Bridges because I assume he didn't read the provision, okay, 

and he -- somebody told him that, and that person just got it 

wrong. But what I would like to do is read for Your Honor 

Paragraph 14(f). It doesn't have to do with arbitration. 

It's a waiver of jury trial. 14(f), Jurisdiction Venue, 

Waiver of Jury Trial. The parties hereby agree that any 

action, claim, litigation, or proceeding of any kind 

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whatsoever against any other party in any way arising from or 

relating to this agreement and all contemplated transactions, 

including claims sounding in contract, equity, tort, fraud, 

statute defined as a dispute shall be submitted exclusively to 

the U.S. District Court for the Northern District of Texas, or 

if such court does not have subject matter jurisdiction, the 

courts of the State of Texas, City of Dallas County, and any 

appellate court thereof, defined as the enforcement court. 

Each party ethically and unconditionally submits to the 

exclusive personal and subject matter jurisdiction of the 

enforcement court for any dispute and agrees to bring any 

dispute only in the enforcement court. Each party further 

agrees it shall not commence any dispute in any forum, 

including administrative, arbitration, or litigation, other 

than the enforcement court. Each party agrees that a final 

judgment in any such action, litigation, or proceeding is 

conclusive and may be enforced through other jurisdictions by 

suit on the judgment or in any manner provided by law. 

 And then the kick, Your Honor, all caps, as jury trial 

waiver always are: Each party irrevocably and unconditionally 

waives to the fullest extent permitted by law any right it may 

have to a trial by jury in any legal action, proceeding, cause 

of action, or counterclaim arising out of or relating to this 

agreement, including any exhibits, schedules, and appendices 

attached to this agreement or the transactions contemplated 

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hereby. Each party certifies and acknowledges that no 

representative of the owner of the other party has represented 

expressly or otherwise that the other party won't seek to 

enforce the foregoing waiver in the event of a legal action. 

It has considered the implications of this waiver, it makes 

this waiver knowingly and voluntarily, and it has been induced 

to enter into this agreement by, among other things, the 

mutual waivers and certifications in this section. 

 Your Honor, I will forgive Mr. Bridges. I assume he just 

did not read that. But to represent to the Court that that 

language does not contain a jury trial waiver is -- is just 

wrong. 

 THE COURT: All right. I'm going to stop right 

there. And you were reading from the Second Amended and 

Restated Shared Services Agreement between Highland -- 

 MR. POMERANTZ: Not shared services. I'm reading 

from the Second Amended and Restated Investment Advisory 

Agreement -- 

 THE COURT: Investment -- 

 MR. POMERANTZ: -- between the Charitable DAF, the 

Charitable DAF GP, and Highland Capital Management. The 

agreement whereby the Debtor was the investment advisor to the 

Charitable DAF Fund and the Charitable DAF GP. 

 THE COURT: All right. Well, Mr. Bridges, I'm going 

to bounce quickly back to you. This is your chance to defend 

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your honor. 

 MR. BRIDGES: Yeah, we're -- we're looking at a 

different agreement, where -- where literally the words that 

were read to you are not in the agreement in front of us and 

it is news to me. So, Your Honor, this is a problem -- 

 THE COURT: What is the agreement you're looking at? 

 MR. BRIDGES: It is the Amended -- I assume that 

means First Amended -- Restated Advisory Agreement. 

 MR. POMERANTZ: Your Honor, we are happy to file this 

agreement with the Court so the Court has the benefit of it in 

connection with Your Honor's ruling. 

 THE COURT: Okay. I would like you to do that. Uhhuh. 

 MR. BRIDGES: I'd like -- I'd like to request -- I'll 

withdraw that. 

 THE COURT: Okay. Go on, Mr. Pomerantz. 

 MR. POMERANTZ: Mr. Bridges, if you could put us on 

mute. If you could put us on mute, Mr. Bridges, so I don't 

hear your feedback. Thank you. 

 Mr. Bridges also complains about the language "to the 

extent permissible by law." As Your Honor knows and as has 

been my practice over 30 years, that language is probably in 

every plan where there's a retention of jurisdiction: to the 

extent permissible by law. And Mr. Bridges says that this 

will create ambiguity in the order that couldn't be enforced. 

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There's no basis for that. Our including the language "to the 

extent permissible by law" in the orders, as we are prepared 

to do, is consistent with the plan confirmation order where we 

addressed that issue. And we addressed that issue because we 

didn't want to put Your Honor in a position where thereby Your 

Honor may have an action before Your Honor that passes the 

colorability gate that Your Honor may not be able to assert 

jurisdiction. And since jurisdiction can't be waived in that 

regard, we will agree to amend that. 

 There's nothing ambiguous about that, and there's no 

reason, though, that clause has to modify the Court's ability 

to act as a gatekeeper, because, as we've argued ad nauseam, 

gatekeeper provisions where the Court has that ability is not 

only part of general bankruptcy jurisprudence but also part of 

the Bankruptcy Code. 

 Counsel says that Barton doesn't apply because the 

business judgment of Your Honor was used in retaining Mr. 

Seery as opposed to in some other capacity. There's no basis 

for that, Your Honor. A court-appointed -- a court-approved 

CEO, CRO, professional, they are all entitled to protection 

under the Barton act. And the argument -- and again, this is 

separate and apart from whether he's entitled to protection 

under the January 9th order. But the argument that because it 

was the business judgment -- again, business judgment in doing 

something that Your Honor expressly contemplated under the 

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January 9th corporate governance order -- there's just no law 

to support that. And I guess he's trying to get around the 

plethora of cases that deal with the situation where Barton

has been extended. 

 Your Honor, Mr. Bridges, again, in arguing that we're 

ships passing in the night on Shoaf and Applewood and 

Espinosa, no, we're not ships passing in the night. We have a 

difference in agreement on what these cases stand for. These 

cases stand for the proposition that a clear and unambiguous 

provision, plain and simple, if it's clear and unambiguous, it 

will be given res judicata effect. The release in Shoaf, 

clear and unambiguous. The release in Applewood, not. The 

issue here is the exculpation language. That was clear and 

unambiguous. It applied prospectively. The argument makes no 

sense that we didn't identify -- we didn't identify claims 

that might arise in the future, so therefore an exculpation 

clause doesn't apply? That doesn't make any sense. 

 Your Honor clearly exculpated parties. Mr. Dondero knew 

it. CLO Holdco knew it. The DAF knew it. So the issue Your 

Honor has to decide is whether that exculpation was a clear 

and unambiguous provision such that it should be entitled to 

res judicata effect. And we submit that the answer is 

unequivocally yes. 

 That's all I have, Your Honor. 

 THE COURT: All right. Well, -- 

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 MR. MORRIS: Your Honor? I apologize. 

 THE COURT: Okay. 

 MR. MORRIS: This is John Morris. 

 THE COURT: Yes? 

 MR. MORRIS: I just want to, with respect to the 

exhibits, I know there was no objection, but I had cited to 

Docket Nos. 2419 and 2423. The original exhibit list is at 

Docket No. 2412. So it's the three of those lists together. 

2412, as amended by 2419, as amended by 2423. Thank you very 

much. 

 THE COURT: All right. Thank you. All right. 

 MR. BRIDGES: Your Honor, I still have no objection 

to that, but may I have the last word on my motion? 

 THE COURT: Is there time left? 

 THE CLERK: Yes. 

 THE COURT: Okay. Go ahead. 

 MR. BRIDGES: I just need a minute, Your Honor. They 

agreed to change the order. They proposed it to us. They 

proposed it in a proposed order to you. They can't also say 

that it cannot be changed. 

 Secondly, Your Honor, in Milic v. McCarthy, 469 F.Supp.3d 

580, the Eastern District of Virginia points out that the 

Fourth Circuit treats appointment of estate professionals as 

interlocutory orders as well. 

 That's all. Thank you, Your Honor. 

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 THE COURT: All right. Here's what we're going to 

do. We've been going a very long time. I'm going to take a 

break to look through these exhibits, see if there's anything 

in there that I haven't looked at before and that might affect 

the decision here. So we will come back at 3:00 o'clock 

Central Time -- it's 2:22 right now -- and I will give you my 

bench ruling on this. All right. 

 So, Mike, they can all stay on the line, right? 

 Okay. You can stay on, and we'll be back at 3:00 o'clock. 

 THE CLERK: All rise. 

 (A recess ensued from 2:22 p.m. to 3:04 p.m.) 

 THE CLERK: All rise. 

 THE COURT: All right. Please be seated. All right. 

Everyone presented and accounted for. We're going back on the 

record. 

 MR. POMERANTZ: Your Honor, before you start, this is 

Jeff Pomerantz. We had sent to your clerk, and hopefully it 

got to you, a copy of the Second Amended and Restated 

Investment Advisory Agreement. We also copied Mr. Sbaiti with 

it as well. And we would also like to move that into 

evidence, just so that it's part of the Court's record. 

 THE COURT: All right. 

 MR. BRIDGES: We would object to that, Your Honor. 

We haven't had an opportunity to even verify its authenticity 

yet. 

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 THE COURT: All right. Well, I'll tell you what. 

I'm going to address this in my ruling. So it's not going to 

be part of the record for this decision, and yet -- well, I'll 

get to it. 

 All right. So we're back on the record in Case Number 19-

34054, Highland Capital. The Court has deliberated, after 

hearing a lot of argument and allowing in a lot of documentary 

evidence, and the Court concludes that the motion of CLO 

Holdco, Ltd. and The Charitable DAF to modify the retention 

order of James Seery, which was entered almost a year ago, on 

July 16th, 2020, should be denied. 

 This is the Court's oral bench ruling, but the Court 

reserves discretion to supplement or amend in a more fulsome 

written order what I'm going to announce right now, pursuant 

to Rule 7052. 

 First, what is the Movants' authority to request the 

modification of a bankruptcy court order that has been in 

place for so many months, which was issued after reasonable 

notice to the Movants, and after a hearing, which was not 

objected to by the Movants, or appealed, when the Movants were 

represented by sophisticated counsel, I might add, and which 

order was relied upon by parties in this case, most notably 

Mr. Seery and the Debtor, and in fact was entered after 

significant negotiations involving a sophisticated courtappointed Unsecured Creditors' Committee with sophisticated 

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professionals and sophisticated members, and after negotiation 

with an independent board of directors, court-appointed, one 

of whose members is a retired bankruptcy judge? What is the 

Movants' authority? 

 Movants fumbled a little on that question, in that the 

exact authority wasn't set forth in the motion. But Movants' 

primary argument is that Movants think the Seery retention 

order was an interlocutory order and that the Court simply has 

the inherent authority to modify it as an interlocutory order. 

 The Court disagrees with this analysis. I do not think 

the Fifth Circuit's Smyth case dictates that the Seery 

retention order is still interlocutory. The Seery retention 

order was an order entered pursuant to Section 363 of the 

Bankruptcy Code, not a Section 327 professionals to a debtorin-possession, professionals to a trustee employment order 

such as the one involved in the Smyth case. 

 But even if the Seery retention order is interlocutory -- 

the Court feels strongly that it's not, but even if it is -- 

the Court believes it would be an abuse of this Court's 

inherent discretion or authority to modify that order almost a 

year after the fact and under the circumstances of this case. 

 Now, assuming Rule 60(b) applies to the Movants' request, 

the Court determines that the Movants have not made their 

motion anywhere close to within a reasonable time, as Rule 

60(c) requires, nor do I think the Movants have demonstrated 

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any exceptional circumstances to declare the order or any of 

its provisions void. The Movants have put on no evidence that 

constitutes surprise or constitutes newly-disputed evidence. 

So why are there no exceptional circumstances here such that 

the Court might find, you know, a void order or void 

provisions of an order? 

 First, this Court concludes that there's no credible 

argument that the Court overreached its jurisdiction with the 

gatekeeping provisions in the order. Gatekeeping provisions 

are not only very common in the bankruptcy world -- in 

retention orders and in plan confirmation orders, for example 

-- but they are wholly consistent with the Barton case, the 

U.S. Supreme Court's Barton's case, and its progeny that has 

become known collectively as the Barton doctrine. Gatekeeping 

provisions are wholly consistent with 28 U.S.C. Section 

959(a)'s complete language. 

 The Fifth Circuit has blessed gatekeeping provisions in 

all sorts of contexts. It has blessed them in the situation 

of when Stern claims are involved in the Villegas case. It 

even blessed Bankruptcy Courts' gatekeeping functions a long 

time ago, in 1988, in a case that I don't think anyone 

mentioned in the briefing, but as I've said, my brain 

sometimes goes down trails, and I'm thinking of the Louisiana 

World Exposition case in 1988, when the Fifth Circuit blessed 

there a procedure where an unsecured creditors' committee can 

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bring causes of action against persons, such as officers and 

directors or other third parties, if they first come to the 

Bankruptcy Court and show a colorable claim. They have to 

come to the Bankruptcy Court, show they have a colorable claim 

and they're the ones that should be able to pursue them. Not 

exactly on point, but it's just one of many cases that one 

could cite that certainly approve gatekeeper functions of 

various sorts of Bankruptcy Courts. 

 It doesn't matter which court might ultimately adjudicate 

the claims; the Bankruptcy Court can be the gatekeeper. 

 And the Court agrees with the many cases cited from 

outside this circuit, such as the case in Alabama, in the 

Eleventh Circuit, and there was another circuit-level case, at 

least one other, that have held that the Barton doctrine 

should be extended to other types of case fiduciaries, such as 

debtor-in-possession management, among others. 

 Finally, as I pointed out in my confirmation ruling in 

this case, gatekeeping provisions are commonplace for all 

types of courts, not just Bankruptcy Courts, when vexatious 

litigants are involved. I have commented before that we seem 

to have vexatious litigation behavior with regard to Mr. 

Dondero and his many controlled entities. 

 Now, as far as the Movants' argument that there was not 

just improper gatekeeping provisions but actually an improper 

discharge in the Seery retention order of negligence claims or 

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other claims that don't rise to the level of gross negligence 

or willful misconduct, again, I reiterate there's nothing 

exceptional in the bankruptcy world about exculpation 

provisions like this. They absolutely are a term of 

employment very often. Just like compensation, they're 

frequently requested, negotiated, and approved. They are 

normal in the corporate governance world, generally. They are 

normal in corporate contracts between sophisticated parties. 

And most importantly of all, even if this Court overreached 

with the exculpation provisions in the Seery retention order, 

even if it did, res judicata bars the attack of these 

provisions at this late stage, under cases such as Shoaf,

Republic Supply v. Shoaf from the Fifth Circuit, the Espinosa

case from the U.S. Supreme Court, and even Applewood, since 

the Court finds the language in this order was clear, 

specific, and unambiguous with regard to the gatekeeping 

provisions and the exculpation provisions. 

 Last, and this is the part where I said I'm going to get 

to this agreement that has been submitted, the Second Amended 

and Restated Investment Advisor Agreement or whatever the 

title is. I am more than a little disturbed that so much of 

the theme of the Movants' pleadings and arguments, and I think 

even representations to the District Court, have been they 

have these sacred jury trial rights, these inviolate jury 

trial rights, and an Article I Court like this Court should 

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have no business through a gatekeeping provision impinging on 

the possible pursuit of an action where there's a jury trial 

right. 

 I was surprised initially when I thought about this. I 

thought, wow, I've seen so many agreements over the months. I 

can't say every one of them waived the jury trial right, but I 

just remembered seeing that a lot, and seeing arbitration 

provisions, and so that's why I asked. It just was lingering 

in my brain. So I'm going to look at what is submitted. I'm 

not relying on that as part of my ruling. As you just heard, 

I had a multi-part ruling, and whether there's a jury trial 

right or not is irrelevant to how I'm choosing to rule on this 

motion. But I do want to see the agreement, and then I want 

Movants within 10 days to respond with a post-hearing trial 

brief either saying you agree that this is the controlling 

document or you don't agree and explain the oversight, okay? 

Because it feels like a gross omission here to have such a 

strong theme in your argument -- we have a jury trial right, 

we have a jury trial right, by God, the gatekeeping 

provisions, among other things, impinge on our sacred pursuit 

of our jury trial right -- and then maybe it was very 

conspicuous in the controlling agreement that you'd waived 

that, the Movants had waived that. 

 So, anyway, I'm requiring some post-hearing briefing, if 

you will, on whether omissions, misrepresentations were made 

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to the Court. 

 Anyway, so I reserve the right to supplement or amend this 

ruling with a more fulsome written order. I am asking Mr. 

Pomerantz to upload a form of order that is consistent with 

this ruling, and -- 

 MR. POMERANTZ: Your Honor, we will do so. I do have 

one thing to bring to the Court's attention, unrelated to the 

motion, before Your Honor leaves the bench. 

 THE COURT: All right. So just a couple of follow-up 

things. Have you -- I'm not clear I heard what you said about 

this agreement. Did you email it to my courtroom deputy or 

did you file it on the docket? 

 MR. POMERANTZ: We emailed it to your courtroom 

deputy. We're happy to file it on the docket. And we also 

provided a copy to Mr. Sbaiti. 

 I would note for the Court that it's signed both by The 

Charitable DAFs by Grant Scott, just for what it's worth. 

 THE COURT: Okay. All right. Well, I'm trying to 

think what I want -- I do want you to file it on the docket, 

and I'm trying to think of what you label it. Just call it 

Post-Hearing Submission or something and link it to the motion 

that we adjudicated here today. And then, again, you've got 

10 days, Mr. Bridges, to say whatever you want to say about 

that agreement. 

 I guess the last thing I wanted to say is we sure devoted 

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a lot of time to this motion today. We have -- this is a 

recurring pattern, I guess you can say. We have a lot of 

things that we devote a lot of time to in this case that I get 

surprised, but it is what it is. You file a motion. I'm 

going to give it all the attention Movants and Respondents 

think it warrants. I'm going to develop a full record, 

because, you know, there's a recurring pattern of appeals 

right now, 11 or 12 appeals, I think, not to mention motions 

to withdraw the reference. If we're going to have higher 

courts involved in the administration of this case, I'm going 

to make a very thorough record so nobody is confused about 

what we did, what I considered, what my reasoning was. 

 So I kind of think it's unfortunate for us to have to 

spend case resources and so much time and fees on things like 

this, but I'm going to make sure a Court of Appeals is not 

ever confused about what happened and what we did. So that's 

just the way it's going to be. And I feel like we have no 

choice, given, again, the pattern of appeals. 

 All right. So, with that, Mr. Pomerantz, you had one 

other case matter, you said? 

 MR. POMERANTZ: Yes. But before I get to that, Your 

Honor, I assume that, in response to the Movants' submission 

on the agreement, that we would have right at four or seven 

days to respond if we deem it's appropriate? 

 THE COURT: I think that's reasonable. That's 

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reasonable. 

 MR. POMERANTZ: Okay. Thank you, Your Honor. 

 THE COURT: So let me think of how I want to do this. 

I'll just do a short scheduling order of sorts that just, it 

says in one or two paragraphs, at the hearing on this motion, 

the Court raised questions about the jury trial rights and the 

Debtor has now submitted the controlling agreements, I'm 

giving the Movants 10 days to respond to whether this is 

indeed a controlling agreement, and why, if it is, the Movants 

have heretofore taken the position they have jury trial 

rights. And then I will give you seven days thereafter to 

reply, and then the Court will set a further status conference 

if it determines it's necessary. Okay? 

 So, Nate, we'll do a short little order to that effect. 

Okay? 

 MR. POMERANTZ: Thank you, Your Honor. 

 I -- again, before I raise the other issue, I want to pick 

up on a comment Your Honor just made towards the end. I know 

the Court has been frustrated with the time and effort we've 

been spending. The Debtor and the creditors have been 

extremely frustrated, because in addition to the time and 

effort everyone's spending, we're spending millions of 

dollars, millions of dollars on litigation that -- 

 THE COURT: It's one of the reasons you needed an 

exit loan, right? 

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 MR. POMERANTZ: Right. No, exactly. That's 

frivolous, that we think is made in bad faith. 

 And Your Honor, and everyone else who's hearing this on 

behalf of Mr. Dondero, should understand we're looking into 

what appropriate authority Your Honor would have to shift some 

of the costs. Your Honor did that in the contempt motion. 

Your Honor can surely do that in connection with the notes 

litigation. But all this other stuff that is requiring us to 

spend hundreds and hundreds of hours and spend millions of 

dollars, we are clearly looking into whether it would be 

appropriate and what authority there is. I just wanted to let 

Your Honor know that. 

 And in connection with that, the last point, Your Honor, I 

can't actually even believe I'm saying this, but there was 

another lawsuit filed -- we just found out in the break -- on 

Wednesday night by the Sbaiti firm on behalf of Dugaboy in the 

District Court. 

 Now, to make matters worse, Your Honor, the litigation 

relates to alleged improper management by the Debtor of MultiStrat. If Your Honor will recall, at many times I've told 

this Court what Dugaboy's claims they filed in this case. 

Dugaboy has a claim that is filed in this case for 

mismanagement postpetition of Multi-Strat. Now the Sbaiti 

firm, in addition to representing CLO Holdco, in addition to 

representing the DAF, and whatever the Plaintiffs' lawyers are 

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in that other District Court, PCMG, and in connection with the 

Acis matter, they've decided they haven't had enough. They've 

now filed another motion that -- you know, why they filed it 

in District Court and there's a proof of claim on the same 

issues, I don't know. But I thought Your Honor should know. 

I'm not asking Your Honor to do anything about it. But we 

will act aggressively, strongly, and promptly. 

 Thank you, Your Honor. 

 THE COURT: All right. Well, you've reminded me of 

what came out earlier today about the entity -- I left my 

notepad in my chambers -- PMC or PMG or something. 

 Mr. Bridges, we're not going to have a hearing right now 

on me doing anything, but what are you thinking? What are you 

doing? 

 MR. BRIDGES: Your Honor, I'm not trying to duck your 

question. I literally have no involvement with any other 

claim, and we would have to ask Mr. Sbaiti to answer your 

questions. 

 THE COURT: All right. Is he there? 

 MR. BRIDGES: He is. 

 THE COURT: I'll listen. 

 MR. BRIDGES: I'll switch seats and give him this 

chair. 

 MR. SBAITI: Sorry, Your Honor. We had two computers 

going and weren't able to use the sound on one, so we ended up 

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turning that off. 

 Your Honor, I'm not sure what the question is about when 

you say what are we thinking. We have a client that's asked 

us to file something, and when we're advised by bankruptcy 

counsel that it's not prohibited for us to do so, and don't 

know why we're precluded from doing so, and when the time 

comes I'm sure we'll be able to explain to Your Honor -- 

someone will be able to explain to Your Honor why what we're 

doing, despite Mr. Pomerantz's exacerbation, or excuse me, 

exasperation, why that wasn't improper. It's our belief that 

it wasn't improper or a violation of the Court's rule. 

 THE COURT: Just give me a quick shorthand Readers' 

Digest of why you don't think it's improper. 

 MR. SBAITI: Sure. My understanding is, Your Honor, 

there's not a rule that says we can't file it against the 

Debtor for postpetition actions. So that, that's as -- that's 

as much as I understand. And I'm going to -- I'm not trying 

to duck it, either. And if I'm wrong about that and someone 

wants to correct me on our side offline and if we have to 

explain to the Court why that's so or what rule has been 

violated, I'm sure we'll be able to put together something for 

that. But that's what I've been advised. 

 THE COURT: Have you done thorough -- 

 MR. POMERANTZ: Your Honor, I think what -- 

 MR. SBAITI: (garbled), Your Honor. 

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 THE COURT: Have you done thorough research yourself? 

Your Rule 11 signature is on the line, not some bankruptcy 

counsel you talked to. Have you done the research yourself? 

 MR. SBAITI: Well, Your Honor, I've relied on the 

research and advice of people who are experts, and I believe 

my Rule 11 obligations also allow me to do that, so yes. 

 MR. POMERANTZ: Your Honor, I think we're entitled to 

know if it's Mr. Draper's firm who has been representing 

Dugaboy. He's the bankruptcy counsel. I don't think it's an 

attorney-client privilege issue. If Mr. Sbaiti is going to be 

here and sort of say, hey, bankruptcy counsel said it was 

okay, I think we would like to know and I'm sure Your Honor 

would like to know who is that bankruptcy counsel. 

 THE COURT: Yes. Fair enough. Mr. Sbaiti? 

 MR. SBAITI: Your Honor, in consultation with Mr. 

Draper and with consultation with other counsel that we've 

spoken to, that has been our understanding. 

 THE COURT: Who's the other counsel? 

 MR. SBAITI: Well, we've talked to Mr. Rukavina about 

some of these things for the PCMG and the Acis case. We've 

talked to the people who, when they tell us you can't do this 

because they're bankruptcy counsel for our client, then we 

don't do something. So, and I'm not trying to throw anybody 

under the bus, but my understanding of what goes on in 

Bankruptcy Court is incredibly limited, so, you know, and if 

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it's a mistake then I'll own it, if I have a mistaken 

understanding, but I also wasn't anticipating having to make a 

presentation about this right here right now, so -- 

 THE COURT: Well, you're filing lawsuits that involve 

this bankruptcy case during the hearing, so -- 

 MR. SBAITI: Oh, we didn't file it during the 

hearing, Your Honor. It was filed last night, I believe. 

 THE COURT: Okay. Well, I assume that you're going 

to go back and hit the books, hit the computer, and be 

prepared to defend your actions, because your bankruptcy 

experts, they may think they know a lot, but the judge is not 

very happy about what she's hearing. 

 MR. POMERANTZ: Your Honor, if I may ask when Your 

Honor intends to issue the contempt ruling in connection with 

the June 8th hearing? I strongly believe -- and, obviously, 

this has nothing to do with the contempt hearing; this 

happened after -- but I strongly believe that sending a 

message that Your Honor is inclined to hold counsel in 

contempt, which obviously is one of the violators we said 

should be held in contempt, it may be important to do that 

sooner rather than later so that people know that Your Honor 

is serious. 

 THE COURT: All right. Well, I understand and 

respect that request. And let me tell you all, I had a sevenday -- okay. You all were here on that motion June 8th. I 

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had a seven-day, all-day, every-day, 9:00 to 5:00, 45-minute 

lunch break, in-person hearing with a dozen or so live 

witnesses that I just finished Tuesday at 5:00 o'clock. So 

you all were here on the 8th, and then -- what day was that -- 

what was -- Tuesday, I finished. Tuesday was the 22nd. So I 

started on the 14th, okay? So you all were here on the 8th 

and I had a live jury trial -- I mean, not jury trial, a live 

bench trial -- live human beings in the courtroom, beginning 

June 14th. So you're here the 8th. June 14th through 22nd, I 

did my trial. And here we are on the 25th. And guess what, I 

have another live human-being bench trial next week, Monday 

through Friday. 

 So we've been working in other things like this in between 

those two. So I'm telling you that not to whine, I'm just 

telling you that, that's the only reason I didn't get out a 

quick ruling on this, okay? 

 MR. POMERANTZ: And Your Honor, I was not at all 

making that comment to imply anything about the Court. 

 THE COURT: Well, -- 

 MR. POMERANTZ: The time and effort that you have 

given to this case is extraordinary, -- 

 THE COURT: Okay. 

 MR. POMERANTZ: -- so please don't misunderstand my 

comment. 

 THE COURT: Okay. And I didn't mean to express 

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annoyance or anything like that. I guess what I'm trying to 

do is I don't want anyone to mistake the delay in ruling on 

the contempt motion to mean I'm just not that -- you know, I'm 

not prioritizing it, other things are more serious to me or 

important to me, or I'm going to take two months to get to it. 

It's literally been I've been in trial almost all day long 

every day since you were here. But trust me, I'm about as 

upset as upset can be about what I heard on June 8th, and I'm 

going to get to that ruling, and I know what I'm going to do. 

And, well, like I said, it's just a matter of figuring out 

dollars and whom, okay? There's going to be contempt. I just 

haven't put it on paper because I've been in court all day and 

I haven't come up with a dollar figure. Okay? 

 So I hope -- I don't know if that matters very much, but 

it should. 

 All right. We stand adjourned. 

 (Proceedings concluded at 3:35 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 06/29/2021 

______________________________________ ________________ 

Kathy Rehling, CETD-444 Date 

Certified Electronic Court Transcriber 

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INDEX 

Excerpt 

11:33 a.m. to 3:35 p.m. 

PROCEEDINGS 3 

OPENING STATEMENTS 

- By Mr. Bridges 3 

- By Mr. Pomerantz 23 

WITNESSES 

-noneEXHIBITS 

Movants' Exhibits 1, 3 through 12, 15 through Received 91 

28, and 30 through 44 

Debtor's Exhibit 1 Received 91 

Debtor's Exhibits 1 through 17 Received 93 

RULINGS 106 

 

END OF PROCEEDINGS 121 

INDEX 122 

 

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EXHIBIT 22 

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF TEXAS (DALLAS)

IN RE: . Case No. 19-34054-11(SGJ)

 .

HIGHLAND CAPITAL . 

MANAGEMENT, L.P., . 

 . 

 .

Debtor. . 

. . . . . . . . . . . . . .

 . Adv. No. 21-03067(SGJ) 

CHARITABLE DAF FUND, LP, .

et al., . 

 .

Plaintiffs, . Earle Cabell Federal Building

 . 1100 Commerce Street

 v. . Dallas, Texas 75242

 .

HIGHLAND CAPITAL, . 

MANAGEMENT, L.P., et al., . 

 .

Defendants. . Tuesday, November 23, 2021

. . . . . . . . . . . . . . 9:40 a.m.

TRANSCRIPT OF HEARING ON

PLAINTIFFS' MOTION TO STAY ALL PROCEEDINGS (55);

PLAINTIFFS' MOTION TO STRIKE REPLY APPENDIX (47); AND

DEFENDANTS' MOTION TO DISMISS COMPLAINT (26)

BEFORE HONORABLE STACEY G. JERNIGAN

UNITED STATES BANKRUPTCY COURT JUDGE

TELEPHONIC APPEARANCES CONTINUED ON NEXT PAGE.

Audio Operator: Hawaii S. Jeng

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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TELEPHONIC APPEARANCES:

For CLO Holdco, Ltd.: Sbaiti & Company PLLC

BY: MAZIN AHMAD SBAITI, ESQ.

JP Morgan Chase Tower

2200 Ross Avenue, Suite 4900 W

Dallas, Texas 75201

For Highland Capital Pachulski Stang Ziehl & Jones LLP

Management: BY: JOHN MORRIS, ESQ.

780 3rd Avenue, 34th Floor

New York, NY 10017

Pachulski Stang Ziehl & Jones LLP

BY: JEFFREY N. POMERANTZ, ESQ.

10100 Santa Monica Blvd., 13th Floor

Los Angeles, California 90067

For Highland CLO Brobeck Phleger & Harrison

Funding, Ltd.: BY: JONATHAN W. JORDAN, ESQ.

4801 Plaza on the Lake

Austin, Texas 78746

King & Spalding LLP

BY: PAUL RICHARD BESSETTE, ESQ.

500 West 2nd Street, Suite 1800

Austin, Texas 78701

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INDEX

 PAGE

PLAINTIFFS' MOTION TO STAY ALL PROCEEDINGS (55)

 Court's Ruling - Denied 29

PLAINTIFFS' MOTION TO STRIKE REPLY APPENDIX (47)

 Court's Ruling - Denied 32

DEFENDANTS' MOTION TO DISMISS COMPLAINT (26)

 Court's Ruling - Under Advisement 103

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4

1 THE COURT: Good morning. Please be seated.

2 All right. We have a setting in the Charitable DAF

3 Fund, et al., v. Highland, Adversary 21-3067. We have three

4 motions that are set. 

5 Let me get appearances from the Plaintiffs' counsel

6 first. Go ahead.

7 MR. SBAITI: Good morning, Your Honor. This is Mazin

8 Sbaiti for the Plaintiffs.

9 THE COURT: Okay. Thank you. 

10 Now for the Defendants, who do we have appearing?

11 MR. POMERANTZ: Good morning, Your Honor. It's Jeff

12 Pomerantz and John Morris from Pachulski Stang Ziehl & Jones. 

13 Your Honor, before -- I understand Your Honor is going to take

14 up the motion to stay first. 

15 Before Your Honor does so, I have a procedural issue

16 relating to that motion that I would like to address the Court

17 after appearances are made.

18 THE COURT: All right. I assume that's all the

19 lawyer appearances for this adversary.

20 MR. JORDAN: Your Honor?

21 THE COURT: Oh, go ahead.

22 MR. JORDAN: Your Honor, we are a nominal defendant,

23 but John Jordan on behalf of Highland CLO Funding, Ltd.

24 THE COURT: Okay. Thank you. Sorry about that.

25 MR. BESSETTE: And, Your Honor, Paul Bessette, Mr.

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1 Jordan's colleague is on the phone, as well.

2 THE COURT: Okay. Thank you. 

3 All right. Anyone else I missed?

4 (No audible response)

5 THE COURT: All right. Mr. Pomerantz, your

6 procedural issue?

7 MR. POMERANTZ: Thank you, Your Honor. 

8 Your Honor, I must once again bring to this Court's

9 attention a violation of the Court Rules by the various counsel

10 representing Mr. Dondero. This time it's by Mr. Sbaiti. 

11 When the district court entered its order granting

12 Highland's motion to enforce the reference and referring this

13 matter to Your Honor, there were three matters on the Court's

14 docket, district court's docket that got transferred. First

15 was the motion to dismiss, second was the motion to stay, and

16 third was the motion to strike, which essentially has been

17 rendered moot.

18 The briefing was complete with respect to the first

19 two matters, the motion to dismiss and the motion to stay. And

20 all that remained for the Court to do was to set a hearing and

21 have oral argument. Your Honor, on October 13th, Your Honor

22 set a hearing for today for each of those two motions. 

23 Nevertheless, on November 10th, almost a month after the Court

24 set the matters for hearing and after pleadings were closed,

25 Plaintiffs filed what they called their amended motion to stay.

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1 As an initial matter, Your Honor, the amended motion

2 was not even filed in this adversary proceeding initially. It

3 was filed in the main case, and there was an error that Mr.

4 Sbaiti corrected on November 18th, five days before this

5 hearing. Plaintiff did not ask for leave of court to file any

6 further pleadings. They did not provide the time under the

7 local rules for response. And, in fact, they raised additional

8 arguments in their amended motion. 

9 Well, Your Honor, we can certainly argue to the Court

10 that the amended motion constitutes a new motion, is untimely,

11 and the hearing should be continued to allow us to file a

12 response. We're not going to do that, Your Honor. As I will

13 discuss when it's my time to response substantively to the

14 motion, the new arguments to stay the proceedings, the amended

15 motion are equally as frivolous as the arguments contained in

16 the original motion.

17 But I bring this to the Court's attention because,

18 again, it's extremely frustrating to have the lawyers

19 representing Mr. Dondero's related entities continue to act as

20 if the rules do not apply to them. Your Honor will recall just

21 a week or so ago, Your Honor made a -- we had a similar issue

22 in connection with the motion to dismiss. Failure to follow

23 the rules is unprofessional, and it's disrespectful not only to

24 Highland's professionals but also to the Court and it

25 interferes with Your Honor's ability to control your docket and

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1 sufficiently prepare for contested matters.

2 At some point, Your Honor, there should be real

3 consequences for the continued violation of the rules. Having

4 said that, Your Honor, we are prepared to go forward with the

5 motion to stay today.

6 THE COURT: All right. Mr. Sbaiti, what say you? 

7 I'm looking at Docket Entry Number 69 in the adversary

8 proceeding that was filed last Thursday. So, obviously, very,

9 very late in the game, shall we say. What is your response to

10 this?

11 MR. SBAITI: Your Honor, that was not filed in the

12 adversary as an error. When we asked one of our paralegals to

13 file it, we're not as familiar with the bankruptcy court system

14 and it was an error. It was corrected once the lawyers

15 realized it, which was last -- which was on November the 18th. 

16 It was filed in, I guess in the main case. But it was simply

17 an inadvertent error, Your Honor.

18 MR. POMERANTZ: I would add, Your Honor, the original

19 motion filed inadvertently was November 10th. It still was not

20 timely. I think Mr. Sbaiti needs to answer the question of why

21 that was filed untimely, okay.

22 THE COURT: All right. Thank you, Mr. Sbaiti.

23 So, one of my pet peeves in life is people blaming

24 paralegals, by the way. But be that as it may, as Mr.

25 Pomerantz points out that it was still untimely the motion

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1 filed in the underlying bankruptcy case November 10th. So what

2 is your --

3 MR. SBAITI: Your Honor, when we looked at the motion

4 and looked at the progression of the case, we filed an amended

5 motion simply to clarify our position. And really I don't

6 think we've changed our arguments all that much. We simply

7 clarified our position. We've seen amended motions filed in

8 the bankruptcy in our prior dealings, and so at that point, we

9 felt like there wasn't a rule explicitly saying we couldn't

10 have an amended motion. 

11 But if it's untimely, Your Honor, you know, we don't

12 think it changes the underlying arguments. As Mr. Pomerantz

13 said, we don't think there's any prejudice to Highland either.

14 THE COURT: All right. Well, just to be clear, you

15 know, it's one thing in an underlying bankruptcy case to file

16 an amended motion after you've gotten a motion set for hearing

17 that might slightly adjust, you know, facts or relief sought. 

18 And, of course, we independently look at it when it happens in

19 an underlying case to see do we need more notice to affected

20 parties.

21 But in an adversary proceeding, you know, you just

22 don't do this. All right? If you have some sort of

23 exceptional circumstances, you can file I guess a motion to

24 amend because I got to include this new information that didn't

25 exist. But you just don't do this, okay?

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1 So I don't -- could you be clear what was the new

2 information? What was the new information that had to be

3 brought before the Court suddenly?

4 MR. SBAITI: Your Honor, there wasn't new

5 information. We were simply giving notice of our understanding

6 of where the legal arguments were going. The reason being is

7 that after those motions were filed and recently, the debtor

8 took the position in two other cases that they should be

9 dismissed pursuant to the permanent injunction.

10 And so that clarified for us at least a couple of

11 arguments that were unclear to us where the debtor stood on

12 whether or not the permanent injunction would be a basis to

13 dismiss or stay any of the claims that were pending. There are 

14 two other claims pending in district court. Since we had filed

15 that motion, the debtor filed a motion to reconsider the stays

16 that were granted in those two courts. And then they also

17 moved to dismiss on the basis of the permanent injunction. 

18 And so given that the debtor took the position that

19 they were willing to dismiss those cases based upon the

20 permanent injunction, it in many ways contravenes the position

21 they took in response to our motion which is that the -- for

22 example, they somewhat take the position in Paragraph 22, it

23 wasn't as clear then but it's clear -- it seems clearer now

24 that the permanent injunction is not relevant to whether or not

25 the case can go forward in any capacity.

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1 And so we simply wanted to incorporate that, but it's

2 mainly legal argument about the choices that are before the

3 Court. That was really it. I mean, theoretically, I would

4 have made them for the first time during oral argument and we

5 thought we were doing something good by giving -- apprising the

6 Court in writing and giving notice of these arguments to the

7 other side by filing an amended motion. We didn't add new

8 evidence or anything like that.

9 MR. POMERANTZ: Your Honor, that argument is

10 completely disingenuous because our motion to dismiss and

11 motion for reconsideration that Mr. Sbaiti refers to is several

12 weeks ago, okay. It wasn't November 10th. It was several

13 weeks ago. 

14 I will respond substantively why Mr. Sbaiti is wrong

15 and there's no inconsistent positions when it's my time to

16 speak. But for Mr. Sbaiti to say he was doing us a favor and

17 he was reacting to recent new information is just wrong, Your

18 Honor. And they should just not be continued to allowed to get

19 away with flouting the rules.

20 THE COURT: All right. Well, let me just say I'm

21 confused, maybe I should say baffled, about this amended

22 motion. You know, the motion to dismiss that is before the

23 Court for oral argument today isn't about the injunction, isn't

24 about the plan injunction. It's about res judicata and other

25 12(b)(6) arguments. 

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1 So I'm confused and I think, you know, it's been

2 clear for many months in this adversary proceeding, in

3 particular, the debtor's position on the plan injunction,

4 particularly, you know, in the whole argument on the motion to

5 leave to add Mr. Seery as a defendant.

6 So I'm confused, but we're going to go forward on the

7 argument today, whatever argument you want to make. And you've

8 been, I guess, forewarned. I will say that these last-minute

9 amended motions are not going to be tolerated, are not going to

10 be considered. And so, you know, I hope you won't do it again. 

11 Your firm has already been sanctioned once in this adversary

12 proceeding. I'm sure we all remember. 

13 So, you know, I'm just kind of baffled why you would

14 take a chance filing an amended motion without leave or somehow

15 getting it to the attention of the Court or running it by the

16 other parties for their consent to you doing it. But we're

17 going to go forward and just hear the arguments, okay. And so

18 --

19 MR. SBAITI: Thank you.

20 THE COURT: -- I'll hear your argument. 

21 I'm letting people know I don't know where this time

22 estimate came on the calendar today, three hours. I don't know

23 if someone specifically expressed that. But I'm letting you

24 know at noon I have a swearing-in ceremony that I'm doing back

25 in my chambers. So I will stop at noon Central time. 

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1 And so does anyone think that's going to be a

2 problem?

3 MR. SBAITI: It should not be, Your Honor, from our

4 perspective.

5 THE COURT: Mr. Pomerantz?

6 MR. POMERANTZ: I don't believe so. Mr. Morris is

7 going to handle the motion to dismiss which is going to be the

8 bulk. My presentation on the motion to stay is only going to

9 be around ten minutes or so.

10 THE COURT: Okay. Thank you. 

11 Mr. Sbaiti, your argument on the motion for stay.

12 MR. SBAITI: Thank you, Your Honor. 

13 Your Honor, may I share my screen? 

14 THE COURT: You may.

15 MR. SBAITI: I have a PowerPoint that can kind of --

16 THE COURT: Okay. You may.

17 MR. SBAITI: -- walk us through. Thank you. 

18 Is Your Honor able to see my screen? 

19 THE COURT: I can, yes.

20 MR. SBAITI: Thank you, Your Honor. 

21 Your Honor, what I would point you to is, first, the

22 injunction language. This is what Your Honor's permanent

23 injunction says, and this is really what animates our motion to

24 stay. Out motion to stay is derived specifically because my

25 clients and I feel like our case has been enjoined by this

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1 injunction, if not completely disposed of.

2 The language says that we're an enjoined:

3 "An enjoined party is permanently enjoined from

4 commencing, conducting, or continuing in any manner

5 any suit, action, or other proceeding of any kind

6 including any proceeding in a judicial, arbitral,

7 administrative, or other forum against or affecting

8 the debtor or the property of the debtor." 

9 And then (v) of that injunction says:

10 "or acting or proceeding in any manner in any place

11 whatsoever that does not conform to or comply with

12 the provisions of the plan."

13 One of the things that was suggested in Paragraph 22

14 of their response was that the DAF and Holdco are not enjoined

15 parties. But the final plan defines an enjoined party in

16 Article 1(b)(56) as any entity who has or -- all entities who

17 have held, hold, or may hold claims against the debtor; any

18 entity that has appeared and/or filed any motion, objection, or

19 other pleading in this Chapter 11 case regardless of the

20 capacity in which such entity appeared and any other party in

21 interest. And, five, the related persons of each of the

22 foregoing.

23 Article 1(b)(22) defines a claim as any claim that's

24 defined in Section 1015 of the Bankruptcy Code. And Section

25 1015 of the Bankruptcy Code defines a claim as a right to

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1 payment whether or not such right is reduced to judgment,

2 liquidated, unliquidated, fixed, contingent, matured,

3 unmatured, disputed, undisputed, legal, equitable, secured, or

4 unsecured.

5 So given this definition, when we've read this

6 injunction, we believed that we were enjoined parties, the DAF

7 and Holdco were both enjoined parties. They had appeared in

8 the -- they have claims. Obviously, those are the claims being

9 asserted here. 

10 And so going back to the injunction language, we

11 believe this lawsuit has been disposed of by this permanent

12 injunction. We believe there's really only one or two things

13 that should probably happen with this lawsuit. Either it could

14 be dismissed based upon the permanent injunction or what we

15 proposed in our motion to stay is that the Court exercise its

16 inherent authority to simply stay the case pending the appeal

17 of this language, which is up on appeal in the Fifth Circuit

18 right now.

19 If that language, and if the injunction gets affirmed

20 by the Fifth Circuit, then certainly the dismissal can happen

21 once that affirmance happens and there's no harm, no foul, and

22 no one's wasted any time.

23 If they're not, if it's overturned, then, obviously,

24 the injunction would be vacated, presumably by the Fifth

25 Circuit. And at some point, if the Court decides not to enter

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1 a similar injunction that would likewise dispose of this case,

2 then the case could proceed on the merits.

3 The issue we've identified both in our original

4 motion and as we fleshed out in our -- as a matter of law in

5 our amended motion to simply put a finer point on it is that

6 the merits are now -- have been disposed of. This injunction

7 ends this case, at least as far as we read it. It ends this

8 case irrespective of the underlying merits of the lawsuit,

9 which means that the lawsuit merits themselves have become moot

10 and any opinion or any attempt to resolve it is obviously an

11 advisory opinion by the Court.

12 So we really only see two ways that this could go

13 right now without either gutting the injunction or

14 circumventing it completely, which is to say that either the

15 case should be dismissed based upon the permanent injunction or

16 the case should be stayed based upon the permanent injunction.

17 Mr. Pomerantz or the debtors' brief suggests that,

18 well, the injunction doesn't prevent hearing pending motions. 

19 But I would respectfully disagree with that. If you look at

20 the language, "commencing, conducting, or continuing in any

21 manner in any suit, action, or other proceeding against or

22 affecting the debtor." 

23 As 12(b)(6) hearing, I would imagine, was intended to

24 fall under the umbrella of a proceeding. And us arguing a

25 12(b)(6) motion would us be conducting and maybe even

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1 continuing the suit because we're trying to protect the merits

2 of the suit, which as I said are at this juncture already moot.

3 And so it comes down to I think a very simple

4 question, which is what do we do at this juncture. Do we just

5 simply dismiss the lawsuit in light of this permanent

6 injunction or stay the lawsuit in light of this permanent

7 injunction? 

8 The debtor makes a lot of hay out of the fact that,

9 well, there are special rules that apply when you're trying to

10 stay a case pending appeal. But if you look at all of their

11 case law, it has to do with different circumstances where an

12 appeal -- where there's a matter on appeal that could

13 substantially affect the resolution of the case, which here we

14 think it actually could. But in those cases, those appeals

15 would affect the resolution of the case on the merits; whereas,

16 here, the question goes to whether or not a permanent

17 injunction that really has stopped us all in our tracks. 

18 As soon as we understood this injunction and its

19 scope, we're the ones who reached out to the debtor's counsel

20 and asked them on a meet-and-confer whether or not they would

21 just agree to stay the matter. And we were a little bit

22 surprised by their reaction when they first didn't think that

23 this applied to our case, and we didn't understand how. And

24 then they changed their mind, said it did apply to our case but

25 they didn't think that we should stay the case. And they

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1 didn't suggest let's just dismiss it based upon the permanent

2 injunction.

3 So it kind of comes down to the same small -- same

4 simple issue, Your Honor. There's this permanent injunction,

5 and I don't think there's any way for us to get around it at

6 this juncture.

7 THE COURT: Mr. Pomerantz:

8 MR. POMERANTZ: Yes, Your Honor. 

9 I'm going to respond to several of the arguments Mr.

10 Sbaiti made in his motion, which apparently he's abandoned

11 because he only is focused on the injunction. And I'm also

12 going to tell Your Honor, what our arguments are because

13 despite Mr. Sbaiti's efforts, he's completely misquoted them.

14 So in the motion and the amended motion, the

15 Plaintiffs make several arguments why this Court should stay

16 the matter. First, they argue they're entitled to a stay

17 because the exculpation provision in the plan prohibits them

18 from proceeding against the Defendants in the action. And

19 there are several problems with that argument.

20 First, Mr. Sbaiti and the Plaintiffs don't even

21 attempt to meet the Fifth Circuit's standards for a stay

22 pending appeal because, of course, they can't. Mr. Sbaiti's

23 trying to sidestep the grounds for a stay pending appeal by

24 arguing it doesn't apply just is incorrect. 

25 They would have to show that there is a likelihood of

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1 success on the merits, they would suffer irreparable harm, the

2 debtor wouldn't suffer irreparable harm, and there is -- public

3 interest supports a stay. They can't do any of them.

4 In fact, as Your Honor is well aware, Your Honor

5 denied the actual appellants in that suit, in that order, the

6 confirmation order, a stay pending appeal and that was denied

7 by the district court and also denied by the Fifth Circuit

8 Court of Appeals.

9 The Plaintiffs didn't object to the plan, they are

10 not parties to the appeal, and they never sought a stay pending

11 appeal. So they really can't explain why they as really

12 strangers to the appeal are entitled to a stay of the

13 effectiveness of the plan when the actual appellants to that

14 order were denied a stay pending appeal up through the

15 appellate ladder.

16 Second, notwithstanding Mr. Sbaiti's arguments in the

17 motion, the exculpation provision is neither as broad nor does

18 it affect all the parties that are subject to this litigation. 

19 There are three Defendants in the complaint. The only

20 Defendant that is covered by the exculpation provision is the

21 debtor. The exculpation provision does not apply HCF Advisors,

22 and it does not apply to Highland CLO Funding. 

23 Also, while the exculpation provision does apply to

24 the debtor, it only exculpates the debtor from claims of

25 negligence. The complaint raises a variety of causes of action

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1 that have nothing to do with negligence and would not be

2 covered by the exculpation provision.

3 But, Your Honor, the biggest problem with their

4 argument that the exculpation provision supports a stay is that

5 the exculpation -- the appeal of the exculpation provision has

6 nothing to do with this case. Why? Because the Fifth Circuit

7 appeal concerns whether the exculpation provision is

8 appropriate for parties other than the debtor. The debtor is

9 the only Defendant in this case that obtains the benefit of the

10 exculpation. 

11 And there is no dispute, there was no dispute at

12 confirmation, there's no dispute in the case law, there's no

13 dispute in Pacific Lumber, there's no dispute in the appeal

14 that a plan can exculpate the debtor. So the Fifth Circuit

15 appeal doesn't implicate the exculpation provision and cannot

16 support a basis for a stay.

17 The next argument Mr. Sbaiti makes is the injunction

18 provision, and the injunction provision is on appeal to the

19 Fifth Circuit. But the aspect of the appeal of the injunction

20 is not the provision that Mr. Sbaiti points to. 

21 And, again, as with the exculpation provision, the

22 same arguments about failure to obtain a stay, failure to be

23 party to the appeals, and failure to object to the plan apply,

24 as well. But as is the case with the exculpation provision,

25 the resolution of the appeal of the injunction provision will

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1 not affect this case in any way. 

2 They point to the portion of the injunction that

3 prohibits enjoined parties from directly or indirectly

4 continuing, commencing, or conducting in any manner any suit or

5 action proceeding against the debtor. They argue that they

6 cannot proceed without violating the injunction because the

7 injunction was intended to put all litigation against the

8 debtor to an end. 

9 But, of course, Your Honor, that is not true. That

10 is not what the injunction is. The issue on appeal before the

11 Fifth Circuit as it relates to the injunction is whether the

12 injunction impermissibly enjoins parties from enforcing their

13 rights with respect to post-effective date commercial

14 relationships with the reorganized debtor. And, of course, we

15 argue that it's appropriate, but it has nothing to do with the

16 provision Mr. Sbaiti identified.

17 The appeal does not impact in any way whether a plan

18 can enjoin prosecution of claims that arose prior to the

19 effective date. And, of course, such a plan provision is

20 completely appropriate and is customary. The plan provided the

21 debtor as the plan provides all debtors with a fresh start and

22 enjoins litigation against the debtor. 

23 But importantly, Your Honor, that does not mean as

24 Plaintiffs argue that any liability for pre-effective date

25 conduct just goes away and that creditors are left without a

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1 remedy to pursue claims against the debtor for pre-effective

2 date conduct.

3 Rather, if they have a pre-petition claim in lieu of

4 their litigation that's pending, they file a pre-petition claim

5 against the estate and that matter is resolved in the claims

6 objection procedure. Or, as in the case here, when they make

7 an allegation that there is a post-petition claim, what do they

8 do? They file a request for payment of an administrative

9 claim, and this Court addresses the validity of the

10 administration claim. The lawsuit pending in another

11 jurisdiction stops, but the claim has to be resolved in the

12 bankruptcy court.

13 The only conduct that the injunction really prohibits

14 is them from proceeding with actions in other courts. It does

15 not deny them a remedy. Accordingly, their argument that they

16 cannot proceed with claims against the debtor because of the

17 injunction provision just lacks any merit and can't form the

18 basis for a stay.

19 Plaintiffs' next argument in their briefing is that

20 if the Court refuses to stay the complaint, they will file a

21 motion to withdraw the reference of this matter to the district

22 court. Your Honor, this is the biggest head-scratcher of them

23 all given how this complaint ended up before Your Honor. This

24 exact issue and Plaintiffs' arguments as to why the reference

25 should be withdrawn have already been fully briefed and decided

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1 by the district court. 

2 As Your Honor may recall, the Plaintiff filed this

3 action in the district court, conveniently failing to include

4 the bankruptcy case as a related case or mentioning that the

5 bankruptcy courts have related jurisdiction in the filings. 

6 Your Honor may have had occasion to review the underlying

7 complaint when the debtor brought a motion for contempt against

8 counsel for Plaintiffs for pursuing a claim against Mr. Seery

9 in violation of Your Honor's January 9th, 2020 and July 16th,

10 2020 orders.

11 Your Honor issued an order finding counsel and

12 various parties in contempt which order is, of course, subject

13 to appeal. At the time we were litigating the contempt motion,

14 we filed two motions in district court. The first was a motion

15 to enforce the reference and have the district court send that

16 complaint to Your Honor. And that motion to enforce the

17 reference is now on Your Honor's docket at Number 22 and 23.

18 The second was the motion to dismiss which is before

19 Your Honor today. Plaintiffs oppose the motion to enforce the

20 reference arguing that mandatory withdrawal was required

21 because the matter involved consideration of non-bankruptcy

22 federal law, specifically federal securities laws and the

23 Investment Advisors' Act.

24 Plaintiffs further argue to the district court why

25 would you refer the case to the bankruptcy court if it's only

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1 going to end up back in the district court upon mandatory

2 withdrawal of the reference. They argue to the district court

3 that would be a complete waste of time.

4 We filed our reply at Docket Number 42 explaining to

5 the district court why mandatory withdrawal of the reference

6 did not apply and why this case should be referred to Your

7 Honor. And what did the district court subsequently do? It

8 entered an order referring this action to Your Honor which is

9 why we are here today.

10 Plaintiffs now flout the district court's order of

11 reference by telling the Court that if the Court does not stay

12 the matter, they will file a motion to withdraw the reference

13 before Your Honor, and they attach virtually identical pleading

14 that they filed in opposition to our motion to enforce the

15 reference.

16 Plaintiffs did not disclose in their amended motion

17 that there was a fully-briefed motion to enforce the reference

18 before the district court. Plaintiffs' argument is

19 disingenuous and designed to mislead the Court. 

20 The district court has only agreed that mandatary

21 withdrawal of the reference does not apply and this case

22 belongs in Your Honor. And while we cannot stop the Plaintiffs

23 from filing any motion before this Court, we want to put them

24 on notice that if they do file a motion for withdrawal of the

25 reference in light of the facts as I just stated them, we will

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1 seek sanctions.

2 In any event, Your Honor, the fact that they may file

3 a motion for withdrawal of the reference at some point in the

4 future is not grounds to stay the matter.

5 Lastly, Your Honor, Plaintiffs argued in the opening

6 that Highland's position today in opposing the motion to stay

7 is inconsistent with positions Highland has taken in two other

8 lawsuits commenced by the Sbaiti firm. Like all of their other

9 arguments, they misrepresent the facts and are frivolous. 

10 The Sbaiti firm filed a complaint on behalf of the

11 DAF in the district court arguing that Highland mismanaged

12 (audio drop). That complaint followed in the heels of an

13 almost identical complaint filed by Dugaboy asserting the same

14 claims.

15 And Your Honor may recall questioning Mr. Sbaiti at a

16 hearing in June how Dugaboy could pursue such a claim in the

17 district court if Dugaboy had a pending proof of administrative

18 claim on file in the bankruptcy case. Well, soon after that

19 hearing, Your Honor, the Dugaboy complaint was dismissed, and a

20 few days later the DAF complaint was filed. That complaint has

21 never been served on Highland.

22 The second lawsuit is also a lawsuit filed by the

23 Sbaiti firm on behalf of an entity called PCMG in the district

24 court. And PCMG previously held less than five one-hundredths

25 of a percent interest in a certain fund managed by highland. 

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1 The lawsuit alleges that Highland acted improperly to sell

2 certain assets of the fund, thereby damaging PCMG. That

3 complaint has also never been served on Highland.

4 The Plaintiffs sought a stay of those matters before

5 Highland could file a response, and the court -- the district

6 court's entered stays in those matters. And Highland has filed

7 motions for reconsideration and the motions to dismiss because

8 they violate the injunction.

9 But, importantly, Your Honor, if you read the

10 motions, Highland does not argue that Plaintiffs do not have a

11 remedy for the alleged wrongs they say they suffer. Rather,

12 Highland's argument is that any claims alleged in those

13 lawsuits, just like any claims alleged in the lawsuit before

14 Your Honor today, must proceed in bankruptcy court as part of

15 the claims objection process. That's where they will have

16 their day in court. The lawsuits don't go away. The

17 injunction prevents them from continuing on in district court.

18 Accordingly, Highland is being totally consistent in

19 all matters, and the litigations may not proceed there but must

20 proceed before Your Honor. And, of course, none of these three

21 matters are implicated by the Fifth Circuit appeal.

22 Your Honor, the amended motion was procedurally

23 improper and is substantively without merit. And for all these

24 reasons, we request that the Court deny the stay motion and

25 proceed with the hearing on the motion to dismiss. 

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1 Thank you, Your Honor. 

2 THE COURT: All right.

3 Mr. Sbaiti, you get the last word.

4 MR. SBAITI: Thank you, Your Honor. 

5 Your Honor, the administrative claim process that was

6 described as being the way that these claims were supposed to

7 proceed, by the language of the order that we read, does not

8 allow for these claims. Those claims are limited to a specific

9 category of claims that don't include the claims that are

10 alleged in this lawsuit. 

11 And in any event, this lawsuit wasn't filed as an

12 administrative claim. So if that's the case and it needs to be

13 refiled or reasserted as an administrative claim, then I think

14 that's a subject for another day. All I know is that we have

15 this injunction right now that either should stay this case

16 pending the appeal, which I'll address the issue on appeal in a

17 moment, or it should be dismissed, perhaps without prejudice so

18 that it can be refiled properly as an administrative claim if

19 that's what's supposed to happen, because I guess this converts

20 the matter.

21 The appeal, the subject of the appeal as to the

22 injunction, Your Honor, the appeal actually encompasses many of

23 the issues that we're talking about in this case. Now Mr.

24 Pomerantz tries to narrow the scope of what's up on appeal, and

25 that may indeed be the argument that they're going to present

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1 to the Fifth Circuit or that they've presented to the Fifth

2 Circuit. 

3 But the actual issue up on appeal is the

4 enforceability and validity of the order for a variety of

5 reasons which includes the provision that we're talking about

6 and the enforceability of the provision that we're talking

7 about because it gets rid of particular claims. And I guess

8 the argument back is, no, it doesn't because there's now an

9 alternative means of going there.

10 Mr. Pomerantz says that we shouldn't have proffered a

11 motion to enforce the reference. That proffer, however, was

12 because Judge Boyle's reference to this Court didn't deal with

13 our motion to -- our cross-motion to withdraw the reference. 

14 All it dealt with was their motion to enforce the reference as

15 a -- to enforce the standing order in the district court. And

16 that's all she ordered was she cited the standing order and the

17 statutes, I think it's 157(a), and that's really all it did.

18 So it left open the question of whether she wanted

19 Your Honor to deal with the withdrawal of the reference

20 specifically as to the 12(b)(6) issue in the first instance. 

21 It didn't resolve the question. It doesn't purport to resolve

22 that question. And it's not unheard of for the district court

23 then to send the matter to the bankruptcy court and then to

24 piecemeal which proceedings the withdrawal of the reference is

25 applicable to and then all the other proceedings would stay

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1 with Your Honor or with the bankruptcy court.

2 So we weren't flouting the district court's order,

3 and we certainly weren't flouting any of the previous orders. 

4 And the threat of a sanction for simply exercising our rights

5 in due course is not well taken.

6 Now Mr. Pomerantz says, well, the DAF and CLO Holdco

7 are not parties to the appeal. I don't think that's relevant

8 because if the provision is struck by the Fifth Circuit, it's

9 not only struck for the appellants, it's struck as to all. 

10 It's either valid or it's invalid. And even if it's declared

11 to be invalid only as to the appellants, it's not suddenly

12 valid as to everyone else who didn't appeal. That's not

13 generally how these appeals have worked.

14 If the Court doesn't stay this matter, Your Honor,

15 and doesn't dismiss it, we still maintain, Your Honor, that as

16 it stands today, the question on the merits have been mooted

17 and we cannot proceed. I think what Mr. Pomerantz is hoping

18 for or the debtor is hoping for is a provision where our hands

19 are potentially tied to argue the motion. 

20 And if the Court tells us they're not, then we'll

21 certainly argue the 12(b)(6). But what I don't want to do is

22 argue a 12(b)(6) motion that on its face appears to violate the

23 permanent injunction and then be held in contempt for violating

24 that injunction.

25 And so that's why we've asked for the Court to either

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1 stay the matter under its inherent jurisdiction or to -- if

2 you're going to -- if it's not going to be stayed, then we

3 believe it has to be dismissed according to the permanent

4 injunction as it stands right now.

5 THE COURT: All right.

6 The motion to stay is denied. The amended motion to

7 stay is likewise denied. This is an odd argument. I guess one

8 might say the traditional four-factor test for a stay of a

9 proceeding has really not been the subject of the argument here

10 for a stay. 

11 So suffice it to say the four-prong test for a stay,

12 you know, hasn't been met here. There hasn't been a showing of

13 substantial likelihood of success on the merits or irreparable

14 injury if the stay's not granted or a stay will not

15 substantially harm others or the stay would serve a public

16 interest. 

17 But going on to the arguments that were focused on by

18 movant, I just don't think that you have shown that, you know,

19 either the exculpation clause or the injunction provisions of

20 the plan somehow tie your hands in arguing the 12(b)(6) motion,

21 defending against the 12(b)(6) motion today or I just think

22 that your arguments reflect, frankly, a misunderstanding of how

23 the injunction language and exculpation language applies here.

24 So the motion for stay is denied, and I will ask Mr.

25 Pomerantz to submit an order reflecting the Court's ruling.

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1 So it looks like we have another procedural matter,

2 Mr. Sbaiti. You filed a motion to strike reply appendix of the

3 Plaintiffs quite a while back. So did you want to present

4 that?

5 MR. SBAITI: Yes, Your Honor. I think it's a very

6 simple procedural issue. 

7 Generally, a party that files a 12(b)(6) is limited

8 to the four corners of the complaint. And if there's a

9 contract incorporated or a document incorporated as an

10 intrinsic part of the complaint, you know, that's usually

11 considered under the 12(b)(6) motion.

12 What the Defendants did, what the debtor here did is

13 they filed a bunch of evidence in their 12(b)(6), essentially

14 attempting to argue it as a summary judgment. We raised that

15 in our response. So as part of our response, we objected to

16 all the evidence. But then on the reply, they filed a bunch

17 more evidence both without leave and improperly, basically

18 sandbagged us. 

19 And so we raised two points for striking that

20 evidence. One was akin to the first argument, which is it's

21 not an evidentiary hearing. It's not an evidentiary process in

22 the first instance. A 12(b)(6) motion has to assume that the

23 facts pled are true, and then the question is whether they

24 state a claim. 

25 And, secondly, adding them to the reply is especially

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1 egregious because the reply is the last word. And we didn't

2 have an opportunity to respond, and we also don't think it's

3 relevant nor should we have to respond to a whole bunch of

4 extra evidence that was attached. 

5 That's essentially the basis of our motion, Your

6 Honor.

7 MR. POMERANTZ: Your Honor, the simple answer to the

8 issue is we filed the reply of the appendix in connection with

9 the motion to enforce the reference. We didn't file it in

10 connection with the motion to dismiss. The motion to enforce

11 the reference is moot. So what Mr. Sbaiti, his whole argument

12 doesn't make any sense.

13 As a substantive matter, just there wasn't any

14 evidence. It was pointing to court pleadings, orders, and

15 stuff. So it's irrelevant. I don't know why it's still on the

16 docket. It shouldn't be on the docket since it related to the

17 motion to enforce the reference.

18 THE COURT: All right. Mr. Sbaiti, did you just

19 simply --

20 MR. SBAITI: Your Honor, much of that evidence was --

21 THE COURT: -- misunderstand or what?

22 MR. SBAITI: I think we might have because it was

23 filed as a separate item, and it may have been miscalendared or

24 misapplied on our system. But the way it was presented to us

25 when we got it was it appeared to be evidence in support of,

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1 well, I guess both, but certainly evidence that was averted to

2 in the reply. 

3 But if they're saying that the Court's not going to

4 consider it, then that moots the motion and I think we can move

5 on.

6 MR. POMERANTZ: Yes, Your Honor. I had nothing to do

7 with his motion. I guess there was another mistake on their

8 end. I guess that stuff happens occasionally. 

9 THE COURT: Okay. All right. So I'll deny it as

10 based on a mistake that's been acknowledged here. And so with

11 that, let's have an order cleaning that up, as well, Mr.

12 Pomerantz, please.

13 With that, we'll move on to the Defendants' motion to

14 dismiss complaint. I think, Mr. Pomerantz, you said Mr. Morris

15 will be making this argument?

16 MR. POMERANTZ: That is correct, Your Honor.

17 THE COURT: All right.

18 Mr. Morris, I'll hear your argument.

19 MR. MORRIS: Good morning, Your Honor. John Morris

20 for Pachulski Stang Ziehl & Jones for the reorganized debtor. 

21 Can you hear me okay?

22 THE COURT: I can. Thank you. 

23 MR. MORRIS: Okay. 

24 Your Honor, this is a bit like Groundhog's Day. I

25 believe that we're going to spend the next half hour or an hour

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1 discussing the very issues that were before the Court earlier

2 this year on the HarbourVest 9019 motion. 

3 As the Court will recall from the June 8 hearing,

4 there is a complaint that's been filed ostensibly by the DAF

5 and CLO Holdco. As Your Honor will recall, the testimony

6 established that Mark Patrick had just been installed as the

7 trustee, had no knowledge of the prior events, and Mr. Dondero

8 and Mr. Sbaiti spent quite some time together formulating this

9 particular complaint that is nothing less than a collateral

10 attack on the Court's prior order.

11 I'd like to, if I can, just walk through a PowerPoint

12 presentation to try to make the debtor's position quite clear,

13 if I may.

14 THE COURT: You may.

15 MR. MORRIS: And I would ask my assistant, Ms. Canty

16 (phonetic), to put up the first slide.

17 Your Honor, you'll recall that last December, the

18 debtor filed its motion under Rule 9019 for court approval of a

19 settlement. The debtor was completely and utterly transparent

20 in what the terms of the settlement were. 

21 Very briefly, as set forth in Appendix 2 or Exhibit 2

22 which was the motion itself, in Paragraph 32, Your Honor, the

23 debtor set forth the terms of the transaction for which it was

24 seeking approval. Those terms included in the very first

25 bullet point a statement that HarbourVest shall transfer its

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1 entire interest in CLOF to an entity to be designated by the

2 debtor. 

3 And that's an important point that we'll talk about

4 in a number of different contexts, Your Honor. The debtor made

5 it very clear at the very first moment of this matter that it

6 was not going to acquire the asset but the asset was going to

7 be transferred to an entity to be designated by the debtor. 

8 The debtor's motion filed last December clearly stated the

9 value of the interest that it would be acquiring in return. 

10 That was also set forth in Paragraph 32 in a footnote.

11 It didn't say that it was the fair market value. It

12 said the method of valuation was the net asset value and gave a

13 valuation date of December 1st so that all parties in interest

14 who received the motion understood the economics of the deal. 

15 And the deal that the debtor was asking the Court to approve

16 was one whereby HarbourVest would receive certain claims and in

17 exchange for those claims, they were going to transfer their

18 interest in CLO -- HCLOF.

19 The debtor also filed on the docket for all to see a

20 copy of the settlement agreement. The settlement agreement

21 sets forth the terms of the deal, including again the statement

22 that HarbourVest "will transfer all of its rights, title, and

23 interest in HCLOF." It actually says to an affiliate or an

24 entity to be designated by the debtor. And the transfer

25 agreement itself was also put on the docket.

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1 So that's where things stood just before Christmas. 

2 I know that there's some due process and other type arguments

3 that are in the Plaintiffs' opposition to the motion. But, of

4 course, the undisputed facts are that the debtor timely filed

5 the motion. The time period was consistent with all applicable

6 rules. Nobody ever asked the debtor for an extension of time.

7 Nobody ever filed a motion for an extension of time. And so

8 those due process arguments I think carry no weight at all.

9 So the debtor filed the motion. And if we can go to

10 the next slide, we see what the responses were, and there were

11 several. All of the responses, the only responses were

12 objections to the motion filed by Mr. Dondero and his certain

13 of his affiliated entities.

14 Mr. Dondero's objection can be summarized as follows. 

15 He made the following observations and asserted the following

16 objections to the proposed settlement. The first thing he said

17 is that the settlement far exceeds the bounds of

18 reasonableness. Now, of course, one cannot make a

19 determination of reasonableness without having an understanding

20 of value. The debtor was giving something and it was getting

21 something. 

22 And so Mr. Dondero understood that the issue of value

23 was front and center. If there was any mistake about it, he

24 also noted that he understood that as part of the settlement

25 and, again, I've written this incorrectly, HarbourVest will

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1 transfer its entire interest in HCLOF to the debtor. That is

2 not what Mr. Dondero understood. In fact, Mr. Dondero

3 understood that it would transfer its entire interest in HCLOF

4 "to an entity to be designated by the debtor," again, making it

5 clear that he knew exactly what the debtor was doing here. And

6 that can be found at Appendix 4 in Footnote 3 on Page 1 if you

7 want the exact quote from Mr. Dondero's pleading.

8 In the same footnote, he also specifically

9 acknowledges that he understood the valuation. He understood

10 the method valuation. He understood the valuation date of

11 December 1st. And he urged the Court in his pleading to

12 scrutinize the settlement to make clear that the available

13 value of the investment should be realized by the debtor's

14 estate. 

15 And this is such a critical point, Your Honor. His

16 concern was that by placing the value in an entity other than

17 the debtor itself, that the Court wouldn't have jurisdiction

18 over that asset. That was his concern. So not only did he

19 understand that the asset was going to be transferred to an

20 affiliate, he wanted to make sure that this Court had

21 jurisdiction over the asset. 

22 And, of course, Mr. Seery in his testimony and

23 otherwise, we provided the Court with all the comfort it needed

24 to know that even though it was being assigned to a special25 purpose vehicle wholly-owned by the debtor, it would

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1 nevertheless be subject to the Court's jurisdiction.

2 Mr. Dondero's trusts also filed an objection if we

3 can go to the next slide.

4 Dugaboy and Get Good represented by Douglas Draper

5 made the following observations and asserted the following

6 objections to the HarbourVest Settlement. They, too, made

7 clear that they understood that the asset was going to be

8 transferred to an entity designated by the debtor. They, too,

9 acknowledge that they understood that the debtor was valuing

10 the asset at approximately $22 million as of December 1st. And

11 their objection was that the Court couldn't evaluate the

12 settlement without knowing how the asset was valued, without

13 knowing whether the debtor could acquire the asset, very

14 critical point. 

15 These are the points that are made in the complaint. 

16 These are the exact same points that are made in the complaint. 

17 And also the Court couldn't evaluate the settlement unless they

18 understood that the value would be inure to the benefit of the

19 debtor's estate, again, mimicking Mr. Dondero's concern that by

20 placing the asset in an affiliate of the debtor, that it might

21 not be subject to the Court's jurisdiction.

22 Finally, and most importantly, if we can go to the

23 next slide. The Plaintiff, CLO Holdco, filed an objection to

24 the 9019 motion. And this is just so critical. And this is

25 the Groundhog Day aspect that I specifically speak of. CLO

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1 Holdco's objection was based solely on its assertion that it

2 had a superior right to the opportunity to acquire the asset

3 that was being transferred by HarbourVest. It only made one

4 argument in support of its contention that it had a superior

5 right, but that argument was specifically premised on the

6 membership agreement, Section 6.1 and 6.2 of the membership

7 agreement.

8 CLO Holdco, the Plaintiff in the underlying action,

9 argued to this Court that HarbourVest had no authority to

10 transfer the asset without complying with the right of first

11 refusal that would give CLO Holdco the opportunity to take the

12 asset for itself. That's what this Court was told. CLO Holdco

13 didn't make this argument fleetingly. They provided an

14 extraordinarily detailed analysis of Sections 6.1 and 6.2 of

15 the membership agreement and concluded "that HarbourVest must

16 effectuate the right of first refusal before it can transfer

17 its interest in HCLOF. That was the objection. Objections

18 have consequences, as Your Honor knows.

19 If we can go to the next slide. 

20 By filing an objection, CLO Holdco and the trusts and

21 Mr. Dondero became participants in the litigation. 

22 Notwithstanding the Plaintiffs' arguments to the contrary, when

23 they file the objections, they participate in what's called a

24 contested matter. And in a contested matter, they had every

25 right to take all discovery on any issue that was related to

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1 the 9019 motion, including the transfer, the disposition of the

2 asset to an affiliate of the debtor, the valuation of the asset

3 that's being received, the merits of the settlement itself, the

4 causes of action, whether, you know, what communications that

5 were, the negotiations, what did Mr. Seery and Mr. Pugatch

6 discuss? Right? 

7 They could have taken any discovery they wanted. And

8 they did avail themselves of discovery, in fact. They did -- I

9 don't know why they did what they did, but they chose to take

10 one deposition, and that was Mr. Pugatch, okay.

11 His deposition transcript, I think is at Exhibit 7,

12 or Appendix Number 7, and it was a long deposition. It really

13 was. And they asked Mr. Pugatch at the deposition if he knew

14 what the value of the asset that was being transferred was. 

15 And he said $22.5 million. So it wasn't just Mr. Seery or the

16 debtor who was subscribing to this valuation. The party on the

17 other side of an arm's length negotiation was subscribing to

18 the exact same valuation.

19 The Plaintiffs could have taken whatever discovery

20 they wanted. This is a full and fair opportunity to

21 participate in the litigation. We proceeded to trial. Before

22 we got there, actually, the debtor filed its response to CLO

23 Holdco's objection and proffered its own very detailed and

24 apparently very persuasive analysis that CLO Holdco's objection

25 was without merit, that CLO Holdco had no right of first

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1 refusal under the facts and circumstances as they existed, and

2 with Grant Scott, Mr. Dondero's childhood friend at the helm,

3 we got to Court for the contested hearing on the debtor's 9019

4 motion, and CLO Holdco withdrew their objection. 

5 And I've put up on the screen just an excerpt of the

6 transcript because, you know, when we talk about whether or res

7 judicata should apply, because was there a hearing on the

8 merits? Was there a decision on the merits? Just look at the

9 words of CLO Holdco's lawyer. "CLO Holdco has had an

10 opportunity to review the reply briefing and after doing so has

11 gone back and scrubbed the HCLOF corporate documents based on

12 our analysis of Guernsey law."

13 And some of the arguments of counsel in those

14 pleadings and our review of the appropriate documents, counsel

15 obtained the authority from Mr. Scott to withdraw the CLO

16 Holdco objection based on the interpretation of the member

17 agreement. We were grateful for that and the Court

18 specifically said in response, "That eliminates one of the

19 major arguments that we had anticipated this morning."

20 Apparently, the Plaintiffs believe that those events

21 have no meaning and that this Court's reliance on CLO Holdco's

22 substantive withdrawal of its objection has no meaning. I

23 think they're wrong, and we'll get to that in a moment.

24 We proceeded with the hearing. Mr. Seery and

25 Mr. Pugatch testified at length. If you look at Footnote 3,

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1 you'll see Mr. Seery testified for almost 70 pages of

2 testimony. Mr. Pugatch testified for almost 45 pages of

3 testimony. His testimony was exhaustive. And, again, any of

4 the objecting parties had the right to ask whatever questions

5 they want. 

6 But I do want to just note a few things that aren't

7 up on the screen right now. If you go to Appendix 9, Your

8 Honor, which is the transcript of the hearing, at Page 13, you

9 will see that the very first thing I discussed in my opening

10 statement was the economics and how with a valuation of $22.5

11 million this deal made sense for the debtor.

12 You will see from Pages 30 to 42 there is extensive

13 testimony from Mr. Seery about the amount and the value of the

14 asset. But the most important part of Mr. Seery's testimony is

15 that he explains how it came to be that HarbourVest agreed to

16 transfer its interest in HCLOF to an affiliate of the debtor. 

17 And that came about, not because Mr. Seery or the debtor was

18 initially at all interested in doing this. The whole idea

19 originated with HarbourVest. 

20 They wanted to extract themselves from the Highland

21 platform. They wanted to give this piece up. So there's no

22 conspiracy going on here. The unrebutted testimony that all of

23 the objecting parties had an opportunity to challenge was that

24 the whole idea originated with Mr. Pugatch and with

25 HarbourVest. I think that's an important point to take into

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1 account.

2 And finally, again, from the hearing, if you look at

3 at Appendix 9, you'd also find that Mr. Pugatch, again,

4 testified, as he had in his deposition, as to the value of the

5 interest being transferred. So we completed the testimony. We

6 rested our case having had a full and fair opportunity to

7 contest the motion. The objecting parties rested as well. And

8 we got to the point where we had to prepare the notice, and we

9 were discussing that at the hearing, if we can go to the next

10 slide.

11 And it's very important, because again, this was all

12 done transparently, and it was all done on the record. And

13 after the close of evidence, I addressed the order that was

14 going to be prepared. I specifically said that I wanted to

15 make clear that we were going to include a provision, "that

16 specifically authorizes the debtor to engage in, to receive

17 HarbourVest the asset, you know, the HCLOF interest," right. I

18 wanted everybody to know that was what was going to happen, and

19 then I said, "The objection has been withdrawn." I think the

20 evidence is what it is and we want to make sure that nobody

21 thinks they're going to go to a different court somehow to

22 challenge the transfer. But yet, that is exactly what the

23 complaint seeks to do.

24 Having put everybody on notice as to where we were

25 going, as to what the evidence showed, the debtor drafted and

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1 the Court adopted an order, and the order says, among other

2 things, that HarbourVest was authorized to transfer its

3 interest to the debtor. Actually, it says, "to a wholly owned

4 and controlled subsidiary of the debtor," pursuant to the

5 transfer agreement, "without the need to obtain the consent of

6 any party or to offer such interest first to any other investor

7 in HCLOF." So the Court heard the 9019 motion pursuant to a

8 Bankruptcy Rule and entered and order that was unambiguous and

9 that the Plaintiffs did not appeal from.

10 We can go to the next slide.

11 At a very high level, Your Honor, it is just crystal

12 clear that the complaint is just inextricably intertwined with

13 the 9019 proceedings and the order itself. I think Mr. Sbaiti

14 would agree with me that but for the order that approved the

15 transfer of the asset and the testimony about the value of that

16 asset, they have no claims. 

17 Every single claim is predicated on what happened in

18 the 9019 hearing. Every single claim is predicated on the

19 Court's order approving the transfer of the asset and the

20 testimony and evidence that was adduced in relation to that

21 asset. 

22 There were really only two issues that the Court -- I

23 mean, if you want to think about it at its most simplistic

24 level, the Court was being asked to assess, is it fair, is it

25 reasonable, is it legally permissible for the debtor to give

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1 something. In this case, allowed claims and releases, and to

2 get something in return. In this case, HarbourVest's interest

3 in HCLOF and releases in return. And that is really the

4 gravamen of the complaint.

5 The complaint is based whether it's breach of

6 fiduciary duty or RICO or breach of contract or tortious

7 interference, whatever the claim is, none of them exist if the

8 debtor doesn't get this. They just don't exist. And that is

9 why the complaint and the proceeding are inextricably

10 intertwined. And if you just take a look at just one paragraph

11 of the pleading, it says at the core of this lawsuit is the

12 fact that HCM, that's the then debtor, purchased the

13 HarbourVest interests in HCLOF for $22.5 million knowing that

14 they were worth far more than that. There's not a cause of

15 action that exists in the complaint that isn't dependent on

16 Paragraph 36.

17 So if we can go to the next slide with that

18 background, I'd like to argue why under 12(b), the complaint

19 should be dismissed because the claim should be barred under

20 the doctrine of res judicata. Luckily, Your Honor, there is at

21 least one area of agreement between the parties here, and that

22 is the purpose of the doctrine and the elements that have to be

23 satisfied in order to meet the burden of proof necessary to

24 have the claims barred. And in Footnote 1, you can -- I've

25 tried to just be helpful to the Court to show that we may not

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1 cite to the exact same cases, but the parties agree that the

2 doctrine is intended to foreclose the re-litigation of claims

3 that were or could have been raised in a prior action and that

4 there's four elements that have to be satisfied for the

5 doctrine to apply.

6 The parties have to be either identical or at least

7 in privity, the judgment in the prior action had to have been

8 rendered by a court of competent jurisdiction. Number three,

9 the prior action had to have been concluded by a judgment on

10 the merits. And the last one is that the same claim or cause

11 of action was involved in both suits. So I just want to spend

12 a few minutes now, Your Honor, going through those four

13 elements to show the Court how easily the reorganized debtor

14 meets this standard.

15 If we can go to the next slide, I can take care of

16 the first two elements very quickly.

17 The first element, the debtor asserted that the

18 Plaintiffs were parties or in privity with parties to the prior

19 proceeding. That's at Paragraph 17 of the motion to dismiss. 

20 The debtor relies on the deposition testimony of Grant Scott,

21 who was then the trustee of the DAF. 

22 CLO Holdco is a wholly-owned subsidiary of the DAF,

23 or wholly controlled, in any event, and Mr. Scott's testimony

24 was that he was the only director and there were no employees

25 of either entity. So we, in our motion, put forth evidence to

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1 establish the first element, and I don't believe, maybe I've

2 missed it. I don't believe that the Plaintiffs have contested

3 that element. If they have, I think Mr. Scott's testimony will

4 carry the day, in any event.

5 The second element as to whether or not a court of

6 competent jurisdiction is the entity or the court that rendered

7 the ruling. Of course, that's been met, too. The Plaintiffs,

8 in their opposition to the motion to dismiss, suggested that

9 the bankruptcy court would have lacked jurisdiction if their

10 cross motion to withdraw the reference was granted. They said

11 if the district court decides that mandatory withdrawal

12 applies, then it cannot find that the bankruptcy courts already

13 entered final judgment was rendered on Plaintiffs' causes of

14 action and had jurisdiction to do so. I think that's just a

15 clear misstatement of the law. 

16 But in any event, Your Honor, at this point, I

17 believe it's irrelevant because the district court, in fact,

18 sent the case back to Your Honor and back to this Court. And

19 so, at the end of the day, Plaintiffs' argument doesn't hold

20 water because of the district court's ruling, which can be

21 found -- the order of reference can be found at Docket

22 Number 64. And so I think that easily takes care of the second

23 prong.

24 The third prong is whether -- if we can go to the

25 next slide -- the prior proceeding resulted in a judgment on

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1 the merits. And this is really the critical point, Your Honor. 

2 As the Court knows, the whole doctrine of res judicata is

3 designed to prevent, as the parties agree, the re-litigation of

4 claims. Stated another way, it's to bring finale. It's to

5 make sure that the Court doesn't hear the same claims and the

6 same issues that either were brought or that could have been

7 brought in a prior proceeding. And so, we believe that we

8 easily meet the standards set forth in the third prong. The

9 9019 order necessarily determined that the quid pro quo that I

10 described earlier was fair, reasonable, and legally

11 permissible.

12 Notwithstanding their assertions to the contrary, the

13 Plaintiffs are most definitely seeking to unwind at least one

14 half of the Court's order by belatedly claiming that they are

15 entitled to the benefit of the bargain while leaving Highland

16 burdened, frankly, with the claims that HarbourVest got as part

17 of the deal. I will tell you, Your Honor, and this is

18 argument, the debtor would never have asked for, and I don't

19 believe that the Court would ever have granted, the 9019 motion

20 if they thought that there was a risk in the future that

21 Highland wouldn't get the benefit of the bargain and it was

22 incumbent upon CLO Holdco and the DAF, and frankly, any party

23 in interest, to stand up and be counted and tell the Court and

24 the debtor, why the debtor was not entitled to do this deal and

25 CLO Holdco did that. They actually did.

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1 They stood up and they filed an objection and they

2 said we have a superior right to this asset in the form of a

3 right of first refusal. They wound up folding in the face of

4 persuasive argument, and I respect the lawyer who did that. I

5 just do. But that was the time to speak up, and that's why it

6 is on the merits because that is exactly what res judicata is

7 intended to do. It's intended to have everybody put your cards

8 on the table. You don't put one card on the table and say, I'm

9 going to challenge this under 6.2 of the members agreement, but

10 I'm not going to tell you that I also think you owe me a

11 fiduciary duty under the Advisors Act or as the control party

12 or under any other theory that they had. They can't do that. 

13 That's exactly what the problem is here.

14 If we can go to the next slide. Is it a judgment on

15 the merits? The debtor and the Court relied on CLO Holdco's

16 representation that it was withdrawing its argument, its claim,

17 its contention, its assertion that it had a superior right to

18 obtain the HarbourVest interest in HCLOF. Again, they did so

19 not whimsically, not because Mr. Kane was going to be out of

20 town and he couldn't make the hearing. He did it after, and I

21 don't think this matters frankly, but I think it's worth noting

22 that he did it after an extremely careful analysis. I would

23 tell you, Your Honor, that -- well, I would argue, Your Honor,

24 that even if Mr. Kane at CLO Holdco had never filed an

25 objection, if they'd never filed -- if they'd gotten notice

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1 that this was happening and they sat silently, that would have

2 been enough for res judicata because the issue before the Court

3 was whether it was legally permissible for the debtor to

4 acquire this asset.

5 And if they had an obligation, if they owed a duty to

6 another party, it wouldn't have been legally permissible. And

7 if somebody believed that it wasn't legally permissible because

8 a duty was owed to them, they had an obligation to speak up. 

9 And so I think it's very important, particularly for the

10 collateral estoppel argument that I'll make in a moment, that

11 CLO Holdco did in fact file an objection. It was based on the

12 breach of contract claim that's in their complaint. It's the

13 exact same claim. And they withdrew it. I think it's very,

14 very important. I think it highlights why res judicata

15 applies. I think it is the linchpin of the collateral estoppel

16 argument.

17 But at the end of the day, I think if they say

18 nothing, they should be estopped or precluded under res

19 judicata from now asserting -- it would be like -- I was

20 thinking about this earlier, Your Honor. If you'll remember

21 earlier this year, Mr. Dondero and his entities have kind of a

22 habit of withdrawing objections at the last minute. We had a

23 couple of sale hearings earlier this year. And the issue was

24 valuation, you know, and the process, and could the debtor meet

25 its burden of proving that the sale outside of the ordinary

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1 course of business was in the debtor's best interest. And they

2 sold that restaurant. And Mr. Dondero objected. And at the

3 last second, they withdrew the objection. Did they sue

4 tomorrow? Does Your Honor really think that they could bring a

5 lawsuit tomorrow and say they just found a document or theory

6 on which the debtor had an obligation to give them a right of

7 first refusal, even though we've already closed on the

8 transaction, even though they were given notice of the

9 transaction, even though they filed an objection to the

10 transaction, even though they withdrew the objection? Would

11 the Court tolerate for one second a new pleading tomorrow from

12 Mr. Dondero that the debtor actually had a fiduciary duty to

13 give him a right of first refusal to buy that asset under

14 whatever theory, just because he pleads it and the Court has to

15 accept as true the allegations in the complaint? I think not. 

16 And I think it's worth thinking about that to highlight just

17 how -- just how wrong this is.

18 Continuing on. You know, the Plaintiffs in

19 opposition say it can't be a trial on the merits because we

20 weren't parties. Of course they were parties. Again, they

21 filed an objection. They were the parties to the contested

22 matter, full stop. They rely on a case called Applewood and

23 they say, this is the very first point they make in their

24 brief. Applewood, if it wasn't res judicata in Applewood, how

25 could it possibly be res judicata here? But the facts are just

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1 so inapposite, right?

2 In Applewood, you had a garden variety plan and

3 release where the debtor and the officers and directors got a

4 discharge. No objection to it. And a secured lender later on

5 sought to sue guarantors who happened to be officers and

6 directors. And the court, not surprisingly, said that the

7 confirmation order wouldn't prevent the secured lender from

8 going after the officers and directors, not in their

9 capacities, as such, but in their capacity as guarantors, which

10 were never part of the confirmation order. That just doesn't

11 apply here because here, we have the debtor making a motion

12 before the Court in which it sought permission and authority to

13 acquire a particular asset. Anybody who had a claim to that

14 asset should have stepped forward and put their cards on the

15 table.

16 And again, CLO Holdco put their cards on the table

17 and they lost, and they folded. To use the poker analogy, they

18 folded. And to hear them come into Court today and say we're

19 going to sue you because I reshuffled the deck, it's not right

20 and Applewood has no relevance.

21 Finally, Your Honor, you know, it's not on the

22 merits, they say, because you know, Mr. Seery and the debtor

23 hid the true value of the asset, and had we only known the true

24 value of the asset, we would have made all of these other

25 claims. The fact of the matter is, you either have a fiduciary

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1 duty or you don't. And if you had a fiduciary duty, they

2 should have spoken up and they did only under 6.2, but they

3 did.

4 But here's the important part, Your Honor. Take the

5 allegations as true. You have to take all of the allegations

6 as true, not just some of them. And if you look at

7 Paragraph 127 of the complaint, and I would ask Ms. Canty to go

8 to Appendix 11 and let's just put Paragraph 127 up on the

9 board.

10 Here's the irony of the whole thing, right. The

11 whole complaint is based on the fact that somehow Mr. Seery was

12 engaged in insider trading. They accused him of insider

13 trading, and they say he didn't disclose the full value of the

14 asset. Just read Paragraph 127. James Dondero, who was on the

15 board of MGM, is the tippee. You've got an insider trading

16 case -- I mean, I don't represent MGM. I'm not with the SEC. 

17 I don't know why Mr. Dondero thought he should be telling

18 Mr. Seery in December, 2020. It's not clear if it was before

19 or after the 9019 motion was filed. But Mr. Dondero is the

20 very source of information -- you can't make this up. He's the

21 very source of the information that he now complains Mr. Seery

22 didn't disclose.

23 Of course, Mr. Dondero, the trust, CLO Holdco could

24 have asked Mr. Seery at any time, how did you come up with your

25 valuation? Mr. Dondero, knowing that he had supplied to

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1 Mr. Seery, according to Paragraph 27, please take it as true

2 for purposes of this motion only. He's the source of the

3 inside information. And now he has the audacity to come to

4 this Court, notwithstanding the Court's approval, all of the

5 time and money and effort spent in the 9019 process, and say,

6 Mr. Seery was wrong because he didn't tell CLO Holdco and the

7 DAF about the information that Mr. Dondero gave to Mr. Seery. 

8 It's not right.

9 It was a judgment on the merits. And if Mr. Dondero

10 or the DAF or CLO Holdco or the trust wanted to challenge the

11 valuation, they had every opportunity to do so. And based on

12 Paragraph 127, if the Court accepts it as true, shame on them. 

13 Shame on them for not pursuing this issue before. The guy gave

14 Mr. Seery, according to this allegation, and I'm just going to

15 leave it there, inside information. And he sits there in

16 silence, right? It says, look at the last sentence: "The news

17 of the MGM purchase should have caused Seery to revalue HCLOF's

18 investment." Seriously?

19 The third element is (indiscernible). The fourth

20 element, if we can go to the next slide.

21 Are they the same claims? Did the claims arise from

22 the same set of operative facts? I've addressed this pretty

23 clearly already, so I don't want to belabor the point. But

24 obviously, both the 9019 motion and the complaint arise solely

25 from the debtor's settlement with HarbourVest. The debtor's

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1 acquisition of HarbourVest's interest in HCLOF and the debtor's

2 valuation of that interest. Without those three facts, there

3 is no complaint. It's just not credible to argue that the

4 fourth element is not met.

5 The case law is clear. It's quoted in the

6 Plaintiffs' opposition. It's not just the test of whether the

7 claims are the same. It's whether the claim is the same as

8 that which was brought or could have been brought.

9 In their opposition, the Plaintiffs contend that the

10 claims "did not write them until after the settlement was

11 consummated," and that the first time the plaintiffs heard

12 about the valuation of HarbourVest's interests was at the

13 January 14, 2021, hearing. I think I quoted that. If you

14 look, I don't know if it's Page 10 or Paragraph 10; the way I

15 wrote it, it's probably Page 10. I think that's a quote right

16 out of there. But of course, as we saw the debtor disclosed

17 the valuation in its very initial motion, CLO Holdco's counsel

18 elicited valuation testimony directly from Mr. Pugatch, so that

19 was before the hearing.

20 And of course, Mr. Dondero and the trusts both cited

21 in their objections the valuation. The notion that this was

22 not right, just -- it's contradicted by their own conduct,

23 their objections, their questions in deposition, the

24 information that was contained in the motion that they objected

25 to.

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1 I do want to go off-script for just a minute, if we

2 could just take that down because I know that this is probably

3 something that Mr. Sbaiti may argue. And that is, well, gee,

4 but you have to take the allegation as true that Mr. Seery

5 wasn't honest, that Mr. Seery lied to the court. I don't

6 understand why there's not a fraud cause of action in there,

7 but there's not. But that's their theory. 

8 And gee, how does he get to skate away Scott free if

9 he's allowed to do that with impunity, right? I will tell you,

10 Your Honor, of course you've seen Mr. Seery many times. You've

11 made your own assessments of his credibility. I'm not here to

12 argue the merits, but I will just say that the Defendants, if

13 ever forced to, will contest the allegation.

14 But here's the thing, and here's the important point

15 about, you know, whether or not he could lie with impunity and

16 say, I suspect that's where Mr. Sbaiti is going to want to go.

17 Mr. Seery said what he said. And he had a reason to

18 speak, and he spoke, and he said what he said and he told

19 everybody who would listen exactly what he was doing and how he

20 was doing it. For whatever reason, the objectors put the

21 valuation front and center. It's right in their objections. 

22 They noted the objections. But for whatever reason, they did

23 nothing.

24 Whether they were negligent or whether they were

25 lying in wait is kind of irrelevant. They had a full and fair

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1 opportunity to contest this issue. And if they had done so,

2 and the evidence proved what they're now alleging, they can't

3 tell you what would have happened. So, you know, HarbourVest

4 may have taken a different position. The Court may have done

5 something. 

6 We're never going to know now because Mr. Seery and

7 the debtor are getting away with something, but because they

8 put in evidence that went unchallenged by Mr. Dondero and the

9 Plaintiffs. It simply went unchallenged. And they say, oh,

10 gee, that's because we didn't know. Well first of all, you

11 didn't ask. And second of all, again, the source of the inside

12 information, the reason that Mr. Seery should have known the

13 asset was worth more. The reason that he should have refrained

14 from trading and not engaged in insider information was

15 Paragraph 127. It was Mr. Dondero.

16 Here's another thing. If -- if again Mr. Seery had

17 not been honest with the Court and that was ever brought out,

18 Maybe HarbourVest -- maybe HarbourVest would have had a right

19 to complain. There's a lot in the complaint about oh,

20 HarbourVest was misled. The actual evidence that's in the

21 record, and this is part of res judicata, Mr. Seery testified

22 very clearly to the arm's length negotiation that took place. 

23 He told the Court under oath that the negotiations were

24 contentious. 

25 He told the Court under oath that in order to try to

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1 resolve the case, he and Mr. Pugatch went off and had their own

2 private conversation without lawyers. They could have taken

3 discovery on any of that, right. What did you guys talk about? 

4 It's certainly not privileged. They had every opportunity. 

5 But what we do know is that Mr. Pugatch under oath, in

6 deposition, and at trial, said the value is $22.5 million. 

7 So I don't think Mr. Pugatch or HarbourVest is ever,

8 ever, every going to complain about the transaction they did. 

9 Because of what the evidence simply shows. But again, you've

10 got the Plaintiffs in their complaint saying that somehow the

11 debtor and Mr. Seery in negotiating this transaction has now

12 exposed the debtor to liability. It just makes no sense. 

13 So there was a time and there was a place to

14 challenge Mr. Seery. Somebody, you know, maybe HarbourVest

15 could have done something, maybe they could still do something. 

16 I don't know. If they really think that there's a problem,

17 maybe we'll hear from HarbourVest someday. But the Plaintiffs

18 have no right to complain. They just don't. They knew

19 everything. They were the source of the inside information. 

20 They sat on their hands, and they shouldn't be allowed to do

21 what they're doing now.

22 If we can go to the next slide. I want to move to

23 the next theory and try to finish this up. The next theory is

24 that the Plaintiffs' claims are barred by judicial estoppel. 

25 The judicial estoppel argument is really, really very

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1 straight-forward. And it's important because if the Court

2 thinks about this the way I do, it's that the whole issue of

3 valuation is completely irrelevant to the Plaintiffs unless

4 they can show that they were owed some kind of duty, that they

5 had some superior right to acquire the asset. But that's

6 exactly the issue that CLO Holdco relied upon and withdrew and

7 should now be estopped from pursuing. Right. 

8 The legal standard, again the parties agree on, that

9 in order to be estopped, the party must take an inconsistent

10 position. And the party must have convinced the Court to

11 accept that position. Again, both prongs are easily met here

12 in just a few sentences from the January 14 hearing. You have

13 Mr. Kane saying that he understands and acknowledges and admits

14 that they have no superior right to the investment. And the

15 Court relying on that very representation in declining to

16 conduct a hearing and render a ruling on the merits of the

17 claim that was withdrawn. The objection that was withdrawn.

18 And for the avoidance of doubt, after Mr. Draper

19 spoke on behalf of the Trust, the Court, at Page 22 engaged in

20 the following colloquy. The Court asked Mr. Draper:

21 "THE COURT: Were you saying that the Court still

22 needs to drill down on the issue of whether the

23 debtor can acquire HarbourVest's interest in HCLOF.

24 "MR. DRAPER: No.

25 "THE COURT: Okay. I was confused whether you were

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1 saying I needed to take an independent look of that. 

2 Now that the objection has been withdrawn of CLO

3 Holdco, you're not pressing the issue.

4 "MR. DRAPER: No. I am not." 

5 Okay. You can call it res judicata, you can call it

6 judicial estoppel, collateral estoppel, the two prongs are

7 easily met. They're taking an inconsistent position today and

8 through all kinds of different theories, including the one that

9 they withdrew, the Plaintiffs assert that they had a superior

10 right to acquire the interest from HarbourVest. 

11 And they should have asserted those rights at the

12 hearing. That was the time. And they should be estopped now

13 from taking a completely inconsistent position from the one

14 that was before the Court. And I just do want to point out,

15 the statement from a case called Hall vs. G.E. Plastic. And

16 it's interesting, Your Honor, because there's only a few cases

17 that I focused on, because this is really more fact intensive. 

18 And there isn't a dispute as to the, you know, the elements of

19 these matters. 

20 But it is interesting that the Plaintiffs, you know,

21 generally ignore all of the cases that we cite to. One which

22 is Hall vs. G.E. Plastic, where the Court said that the focus

23 on the prior success or judicial acceptance requirements is to

24 minimize the degree of a party contradicting a Court's

25 determination, based on a party's prior position. That's the

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1 whole point of the exercise. You can't do this. You can't do

2 this.

3 Just quickly, that leaves the individual arguments as to

4 each of the five causes of action and I just want to go through

5 some highlights. There's a negligence claim, Your Honor. And

6 we did not file a pleading, but the Court can certainly take

7 judicial notice of the fact that the effective date has

8 occurred. Under the effective date, the plan is now effective. 

9 That includes the exculpation clause, as Mr. Pomerantz, I think

10 accurately and without contradiction pointed out earlier, the

11 exculpation clause applies specifically to the debtor and to

12 negligence claims. And that's not a matter that's at all

13 subject to appeal.

14 So I think just to add to the arguments that we have

15 in our papers, which I adopt and do not abandon for any

16 purpose, I would add to the argument on negligence, that it's

17 now precluded, as a result of the plan becoming effective. 

18 The fiduciary duty count suffers from numerous defects. I

19 just want to point out a couple of them. They don't respond to

20 the argument under Corwin, that under the Advisor's Act, there

21 is no private right of action to sue for damages arising from a

22 breach of fiduciary duty. This claim rears its head in

23 virtually every single complaint. They've never addressed

24 Corwin. Corwin is binding on this Court, and it is unambiguous

25 that there is no private right of action to sue for damages for

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1 breach of fiduciary duty under the Advisor's Act. 

2 They ignore Goldstein. Goldstein is not from the

3 Fifth Circuit, but it's very persuasive authority that advisors

4 do not owe fiduciary duties to their individual investors. 

5 Instead, they owe fiduciary duty to their client. Their client

6 is the entity with whom they're in contractual privity. And so

7 in this case, there's no fiduciary duty there, either.

8 The breach of contract claim. Again I just -- I

9 would just say quickly, Your Honor, it's barred under judicial

10 estoppel. Even if it wasn't, it's clear based on Mr. James'

11 analysis and admission that the debtor's, or the reorganized

12 debtor's interpretation of 6.2 is accurate. And you know, I

13 said this in the beginning. Now let me tie it in a bow because

14 the breach of contract claim, and the tortuous interference

15 claim are both tied to the same thing. And that is the

16 assertion that the Plaintiffs had a right under the membership

17 agreement, a right of first refusal.

18 And they basically say that the debtor was playing

19 games. That they shouldn't be able to get through 6.2 by

20 assigning it to an affiliate. And that's where I go back, Your

21 Honor, and just remind the Court that the debtor told the whole

22 world exactly what they were doing in their motion. And their

23 objections, Mr. Dondero and the Trusts both acknowledge to the

24 whole world that they understood exactly what was happening.

25 In fact, their concern was not that it was going to

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1 the debtor, but that it might be going to an affiliate outside

2 of the bankruptcy court's jurisdiction. And for them to now

3 say, having taken all of those positions -- talk about

4 inconsistent positions. They should be barred from saying

5 today, that the use of an affiliate to effectuate the

6 transaction was wrongful, because they actually told the Court

7 that they needed to -- that the Court needed to make sure that

8 it had jurisdiction over the very entity they now say somehow

9 shouldn't have been allowed to get the asset.

10 It's a bit much. So that takes care of the tortuous

11 interference. 

12 The RICO claim, Your Honor, again is a motion. 

13 There's so many different aspects to it. But I don't think the

14 Court needs to get past the Supreme Court holdings in HJ, Inc. 

15 Again, just simply ignored by the Plaintiffs in their

16 opposition to the motion to dismiss. In HJ, Inc., the Court --

17 the Supreme Court did an exhaustive analysis to try to

18 determine and ultimately did determine, what a pattern of

19 racketeering activity meant. And the Supreme Court came to the

20 following formulation. That it had to have two or more

21 predicate related offenses that amounted to a threat of

22 continued criminal activities.

23 You know, the notion here is that the debtor and Mr.

24 Seery engaged in insider trading. We've already -- I've

25 already mentioned that according to the complaint, which the

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1 Court can take as true. Mr. Dondero, himself, was the tippee. 

2 But be that as it may, they don't come close to meeting the

3 very high standards set forth by the Supreme Court in HJ, Inc.

4 to show that whatever conduct Mr. Seery and the debtor engaged

5 in, and if you take the allegations as true, in not telling

6 what the fair value of the asset was, that that doesn't amount

7 to a hill of beans for purposes of RICO. That you don't have

8 any, I think predicate acts. I think here's the Court,

9 predicate acts extending over a few weeks or months,

10 threatening no future criminal conduct, do not meet RICO

11 pleading grounds. Right.

12 Security fraud claims cannot be predicate acts for

13 purposes of RICO. That is also clear. And that is really, I

14 mean they say mail, wire and fraud. But what's really at heart

15 is the 10(b)(5). Okay, it's the 10(b)(5) claim. Again, Mr.

16 Seery being -- I mean Mr. Dondero being the tippee. But those

17 are just some of the reasons.

18 None of, you know, that the RICO claim fails. You

19 know, I'll otherwise rely on the papers, unless the Court has

20 specific questions as to any of the other pieces of the motion

21 to dismiss the RICO claim, or any other aspect of the

22 Defendants' motion. I think this is clear. I think we win, no

23 matter how you slice it. It's just wrong. It's just wrong. 

24 This Court will never, ever have a final order if Mr.

25 Dondero is able to engineer complaints such as this, which seek

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1 to assert claims that absolutely positively could have and

2 should have been brought at the time the debtor made its

3 motion.

4 Unless the Court has any questions, I have nothing

5 further.

6 THE COURT: I do not. All right. 

7 Mr. Sbaiti, I'm going to let you have as much time as

8 Mr. Morris. He took 55 minutes. As I mentioned, I have a hard

9 stop at 12:00 to do a swearing in ceremony. So if you're not

10 finished in 40 minutes, then I'm going to have to take a break

11 and come back and let you finish. All right?

12 MR. SBAITI: Thank you, Your Honor. Although I don't

13 think I'm going to be much longer than 35-ish minutes.

14 THE COURT: Okay.

15 MR. SBAITI: if not less.

16 THE COURT: Okay. 

17 MR. SBAITI: I think you'll be able to be done by --

18 we'll be able to be done by noon.

19 THE COURT: All right. Thank you.

20 MR. SBAITI: Thank you, Your Honor. Your Honor, may I

21 share my screen?

22 THE COURT: You may.

23 MR. SBAITI: Thank you, Your Honor. Do you see my

24 Power Point, Your Honor?

25 THE COURT: I do.

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1 MR. SBAITI: Thank you, Your Honor. I don't know

2 what which one you see. Is it the --

3 THE COURT: I see presentation.

4 MR. SBAITI: With the full page?

5 THE COURT: Yes, uh-huh.

6 MR. SBAITI: Okay, yeah, great. I just want to make

7 sure we're on the right page. Thank you, Your Honor. So Your

8 Honor, the defendant debtor is a registered investment advisor. 

9 And it all begins with that. And this where the distinctions

10 between what happened in the 9019 and I'll get to the elements

11 of res judicata through argument. 

12 But the first thing that has to be identified is that

13 the Defendant is a registered investment advisor. The

14 objection filed by Holdco back during the 9019 was an objection

15 against HarbourVest selling its interest by filing the right of

16 first refusal. It did not deal with the investment advisor

17 feature of Highland's relationship. And I'll get to why the

18 9019 doesn't preclude these arguments today.

19 This is essentially the structure. Highland was the

20 investment advisor of HCLOF, and Holdco is an investor in

21 HCLOF. And so Highland would owe a fiduciary duty under the

22 Advisor's Act against -- to CLO Holdco. 

23 Highland also had a direct advisor relationship with

24 the DAF. And so under the Investment Advisor's Act, it owed

25 fiduciary duties to both of those entities. The law governing

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1 registered investment advisors is that it's a federally

2 recognized and defined fiduciary duties. The fiduciary duty to 

3 there's a fiduciary duty to affirmatively keep the advisee

4 informed and the fiduciary duty not to self-deal, i.e., not to

5 trade ahead of an advisee and opportunity that an advisee would

6 want or expect and without the advisee's expressed informed

7 consent. 

8 This is a federally recognized and defined fiduciary

9 duty and it's actionable under state fiduciary duty laws. 

10 While Mr. Morris ended his argument by saying we didn't deal

11 with their case law saying that there's no private right of

12 action under the Advisor's Act, the fact of the matter is that

13 Judge Boyle, about ten years ago, found that a state -- the

14 breach of fiduciary duty claim can be predicated on breaches of

15 federally imposed fiduciary duties under the Advisor's Act. 

16 And that's what Douglass v. Beakley held. And that's actually

17 what we cited in our response. So I'm not sure why he would

18 argue that we haven't addressed the issue of where does this

19 private right of action come from.

20 Federal Law supplies the rules of the relationship

21 and State Law provides the cause of action for those breaches. 

22 Now the scope of that has been expounded upon by many cases. 

23 The Fifth Circuit held in Laird, as a fiduciary, the standard

24 of care to which an investment advisor must adhere imposes an

25 affirmative duty of utmost good faith and full and fair

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1 disclosure to all material facts, as well as an affirmative

2 obligation to employ reasonable care to avoid misleading his

3 clients. 

4 The word "affirmative" there is important because it

5 means the investment advisor is not supposed to wait to be

6 asked. The investment advisor as an affirmative duty to

7 proactively provide the information to the client. 

8 The next standard comes from the SEC. We call it the

9 SEC interpretation letter. It's a release that came out in

10 2019. And to meet it's duty of loyalty, an advisor must make

11 full and fair disclosure to its clients of all material facts

12 relating to the advisor relationship. Material facts relating

13 to the advisor relationship include the capacity at which the

14 firm is acting with respect to the advice provided.

15 The SEC had another release in 2000 -- or excuse me,

16 in that same release, the SEC said the duty of loyalty requires

17 that an advisor not subordinate its clients interests to its

18 own. In other word, an investment advisor must not place its

19 own interest ahead of its clients' interests. An advisor has a

20 duty to act in the client's best interest, not its own.

21 The SEC general instruction three to part 2 of Form

22 ADV, that every investment advisor has to pull out. And this

23 is cited in our papers. As a fiduciary, you must also seek to

24 avoid conflicts of interest with your clients, and at a

25 minimum, make full disclosure of all material conflicts of

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1 interest between you and your clients that could affect the

2 advisor relationship. This obligation requires that you provide

3 the client with sufficiently specific facts, so that the client

4 is able to understand the conflicts of interest you have, and

5 the business practices in which you engage, and can give

6 informed consent to such conflicts or practices or reject them.

7 And, finally, the Third Circuit in Belmont said:

8 "Under the best interest test, an advisor may benefit

9 from a transaction recommended to a client if, and

10 only if, that benefit, and all related details of the

11 transaction are fully disclosed." 

12 These fiduciary duties are unwaivable by the advisor. 

13 Any condition, stipulation or provision binding any person to

14 waive compliance with any provision of this subchapter, or with

15 any rule, regulation or order thereunder shall be void. 

16 So the lawsuit does not allege that the HarbourVest

17 settlement should be undone or unwound. I'd like to move to

18 that point. Mr. Morris says well, you have to unwind half of

19 the settlement. Maybe HarbourVest doesn't have to give back

20 what it got, but Highland would still be saddled with the cost

21 of the settlement, but not with the benefit of the settlement. 

22 Well, actually that's not true. There's two points

23 that we would make on that. Number one, our suit is a suit for

24 damages. In other words, the suit would be a suit for money

25 damages, based on the difference between the value of the asset

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1 and what HarbourVest or what the actual value of the asset that

2 was represented, $22.5 million. So the second point, though,

3 is that even under a situation where CLO or Holdco or the DAF,

4 or even HCLOF were to purchase the HarbourVest suit, the

5 expectation would obviously be that they'd pay the $22.5

6 million that Highland paid for it.

7 So Highland is -- so it's not unwinding, and there's

8 no saddling Highland with a burden that they didn't otherwise

9 have, I think that's a misrepresentation. But we're not

10 seeking to unwind the lawsuit -- or excuse me, unwind the

11 settlement. 

12 Now Mr. Morris is correct, the representation of

13 value by Mr. Seery is -- is one of the main points here. And

14 the representation was that the value of the entire asset. Not

15 just the shares of MGM, but the value of the entire asset was

16 $22.5 million. So in other word, nearly half of HCLOF was

17 represented to be worth $22.5 million. It was argued by

18 counsel on Page 14 of the January 14th transcript, and then on

19 Page 112 of that transcript, Mr. Seery specifically says the

20 current value is right around $22.5 million.

21 Now that was also in some of the filing papers and

22 Mr. Morris put up the evidence to Your Honor that Mr. Pugatch,

23 on behalf of HarbourVest also parroted that number. But

24 there's not any evidence today about where that number came

25 from, or whether he was simply relying on Highland's

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1 representation of that value.

2 Now as a general rule, in these 12(B)(6) motions, as

3 I said before, we don't look at the evidence because the whole

4 point of discovery is to find out what's behind a lot of the

5 evidence. That's been quoted. The amount of evidence that

6 went into the 9019 motion as not necessarily full-blown

7 discovery. 

8 I understand Mr. Morris saying well, they could have

9 asked the question. But as I just showed you, they shouldn't

10 have to ask the question. There should be fair and full

11 disclosure of all the material facts. And if it turns out,

12 which we believe it is true, that by January, the value of

13 HCLOF was twice what it was represented, or the HarbourVest

14 portion of HCLOF was twice as to what it was represented,

15 that's a material omission that Highland had an affirmative

16 duty to not misrepresent. Irrespective of the questions being

17 asked.

18 The DAF found out later on that the representation of

19 the value wasn't true. Now Mr. Morris talked for a very long

20 time about all the opportunities that somebody, Mr. Dondero,

21 somebody other than CLO Holdco. In addition to CLO Holdco,

22 could have asked the magic question to find out whether or not

23 they were telling the truth. But that runs right in the face

24 of the standards set forth by the SEC and by the Courts as to

25 the affirmative obligation of an advisor to disclose all the

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1 material benefits that they're going to get as part of a trade. 

2 The idea being that when you're a registered investment advisor

3 and you want to engage in a transaction, you make a full

4 disclosure and say this is the transaction. It's worth 41, but

5 I'm paying 22-1/2. But here's why I'd like to be able to do

6 it. And then that's the discussion that happens.

7 That clearly didn't happen here. And when it turned

8 out that there was this entirely huge upside that they were

9 gaining the benefit of, and maybe HarbourVest didn't care, that

10 that was a false statement. Now the reason we don't have a

11 common law fraud claim, or that we don't necessarily hang our

12 hat on a fraud claim is we don't have enough evidence as it

13 stands today, to specifically say that Mr. Seery intentionally

14 misrepresented that. Although we believe that it was grossly

15 reckless of him to do so. But we don't really need a fraud

16 claim with a gross recklessness standard. We have a breach of

17 fiduciary duty, which basically gets us to the same place.

18 So the timeline we have is September 30th was the

19 last valuation of HCLOF assets provided by HCMLP. And the

20 value of HCLOF, at that time, or the HarbourVest of that value,

21 would have been about 22.5 million. So what it appears to be

22 is that in January or in late December, the valuation that was

23 being done -- what was being reported, wasn't the current

24 valuation. It was the valuation as of the end of the third

25 quarter of 2020.

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1 On December 22nd, the motion to approve the

2 settlement with HarbourVest was filed. HCMLP should have had

3 or would have had up-to-date valuations of the HCLOF assets,

4 but didn't necessarily disclose them as being different than

5 the 22.5 million. On January the 14th, Your Honor, held the

6 9019 hearing. And then that same day, Your Honor entered the

7 approval order.

8 And finally, in March, the DAF learns the true value

9 of HLOF assets as of January 2021 and starts to look into it. 

10 Now Mr. Morris makes much of the fact that well, Mr. Dondero at

11 least knew that he had tipped them off, Mr. Seery. And if you

12 actually read Paragraph 127, you'll see specifically what it's

13 purported that he said. He said stop trading in the MGM

14 assets, because MGM might be in play. So you can't trade

15 because I'm an advisor, Mr. Dondero's an insider, he's the

16 tipper, not the tippee. Mr. Seery becomes the tippee under

17 that theory of the case, and he has to, and is required to,

18 because of their affiliation at the time, he's required to

19 cease trading. And that was the purpose of saying that.

20 The collateral issue that we point is that he at the

21 very least knew about that, and that should have caused him to

22 revalue, if he hadn't done so at the time. Not that, knowing

23 that alone is sufficient to know what the value of HCLOF

24 actually was on that date. That's a complete misrepresentation

25 of the point and purpose of that allegation.

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1 And as Your Honor knows, under 12(B)(6)

2 jurisprudence, the way this is supposed to go is we get the

3 benefit of every inference based upon the allegations, not the

4 movant. So the first violation is that the debtor as an IRA

5 failed to affirmatively disclose the true current valuation of

6 HCLOF and failed to keep the DAF and CLO Holdco reasonably

7 informed of the value of the assets. 

8 And the debtor as an IRA, failed to obtain CLO

9 Holdco's with the DAF's informed consent before it traded in

10 the asset, because it didn't have all of the information. The

11 typical remedy for breach of fiduciary duty is typically

12 damages for any loss suffered by the Plaintiff as a result of

13 the breach. I don't think there's a debate there.

14 So now we get to Mr. Morris' key argument. His key

15 argument is that we should be talking about res judicata. The

16 elements of res judicata and I think we agree is you have to

17 have identical parties in the action; the prior judgment was

18 rendered by a Court of competent jurisdiction; the final

19 judgment was final on the merits, and the cases involved the

20 same causes of action or the same transaction and nexus of

21 facts. 

22 Now I'm going to skip to three, because I think

23 that's one of the key points that we disagree with them on. 

24 There is no case, Your Honor, that we could find, and no case

25 that I read them citing that says an order on an 9019 has

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1 preclusive effect under res judicata under an objector to the

2 settlement. We looked. We looked in the Fifth Circuit. We

3 looked outside of the Fifth Circuit. No District Court, no

4 Fifth Circuit Court of Appeals' opinion we could find held that

5 a 9019 order has res judicata effect on an objector's

6 objection. And I think the reason is pretty simple. Is it

7 doesn't. 

8 Because the Plaintiff's claims, here our claims

9 hadn't even accrued. We have a four year statute of

10 limitations, but I think more importantly is that, as the Fifth

11 Circuit said, the 9019 motion grants the Court discretion. 

12 It's not supposed to be a mini trial. The Court can approve a

13 settlement over even the valid objection of an objector. It's

14 not a trial on the merits. It's not supposed to be a trial on

15 the merits. It's not supposed to be a disposition on the

16 merits. 

17 So the fact that Your Honor could have approved the

18 9019 settlement with HarbourVest, even if we had a valid

19 objection, means this isn't a disposition on the merits, as res

20 judicata would envision. It wasn't a trial on the merits, even

21 though it was withdrawn. 

22 The other elements that we would point out to is that

23 neither the DAV nor Holdco were parties to the dispute between

24 HarbourVest and Highland. And this keys off of the issue that

25 I just raised. The cases that are cited by the debtor to Your

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1 Honor all have to do with where one of the settling parties is

2 trying to undo the settlement for some collateral reason. And

3 the Courts have held, no, that's res judicata, because you were

4 a party to the action. HarbourVest brought the claims against

5 Highland. Highland settled those claims. 

6 CLO Holdco was collateral to that settlement, it's

7 not a -- excuse me, collateral to that dispute. It's not a

8 party to that dispute. Its claims weren’t being resolved by

9 the settlement. And while you have a notice to all creditors

10 and those objections can be raised, there was not inherently

11 any manner for resolving those objections on their own merits. 

12 Only -- it was only resolved in so far as deciding whether or

13 not the settlement was in the best interest of the debtor,

14 which Your Honor decided, and we don’t challenge that. But we

15 do argue that it caused damages and the debtor shouldn’t get

16 off for those damages.

17 The fourth element is that the --

18 THE COURT: Just for the record, the standard in a

19 9019 context is not best interest of the debtor, right?

20 MR. SBAITI: Your Honor, I mean that’s what the rule

21 says and Your Honor’s order --

22 THE COURT: That is not what the rule says. The rule

23 is actually very sparsely worded and then we have Fifth Circuit

24 case law and U.S. Supreme Court law that talk about what the

25 standard is.

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1 MR. SBAITI: Yes, Your Honor. And there are five --

2 THE COURT: And it’s -- is it fair?

3 MR. SBAITI: There are five elements.

4 THE COURT: Is it fair and equitable and in the best

5 interest of the estate given a long list --

6 MR. SBAITI: Correct, Your Honor. And I didn’t mean

7 to --

8 THE COURT: -- of considerations that the Court is

9 supposed to consider that “bear on the wisdom of the

10 settlement.” Okay. So it’s actually much more involved, is my

11 point, than is it in the best interest of the estate. Is it in

12 the best interest of the estate and fair and equitable given

13 all factors bearing on the wisdom of the compromise? And then

14 we have a long laundry list of things the Court should consider

15 as part of that analysis.

16 MR. SBAITI: That’s a --

17 THE COURT: I just bring that up because if I’m still

18 -- my brain is still stuck five minutes ago on your comment

19 that you can’t find any case saying that an order approving a

20 9019 compromise has res judicata effect on creditors. And it’s

21 -- let me just say it’s shocking to me that someone would argue

22 otherwise. Bankruptcy is a collective proceeding --

23 MR. SBAITI: Your Honor --

24 THE COURT: -- where creditors can weigh in and

25 object and raise whatever arguments they think the Court should

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1 consider that bear on the wisdom of the compromise. And the

2 Fifth Circuit in Foster Mortgage has said the Court should give

3 great deference to the views of the creditors, the paramount

4 interest of creditors.

5 So it’s a really sort of shocking proposition that

6 the order approving a 9019 compromise wouldn’t have res

7 judicata effect on all parties and interests who got notice of

8 that. So if you have any elaboration on that, I’d like to hear

9 it.

10 MR. SBAITI: Your Honor, we looked at the Fifth

11 Circuit cases that they cited, which I believe included that

12 case. And even in that case, the point that we made in our

13 papers and the point I was trying to arrive at is that among

14 the factors, yes, the Court should give great deference to the

15 creditors. But among the factors is not that the objections

16 lack merit or are meritless or that they wouldn’t be winnable

17 if they were simply standalone claims.

18 And that was really the only point I was trying to

19 make is that Your Honor has discretion. Granted it’s -- as you

20 mentioned, it’s not unfettered discretion. It’s bounded by

21 standards and there are -- there is, I know, about five

22 standards Your Honor has to consider or the Court has to

23 consider. But among those, that laundry list of standards, is

24 not that the Court finds that any objection lacks merit. And

25 that was really the only point I was making.

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1 And in terms of the case law, we looked at the Fifth

2 Circuit. We looked, frankly, outside the Fifth Circuit as much

3 as we could, and because this is actually not an easy one to

4 research, as it turned out, despite the language. And we also

5 looked for district court opinions in the Fifth Circuit to see

6 did any district court or did any court of appeals give this

7 type of approval to the standard that a 9019 order has res

8 judicata effect on a claim raised in an objection by a

9 creditor.

10 And we couldn’t find any and I read all the cases

11 that Mr. Morris cited in his papers, and they didn’t cite one

12 that explicitly said that. They tried to drive at it through

13 insinuation that, well, if the Court has to give great

14 deference or if the Court has to take into account the

15 underlying facts and the fact that there is discovery, surely

16 that must mean this is akin to the trial on the merits. And I

17 think that’s where we simply disagree in good faith. I’m not

18 ascribing any bad intention. But we disagree that that’s where

19 the law goes.

20 Res judicata is not -- while it’s supposed to stop

21 the relitigation of issues, it is predicated on there having

22 been actual litigation of those issues. And when HarbourVest

23 and Highland settle a case and my clients show up with an

24 objection, even though they withdraw an objection, that, in our

25 opinion -- and we’re asking the Court to see it our way -- is

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1 not trial on the merits. It’s not a disposition on the merits

2 of the objection in and of itself. Some objections we can --

3 THE COURT: But the context matters. In the context

4 of a 9019 compromise, the hearing is about look at the bonafide

5 ease of the settlement. And it’s either fair and equitable and

6 in the best interest of the estate or not. And an objector can

7 say this is a terrible settlement and here’s why it’s a

8 terrible settlement and let me cross-examine the movant and let

9 me put on my own witness that will enlighten the Court as to

10 why this is a terrible settlement, why I say terrible, why it’s

11 not fair and equitable. 

12 That’s your chance to convince the Court, don’t

13 approve this settlement because there are, you know, 14

14 problems with it. And if you convince the Court, then you

15 convince the Court and it’s not approved. If you don’t, you

16 appeal, and we do have an appeal of the settlement order.

17 So, again, I’m not understanding the "res judicata

18 doesn’t apply" argument.

19 MR. SBAITI: Your Honor, if I could riff on two

20 points based upon what you just said, if I could address those.

21 The first is there are clearly two kinds of

22 objections that get -- at least two kinds of objections that

23 get raised in these 9019 approval hearings. The two that you

24 heard recounted, some were this is bad for the estate. There’s

25 reasons why we don’t think the estate will benefit from it and

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1 it will be harmed from it. 

2 And those types of objections, which I believe mostly

3 comprise the objections that Mr. Morris was talking about

4 because they are concerns for the estate. And so creditors who

5 want to get money from the estate are concerned that the

6 settlement will not enter (phonetic) to the benefit of the

7 estate, and therefore, not enter to their benefit as creditors. 

8 That’s number one.

9 But those don’t adhere in a lawsuit. Those aren’t

10 claims for damages that the settlement is going to create for

11 the person objection or for the party objecting. There’s a

12 whole separate set of objections similar to the ones HCLO

13 Holdco raised where that what inheres in the objection is this

14 is actually going to cause us some kind of damage. 

15 And so, the factors though, don’t require the Court

16 in those second set of instances to say, well, you know what? 

17 Not only do I think you’re wrong, but I think that your

18 lawsuit, the underlying causes of action that give rise to this

19 objection, have no merit on their own face, that the discovery

20 is not there to support them, that a jury is not going to find

21 there. I am now the trier or the Court is now the trier of

22 fact on the merits of the underlying causes of action that

23 animate the objection.

24 And that’s where I believe we’re diverging with the

25 debtor on the law. It goes too far to say that a 9019 hearing

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1 where the Court in the end has discretion to approve it, even

2 over a meritorious objection by any party, regardless of what

3 bucket of objections the objection falls into. It goes -- our

4 argument today, Your Honor, and we’re asking the Court to see

5 it our way, is that that would go too far. That an actual

6 cause of action shouldn’t be eradicated simply because of the

7 9019 process because, as you pointed out, the Court does have

8 to go through a litany of factors. 

9 And if the Court determines that it’s fair and it’s

10 more equitable to overrule the objection, the Court has that

11 discretion. And we’re not here to unwind that discretion.

12 But the settlement process did violate certain

13 obligations and did cause my client damages. And that’s what

14 we’re saying isn’t precluded.

15 THE COURT: Okay.

16 MR. SBAITI: The fourth element, Your Honor, which I

17 guess in many ways maps on to the argument I just made to Your

18 Honor is that the cases, the underlying cases, do not involve

19 the same claims. Plaintiffs' claims arise from the settlement

20 process itself and not from the underlying issues being settled

21 between HarbourVest and Highland. So that’s why we think at

22 least three of the four elements aren’t met here. And we’ll

23 reserve on the papers, you know, whether jurisdiction was

24 applicable because I think that’s probably water under the

25 bridge at this point in the oral argument.

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1 Now, Mr. Morris attacks the case that we cite,

2 Applewood Chair vs. Three Rivers Planning. And he argues that,

3 well, this is not applicable. And the argument he made however

4 was he put it in the context of, well, the parties there, the

5 issue was you had guarantors who were not parties in their

6 capacity as guarantors. But that’s not actually what the Court

7 held.

8 The Court didn’t say that the release wasn’t

9 applicable to them because they didn’t appear as parties in

10 their guarantee capacities. They -- the Court held that, well,

11 the specific discharge language doesn’t enumerate those

12 specific guarantees, and so therefore it’s not released.

13 And where this dovetails, we believe, as closely as

14 we can, this isn’t a 9019 case. This is a final confirmed

15 plan. But where it dovetails with what our argument is, is

16 that the Court there as well was essentially saying the

17 underlying causes of action weren’t really presented to us, so

18 we’re not -- we -- and the confirmation of the plan didn’t

19 involve disposing of them, so we’re not going to say that they

20 are precluded. And we think that that’s as close an analogy as

21 we’ve found in the Fifth Circuit to the issues here today.

22 So I would say, Your Honor, that we believe that

23 dispenses with the res judicata argument. The judicial

24 estoppel argument, they conflate the language. I’ll go back to

25 this for a second. They conflate the language of judicial

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1 estoppel on the success of the claim. None of the cases they

2 cite on judicial estoppel involved where a party took a

3 position, withdrew their argument, and then the Court moved on.

4 Mr. Morris tries to convert a judicial estoppel claim

5 into a judicial reliance claim, which is not the purpose of the

6 doctrine and is not the doctrine at all. The doctrine is that

7 if you take a successful position in one court, you can’t take

8 the opposite position in another court. CLO Holdco didn’t take

9 a successful position in one court and then change its position

10 later on. In fact, its positions, as Mr. Morris stated, are

11 remarkably similar. They’re not inconsistent, which is the

12 problem with their judicial estoppel argument. And we -- I

13 think we fairly briefed that in our papers and we’ll otherwise

14 rest on the papers.

15 To deal -- to address the actual claims, again, I

16 come back to the idea of a fiduciary duty claim, which is our

17 lead claim. And to be clear, it’s a state claim predicated on

18 the violation of federally imposed fiduciary duties.

19 And I’m looking for a clock to make sure I’m not

20 abusing Your Honor’s time, and I don’t have one right in front

21 of me because my screen -- my screen is up.

22 Your Honor, the Douglass v. Beakley case is, like I

23 said, is Judge Boyle’s case. It specifically provides a cause

24 of action based upon violations of the Advisers Act. We also

25 cite about four or five other cases in footnote 8 of our

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1 response from other circuits, including the Third Circuit, the

2 Belton case that I referred to earlier, all of which held that,

3 yes, a state fiduciary duty claim can be predicated on breaches

4 of a federal Advisers Act violation.

5 The other point that they make on the fiduciary duty

6 claim is they argue HCMLP doesn’t owe fiduciary duties to CLO

7 Holdco. And the cases they cite, Your Honor, we dealt with in

8 the papers why they were distinguishable, because in those

9 cases they were dealing with the fact that there wasn’t any

10 harm or any direct relationship. But what they ignore is the

11 actual language of the Advisers Act, which is important.

12 Well, first of all, Mr. Seery admitted in his own

13 testimony during the approval hearing in July of 2019 that he

14 says, “We owe.” He says, “There are third party investors in

15 the fund -- in these funds who have no relation whatsoever to

16 Highland, and we owe them a fiduciary duty both to manage their

17 assets prudently, but also to seek to maximize value.” I think

18 Mr. Seery was absolutely correct when he said that. Highland

19 owes fiduciary duties to the investors in the funds that

20 Highland manages. The core of our case is that Highland is

21 using or abusing the assets of the funds it managed in HCLOF

22 for its own enrichment, which is a classic breach of fiduciary

23 duty case under the Advisers Act.

24 Now -- excuse me. The other point that I would say,

25 Your Honor, is that there is a statutory basis for us to argue

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1 a breach of fiduciary duty. Excuse me. I didn’t mean to stop

2 sharing. I apologize.

3 Are you back with me, Your Honor, on my --

4 THE COURT: Yes.

5 MR. SBAITI: -- PowerPoint?

6 THE COURT: Yes.

7 MR. SBAITI: Sorry about that, Your Honor. I just

8 hit the wrong thing. I’m not very technologically savvy. Here

9 we go.

10 So Holdco is an investor in HCLOF, which is a pooled

11 investment vehicle. A pooled investment vehicle under the case

12 law we cite is simply defined as an investment vehicle that

13 doesn’t publicly solicit investors and has few than 100

14 investors. Highland advises it. That’s the same holding in

15 TransAmerica Mortgage, by the way, which we also cite. 

16 15 U.S. C. Section 80(b)(6) establishes the federal

17 fiduciary standards to govern the conduct of registered

18 investment advisers. That’s also the TransAmerica case. 15

19 U.S.C. Section 80(b)(6)(D) delegated to the SEC the power to

20 decide the scope of those duties that are imposed under the

21 statute. And so the SEC enacted 17 C.F.R. Section 275.206(4)-

22 8. 

23 And it expressly states, and we cite the statute or

24 the regular in full in our papers, that the fiduciary duties

25 are owed to investors in the pooled investment vehicles. It

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1 specifically says that. It talks about two different duties

2 owed and they’re owed to the investors in the vehicles, which

3 means they’re owed to Holdco as an investor in HCLOF, which is

4 the vehicle that Highland manages.

5 It’s black and white in the regulation. And we

6 haven’t seen any response. There was no response of that in

7 the reply that was filed, Your Honor. And so the argument that

8 there’s not a fiduciary duty owed to Holdco because it’s merely

9 an investor in HCLOF simply doesn’t comport with the law.

10 And finally, the petition lays out the basis for our

11 claims including the applicable federal and state law. 

12 Plaintiffs' response lays out why the legal arguments aren’t

13 opposite at the 12(b)(6) stage and Rule 9(b) is met where

14 necessary under the federal claim. And I’m trying to unshare

15 so that I can get back to regular argument.

16 I’d like to briefly address Mr. Morris’ argument,

17 Your Honor. Your Honor, I re-raise my argument that I made

18 before, which is that a 12(b)(6) motion and hearing is not the

19 appropriate time for all the evidence that was poured in here. 

20 And I understand Mr. Morris’ contention, well, it’s really hard

21 to ignore all the history of this case. But a lot of that

22 history really boils down to things that were actually admitted

23 in the complaint. The complaint recognized there was a 9019. 

24 But what Mr. Morris wants to do is go beyond that and to go to

25 what people said and what they must have meant. What Mr.

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1 Dondero must have meant in his objection, what Dugaboy must

2 have meant by their objection, what Mr. Pugatch must have meant

3 by his testimony. 

4 All of that is highly improper at this stage of the

5 proceeding, Your Honor. It’s outside of the 12(b)(6) confines. 

6 It’s outside the four corners of the complaint. And we object

7 to all of that evidence being considered.

8 THE COURT: Let me --

9 MR. SBAITI: The question we --

10 THE COURT: Let me ask you about that procedural

11 point.

12 MR. SBAITI: Yes, Your Honor.

13 THE COURT: As we know, 12(d) provides that if

14 matters outside the pleadings are presented to and not excluded

15 by the Court in a 12(b)(6) motion, the motion must be treated

16 as one for a summary judgment under Rule 56 and all parties

17 must be given a reasonable opportunity to present all the

18 material that is pertinent to the motion.

19 Are you -- what are you arguing? That I should treat

20 it as a motion for summary judgment and give you more time to

21 present other materials? I mean, you both presented an

22 appendix, okay. And I’m telling you we’re seeing this more and

23 more, I’ve noticed. People are going beyond the four corners

24 of a motion to dismiss and attaching things. And there’s some,

25 you know, Fifth Circuit authority that says, well, if what is

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1 attached is integral to understanding, you know, an allegation

2 or whatever in the pleading, you know, there is some discretion

3 to go outside the four corners.

4 So I’m trying to understand the point you’re making

5 with this. Are you saying I should treat it as a motion for

6 summary judgment or do these attachments really -- you know, do

7 I have authority under the Fifth Circuit to consider them as

8 part of the 12(b)(6) motion or not?

9 MR. SBAITI: Typically, in our experience, Your

10 Honor, is when a summary or when a 12(b)(6) is going to be

11 treated as summary judgment under 12(d), the Court says that

12 and then the parties are given an opportunity, as you said, to

13 go do some discovery in order to put together the evidence and

14 materials to then come back and respond as a summary judgment. 

15 We responded to a 12(b)(6) and objected to the evidence. If

16 the Court wants to treat it as a summary judgment, then we

17 would ask for an opportunity for -- to conduct discovery in

18 order to be able to respond as a summary judgment motion, but

19 we didn’t -- because we responded to a 12(b)(6) --

20 THE COURT: You did the same thing though. You did

21 the same thing in your response. You submitted an appendix of

22 evidence, if you want to call it evidence. As someone pointed

23 out, it’s stuff from the bankruptcy court record. I don’t

24 think it went beyond what was already in the bankruptcy court.

25 MR. MORRIS: And if I -- can I be heard on this, Your

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1 Honor? 

2 THE COURT: You can. You can.

3 MR. MORRIS: Just to respond. This is really quite

4 simple. The motion to dismiss is based on res judicata. Res

5 judicata necessarily requires a review of what happened in

6 connection with the prior hearing. There’s nothing that we

7 have identified or put forth in the appendix or on our exhibit

8 list except for the pleadings in the 9019, the transcripts, the

9 one deposition transcript, the one trial transcript, the

10 settlement agreement, the transfer agreement. I’d love to know

11 what the Court couldn’t or shouldn’t take judicial notice of. 

12 There is no emails. There is no -- there is no -- there is no

13 extrinsic evidence, if you will. All of this is either on the

14 docket or was presented as part of the hearing.

15 THE COURT: Yeah. I’m just trying to ferret --

16 MR. MORRIS: And it’s necessary. And it’s necessary

17 for the motion.

18 THE COURT: Yeah. I’m just trying to ferret out the

19 procedural position that’s being asserted here. And I don’t

20 have the case cites off the top of my brain, but there is

21 authority from at least the Northern District judges, if not

22 the Fifth Circuit, saying in a 12(b)(6) motion I can take

23 judicial notice of items in the record. And then, you know,

24 there -- I know there’s Fifth Circuit authority saying I can go

25 beyond the four corners in a 12(b) context if it’s just basic,

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1 you know, explaining things that are in allegations. You know,

2 such as --

3 MR. SBAITI: May I address that, Your Honor?

4 THE COURT: -- such as if a contract is in dispute,

5 okay. Like there’s no way you can have a cause of action under

6 the contract and here’s the contract. So I’m just trying to

7 nail down your procedural position here.

8 MR. SBAITI: Your Honor, the distinction I was trying

9 to make that I don’t think I put as artfully as I might be able

10 to put now is in a 12(b)(6) if there’s a contract, as you said,

11 if there’s a legal document, a contract and order that’s

12 integral to the case, Your Honor can take judicial notice of

13 that. Generally, a court can take judicial notice of filings

14 in a bankruptcy, the fact that they were filed.

15 So the transcripts, which Your Honor can’t take

16 judicial notice of, is the truth of those. And that was what I

17 was objecting to is it’s one thing for him to say an objection

18 was filed and therefore, because an objection was filed, that

19 should be it. That was your only chance. I’m not saying Mr.

20 Morris can’t make that argument. 

21 But when he goes beyond the fact of the filing or the

22 fact that there was a transcript or the fact that there was a

23 deposition and starts to read from the depositions or read from

24 the filings and say this is what those mean, that goes against

25 the 12(b)(6) parameters because, number one, now it’s

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1 substantive evidence and not simply a judicial notice of

2 something that’s right there in front of the Court, i.e.,

3 something on its own docket. Because those statements and the

4 interpretation of those statements are subject to credibility

5 findings. They’re subject to clarification. They’re subject

6 to rebuttal. That’s the purpose of discovery.

7 And so if Your Honor -- and Mr. Morris is right. 

8 Usually, res judicata involves knowing what happened in the

9 prior proceedings. So if all he wants to do is rest on the

10 fact that an objection was filed by CLO Holdco and maybe even

11 other people, and that should be it and he thinks that’s enough

12 for Your Honor to say res judicata applies, then I don’t think

13 we have a problem. It’s when he goes beyond that and says,

14 Your Honor, these people must have known and this is what they

15 meant by their argument, that’s what I’m asking Your Honor not

16 to consider. And if Mr. Morris wants you to consider that,

17 that’s a summary judgment motion and we should have the

18 opportunity to do discovery at the very least into the issues

19 he has now raised as supporting his res judicata defense which

20 he has the burden of proof on.

21 MR. MORRIS: Your Honor, this is one of the strangest

22 arguments I have ever heard. I’m allowed to offer the Court

23 and the Court is allowed to accept the documents, but I’m not

24 allowed to read them. I’m not allowed to make arguments. I

25 don’t understand what that even means. If it were a contract,

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1 I would be allowed to put the contract in front of Your Honor,

2 but I wouldn’t be able to argue why the contract doesn’t say

3 what the Plaintiff says. I don’t get it.

4 THE COURT: Okay.

5 MR. MORRIS: That’s --

6 THE COURT: Just I’ve heard enough on this. I don’t

7 think we have moved into Rule 12(e), that realm of me needing

8 to treat this as a motion for summary judgment. I think the

9 so-called evidence, the appendix that was attached to the

10 motion as well as the appendix that was attached to Plaintiffs'

11 response, it’s stuff that I can take judicial notice of that’s

12 in the record of this Court and I can look at it. You know, it

13 is what it is, the record of this Court.

14 All right. So I have nine people waiting in

15 chambers. I’m trying to figure out should I take a break now

16 or are you fairly close to wrapping up. Either answer is fine,

17 Mr. Sbaiti. I just need to figure out who I make wait here.

18 MR. SBAITI: I have -- oh, I’m sorry. I didn’t mean

19 to interrupt you, Your Honor. I was just going to say I have

20 five minutes left, but I know Mr. Morris probably wants to come

21 back. So if you want to break now and we can come back at

22 whenever the Court wants us to, we can do so.

23 THE COURT: All right. Why don’t you make your final

24 five minutes and then we’ll take a break?

25 MR. SBAITI: Okay. Thank you, Your Honor.

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1 I just wanted to address some of the arguments that

2 Mr. Morris raised in his argument. The first thing is -- and I

3 addressed this in part -- but Mr. Morris makes a big deal about

4 paragraph 127 of the complaint and essentially suggests that

5 we’re the -- or that Mr. Dondero is the perpetrator of a

6 nefarious scheme. Whereas, what the pleading actually says,

7 and I again encourage Your Honor to re-read -- to read it

8 specifically, is that Mr. Dondero warned Mr. Seery not to trade

9 in the stock and not to make any transactions because the stock

10 was going to appreciate in value. 

11 That has two implications for us, Your Honor. Number

12 one, it means Mr. Seery was a tippee of insider information,

13 and number two, it means that Mr. Seery, if he did trade on

14 that information or if he did pass that information on to

15 someone else, that is a problem from the Advisers Act

16 standpoint, which is really the only purpose of saying that.

17 While paragraph 127 also says that that should have

18 caused Mr. Seery to revalue the NAV of HCLOF, it does not state

19 and we did not plead that the entire value of HCLOF is tied to

20 the MGM stock. So the insinuation that that somehow gave us

21 inside information about what the true value of HCLOF was and

22 we should have known or that Mr. Dondero should have known is

23 simply untrue.

24 The other argument Mr. -- that Mr. Morris likes to

25 harp on is that CLO Holdco withdrew its argument, but he

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1 characterizes Mr. Kane’s withdrawal testimony -- as he says,

2 Mr. Kane admitted that CLO Holdco lacked the superior right to

3 obtain the HarbourVest. If you read the very language that was

4 highlighted on Mr. Morris’ slide, that’s not what Mr. Kane

5 says. Mr. Kane says, “We’ve gone back to the drawing board. 

6 We’ve read your reply. And my client has given me permission

7 to withdraw the argument or withdraw the objection.” That’s

8 all he said. There was not an admission that he was wrong. 

9 There was not an admission that they had made a mistake. There

10 was simply an admission that they decided to withdraw the

11 objection for whatever reason.

12 Lastly, on the specific claims --

13 THE COURT: That’s not an accurate description of the

14 record. He said he looked at --

15 MR. SBAITI: Your Honor, I was reading it along with

16 him.

17 THE COURT: -- Guernsey Law. And I don’t know if his

18 words were deep dive.

19 MR. SBAITI: Yeah.

20 THE COURT: But he had looked at the agreements

21 extensively. That’s just not what he said.

22 MR. SBAITI: And he said he was with -- Your Honor,

23 he said he was withdrawing. He didn’t say we were wrong. He

24 didn’t say we don’t have a claim. What he said was, “We’re

25 withdrawing the objection.”

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1 THE COURT: After doing an extensive look at the

2 agreements in Guernsey Law, okay, so.

3 MR. SBAITI: Sure. But, Your Honor, he might have --

4 he could just as easily thought we have a chance, but it’s not

5 a good one. And frankly, we’ll be here for 20 days and we’re

6 withdrawing it for that reason because we’ll live to fight

7 another day. Your Honor, there’s an innumerable number. To

8 simply say that he admitted that they didn’t have a correct

9 claim, it’s just he didn’t say that. That’s all. That’s the

10 only point I’m making.

11 Your Honor, I don’t disagree with the debtor that the

12 Court’s exculpation clause gets rid of the negligence claim

13 which was obviously filed before the effective date, so that

14 claim is gone. 

15 And I think the last argument that Mr. Morris makes

16 on the RICO claim is the federal court, the Supreme Court

17 standard for pleading a RICO claim, that acts that only

18 continue for a few weeks are not -- don’t set out a RICO claim. 

19 Your Honor, in our response to that, we actually submitted an

20 amended complaint that shows that the type of acts we’re

21 talking about, the pattern of the debtor using its investor

22 vehicles assets to liquidate is a long pattern and practice

23 than simply the HarbourVest suit. And so, we move to amend on

24 that basis to satisfy that pleading defect, which is the main

25 one that they focused on.

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1 That’s all I have, Your Honor. 

2 THE COURT: All right. Thank you.

3 We’re going to take a 15 minute break and come back. 

4 I’ll ask Mr. Jordan and Mr. Bessette did they have anything

5 they wanted to say today. I know they joined in the debtor’s

6 motion. And then we’ll let Mr. Morris have rebuttal.

7 All right. So we’ll be back in 15 minutes.

8 THE CLERK: All rise.

9 MR. MORRIS: Thank you, Your Honor.

10 (Recess at 12:05 p.m./Reconvened at 12:23 p.m.)

11 THE CLERK: All rise.

12 THE COURT: All right. Please be seated.

13 We're back on the record in Charitable DAF v.

14 Highland Capital. All right. So I promised I was going to go

15 back to counsel for Highland CLO Funding, Ltd. So Mr. Jordan,

16 Mr. Bessette, is there anything you wanted to say for oral

17 argument?

18 MR. JORDAN: Thank you, Your Honor. John Jordan on

19 behalf of HCLOF. 

20 Our points are two procedural points. The first is

21 as the Court anticipated, in our motion to dismiss filed back

22 in August, we joined in the motion to dismiss of Highland. And

23 so to the extent that the Court after deliberation is inclined

24 to grant that motion, we would ask that as a joining party,

25 HCLOF be pulled along with that.

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1 The second procedural point is that back in our

2 motion to dismiss, we pointed out that the complaint does not

3 actually allege anything against HCLOF. In the story, we're

4 essentially the football and neither Oklahoma nor UT. And we

5 pointed that out as an additional argument to what you've heard

6 today. That motion was never responded to. The deadline by

7 agreement was extended to October 11th. And the lack of

8 response was, we believe, not inadvertent but simply an

9 acknowledgment that HCLOF is not a party that anything is being

10 claimed against.

11 It particularly makes sense since effectively and in

12 rough numbers, they're half owned by both sides. So for every

13 dollar that HCLOF spends hanging around the case, the parties

14 are paying essentially 100 cents collectively. So for that

15 reason, we would ask, and subject to Mr. Sbaiti's input,

16 whether the Court would ask us or direct us to upload an order

17 granting our motion as unopposed. We just feel like we don't

18 have any role in this case.

19 THE COURT: All right.

20 Mr. Sbaiti, what about that?

21 MR. SBAITI: Your Honor, they were originally added

22 as a nominal party. And as a nominal party, because of the

23 potential need to have a derivative action, I think that based

24 upon Highland's arguments and the arguments that we had, I

25 don't think the derivative action is necessary for us to

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1 maintain on a go-forward basis. And so we don't oppose them

2 being dismissed.

3 THE COURT: All right. Then I assume, Mr. Morris,

4 you don't have any problem with this, correct?

5 MR. MORRIS: No, Your Honor.

6 THE COURT: Okay. So I'll look for the parties to

7 submit an agreed order of dismissal of HCLOF after the hearing. 

8 All right?

9 MR. JORDAN: Thank you, Your Honor.

10 THE COURT: All right. Mr. Morris, you get the last

11 word.

12 MR. MORRIS: Thank you, Your Honor. I hope to be

13 relatively brief. I really just want to focus on the arguments

14 concerning whether or not the order that was entered by this

15 Court was an order that was entered on the merits. 

16 As the Court is well aware, a 9019 motion filed by a

17 debtor is done so on notice. It is to give all parties in

18 interest an opportunity to be heard, not just as to whether or

19 not the debtor meets its burden of proof under Rule 9019 but

20 whether or not the Court can find, as it must, that the

21 proposed settlement is in the best interest of the estate.

22 The purpose of -- I mean that is the purpose of the

23 giving notice so that everybody has a chance to be heard. The

24 questions that the Court asked, the questions that every

25 bankruptcy court asks in a 9019 is can the debtor do this deal,

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1 should the debtor do this deal, is it in the best interest of

2 the estate to do this deal.

3 And, you know, the idea that a 9019 order is somehow

4 res judicata only to the parties to a settlement is just

5 something that doesn't make any sense to me because it

6 abrogates so many rules that exist that allows and encourages

7 and requires parties who have objections to be heard. 

8 Mr. Sbaiti's clients filed an objection. They

9 initiated a contested matter. They obtained rights. They were

10 litigants. They are litigants in a contested matter where

11 they're required to tell the Court what objections they have to

12 the settlement, and they did that.

13 Mr. Sbaiti, you know, told me that I wasn't allowed

14 to characterize the words that are used in the documents that

15 have now been admitted by the Court. And, yet, I heard him say

16 that maybe Mr. Kane (phonetic) really meant to tell Your Honor

17 that he was withdrawing the claim because he was going to save

18 it for another day. 

19 I'd just ask the Court to look at the transcript. I

20 don't have to interpret it at all. And I'd ask the Court to

21 read the words. I can put them back up on the screen, but

22 they're pretty short. It's at Pages 7 and 8 of the transcript

23 of what Mr. Kane told you and what you said in response. It's

24 on the page, not my interpretation, and what the import of that

25 was.

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1 Mr. Sbaiti believes, I guess, if one is allowed to

2 engage in such conduct without consequence, that one is allowed

3 to allow to file objections, cause the Court and the litigants

4 to participate, to give discovery, to write briefs, to do

5 analyses, withdraw it on the basis of their own good faith

6 analysis of Guernsey law of the documents and somehow say it's

7 irrelevant. Not what the law is, not what res judicata is

8 intended to do.

9 He should have put all of his cards on the table. In

10 fact, I think that Mr. Kane believed he was putting all of his

11 cards on the table because that's what he did. He filed a very

12 comprehensive objection. He asserted a right to the

13 opportunity that the debtor was proposing to take in the 9019

14 motion. That's what he was doing. He was objecting on the

15 basis that he claimed his client had a superior right to this

16 asset.

17 And he didn't -- like I said earlier, Your Honor, I

18 don't think he would be permitted, I don't think these claims

19 would fly today if no objection was filed. But the fact that

20 there was renders, I think, indisputable that there was a

21 finding on the merits, right. And the only reason that the

22 Court didn't rule on Mr. Kane's motion, the only reason the

23 Court didn't rule on it is because Mr. Kane withdrew it. 

24 Is that really the way this process is supposed to

25 work, that one can tell the Court that after a review of the

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1 documents, I'm going to withdraw the objection and then file a

2 claim for damages three months later with a different client,

3 with a different control person, with a different lawyer? 

4 That's okay under doctrine of res judicata? I don't think so.

5 They had a full and fair opportunity. The fact that

6 this was somehow -- you know, they're denigrating the fact that

7 this was a 9019 motion. There's not supposed to be a mini8 trial. Your Honor had discretion as to what to do. Every

9 court in every bench trial has discretion as to what to do and

10 whether or not to overrule objections and whether or not to

11 substain [sic] objections. That's what judges to. 

12 And there's nothing offensive about the fact that it

13 happened in the context of a 9019 motion. They don't get to

14 sit on their hands and wait to fight another day. If they

15 believed that the debtor was exposing itself to liability, and

16 that's what they actually say in the opposition, that's what I

17 actually think they say in the complaint, accept it as true,

18 they believe that the debtor created liability for itself by

19 rendering -- by entering into this transaction. 

20 Shouldn't they have raised their hand and said you

21 can't do this deal, right? And the only response to that --

22 they have to that is they had no idea about value. Paragraph

23 127, Your Honor, Mr. Dondero, the architect of this complaint,

24 as was proven on June 8th, knew very well about value. And it

25 doesn't matter that it was only MGM. Your Honor commented on

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1 that at the June 8th hearing in a different context. But

2 everybody knows, right, it is. He sits on the board of MGM. 

3 And I'm sorry if I called him a tippee instead of a

4 tipper. But if this complaint goes forward, we'll dig into

5 that real deep. But there's no reason it ought to, Your Honor. 

6 This case ought to be dismissed on res judicata grounds. It

7 should be dismissed on judicial estoppel grounds. And it

8 should be dismissed for all the reasons that I said in my

9 argument in my brief. 

10 But I do just want to close with one point, and that

11 is to read from a case called Goldstein, which I think I

12 alluded to earlier on this issue of whether there's a fiduciary

13 duty that's owed by an advisor to an investor and a fund:

14 "At best, it is counterintuitive to characterize the

15 investors in a hedge fund as the clients of the

16 advisors. The advisor owes fiduciary duties only to

17 the fund, not to the fund's investors."

18 There's a lot of discussion about fiduciary duties,

19 Your Honor. But to the extent that they have any basis to

20 defeat the motion to dismiss on res judicata or collateral

21 estoppel grounds, we hope and we trust and we know the Court

22 will review the case law vigorously to test some of the

23 assertions to that. 

24 I have nothing further, Your Honor.

25 THE COURT: All right. Well, thank you to all of

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1 you.

2 As a reminder, I don't think you need it, but as a

3 reminder, I am essentially acting as a magistrate for Judge

4 Boyle in this action. And whichever way I go on whichever

5 theories, I think she would expect a thorough write-up. It

6 would, of course, be in the form of a report and recommendation

7 for her to either adopt or not if I dispose of some or all of

8 the counts in the lawsuit. 

9 Even to the extent I deny dismissal, even though the

10 rule typically does not require a court to make detailed

11 findings and conclusions in connection with a denial of a

12 motion to dismiss, again, since I'm sitting as a magistrate, I

13 think Judge Boyle would expect some thorough explanations and

14 reasoning from me.

15 So that's my way of saying I'm taking this under

16 advisement. I am going to drill down on some of the cases that

17 have been argued. I think some important issues are raised

18 here that need some thorough reasoning. 

19 So I will do the best to get this out without too

20 much delay. I think there's probably zero chance, zero chance

21 I'm going to get it done by the end of the year. We're just

22 too behind with some of our under-advisements. But I will try

23 earnestly to get it out fairly soon after the first of the

24 year. All right?

25 Thank you. You all have a good holiday.

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1 THE CLERK: All rise.

2 (Proceedings concluded at 12:37 p.m.)

3 * * * * *

4

5 C E R T I F I C A T I O N

6 We, DIPTI PATEL, KAREN WATSON, CRYSTAL THOMAS, AND

7 PATTIE MITCHELL, court approved transcribers, certify that the

8 foregoing is a correct transcript from the official electronic

9 sound recording of the proceedings in the above-entitled

10 matter, and to the best of my ability.

11

12 /s/ Dipti Patel 

13 DIPTI PATEL, CET-997

14

15 /s/ Karen Watson 

16 KAREN WATSON, CET-1039

17

18 /s/ Crystal Thomas 

19 CRYSTAL THOMAS, CET20

21 /s/ Pattie Mitchell 

22 PATTIE MITCHELL 

23 LIBERTY TRANSCRIPTS DATE: November 23, 2021

24

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IN THE UNITED STATES BANKRUPTCY COURT 

FOR THE NORTHERN DISTRICT OF TEXAS 

DALLAS DIVISION 

IN RE: § 

 § 

HIGHLAND CAPITAL MANAGEMENT § CASE NO. 19-34054-SGJ-11 

L.P., § (CHAPTER 11) 

 REORGANIZED DEBTOR. § 

______________________________________ § 

CHARITABLE DAF FUND, L.P., § 

 § 

 PLAINTIFF § 

 § 

VS. § ADVERSARY NO. 22-03052 

 § 

HIGHLAND CAPITAL MANAGEMENT, § 

L.P., § 

 § 

 DEFENDANT § 

 

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT’S AMENDED 

MOTION TO DISMISS ADVERSARY PROCEEDING 

[DE ## 19, 20, 21, & 32]1

1 “DE # ___” as used herein refers to the Docket Number at which a pleading appears in the docket maintained by 

the Bankruptcy Clerk in Adv. Proc. No. 22-03052. Here, DE ## 19, 20 & 21 refer to the Amended Motion to 

Dismiss, the Brief in Support, and the Appendix in Support filed by the Defendant (the “Original Appendix”). 

Signed September 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 action (“Action”) was originally commenced in the United States 

District Court for the Northern District of Texas (“District Court”) and was thereafter referred to 

the bankruptcy court (“Bankruptcy Court”).2

 

In the Action, a Plaintiff seeks damages and other relief from a former Chapter 11 debtor, 

pertaining to business conduct undertaken by the debtor, during the course of its Chapter 11 

bankruptcy case (“Bankruptcy Case”)—conduct that allegedly harmed the Plaintiff. The Action 

was filed after confirmation of the Debtor’s plan, but before the effective date of the plan occurred. 

The former debtor-in-possession (now a reorganized debtor) moves for dismissal of the 

Action, arguing primarily that the filing of the Action in District Court was an improper means 

for pursuing a post-petition administrative claim against a chapter 11 debtor. There was a welldefined process for pursuing administrative expense claims in the Bankruptcy Case—of which the 

Plaintiff received ample notice—and the Plaintiff ignored that process, choosing instead to embark 

on post-confirmation litigation in the District Court. The former debtor-in-possession also argues 

Additionally, DE # 32 refers to the Defendant’s Amended Appendix in Support of Amended Motion to Dismiss, that 

merely added two more exhibits to Defendant’s Original Appendix—new Exhs. 21 & 22. See also DE # 30 (the 

Response of the Plaintiff) and DE # 31 (the Reply of the Defendant). Notably, at the oral argument on the Amended 

Motion to Dismiss, the court ruled that only Exhs. 1-13, 17, 21, and 22 would be considered by the court. All of 

these exhibits, except Exh. 17, were items on the Bankruptcy Court’s docket of which this court may take judicial 

notice in the context of a Rule 12(b) motion to dismiss. Although a court generally limits its inquiry on a Rule 12(b) 

motion to dismiss to a plaintiff’s complaint or any documents attached to the complaint, a court may also take 

judicial notice of matters that are part of the public record when considering a motion to dismiss. See, e.g., T.L. 

Dallas (Special Risks), Ltd. v. Elton Porter Marine Ins., No. 4:07–cv–0419, 2008 WL 7627807, at *2 (S.D. Tex. 

2008); Cade v. Henderson, No. CIV A 01-943, 2001 WL 1012251, at *2 (E.D. La. Aug. 31, 2001). As to Exh. 17, it 

was a short Declaration of Defendant’s Chief Executive Officer (“CEO”), James Seery, dealing solely with the Rule 

12(b)(1) standing (i.e., lack of subject matter jurisdiction) issue, and there was no objection to Exh. 17 being 

considered by the court. See DE # 41, Transcript of oral argument on the Amended Motion to Dismiss (“8/3/22 

Transcript”), at 3:22–5:17. 

2 The referral occurred by virtue of an order entered by Judge David C. Godbey on May 19, 2022, in Civil Action # 

3:21-cv-01710-N. See DE # 32, Ex. 13, Appx. 477-79. 

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that—in addition to Plaintiff’s procedural problems—that Plaintiff lacks standing to pursue its 

claims. 

A. The Parties 

The movant is the Defendant, Highland Capital Management, L.P., now a reorganized 

debtor (“Highland” or “Reorganized Debtor”). Highland is the sole defendant. The allegedly 

actionable conduct of Highland occurred in August 2020 (mid-way through its Chapter 11 case). 

The Bankruptcy Court entered an order confirming Highland’s Chapter 11 plan, on February 22, 

2021. Highland’s plan went effective on August 11, 2021. The Action was filed on July 22, 2021, 

some seven months after entry of the Bankruptcy Court’s confirmation order but just before the 

effective date. 

The respondent, the Plaintiff, is an entity known as Charitable DAF Fund, L.P. (“Plaintiff” 

or “Plaintiff/DAF”).3

 Plaintiff is a limited partnership hedge fund, organized in the Cayman 

Islands, that purports to have charitable purposes (i.e., it is designated as a “donor advised fund”), 

and was originally seeded with funds from Highland.4

 Plaintiff purports to now act through an 

3 Notably, this is Plaintiff/DAF’s second time to sue Highland, post-confirmation, regarding Highland’s alleged 

post-petition mismanagement or misconduct during its Chapter 11 case. See Adv. Proc. # 21-3067 styled Charitable 

DAF Fund, L.P. et al. v. Highland Capital Management, L.P., et al, (Bankr. N.D. Tex.) (hereinafter, the “First DAF 

Post-Confirmation Lawsuit Against Highland”). The First DAF Post-Confirmation Lawsuit against Highland was 

also filed in the United States District Court (Judge Jane Boyle) and then was referred by Judge Boyle to the 

Bankruptcy Court. That lawsuit challenged the legality of Highland’s conduct in entering into a compromise and 

settlement agreement during the Bankruptcy Case (with Bankruptcy Court approval) with an entity known as 

HarbourVest. The Bankruptcy Court dismissed the First DAF Post-Confirmation Lawsuit Against Highland on 

March 11, 2022 (based on estoppel grounds and declining to reach other grounds possibly warranting dismissal). 

Finally, this court notes that an entity known as Dugaboy Investment Trust—a family trust of which Highland’s 

former CEO, James Dondero, and/or his family members are beneficiaries —earlier, on June 23, 2021, filed a 

District Court action based on the very same allegations that are asserted in this present Action but later voluntarily 

dismissed such action. DE # 32, Exh. 22, Appx. 781. See also 8/3/22 Transcript at 10:13. 4 See DE # 99 entered in the First DAF Post-Confirmation Lawsuit Against Highland, Adv. Proc. # 21-3067, at p.2.

As referenced earlier, although a court generally limits its inquiry on a motion to dismiss to the plaintiff’s complaint 

or any documents attached to the complaint, a court may also take judicial notice of matters that are part of the 

public record when considering a motion to dismiss. See authorities mentioned in footnote 1, supra.

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individual named Mark Patrick5—a former Highland employee who now works for entities 

controlled by or associated with James Dondero, Highland’s founder and former CEO. 

B. The Allegedly Actionable Conduct. 

Plaintiff represents in its Complaint that it was an investor in a non-debtor entity known as 

“Multi Strat.” Multi Strat was controlled by Highland—in that Highland was Multi Strat’s 

investment manager and ultimate majority equity owner.6

 In its Complaint, Plaintiff alleges that 

Highland, during its Bankruptcy Case, breached contractual and extra-contractual duties to 

Plaintiff, as an alleged investor in “Multi Strat”—supposedly causing Plaintiff harm. The pith of 

the Complaint deals with Multi Strat’s previous ownership of a pool of “viaticals.” Viaticals are 

life insurance policies, insuring the lives of various random individuals, that have been purchased, 

with the purchaser taking over the payment of premiums on such policies, such that when the 

individual dies, the life insurance proceeds are paid to the purchaser/owner of the policies (in this 

case, Multistrat). Distilled to its essence, Plaintiff’s argument is that Highland—acting as Multi 

Strat’s investment manager—caused the sale of Multi Strat’s pool of viaticals, during the Chapter 

11 case (in August 2020), pursuant to a flawed process, at a price that Plaintiff believes was too 

low, and subject to other improprieties. To be clear, the sale was not subject to a Section 363 sale 

motion or court order, since Multi Strat’s assets (i.e., the viaticals) were not property of the estate. 

The Complaint must be dismissed, pursuant to Rules 12(b)(1) and (b)(6) of the Federal 

Rules of Civil Procedure (the “FRCP”), made applicable to this Action by Rule 7012(b) of the 

Federal Rules of Bankruptcy Procedure (the “FRBP”), for at least two reasons. First, the causes 

5 Until at least mid-January 2021, Grant Scott, James Dondero’s life-long friend and college roommate, was the sole 

director of Plaintiff/DAF. See DE # 99, entered in the First DAF Post-Confirmation Lawsuit Against Highland, Adv. 

Proc. # 21-3067, at p. 3. Mark Patrick was installed as the new control person at some point thereafter in 2021. DE 

# 32, Exh. 22, Appx. 790.

6

 It is undisputed that Highland was both the investment manager of and majority investor in Multi Strat. 

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of action asserted in the Complaint—that Highland breached its contractual and extra-contractual 

duties to Plaintiff during the Chapter 11 case—would, if meritorious, have been “administrative 

expense claims” and, under the terms of the Plan, were required to be filed with the Bankruptcy 

Court and served on Highland no later than September 25, 2021. Despite these Plan 

requirements—of which Plaintiff received notice—Plaintiff asserted its claims through this Action 

in the District Court. That decision must be deemed fatal, and Plaintiff’s claims are now timebarred. Second, Plaintiff has now acknowledged in its response to Highland’s Amended Motion 

to Dismiss that it is not an investor in Multi Strat. Rather, its subsidiary, an entity known as “CLO 

Holdco” is (“CLO Holdco” is apparently a 4.06% equity owner of Multi Strat). Regardless of 

Plaintiff’s reasons for filing the Complaint in its own name, rather than in the name of its subsidiary 

CLO Holdco (and this court can only speculate),7

 the result is the same. Plaintiff itself lacks 

standing to assert the claims in the Complaint, for the reasons further described herein, and this 

Court accordingly lacks jurisdiction to adjudicate the claims asserted in the Complaint. Moreover, 

allowing substitution of CLO Holdco as a plaintiff at this point in time (if a motion pursuant to 

Rules 15 and 17 of the FRCP were to be made) would be futile, since the real problem here is the 

failure to follow the Plan and Bankruptcy Code’s required procedures for pursuing an 

administrative expense claim. Accordingly, the Complaint must be dismissed. 

7 The court notes that CLO Holdco was very active in the Highland Bankruptcy Case, including objecting to the 

Plan. See DE ## 1675 and 1797 in the main Highland Bankruptcy Case. Its 100% parent, Plaintiff/DAF, on the 

contrary, was not nominally—although Plaintiff/DAF, as 100% parent to CLO Holdco, would have necessarily been 

giving directions to CLO Holdco during the Bankruptcy Case. The court cannot help but speculate that Plaintiff was 

trying to avert estoppel arguments that might have been made if CLO Holdco had filed this Action—given its active 

litigation of the Plan. In any event, as described herein, this Action fails for other reasons more fundamental than 

estoppel. 

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II. UNDISPUTED FACTS

A. Relevant Dates and Deadlines in the Highland Bankruptcy Case

On October 16, 2019 (the “Petition Date”), Highland commenced a voluntary petition 

under chapter 11 of the Bankruptcy Code. 

On February 22, 2021, after months of contentiousness and various sessions of mediation 

with professional mediators—which successfully led to resolution of certain large creditor 

claims—the Bankruptcy Court entered an Order (i) Confirming the Fifth Amended Plan of 

Reorganization (as Modified) and (ii) Granting Related Relief (the “Confirmation Order”),8

 which 

confirmed the Fifth Amended Plan of Reorganization of Highland Capital Management, L.P (as 

Modified) (the “Plan”).9

Notably, the Plan contained customary language incorporating section 1141(d)(1)(A) of 

the Bankruptcy Code and releasing the Debtor from pre-confirmation liabilities of any kind: 

Except as otherwise expressly provided by this Plan or the Confirmation 

Order, upon the Effective Date, the Debtor and its Estate will be deemed discharged 

and released under and to the fullest extent provided under section 1141(d)(1)(A) 

and other applicable provisions of the Bankruptcy Code from any and all Claims 

and Equity Interests of any kind or nature whatsoever, including, but not limited to, 

demands and liabilities that arose before the Confirmation Date, and all debts of 

the kind specified in section 502(g), 502(h), or 502(i) of the Bankruptcy Code.10

 

Section 1141(d(1)(A), in turn, provides that the confirmation of a plan “discharges the 

debtor from any debt that arose before the date of such confirmation.” 11 U.S.C. § 1141(d)(1)(A). 

To be clear, this did not leave parties without a remedy to assert possible post-petition, preconfirmation claims. In that regard, the Plan contained customary definitions and other provisions 

8

 DE # 32, Exh. 3, Appx. 19-180. 

9 Id., Exh. 4, Appx. 181-247. 10 Id., Exh. 4, Appx. 235 (emphasis added). 

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regarding the filing and adjudication of “administrative expense claims.” These provisions, 

summarized below, are key to the disputes in this Action. 

First, as is typical for a Chapter 11 plan, there was a “Defined Term” for “Administrative 

Expense Claim” as follows: 

“Administrative Expense Claim” means any Claim for costs and expenses 

of administration of the Chapter 11 Case that is Allowed pursuant to sections 

503(b), 507(a)(2), 507(b) or 1114(2) of the Bankruptcy Code, including, without 

limitation, (a) the actual and necessary costs and expenses incurred after the Petition 

Date and through the Effective Date of preserving the Estate and operating the 

business of the Debtor . . . and that have not already been paid by the Debtor during 

the Chapter 11 Case . . .. 11

Second, the Plan further provided that: 

If an Administrative Expense Claim ... is not paid by the Debtor in the 

ordinary course, the Holder of such Administrative Expense Claim must File, on 

or before the applicable Administrative Expense Claims Bar Date, and serve on the 

Debtor or Reorganized Debtor, as applicable ... an application for allowance and 

payment of such Administrative Expense Claim.12

There was a defined term for “File” in the Plan as follows: 

“File” or “Filed” or “Filing” means file, filed, or filing with the Bankruptcy 

Court or its authorized designee in the Chapter 11 Case. 13

Finally, there was a defined term for Administrative Expense Bar Date as follows: 

“Administrative Expense Claims Bar Date” means, with respect to any 

Administrative Expense Claim (other than a Professional Fee Claim) becoming due 

on or prior to the Effective Date, 5:00 p.m. (prevailing Central Time) on such date 

that is forty-five days after the Effective Date.

14 

 

11 Id., Appx. 189. 12 Id., Appx. 204 (emphasis added). 13 Id., Appx. 196 (note that the reference to the “authorized designee” for the Bankruptcy Court in the Chapter 11 

Case would have been a reference to Kurtzman Carson Consultants LLC (“KCC”), the claims and noticing agent in 

the above-captioned case, which, among other things, maintained the proof of claim register in the case for 

prepetition claims). 14 Id., Appx. 189 (emphasis added).

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On August 11, 2021, the Plan became effective. On August 11, 2021, Highland filed the 

Notice of Occurrence of Effective Date of Confirmed Fifth Amended Plan of Reorganization of 

Highland Capital Management, L.P. (the “Notice of Effective Date”),15 clearly disclosing that the 

“Effective Date” (as defined in the Plan) had occurred on August 11, 2021. 

Consistent with the Plan, the Notice of Effective Date disclosed in bold, capitalized letters, 

that all “administrative expense claims” were required to be filed no later than 45 days after the 

Effective Date (i.e., September 25, 2021): 

PLEASE TAKE FURTHER NOTICE that, except with respect to 

Administrative Expense Claims that are Professional Fee Claims or as otherwise 

set forth in the Plan, requests for payment of an Administrative Expense Claim must 

be Filed with the Bankruptcy Court no later than forty-five (45) days after the 

Effective Date (the “Administrative Expense Claims Bar Date”). HOLDERS OF 

ADMINISTRATIVE EXPENSE CLAIMS THAT ARE REQUIRED TO 

FILE AND SERVE A REQUEST FOR PAYMENT OF SUCH 

ADMINISTRATIVE EXPENSE CLAIMS BY THE ADMINISTRATIVE 

EXPENSE CLAIMS BAR DATE THAT DO NOT FILE AND SERVE SUCH 

A REQUEST BY THE ADMINISTRATIVE EXPENSE CLAIMS BAR 

DATE SHALL BE FOREVER BARRED, ESTOPPED, AND ENJOINED 

FROM ASSERTING SUCH ADMINISTRATIVE EXPENSE CLAIMS 

AGAINST THE DEBTOR OR THE REORGANIZED DEBTOR.

16 

Highland served the Notice of Effective Date via at least First-Class Mail on 

Plaintiff/DAF.17 It is undisputed that Plaintiff/DAF did not file an administrative expense claim 

with the Bankruptcy Court, nor did it serve one on the Reorganized Debtor by the bar date. 

However, on July 22, 2021, seven months after entry of the Confirmation Order (and prior 

to the Administrative Expense Claim Bar Date), Plaintiff commenced this Action against Highland 

15 Id., Exh. 7, Appx. 269-73. 16 Id., Appx. 271 (emphasis in original). 17Id., Exh. 8, Appx. 310. The court also notes that CLO Holdco’s counsel received electronic Notice of the Effective 

Date, id. at Appx. 278, as well as notice by First-Class Mail, id., at Appx. 282, and CLO Holdco itself received 

Notice of the Effective Date by First-Class Mail, id. at Appx. 312-313 at numerous addresses. The court takes 

judicial notice that the Plan itself was also served on CLO Holdco and its counsel. See DE #1630, in the main 

Highland Bankruptcy Case, at Exh. S, p.25 of 139, and at Exh. V, p. 1 of 3. 

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by filing an Original Complaint (the “Complaint”) in the District Court.18 It is undisputed that 

Plaintiff/DAF also never served the Complaint on Highland.19 

The Complaint alleged that Highland, under the direction of its new, independent CEO, 

James P. Seery, Jr.—appointed pursuant to a corporate governance agreement between Highland 

and the Official Committee of Unsecured Creditors (and approved by the Bankruptcy Court)—

violated the contractual and extra-contractual duties that Highland owed to Plaintiff/DAF as an 

alleged investor in the entity known as Multi Strat and that Plaintiff/DAF was harmed thereby.20 

As noted in the Introduction herein, Multi Strat was a vehicle that purchased and owned a pool of 

viaticals—that is, life insurance policies keyed to the lives of various individuals. Multi Strat paid 

the premiums on the policies, and when an insured person died, the life insurance money would 

be paid to the owner of the policy—in this case, Multi Strat. 

Highland’s alleged misconduct occurred during the spring and summer of 2020, i.e., after 

the Petition Date while Highland was a debtor-in-possession.21 The contracts allegedly breached 

were assumed by Highland pursuant to the Plan.22 

B. The Substance of the Complaint; More About “Multi Strat”

The Complaint sets forth three causes of action premised on conduct in which Highland 

allegedly engaged post-petition: (a) First Cause of Action—Highland’s alleged violation of the 

Investment Advisers Act of 1940;23 (b) Second Cause of Action—Highland’s alleged breach of 

18Id., Exh. 5, Appx. 248-59. 19 See 8/3/22 Transcript, at 28:2-11. 20DE # 32, Exh. 5, Appx. 252-58. 21Id., Appx. 251. 22Id., Exh. 4, Appx. 224-25; Exh. 6, Appx. 262, 264. 23 Although no statutory cite is given, the Plaintiff apparently refers to the Investment Advisers Act of 1940, codified 

at 15 U.S.C. § 80b-1 through 80b21, which is the primary source of regulation of investment advisers and is 

administered by the U.S. Securities and Exchange Commission. The court notes that the United States Supreme 

Court has held in Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 19 (1979) that there is not a private 

right of action for damages under the Investment Advisers Act. Specifically, an investor may seek to void an 

investment adviser contract (i.e., essentially allowing a suit for rescission or for an injunction against continued 

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fiduciary duty;24 and (c) Third Cause of Action—Highland’s alleged breach of contract.25 The 

various conduct of Highland is described as: (1) selling the viatical pool of Multi Strat at a 

distressed price (i.e., $35 million) when it was not in distress and there was allegedly no need for 

Multi Strat to sell; (2) concealing the information about the transaction from the Plaintiff; (3) 

failing to advise the Plaintiff of the opportunity to purchase the viatical pool—especially when it 

knew the Plaintiff had an interest in the pool and had the means of purchasing it for more cash 

than $35 million; (4) allegedly concealing the purpose behind the sale of the viatical pool and 

conflicts of interest; (5) allegedly causing the viatical pool to be sold in a manner that violated the 

rights of the Plaintiff as an investor in Multi Strat (e.g., by failing to conduct an auction, obtaining 

competitive bids and taking the pool to market); and (6) utilizing the sale proceeds for its own 

ends—namely, to enrich itself. 

The entity at the heart of the Complaint—Multi Strat—is what is known in the investment 

community as a pooled investment fund structured as a “mini master.” It actually consists of 

Highland Multi Strategy Credit Fund, L.P., a Delaware limited partnership (the “Master Fund”), 

and Highland Multi Strategy Credit Fund, Ltd., a Cayman Island exempted company (the “Feeder 

Fund”). The Master Fund and the Feeder Fund are collectively referred to as “Multi Strat.” 

Highland Multi Strategy Credit Fund GP, L.P., itself a Delaware limited partnership, is the general 

operation of the contract, and for restitution), but not seek actual monetary damages. That being said, it appears that 

the relief sought by Plaintiff for this cause of action is as follows: “Plaintiff seeks to declare the sale of the viaticals 

void because they were accomplished in violation of the Advisers Act” and “Plaintiff further seeks to declare the 

agreement(s) between Highland and Multistrat void because they were continued in violation of the Advisers Act.” 

Complaint, id. at Exh. 5, Appx. 254. 24 Here, the Plaintiff appears to invoke both the Investment Advisers Act as well as Texas law—clearly seeking 

monetary damages including punitive damages.

25Id., Exh. 5, Appx. 252-58. Here, the Plaintiff invokes the Third Amended and Restated Investment Management 

Agreement, effective November 1, 2013 (the “IMA”) between Highland and Multi Strat. 

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partner of Multi Strat, which is wholly owned by Highland Multi Strategy Credit GP, LLC, which 

is, in turn, wholly owned by Highland.26 

The equity ownership interests of the limited partners in Multi Strat are somewhat complex 

but, put simply, on a consolidated basis, Highland owns 58.7% of the limited partnership interests 

in Multi Strat and the entity known as CLO Holdco, Ltd. (“CLO Holdco”) owns 4.06% of the 

limited partnership interests. Notably, CLO Holdco is a subsidiary of Plaintiff/DAF, but, as 

noted earlier, it is undisputed that Plaintiff/DAF itself is not an investor or equity owner of any 

sort of Multi Strat.

27 

Also, notably, the only other owners of Multi Strat are: The Dugaboy Investment Trust 

(1.71%);28 Highland Capital Management Services, Inc. (35.10%), and Mark Okada (.43%).29 The 

Dugaboy interest is notable for the following reason: Dugaboy filed a proof of claim during the 

Highland Bankruptcy Case that, while vague, appears to have been based on the very same theories 

espoused by the Plaintiff/DAF in this Action. Specifically, it stated: 

The Dugaboy Investment Trust (“Claimant”), an investor in certain funds 

managed by the Debtor, including Highland Multi-Strategy Credit Fund, L.P. and 

Highland Multi-Strategy Credit Fund, Ltd., may have claims against the Debtor 

relating to the post-petition actions or inactions of the fund investment manager in 

managing these funds pursuant to Debtor’s Fourth Amended and Restated Limited 

Partnership Agreement and that certain Third Amended and Restated Investment 

Management Agreement by and between Highland Multi-Strategy Credit Fund, 

L.P., Highland Multi-Strategy Credit Fund, Ltd., and the Debtor, as amended from 

time to time. While the potential claims relate to the post-petition actions or 

inactions of the fund investment manager, Claimant is filing this claim to preserve 

26 Id. at Exh. 17, Appx. 592-93. The Master Fund’s governing document is known as the Fourth Amended and 

Restated Limited Partnership Agreement of Highland Multi Strategy Credit Fund, L.P., dated November 1, 2014 

(the “LPA”). The Feeder Fund’s governing document is known as the Amended and Restated Memorandum and 

Articles of Association of Highland Multi Strategy Credit Fund, Ltd., as adopted on November 1, 2014 (the 

“Articles”). Highland’s obligations as investment manager are set forth in a document known as the Third Amended 

and Restated Investment Management Agreement, by and among Highland Multi Strategy Credit Fund, Ltd., 

Highland Multi Strategy Credit Fund, L.P., and Highland Capital Management, L.P., dated November 1, 2013 (the 

“IMA”). 

27 Id. at Exh. 17, Appx. 592-93. 28 It is undisputed that Dugaboy is a family trust of former Highland CEO, James Dondero. 29 Id. at Exh. 17, Appx. 592-93. 

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all potential rights, claims, and causes of action it may have against the Debtor 

under these prepetition agreements relating to the investment manager’s actions or 

inactions in managing these funds.30

The Dugaboy proof of claim was signed and submitted by an individual named Grant Scott, 

the then-Trustee of Dugaboy. Grant Scott was also the then-Trustee of CLO Holdco, the 100% 

subsidiary of Plaintiff/DAF. This proof of claim was later withdrawn. 

Dugaboy also filed a District Court lawsuit against Highland (post-confirmation and preEffective Date, on June 23, 2021)31 raising these very same issues, which it later dismissed. 

 

III. LEGAL ANALYSIS

A. Jurisdiction and Legal Standards 

Bankruptcy subject matter jurisdiction exists with regard to this Action, pursuant to 28 

U.S.C. § 1334(b). The Action presents “arising in” or “arising under” core matters, pursuant to 28 

U.S.C. § 157(b)(2)(A) and (B)—as it involves claims that were asserted against a Chapter 11 

Debtor (before the effective date of its plan) and the application of sections 503 and 507 of the 

Bankruptcy Code. Moreover, the Action requires interpretation of the now-effective Plan of the 

Reorganized Debtor and application of section 1141(d)(1) of the Bankruptcy Code. Therefore, the 

Bankruptcy Court may enter final orders in this matter. Moreover, the District Court has referred 

this Action to the Bankruptcy Court. 

 The Reorganized Debtor’s Amended Motion to Dismiss argues grounds for dismissal, 

pursuant to FRCP 12(b)(1) (i.e., lack of subject matter jurisdiction—due to lack of standing of the 

Plaintiff) and FRCP 12(b)6) (i.e., failure to state a claim upon which relief may be granted). 

30 Id. at Exh. 1, Appx. 6. 31 Id. at Exh. 2, Appx, 8-18.

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With regard to the Rule 12(b)(1) argument, the applicable legal standards are set forth in 

detail in part III.E. of this Opinion. With regard to Rule 12(b)(6), to survive a motion to dismiss 

pursuant to Rule 12(b)(6), a plaintiff must plead “enough facts to state a claim to relief that is 

plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). See also Ashcroft v. 

Iqbal, 556 U.S. 662, 663 (2009). Dismissal is proper under Rule 12(b)(6) when, taking the facts 

alleged in the complaint as true, it appears that the plaintiff “cannot prove any set of facts that 

would entitle it to the relief it seeks.” C.C. Port, Ltd. v. Davis-Penn Mortg. Co., 61 F.3d 288, 289 

(5th Cir. 1995). As set forth below, here, more than anything else, Plaintiff/DAF’s problem is that 

its claims are barred for failure to proceed according to the Plan requirements and because of 

section 1141(d)(1)(A) of the Bankruptcy Code. As earlier noted, the court may take judicial notice 

of matters of public record when considering a motion to dismiss for failure to state a claim. See, 

e.g., T.L. Dallas (Special Risks), Ltd. v. Elton Porter Marine Ins., No. 4:07–cv–0419, 2008 WL 

7627807, at *2 (S.D. Tex. 2008); Cade v. Henderson, No. CIV A 01-943, 2001 WL 1012251, at 

*2 (E.D. La. Aug. 31, 2001). 

B. Plaintiff’s Claims Asserted in the Action, if Valid, Would Constitute “Administrative 

Expense Claims” 

Starting with the basics, an “Administrative Expense Claim” is not merely a concept 

defined in the Debtor’s Plan. It is a significant concept in the Bankruptcy Code. Section 507(a)(2) 

of the Bankruptcy Code establishes that administrative expenses incurred in bankruptcy are to be 

given priority in distribution such that they are generally paid in full before other unsecured nonpriority claims. See 11 U.S.C. § 507(a)(2). These administrative expenses include “the actual, 

necessary costs and expenses of preserving the estate ....” 11 U.S.C. § 503(b)(1)(A). To qualify 

as an “‘actual and necessary cost’ under section 503(b)(1)(A), a claim against the estate must have 

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arisen post-petition and as a result of actions taken by the trustee [or debtor-in-possession] that 

benefited the estate.” See Nabors Offshore Corp. v. Whistler Energy II, L.L.C. (In re Whistler 

Energy II, L.L.C.), 931 F.3d 432, 441 (5th Cir. 2019) (citing Total Minatome Corp. v. Jack/Wade 

Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d 385, 387 (5th Cir. 2001)). 

Notwithstanding the “benefited the estate” concept that has been articulated in case law, an 

exception was created by the United States Supreme Court many years ago (in the context of a 

“Chapter XI arrangement” case under the former Bankruptcy Act of 1898), in a situation in which 

damages were inflicted on innocent third parties through a receiver's (equivalent of a Chapter 11 

trustee or debtor-in-possession today) operation of the debtor's estate. See Reading Co. v. Brown, 

391 U.S. 471, 478-79 (1968). 

In Reading, a building that was being operated by the bankruptcy receiver in a 

reorganization case was destroyed by a fire, and the fire spread to adjoining premises, destroying 

real and personal property of claimant, Reading. Reading argued that the fire was caused by the 

negligence of the receiver and one of his workmen, in the course of operating the debtor's estate 

during a bankruptcy reorganization. See id. at 473–74. The Supreme Court—in grappling with 

what type of a claim Reading might have—held that it would be unfair to force the fire victim to 

share equally with the existing creditors and, thus, granted administrative priority to that claimant. 

See id. at 478 (framing the question as “whether the fire claimants should be subordinated to, 

should share equally with, or should collect ahead of those creditors for whose benefit the 

continued operation of the business ... was allowed”). 

The “Reading exception,” as it has become known, has withstood the test of time and has 

been routinely applied after the enactment of the modern Bankruptcy Code. See, e.g., Jack/Wade 

Drilling, 258 F.3d at 388 (“The Reading exception has survived Congressional amendments to the 

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bankruptcy code and been recognized and applied by nearly every Court of Appeals in the 

nation.”); Texas v. Lowe (In re H.L.S. Energy Co.), 151 F.3d 434, 437 (5th Cir. 1998) (same); In 

re Al Copeland Enters., Inc., 991 F.2d 233, 238-39 (5th Cir. 1993) (same). The Reading case has 

been interpreted broadly to include not just torts, but other negligent or intentional acts committed 

by a debtor-in-possession as giving rise to administrative expense claims. See Al Copeland, 991 

F.2d at 239 (“[T]hose injured during ... administration of an estate are entitled to an administrative 

priority [claim] regardless of whether their injury was caused by a tort or other wrongdoing.”); In 

re Charlesbank Laundry, Inc., 755 F.2d 200, 202 (1st Cir. 1985) (“If fairness dictates that a tort 

claim based on negligence should be paid ahead of pre-reorganization claims, then, a fortiori, an 

intentional action which violates the law and damages others should be so treated”), accord 4 

COLLIERS ON BANKRUPTCY ¶ 503.06[3][c][i] (“Courts have found Reading directly 

applicable to victims of postpetition torts committed by a debtor in possession or trustee. Courts 

have also applied the doctrine to a variety of other postpetition claims”) (citing cases). 

Accordingly, based on the above authority, the claims of Plaintiff, if meritorious, would 

fall into the category of administrative expense claims. Plaintiff specifically alleges that it was 

injured by Highland causing the sale of Multi Strat’s assets during the middle of 2020—after the 

Petition Date, before the Effective Date, and while Highland was a debtor-in-possession—in 

violation of Highland’s alleged contractual and extra-contractual duties owed to Plaintiff. 

Plaintiff’s claims, therefore, would constitute “administrative expense claims” against Highland.

Whistler Energy, 931 F.3d at 443 (discussing circumstances when a party might be entitled to an 

administrative expense claim, regardless of whether there is an assumed or rejected prepetition 

contract, and even when “benefit to the estate” may be less than “readily calculable”; noting 

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sometimes such a claim might simply result as a cost incidental to a debtor’s business operations) 

(citing Reading, 391 U.S. 471). 

C. Requests for Allowance of “Administrative Expense Claims” Were Required to be Filed in 

the Bankruptcy Court by September 25, 2021

As set forth earlier herein, Article II of the Plan dictated the procedures for the filing and 

allowance of “administrative expense claims.” Pursuant to Article II of the Plan, parties seeking 

“administrative expense claims” were required to (i) file those claims with the bankruptcy court 

specifically (not the District Court); and (ii) serve those claims on Highland no later than the 

Administrative Expense Claim Bar Date (i.e., September 25, 2021).32 The Plan and Notice of 

Effective Date make clear that any administrative expense claim not filed with the Bankruptcy 

Court by the Administrative Expense Claim Bar Date would be time-barred. Section 1141(a) 

provides that the provisions of a confirmed plan bind the debtor and any creditor. Eubanks v. Fed. 

Deposit Ins. Corp., 977 F.2d 166, 170–71 (5th Cir. 1992).33 

This court noted in the case of In re Taco Bueno Rests., Inc., 606 B.R. 289, 302-303 (Bankr. 

N.D. Tex. 2019), in addressing the importance of the concept of “timeliness” with regard to 

administrative expense claims, that debtors and reorganized debtors have a keen interest in 

obtaining finality sooner rather than later with regard to administrative expense claims. The reason 

debtors have an interest in such finality derives from the special treatment afforded to 

administrative expense claims. An administrative expense claimant is generally entitled to cash in 

full on the effective date of a plan (or as soon as the claim is allowed thereafter by the bankruptcy 

32 See Exh. 4, Appx. 189, 196, 203-04. 33 See also Hall Fin. Group, Inc., v. DP Partners, L.P, 106 F.3d 667, 672, n.19 (5th Cir. 1997) (bankruptcy judges 

have, for some time, been accorded discretion in setting administrative-claim bar-dates) (citing 3 Collier on 

Bankruptcy ¶ 503.1, at 503–4 n. 2c (Lawrence P. King ed., 15th ed. 1994) (noting that the Bankruptcy Reform Act 

of 1994 sets no time limit for filing administrative claims, and further noting that because nothing in the Bankruptcy 

Rules or Code sets deadlines for filing administrative claims, bankruptcy judges “may set such deadlines on a case 

by case basis”). 

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court). It is a very important event in the bankruptcy case for a reorganized debtor to have a 

deadline for administrative expense claims because administrative claims can pose significant 

feasibility issues for plans. The reorganized debtor needs to be able to ascertain an amount such 

entities must have in cash due to pay administrative expenses. 

There is ample case law that stresses the importance of requiring potential administrative 

expense claimants to follow the mandates of Bankruptcy Code section 503(b) and file a request 

for allowance with the bankruptcy court. See Taco Bueno, 606 B.R. 289 (concluding that utilizing 

a “Proof of Claim” form—i.e., Official Form 410—to make a request for payment of an 

administrative expense, is insufficient to satisfy the requirement under Bankruptcy Code section 

503(a) to timely file and serve a request for payment of an administrative claim by an 

administrative claims bar date; requests for administrative claims have different procedures—

requiring the filing of an application requesting allowance and payment of an administrativeexpense claim on the bankruptcy court's docket).34 See also In re Maxus Energy Corp., 639 B.R. 

51, 64 (Bankr. D. Del. 2022) (claim barred because it was not filed by administrative claim bar 

date and “a claims bar date ‘operates as a federally created statute of limitations, after which the 

claimant loses all of [its] rights to bring an action against the debtor”) (citations omitted); 

Houbigant, Inc. v. ACB Mercantile (In re Houbigant, Inc.), 190 B.R. 185, 188 (Bankr. S.D.N.Y. 

34 This court noted in Taco Bueno that Congress made the rules and burdens for an administrative expense claim 

very different from those for a proof of claim. Section 503 governs an administrative expense claim. Under § 503, 

the burden at the beginning is on the claimant to show reasonableness, necessity, and benefit to the estate. The 

Bankruptcy Code and the Bankruptcy Rules put a claimant in a completely different posture for an administrative 

expense claim compared to a proof of claim. Requiring that a § 503 administrative expense claim be asserted in an 

application, among other things, ensures that the bankruptcy court will have an opportunity to pass judgment on the 

administrative expense and prevent any unreasonable, unnecessary, and non-beneficial claims from being charged to 

the estate. Creditors ultimately bear the burden of persuasion and production to establish that their claims are, in 

fact, an administrative expense. Allowing creditors to satisfy their burden of production by burying an 

administrative expense in a proof of claim circumvents their statutory burdens and forces the trustee or some other 

interested party to affirmatively raise this administrative expense as objectionable—directly contradicting § 503(b)'s 

express requirement that a claimant, in order to have an administrative expense claim allowed, must make a request 

and give notice to parties in the case and obtain a bankruptcy court hearing. Taco Bueno, 606 B.R. at 302.

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1995) (stressing the importance of filing claims timely in the bankruptcy court before the bar date, 

as opposed to in district court litigation).35

Here, Plaintiff’s alleged causes of action are administrative expense claims and were 

required to be filed with this Bankruptcy Court by the Administrative Expense Claim Bar Date. 

Plaintiff knowingly chose not to file an administrative claim. The filing of the Complaint 

constituted an improper means to pursue a post-petition claim against a chapter 11 debtor. To 

the extent it may have been a defensible strategy at the time the Action was filed (see discussion

in Part III.E below for more on this thought), it certainly became wholly indefensible after the Plan 

went effective. The Plaintiff/DAF received notice and had every reason to know, on or after 

August 11, 2021, that it had one avenue to pursue the claims asserted in the Action—through the 

mechanism of filing an Administrative Expense Claim in the Bankruptcy Court on or before 

September 25, 2021. However, it chose not to go that route. As a result, the Complaint must be 

dismissed. 

Plaintiff/DAF makes a confusing argument that “administrative priority claims” are not 

subject to the Plan because the Plan uses the term “Administrative Expense Claim.”36 Plaintiff 

attempts to create confusion where none exists. As noted earlier, the Plan defines “Administrative 

Expense Claim,” in relevant part, as a: 

Claim for costs and expenses of administration of the Chapter 11 Case ... pursuant 

to sections 503(b), 507(a)(2), 507(b) ... including, without limitation, (a) the actual 

and necessary costs and expense incurred after the Petition Date and through the 

Effective Date of preserving the Estate and operating the business of the Debtor 

....37

35 See also NL Indus., Inc. v. GHR Energy Corp., 940 F.2d 957, 966 (5th Cir. 1991) (case involved a post-petition 

contract between a chapter 11 debtor and an oil field service vendor that went awry and vendor filed a federal 

district court lawsuit during the case for breach of contract and torts; while the lawsuit went forward in the Federal 

District Court, the Fifth Circuit opinion contains discussion stressing the need for the vendor to have filed a request 

for administrative expense claim in the bankruptcy court and giving that as a reason for not allowing the vendor to 

amend its pleading to assert damages not provided for in the debtor’s confirmed plan).

36See DE # 30 (Plaintiff’s Response), at 3-4. 37 DE # 21, Exh. 4, Appx. 189. 

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There is no “distinction” in the Plan between an “administrative priority claim” and an 

“Administrative Expense Claim.” Both would encompass claims arising from the “actual and 

necessary costs and expense” of the debtor-in-possession’s post-petition management. Highland’s 

naming convention did not somehow change the substantive application of the Bankruptcy Code 

or the nature of an administrative expense/priority claim. 

D. The Unsupportability of Plaintiff/DAF’s Eleventh-Hour Request (Through Their Response 

to the Motion to Dismiss Their Action) for the Bankruptcy Court to Excuse Their 

“Technical Non-Compliance” and Deem Complaint to Have Been a Timely Request for 

Allowance of an Administrative Expense Claim 

Plaintiff/DAF argues that the Bankruptcy Court should excuse its “technical” noncompliance and treat its Complaint as a “request for an order permitting a late claim or treating the 

filing of this action as a timely Administrative Expense Claim.”38 While Plaintiff minimizes the 

significance of its failure to comply with the Plan, Confirmation Order, and standard bankruptcy 

protocols—by referring to its failure to file a request for allowance of an administrative expense 

claim in the Bankruptcy Court as “technical” non-compliance—its proposal that the Complaint 

should be deemed such a “request” is procedurally and legally improper. The relief must be sought 

by a separate motion and include evidence of “cause” under section 503(a) of the Bankruptcy Code 

and possibly also “excusable neglect.” Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship,

507 U.S. 380, 394 (1993).39 Here, there is no evidence supporting “cause” (or excusable neglect, 

for that matter), just the following undisputed facts: 

38 DE # 30 (Plaintiff’s Response), at p.5. 39 The Pioneer case dealt with late-filed proofs of claim, for prepetition claims, not requests for allowance of postpetition administrative expense claims. Thus, it is not entirely clear that it governs here. Perhaps, only section 

503(a) “cause” is the standard. 

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• The Plan was confirmed on February 22, 2021 and included clear disclosures about the 

Administrative Expense Claim Bar Date. 

• At a hearing on June 25, 2021, shortly before the Complaint was filed—in a hearing on a 

different matter, in which a different post-petition lawsuit filed in the District Court was being 

discussed (and the Bankruptcy Court expressed concern about it)—Plaintiff’s counsel indicated to 

the Bankruptcy Court that he was receiving advice from bankruptcy counsel on whether postpetition administrative expense claims, like those asserted in the Complaint, could be filed in 

courts other than the Bankruptcy Court.40 

• On July 22, 2021, Plaintiff’s counsel filed (but did not serve) the Complaint—i.e., seven 

months after the Confirmation Order and two months before the Administrative Expense Claim 

Bar Date. 

• On or about August 11, 2021, Plaintiff/DAF was served with notice of the Administrative 

Expense Claim Bar Date. 

• Plaintiff/DAF did not file an administrative expense claim with this Court by the 

Administrative Expense Claim Bar Date (i.e., September 25, 2021). 

• On November 23, 2021, the Bankruptcy Court told Plaintiff its arguments regarding the 

Plan injunction—similar to some of the same arguments it is making now—were mistaken. At the 

same hearing, Highland told Plaintiff/DAF, on the record, it should have filed an administrative 

expense claim in this court.41

40 DE # 32, Exh. 21, Appx. 751-53. 41 DE # 32, Exh. 22, Appx. 777 (lines 17) – Appx. 778 (line 18); Appx. 781 (line 10) – 782 (line 17); Appx. 783 

(line 5-14); Appx. 786 (line 17-23).

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• Between the November 2021 hearing and the filing of the Motion (more than eight 

months), Plaintiff/DAF never moved this Court to allow its claim as late filed or took any other 

action to protect its rights. 

• Only after the Complaint was referred to this Court and Highland filed its Amended Motion 

to Dismiss did Plaintiff ask this Court to consider the Complaint as “a late claim” in the Response. 

• Plaintiff has not submitted any evidence of “cause” as required by Section 503(a), nor 

“excusable neglect” under Pioneer (to the extent it is applicable). 

To be clear, Plaintiff argues that it should be held to have asserted a timely request for 

administrative expense claim because (a) its Complaint was filed (but not served) before the 

Administrative Expense Claim Bar Date; (b) Highland (while not formally served) received 

“prompt” notice and was not prejudiced; (c) enforcing the Administrative Expense Claims Bar 

Date would raise concerns regarding Constitutional “due process and taking;” and (d) the “best 

interests of creditors test” in Section 1129 favors Plaintiff.42 Plaintiff also blames its failure to 

comply on the Plan itself, arguing that a Plan injunction therein prevented Plaintiff from fulfilling 

its obligations. Each argument misses the point. 

First, it is irrelevant that the Complaint was filed before the Administrative Expense Claim 

Bar Date. The Bankruptcy Code,43 the Plan,44 and applicable case law require the filing of 

administrative expense claims—like those asserted in the Complaint—on the bankruptcy court’s 

docket, not on another court’s, for a claim to be deemed timely filed. See, e.g., Taco Bueno, 606 

B.R. at 302-03; Houbigant, 190 B.R. at 188.14. 

42 DE # 30 (Plaintiff’s Response), at p. 5. 43 11 U.S.C. § 503(a). 44 DE # 21, Exh. 4, Appx. 125, 203-04. 

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Moreover, any suggestion that the Complaint is an “informal proof of claim” is rejected. 

Even assuming this concept might be applicable in the context of requests for allowance of 

administrative expense claims, an “informal proof of claim” must be filed in the bankruptcy court 

and the equities must favor the claimant. In re Opus Mgmt. Grp. Jackson LLC, 2017 Bankr. LEXIS 

555, at * 29-30 (Bankr. S.D. Miss. Feb. 27, 2017) (“The Court is unaware of any precedent that 

would allow it to treat the pre-bar date filing in one case as an informal proof of claim in another 

case.”); In re Murchison, 85 B.R. 27, 41 (Bankr. N.D. Tex. 1987) (“Debtor’s knowledge of the 

claim has never been held sufficient to constitute an informal proof of claim ... These 

communications cannot constitute a proof of claim because they were not filed with the Court.”). 

 Additionally, Plaintiff’s argument regarding prejudice is disingenuous. Plaintiff filed the 

Complaint but decided not to serve it. Plaintiff cannot rely on Highland’s purported diligence in 

learning of the Complaint to justify its misconduct. The bar date exists to avoid prejudice to 

Highland, not Plaintiff. Moreover, other creditors in a bankruptcy case are entitled to notice that 

a party is asserting an administrative expense claim. Allowance of such a claim could greatly 

impact their ultimate recovery. Creditors (not just the debtor) may want to object and be heard. 

That’s why section 503(b) of the Bankruptcy Code contemplates “notice and a hearing” in the 

bankruptcy court when a request is filed. 

Additionally, no due process or taking concerns arise if Plaintiff is required to abide by 

court- and statutorily created deadlines, and Plaintiff cites to nothing to support this position. 

Additionally, the “best interests of creditors” test applies to plan confirmation and is 

irrelevant in this context. Regardless, the test would weigh in Highland’s favor. Creditors want 

Highland’s assets monetized and proceeds distributed sooner rather than later. Plaintiff’s efforts to 

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“backdoor” an administrative expense claim by asserting it in another forum delays that process, 

increases expenses, and directly contradicts the policy behind bar dates. 

Finally, Plaintiff’s argument that it was confused by the Plan discharge or injunction 

language is not credible. The provisions are typical and unambiguous; they prohibited Plaintiff 

from pursuing claims in the District Court. Numerous other claimants—including some of Mr. 

Dondero’s other affiliates—complied with the bar date. Plaintiff is not entitled to special treatment 

because it, and it alone, found the Plan confusing. 

E. The Plaintiff’s Unspoken, But Not-So-Subtle Strategy Play

Ultimately, the Plaintiff’s filing of the Complaint in the District Court was a strategic move 

that did not work and now it binds the Plaintiff. 

The Plaintiff’s strategy—rather obvious to this Court—was clever, to be sure, but it all 

hinged on the prospect of the Debtor’s Plan being reversed on appeal, which did not ultimately 

happen.45 Specifically, thinking through the Plaintiff’s legal strategy, the court believes the 

Plaintiff’s legal team likely thought through this as follows. First, there was an automatic stay 

conundrum. Specifically, filing the Action might have at first seemed risky, because the automatic 

stay was still in place at the time the Plaintiff filed its Complaint (because it was filed during the 

post-confirmation but pre-Effective Date time frame).46 But, the Plaintiff was pursuing postpetition claims, so the filing of the Action arguably was not precluded by the automatic stay. 11 

U.S.C. § 362(a)(1).47 However, even with that automatic stay conundrum potentially resolved, the 

Plan and Confirmation Order became an obvious obstacle. As discussed here ad nauseum, the 

45 The Fifth Circuit affirmed in substantial part the Plan on September 2, 2022, in Action No. 21-10449. 46 See also DE # 21, Exh. 4, Appx. 167 (Art. IX.G.). 47 The inapplicability of the automatic stay was not a “given.” The relief sought in the Plaintiff/DAF's Complaint 

asked for, among other things, disgorgement of all of Highland’s allegedly ill-gotten gains, and also voiding of 

certain agreements of Highland. This sounds potentially like exercising or an attempt to exercise control over 

property of the estate. 11 U.S.C. § 362(a)(3).

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Plan required a post-petition claim like this to be filed as a Request for Allowance of 

Administrative Expense Claim with the Bankruptcy Court and, moreover, the Plan discharge and 

injunction language precluded an action such as the Plaintiff’s from being filed in another court. 

Plaintiff was no doubt thinking that it had found the perfect “workaround”—file the Action in the 

District Court before the Plan went effective, seek a stay of the Action for a bit,48 and hope that, 

during the stay of the Action, the Plan got reversed on appeal (which would moot the 

Administrative Claim Bar Date and Plan Injunction). In the event of a reversal, the Plaintiff would 

seek to un-stay the Action and go forward in the District Court hopefully—unless the District 

Court decided to refer the Action at that point to the Bankruptcy Court (on the basis that it was at 

least related to the Bankruptcy Case; maybe Plaintiff could successfully fight this). 

Here, as the Plaintiff’s legal strategy started to unravel, on July 5, 2022, in its Response to 

the Motion to Dismiss, the Plaintiff asked the Bankruptcy Court for the first time to treat its 

Complaint as a timely request for allowance of an administrative expense claim (a year after it was 

filed, and 10 months after the deadline for filing it in the Bankruptcy Court). This is not “cause” 

as contemplated by Section 503(a). This is nothing more than a belated and unjustified “Plan B” 

after the Plaintiff’s clever workaround did not pan out as hoped. Houbigant, 190 B.R. at 187 

(“[Claimant] concedes that it failed to [file its claim] to avoid the claims allowance process ... 

[Claimant] cannot have it both ways. Equity mandates that it be bound by its tactical decisions.”). 

F. The Standing Problem. 

Highland has also argued that the Action must be dismissed because Plaintiff lacks both 

prudential and constitutional standing to assert the claims that it has asserted in the Action. 

48 DE # 32, Exh. 9, Appx. 451.

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As has been extensively set forth herein, the Complaint alleges that Plaintiff/DAF was 

injured because Highland mismanaged the sale of certain of Multi Strat’s assets and, in doing so, 

breached its contractual and extra-contractual duties to Plaintiff/DAF as an investor in Multi Strat. 

But Plaintiff/DAF is not a limited partner or investor in Multi Strat (Plaintiff/DAF agrees it is not). 

Rather, Plaintiff/DAF’s 100% subsidiary CLO Holdco is. Therefore, Highland argues 

Plaintiff/DAF lacks standing to assert the claims in the Complaint. While Plaintiff/DAF arguably 

could have constitutional standing as the parent of CLO Holdco (a Multi Strat investor), 

Plaintiff/DAF would have had to plead its relationship to CLO Holdco, that CLO Holdco was 

injured, and that the injury to CLO Holdco caused injury to Plaintiff/DAF. See BCC Merch. 

Solutions, Inc. v. Jet Pay, LLC, 129 F.Supp.3d 440, 449-50 (N.D. Tex. 2015) (finding plaintiff 

parent company had constitutional standing when it pled injury it suffered arising from breach of 

contract to which its subsidiary was a counterparty). Plaintiff/DAF, however, has not done this. 

Highland also argues that Plaintiff/DAF lacks prudential standing because it is not the “real 

party in interest” as required by Rule 17(a) of the FRCP, made applicable by Rule 7017 of the 

FRBP. Prudential standing is a “‘fundamental restriction on [federal judicial] authority” and 

requires ‘a litigant [to] assert his or her own legal rights... and []not rest a claim to relief on the 

legal rights or interests of third parties.’” Id. at 450 (citations omitted). Prudential standing is a 

separate requirement from constitutional standing, and, if a plaintiff lacks prudential standing, the 

action must be dismissed regardless of whether the plaintiff has constitutional standing. Id. This 

prudential standing requirement is embodied in Rule 17(a) of the FRCP, which mandates that a 

claim be brought by the “real party in interest,” i.e., the party “with the right to sue under ... the 

controlling state or federal substantive laws.” Id. at 450, 453. Here, Plaintiff/DAF is not an investor 

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in Multi Strat and has no right to assert the actual investors’ contractual or other rights under 

applicable substantive law.49 

That Plaintiff/DAF is the parent of CLO Holdco, a Multi Strat investor, changes nothing. 

A parent cannot assert the contractual rights of its subsidiaries or pierce its own corporate veil to 

do so. BCC Merch., 129 F. Supp. 3d at 460 (“[W]hile BCC may have Article III standing, the 

Court finds that it lacks prudential standing and is not the real party in interest entitled to enforce 

the ISO Agreement, which BCC’s subsidiary, BankCard, undisputedly entered into alone.”). For 

the foregoing reasons, Plaintiff/DAF is not a “real party in interest” as required by Rule 17(a) and 

lacks prudential standing to assert the claims in the Complaint. 

 Plaintiff/DAF argues that it should be given leave to amend its Complaint to clarify that it 

is suing derivatively on behalf of CLO Holdco and/or to substitute in CLO Holdco as party in 

interest. The Plaintiff/DAF submits that Rule 7017 of the FRBP requires an opportunity to join a 

49 See Carroll v. JPMorgan Chase Bank, 575 Fed. Appx. 260, 260-61 (5th Cir. 2014) (finding plaintiff lacked 

standing and was not the “real party in interest” when it had no right to sue under contract); Farrell Constr. Co. v. 

Jefferson Parish, 896 F.2d 136, 140 (5th Cir. 1990) (finding plaintiff was not a “real party in interest” when it was 

neither a party to the contract nor a third party beneficiary); BCC Merch., 129 F.Supp.3d at 460 (holding plaintiff 

was not a “real party in interest” and lacked prudential standing when it sought to assert the contract rights of its 

wholly-owned subsidiary); see also Hillside Metro Assocs., LLC v. JPMorgan Chase Bank, 747 F.3d 44, 48-49 (2d 

Cir. 2014), cert denied 2015 U.S. LEXIS 1370 (U.S. Feb. 23, 2015) (applying federal common law and holding: 

(“We conclude that Hillside does not have prudential standing in this case because it cannot enforce the terms of the 

[contract], as to which it is neither a party nor a third-party beneficiary, but the enforcement of which is a necessary 

component of its claim”); Williams v. Bd. of Educ. of Chicago, 506 Fed. Appx. 517, 520 (7th Cir. 2013) (“Neither 

situation describes the federal lawsuit filed by Williams, whose indefinite, inchoate claims arise entirely from a 

dispute between two business entities whose contracts granted him no direct or incidental benefit and thus leave him 

without standing to bring these claims); Pelletier v. Rodriguez, 2021 U.S. Dist. LEXIS 131898, at *13 (D. Nev. July 

15, 2021) (“[B]ecause there is no given reason that Clover Valley Ranch LLC could not pursue a breach of contract 

claim in its own name, the Court declines to confer prudential standing on Plaintiff to bring this claim on behalf of a 

third-party.”); Cumming v. Felder, 2018 U.S. Dist. LEXIS 82081, at *5 (D. Conn. May 16, 2018) (“[A]n individual 

who is neither a party to an agreement nor an intended beneficiary of the agreement lacks prudential standing to sue 

under the agreement”) (citing cases); Alexander v. DLJ Mortg. Cap., Inc., 2016 U.S. Dist. LEXIS 198193, at * 8-14 

(S.D. Miss. Jul. 5, 2016) (finding non-party to a contract lacked standing under FRCP 17(a) to bring breach of 

contract claims); Henderson v. Benchmark Strategy, LLC, 2011 U.S. Dist. LEXIS 90988, at *10-11 (D. Colo. Aug. 

15, 2011) (“Mr. Henderson is not a party to the Consulting Agreement and is not the real party in interest to assert 

the rights (if any) of Henderson LLP.”); Browne v. Robb, 583 A.2d 949, 954-55 (Del. 1990) (applying Delaware law 

and finding plaintiff lacked standing to assert breach of a contract to which it was neither a party nor an intended 

third-party beneficiary) .

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real party in interest in such circumstances as these. Specifically, Rule 7017 incorporates FRCP 

17(a)(3), which provides: 

The court may not dismiss an action for failure to prosecute in the name of the real 

party in interest until, after an objection, a reasonable time has been allowed for the 

real party in interest to ratify, join, or be substituted into the action. After 

ratification, joinder, or substitution, the action proceeds as if it had been originally 

commenced by the real party in interest. 

However, because the administrative expense claims asserted in the Compliant are timebarred, granting Plaintiff/DAF leave to amend its Complaint and substitute in CLO Holdco would 

be futile. See, e.g., Stripling v. Jordan Prod. Co., 234 F.3d 863, (5th Cir. 2000) (finding 

amendment “futile” when the “amendment complaint would fail to state a claim upon which relief 

could be granted.”). CLO Holdco would have the same problems that Plaintiff/DAF has—it didn’t 

comply with the Plan and Confirmation Order and timely file an administrative expense claim in 

the Bankruptcy Court and serve it on the Debtor by September 25, 2021. 

IV. CONCLUSION

As this court explained in its Taco Bueno50 decision, the requirement of filing a request for 

allowance of an administrative expense claim in the bankruptcy court, and the act of 

seeking/setting a bar date in connection therewith, are, collectively, a big deal. The concept of 

setting an administrative expense claim bar date is not just about protecting a debtor. It is about 

protecting general unsecured creditors, too—because a large administrative expense claim can 

greatly impact the general unsecured creditors’ share of the bankruptcy pie. That’s why a request 

for allowance of an administrative expense claim must be filed on the bankruptcy court’s docket 

and determined by the bankruptcy court after notice and a hearing. And that’s why any party-ininterest can object to the claim. But, to be clear, the Bankruptcy Code and Rules do not specifically 

50 Taco Bueno, 606 B.R. 289. 

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set the deadline. See 11 U.S.C. § 503. Rather, a debtor typically asks for one to be set or provides 

for one in its plan. That’s what Highland did here. The deadline can be extended for cause under 

section 503(a). The Plaintiff/DAF never filed any motion seeking an extension here arguing 

“cause.” It only asks for an extension now—almost a year after the noticed deadline—and now 

that it’s clear that its District Court Action was improper. The Plaintiff/DAF’s “work-around” 

legal strategy here cannot be condoned. 

Accordingly, it is 

ORDERED that the Motion to Dismiss is GRANTED as to all causes of action asserted 

and the Complaint is dismissed in its entirety with prejudice. 

###END OF MEMORANDUM OPINION AND ORDER### 

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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., ) August 3, 2022 

 ) 2:30 p.m. Docket 

 Reorganized Debtor. ) 

 ) 

 ) 

CHARITABLE DAF FUND, L.P., ) Adversary Proceeding 22-3052-sgj

 ) 

 Plaintiff, ) 

 ) MOTION TO DISMISS ADVERSARY 

v. ) PROCEEDING FILED BY DEFENDANT 

 ) HIGHLAND CAPITAL MANAGEMENT, 

HIGHLAND CAPITAL ) LP [19] 

MANAGEMENT, L.P., ) 

 ) 

 Defendant. ) 

 ) 

TRANSCRIPT OF PROCEEDINGS 

BEFORE THE HONORABLE STACEY G.C. JERNIGAN, 

UNITED STATES BANKRUPTCY JUDGE. 

APPEARANCES: 

For the Plaintiff: Jonathan E. Bridges 

 SBAITI & COMPANY, PLLC 

 JP Morgan Chase Tower 

 2200 Ross Avenue, Suite 4900 W 

 Dallas, TX 75201 

 (214) 432-2899 

For the Defendant: Gregory V. Demo 

 PACHULSKI STANG ZIEHL & JONES, LLP

 780 Third Avenue, 34th Floor 

 New York, NY 10017-2024 

 (212) 561-7700 

For the Defendant: Zachery Z. Annable 

 HAYWARD, PLLC 

 10501 N. Central Expressway, 

 Suite 106 

 Dallas, TX 75231 

 (972) 755-7108 

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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 - AUGUST 3, 2022 - 2:37 P.M. 

 THE COURT: 22-3052. This is a motion to dismiss 

adversary proceeding. For the Movant Highland, who do we have 

appearing? 

 MR. DEMO: Your Honor, Greg Demo; Pachulski Stang 

Ziehl & Jones; on behalf of Highland. Zachery Annable from 

the Hayward firm is here as well. And we have Jim Seery. 

 THE COURT: Okay. Thank you. 

 All right. For Plaintiff/Respondent Charitable DAF, who 

do we have appearing? 

 MR. BRIDGES: Jonathan Bridges here, Your Honor. 

 THE COURT: All right. Well, I've got the pleadings 

here in front of me, and I saw an exhibit list of Movant/ 

Debtor, but I think the exhibits were just all of the 

attachments to the amended motion to dismiss. Is that 

correct? 

 MR. DEMO: That's -- 

 THE COURT: Or the appendix, I should say? 

 MR. DEMO: That is absolutely correct. 

 THE COURT: Okay. All right. Well, I'll hear 

Highland's argument. 

 MR. DEMO: And for the exhibits, we did have a 

discussion with opposing counsel, counsel for the DAF. 

Exhibit 17 is Mr. Seery's declaration. We filed the motion to 

dismiss under both 12(b)(1) and 12(b)(6), and so Mr. Seery's 

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declaration we would like to formally enter into evidence 

because that goes to what we believe is Plaintiff's lack of 

standing and thus this Court's lack of jurisdiction. And we 

do believe that extrinsic evidence is appropriate for that. 

 With respect to Exhibits 1 through 13 and then Exhibits 21 

and 22, those are all documents that were filed on this 

Court's docket and they consist of really three buckets: 

either complaints or orders, the plan, and then transcripts. 

All of those are on this Court's docket. And we would ask 

your Court to take judicial notice of those. And I know that 

Mr. Bridges may have some issues with that, but we do believe 

that's appropriate for a 12(b)(6) motion. 

 THE COURT: All right. So you mentioned 17, the 

Seery Declaration. 1 through 13, -- 

 MR. DEMO: Yes, Your Honor. 

 THE COURT: 1 through 13, and 21 and 22. Or did I 

mishear? 

 MR. DEMO: Yes. No, that's exactly right, Your 

Honor. 

 THE COURT: So that's the universe of what you're 

asking the Court to consider? You're not asking the Court to 

consider 14, 15, and 18 through 20? I don't have them in 

front of me to -- 

 MR. DEMO: 14 -- we are not asking Your Honor to 

consider 14, 15, 16, 18, 19, and 20. 

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 THE COURT: Okay. All right. Mr. Bridges, what say 

you about this? 

 MR. BRIDGES: Thank you, Your Honor. Counsel is 

correct. We have no objection to Exhibit 17. 

 We do object to the remainder. And the remainder, our 

objection is because they're not referenced in the pleading 

and because they aren't actually evidence. What was filed, 

especially what was filed in a different adversarial matter, 

isn't evidence in this case. And that's the basis for our 

objection. 

 MR. DEMO: Your Honor, if I may? 

 THE COURT: You may. 

 MR. DEMO: I guess the first thing is that they were 

all referenced in the pleadings, Your Honor. 

 The second thing is that Your Honor can take judicial 

notice of things on her docket, and all of these things are on 

Your Honor's docket for purposes of the 12(b)(6) motion. 

 And I'm honestly a little surprised by Mr. Bridges' 

arguments and by Plaintiff's arguments because they ask you to 

do the exact same thing in their pleading. They ask you to 

take judicial notice of two time entries that were filed in 

the main docket here as evidence that we, Highland, had 

knowledge of Plaintiff filing the complaint in the District 

Court. And, you know, we're not going to quibble with that 

because they are on your Court's dockets and we do believe 

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that you can take judicial notice of those. 

 And I can cite you Fifth Circuit case law, if you'd like, 

but I think it's a fairly standard issue. 

 THE COURT: All right. I'll over -- 

 MR. BRIDGES: Your Honor, one more thing? 

 THE COURT: Go ahead. Uh-huh. 

 MR. BRIDGES: I might be confused, Your Honor. My 

objection was the failure to reference these documents in the 

original complaint, the pending complaint in this adversary 

proceeding, not to -- failure to have referenced them in the 

briefing of this motion. 

 MR. DEMO: Your Honor, I don't think that changes it. 

I mean, Your Honor is entitled to take judicial notice of 

exhibits -- I mean, I'm sorry, of matters on her docket -- for 

the purposes of our motion to dismiss. And all of these 

pleadings and all of these exhibits and appendices -- the 

witness and exhibit list were referenced in our motion to 

dismiss. I don't think that changes anything. 

 THE COURT: All right. I overrule the objection. I 

can take judicial notice of these items, and I will. 

 MR. DEMO: Thank you, Your Honor. 

 THE COURT: All right. You may proceed. 

 MR. DEMO: Thank you. Again, Your Honor, for 

purposes of the record, Greg Demo; Pachulski Stang Ziehl & 

Jones; on behalf of Highland Capital Management. 

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 We were here today on -- originally on two motions to 

dismiss. And our two motions to dismiss were generally 

identical. The first motion to dismiss, which is going 

forward today, is the motion -- I'm sorry, the motion to 

dismiss the complaint filed by the Charitable DAF Fund, which 

alleges that Highland breached its fiduciary obligations to 

the DAF as an investor in Multi-Strat during the course of the 

bankruptcy. 

 The second thing we were supposed to be here today on, 

Your Honor, was a complaint -- a motion to dismiss the 

complaint filed by PCMG Trading Partners XXIII. PCMG is 

majority-owned by Jim Dondero and wholly controlled by Jim 

Dondero. We did have PCMG contact us last week and offer to 

withdraw that motion. We were happy to accept that offer 

because we do think that it should have been dismissed. 

 That said, Your Honor, we were equally frustrated with 

that offer, because the complaint was filed over a year ago. 

Highland had to expend substantial resources briefing and 

responding to motions. And then, on the eve of trial, when we 

have a dispositive motion on file, they withdrew it. And that 

is frustrating, Your Honor. 

 And it's doubly frustrating because Mr. Dondero has come 

to this Court and tried to make an issue of the burn rate for 

legal fees in this Court. And we think that -- that the 

filing of the complaint and then the last-minute withdrawal of 

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the complaint is emblematic of what Mr. Dondero is doing here, 

Your Honor. 

 That said, we are here only on one motion to dismiss. And 

as I mentioned, it's our motion to dismiss Plaintiff's 

complaint which alleges that Highland Capital Management 

breached its fiduciary obligations to Plaintiff and those 

fiduciary obligations arose under the Investment Advisors Act, 

common law, and contract. And those breaches allegedly 

occurred in mid-2020. And that was after the petition date, 

after Your Honor appointed independent directors to manage the 

bankruptcy, but before confirmation of the plan and before the 

plan's effective date. And each of those causes of action 

primarily revolve around the Plaintiff's contention that 

Highland sold assets that it wasn't supposed to sell. In 

other words, Highland sold assets that Mr. Dondero did not 

want it to sell. 

 And I realize I mentioned the complaint was originally 

filed in the District Court for the Northern District of 

Texas. The District Court referred the complaint to Your 

Honor in May of this year, and Highland filed its amended 

motion to dismiss on May 22nd -- I'm sorry, May 27th, 2022. 

 And our motion to dismiss is simple, Your Honor, and it 

amounts to one simple question: Are the causes -- should the 

Court dismiss the complaint because the causes of action in 

the complaint are administrative expense claims that should 

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have been filed in this Court and served on the Debtor prior 

to the administrative expense claim bar date, which occurred 

in September of 2021? 

 We believe the answer to that question is yes, Your Honor. 

We believe it's unequivocally yes under black letter 

bankruptcy law. 

 But as a separate and alternative basis for dismissal, we 

believe that Plaintiff lacks both constitutional and 

prudential standing, because (1) Plaintiff, the Charitable DAF 

Fund, is not an investor in Multi-Strat, and that's what Mr. 

Seery's declaration says; and (2) the Plaintiff did not allege 

in the complaint how it was harmed by Highland's actions with 

respect to Multi-Strat when it was not an investor in MultiStrat. 

 That's it, Your Honor. And we believe it is and should be 

a simple matter. 

 Plaintiff, however, has made a belated and what we believe 

is a procedurally-improper request to have the complaint 

treated as a late-filed administrative claim by this Court. 

We believe Your Honor should deny that request. 

 But before addressing the law, I think it's important, 

Your Honor, to go through the facts and to go through the 

timeline of this complaint, because what the facts and what 

the timeline will show is that there was no inadvertent error, 

Your Honor. There was a tactical and strategic decision to 

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file the complaint outside of this Court in the hopes that 

this Court would not know about it and that it could be 

adjudicated around Your Honor. 

 And Ms. Canty, can you please put up Slide 1? 

 And as you'll see, Your Honor, this is the timeline that 

we would like to discuss. So, first, February 22nd, 2021. 

Your Honor confirmed Highland's plan of reorganization. 

Highland's plan, like all plans, included clear procedures for 

dealing with administrative expense claims and stated -- 

again, we believe clearly -- that all administrative expense 

claims are required to be filed within 45 days of the plan 

effective date. 

 The next date we would bring Your Honor's attention to is 

June 23rd, 2021. On June 23rd, the Dugaboy Investment Trust 

filed a complaint in the Northern District of Texas, alleging 

that Highland breached its fiduciary duties with respect to 

Multi-Strat. We did not receive notice of that hearing -- of 

that motion, of that complaint. But on June 25th, which is 

the next day here, we had a hearing in front of Your Honor on 

the Plaintiff the Charitable DAF's motion to reconsider the 

order appointing Mr. Seery as Highland's chief restructuring 

officer. During that hearing, we discovered that the Dugaboy 

Investment Trust, Mr. Dondero's family trust, had filed its 

complaint, and we brought that to Your Honor's attention. 

Plaintiff's counsel at that June 25th hearing is the same 

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counsel in front of Your Honor today. 

 During that hearing, Your Honor rightly asked Plaintiff, 

Plaintiff's counsel, about why it believed it could file 

claims rightly before Your Honor in different courts. And 

Your Honor rightly told Plaintiff to, and I'm quoting here, 

"Go back and hit the books and be prepared to defend" filing 

claims outside of this Court. After that hearing, Dugaboy 

withdrew the Dugaboy complaint. 

 The next date I would call Your Honor's attention to is 

July 22nd, 2021, approximately one month after that June 

hearing. That's the date the complaint at issue today was 

filed, Your Honor. The complaint -- and the complaint at 

issue today was never served. Plaintiff filed a motion to 

stay that complaint in the Northern District of Texas and 

never served that motion to stay. 

 Moving forward, Your Honor, November 23rd, 2021. We are 

here again in front of Your Honor on Plaintiff's complaint 

with respect to the HarbourVest settlement. And Highland had 

moved to dismiss that complaint. And again Plaintiff's 

counsel at that hearing in front of Your Honor was the counsel 

here today. 

 During that hearing, we also heard Plaintiff's motion to 

stay the HarbourVest complaint pending resolution and pending 

the appeal of Highland's plan of reorganization to the Fifth 

Circuit. 

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 Plaintiff's arguments concerning the plan injunction at 

that hearing were essentially the exact same as the arguments 

they make in the response to our motion to dismiss, that the 

plan injunction prohibited them from doing anything. It 

prohibited them from prosecuting the causes of action in the 

complaint outside of this Court, which we agree with, but they 

also argued it prohibited them from prosecuting the causes of 

action in the complaint inside of this Court. 

 At that hearing, Your Honor -- and I'll backtrack just a 

second after that -- at that hearing, Your Honor, Highland's 

counsel was very clear on the record that they agreed that the 

plan injunction prohibited litigation filed prior to the 

effective date from occurring outside of this Court. 

Highland, however, was also clear that Plaintiff did have a 

remedy, and that remedy was to file the causes of action in 

the complaint as a motion for allowance of an administrative 

expense claim in this Court and prosecute them here. 

 At that hearing in November of 2021, Your Honor also told 

Plaintiff's counsel that their arguments concerning the plan 

injunction, and I'm quoting here, Your Honor, "reflect, 

frankly, a misunderstanding of how the injunction language 

applies." 

 Now, I'm going to backtrack, Your Honor, because I did 

forget a very important date, and that's the August 11th, 2021 

effective date of the plan. It is indisputed, Your Honor, 

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that Plaintiff received notice of that effective date, and 

Plaintiff's counsel was separately noticed with that effective 

date of the plan. 

 Those certificates of service are in Bankruptcy Docket No. 

2747, and are included in our witness and exhibit list as 

Exhibit 8. Again, it is indisputed that both Plaintiff's 

counsel and Plaintiff had notice of the effective date of the 

plan. 

 And it is also indisputed, Your Honor, that that notice 

disclosed that all administrative expense claims had to be 

filed with this Court and served on the Debtor within 45 days 

of the effective date of the plan, which was September 25, 

2021. 

 It is important to note that at no point in this timeline 

to date did Plaintiff's counsel -- I'm sorry, did Plaintiff do 

anything. Plaintiff did not file an administrative expense 

claim. Plaintiff did not file a motion to have their 

complaint allowed as timely filed. Plaintiff did nothing. 

 It was not until May of 2022 when the District Court 

referred this action to Your Honor and after Highland filed 

its amended motion to dismiss for Plaintiff's failure to 

comply with the administrative expense claim bar date that 

Plaintiff came into this Court asking leniency. 

 Plaintiff came into this Court in their response to the 

motion to dismiss asking Your Honor to treat their claim as a 

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timely-filed administrative expense claim. But what this 

timeline shows, Your Honor, and what the facts show, Your 

Honor, is, again, that this was not an inadvertent mistake. 

Plaintiff chose to file the complaint outside of this Court. 

Plaintiff, with notice of the effective date and notice of the 

administrative expense claim bar date, chose not to file an 

administrative expense claim in this Court. 

 Plaintiff, with Your Honor's -- Your Honor's direct (audio 

gap) in November of 2021 that they misunderstood the plan 

injunction, still did nothing, Your Honor. It was not until 

we moved to dismiss this action that Plaintiff requested, in a 

procedurally-improper way, to have their claim treated as a 

late-filed claim. 

 What we believe that shows, Your Honor, is that this was 

tactical. That what Plaintiff actually wanted was to file 

their claim in the District Court, which they did, and which 

they did not give us notice of; to stay that action in the 

District Court, which they did, and which they did not give us 

notice of; and to have that complaint sit there in the 

District Court until the Fifth Circuit overturned the plan, 

and then and only then would they litigate that action, again, 

away from Your Honor. 

 We believe that's highly improper, Your Honor. 

 That said, the legal question here is, again, very simple. 

Does the complaint include administrative expense claims that 

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are now time-barred because they were not filed in this Court 

by the September 2021 administrative expense claim bar date? 

Again, we believe the answer to that question is a simple yes. 

These are administrative expense claims. 

 Again, Plaintiff's complaint alleges that Highland 

violated its fiduciary obligations to Plaintiff in mid-2020, 

after the petition date, after appointment of independent 

directors, before confirmation, and before the effective date, 

at all times while Highland was the debtor-in-possession. 

 And as Your Honor knows, administrative expense claims, 

generally speaking, are claims that arise under Section 503(b) 

of the Code for the actual and necessary costs of preserving 

the estate and that arise from the debtor-in-possession or 

trustee's postpetition, pre-effective-date, ordinary-course 

operation of the estate. 

 And the claims in the complaint are administrative expense 

claims under 503(b) under the Reading exception which was 

created by the Supreme Court in 1968 in Reading Co. v. Brown. 

And as set forth in our brief, Your Honor, Reading is still 

good law. It's routinely applied in the Fifth Circuit and 

it's routinely applied in all circuits. 

 And Reading, Your Honor, (garbled) it includes not just 

torts, but other claims arising from intentional or other 

wrongful or -- wrongful acts as well. And the claims asserted 

in the complaint are clearly administrative expense claims 

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under Reading. They are claims for intentional and/or 

negligent violations of Highland's alleged fiduciary duty to 

Plaintiff during the course of the bankruptcy. 

 And Ms. Canty, if you could please put up Slide 2. 

 Now, Plaintiff tries to dodge this by saying that the 

definition of, quote, administrative expense claims and the 

plan does not include the types of claims that they allege 

here. But that's not the case, Your Honor. And the defined 

term "Administrative Expense Claim" is in the middle box of 

your screen. And as you'll see, it says it's any claim 

allowed pursuant to Sections 503(b), 507(a)(2), 507(b), or 

1114(2) of the Bankruptcy Code. Those include administrative 

expense claims under the Reading exception, and they include 

the administrative expense claims asserted in the complaint. 

 Those claims were required under the plan -- and the 

provisions are all right here -- again to be filed in this 

Court by September 2021. They were not. 

 And as I mentioned above, it is indisputed that Plaintiff 

had notice of the plan, that Plaintiff had notice of the 

administrative expense claim bar date. And it's also 

indisputed that Plaintiff, represented by counsel, did not 

file with this Court an administrative expense claim by 

September 25th, 2021. Plaintiff's claims are now time-barred. 

 And we believe Your Honor's Taco Bueno opinion is on all 

fours. In Taco Bueno, the claimant at least tried to file an 

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administrative expense claim with this Court by filing a proof 

of claim on the claims register. Your Honor held that wasn't 

good enough and it did not count as an administrative expense 

claim, and Your Honor barred claimant's claim in Taco Bueno as 

time-barred. 

 Here, similarly, Plaintiff, who's been represented at all 

times by counsel, indisputably had notice and chose to file 

the complaint in the District Court rather than complying with 

the provisions of the plan and with the provisions of the 

Bankruptcy Code. Under Taco Bueno and various cases, Your 

Honor, this claim is time-barred. 

 And that should end the discussion, Your Honor, but it 

doesn't, because Plaintiff, in its response to our motion to 

dismiss, finally asked this Court for leniency and finally 

asked this Court to treat the claim as, quote, a request for 

an order permitting a late claim or otherwise to have it 

treated as a timely administrative expense claim under Federal 

Rule of Civil Procedure 15. 

 But that's not how it works, Your Honor. Section 502 of 

the Code allows late-filed administrative expense claims only 

for cause. But that requires a separate motion, and it 

requires evidence, Your Honor. None of that happened here. 

Instead, Plaintiff filed a one-line request to have it treated 

as a late-filed claim, and it filed that request 16 months 

after confirmation, 10 months after the bar date, and 8 months 

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after Your Honor rejected their argument on the plan 

injunction. 

 There is no cause here. Plaintiff has provided no 

evidence of it. It just asked for leniency based on a series 

of what we believe are irrelevant arguments. 

 And that's where the facts again become important. As 

Your Honor has said, facts matter. And the facts here, the 

indisputed facts (garbled) Plaintiff and bely a finding of 

cause or excusable neglect under Pioneer. Again, two 

standards that Plaintiff has not even tried to argue. 

 And, again, Your Honor, what we believe the facts show is 

that there was no inadvertent technical error here. There was 

a considered and strategic plan to file these claims outside 

of this Court in the hopes of avoiding Your Honor. 

 As in Houbigant, which we briefed in our paper, Plaintiff 

is bound by those tactical decisions. And the complaint, Your 

Honor, we would ask be dismissed with prejudice for failure to 

state a -- I'm sorry, for failure to comply with the 

administrative expense claim bar date. 

 And lastly, Your Honor, standing. In our motion to 

dismiss, we sought an order dismissing this action under 

12(b)(1) for lack of constitutional standing and also under 

12(b)(6) for lack of prudential standing. And as stated in 

our papers and in Mr. Seery's declaration -- which, again, is 

Exhibit 17 on our witness and exhibit list -- the DAF, the 

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Plaintiff here, is not an investor in Multi-Strat. And all of 

the allegations in the complaint, all of the causes of action 

in the complaint, revolve around the DAF being an investor in 

Multi-Strat, and Plaintiff did not plead how it could possibly 

have standing as a non-investor. 

 Consequently, Your Honor, Plaintiff failed to plead 

constitutional standing, failed to plead an injury, and failed 

to plead prudential standing because it failed to plead how it 

was the real party in interest under Section 17. 

 Now, Plaintiff makes various arguments in its response 

about how it could have direct and/or derivative standing. 

But, again, Your Honor, one, we believe those arguments are 

meritless, and we believe that they're irrelevant, because 

notwithstanding the liberal amendments standard in Federal 

Rule of Civil Procedure 15 and the language in Federal Rule of 

Civil Procedure 17, we believe amendment here would be futile. 

For all the reasons we discussed, the claims are time-barred. 

And even if Plaintiff were able to amend its complaint to fix 

the standing issues, Plaintiff in no world can unwind and turn 

back the clock to be able to file the complaint in this Court 

as an administrative expense claim by the administrative 

expense claim bar date, which, again, was on September 25th, 

2021. 

 For the foregoing reasons, Your Honor, we ask that you 

dismiss the complaint with prejudice. And I'm happy to answer 

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any questions. 

 THE COURT: Okay. No questions right now. 

 MR. DEMO: Thank you. 

 THE COURT: Mr. Bridges? 

 MR. BRIDGES: Thank you, Your Honor. The last time I 

appeared in this Court was at the June 25th, 2021 hearing that 

counsel referenced. It's particularly memorable to me because 

of being postponed due to symptoms from a cranky gallbladder. 

The time before that I remember even better. That was the 

only other time I was before you, Your Honor. The 

particularly painful order that was the result of that 

previous time is also very memorable to me. 

 My gallbladder is no longer with us, and that order, that 

painful order, has been expunged at considerable costs. I was 

hoping that meant today would be a fresh start. Apparently, I 

need to go backwards just a little bit, perhaps. 

 At the June 25th hearing that counsel described, I did 

argue. At the end, you did ask about a recently-filed lawsuit 

that I didn't know anything about and told you so. You asked 

if Mr. Sbaiti was available, and I believe we had to go get 

him, and he answered your questions, and your exchange was 

with him. 

 I'm afraid that, again, I am unprepared and largely not in 

the know about the other matters that counsel has referenced. 

I came to argue the motion that's at issue today in the 

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adversary proceeding that we're here for. 

 The Federal Reporters, Your Honor, I know that you know 

this, they're full of opinions admonishing courts to favor 

resolving cases on the merits. Ever since the code pleading 

system was abolished, federal courts have expressed their bias 

in favor of addressing the merits of cases, and I would be 

remiss in failing to mention that here on Highland's motion to 

dismiss this case on timeliness and standing grounds. 

 Rule 15 and Rule 17 of the Federal Rules of Civil 

Procedure are among those aimed at getting cases to the 

merits, and we relied on both of those in our brief. 

 The first issue raised in the briefs is the classification 

of our allegations as an administrative expense claim. That 

three-word term is capitalized in the plan, indicating that it 

is a defined term. I read in the reply brief and heard 

counsel argue just moments ago that Highland views this as 

merely a naming convention and not as a limiting provision, 

the defined term. And I see that as a reasonable view of 

what's in the plan. But it does quite -- quite plainly appear 

as a defined term, with a lengthy definition. 

 Although this is not a hill we would choose to die on, and 

much of our response brief is devoted to alternative 

arguments, we don't view the allegations in the complaint as 

administrative in nature, nor as an expense, nor, perhaps most 

importantly, as the result of an action that benefits the 

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estate, as both the plan definition and Section 503(b) 

require. 

 Section 503(b) concerns only, quote, the costs and 

expenses of preserving the estate. What the complaint alleges 

in this matter is that the acts complained of were against the 

interests of the estate and depleted the estate's assets. 

 For example, Paragraph 22, which sums up the factual 

allegations in the complaint, reads as follows. Quote, "In 

short, HCMLP caused Multi-Strat to sell the viatical pool at a 

substantially discounted amount to curry favor with the 

brokers and buyers in the marketplace, for no apparent benefit 

to Multi-Strat's investors or the Debtor's estate." 

 This allegation does not on its face appear to be based on 

the result of an action that benefits the estate. 

 The second issue concerns the consequences if we're wrong 

about the first issue. 

 THE COURT: Let me -- 

 MR. BRIDGES: The consequences -- 

 THE COURT: Let me back up. Let me back up if you're 

moving off that point. What about the Supreme Court -- 

 MR. BRIDGES: Yes, Your Honor. 

 THE COURT: What about the Supreme Court's Reading

case or Reading case? If my memory -- it's been years since 

I've read it, but I remember it pretty well. I believe that 

involved a fire, right, a fire in a building that a trustee 

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was operating. Certainly, a fire and great damage caused to a 

third party wouldn't seem on its face to benefit the estate, 

as that phrasing is used in 503(b). But the U.S. Supreme 

Court said something to the effect of, you know, he's doing 

business and it's a cost of doing business that, you know, 

you're going to sometimes have things like this happen. And 

isn't that exactly the same sort of situation we have here if 

your allegations are true? 

 MR. BRIDGES: I don't think so, Your Honor, although 

I would -- would like to emphasize again this is not a hill 

that we would choose to die on. But I think -- 

 THE COURT: Am I correct -- 

 MR. BRIDGES: -- two reasons distinguish -- 

 THE COURT: -- in remembering the facts of that 

famous U.S. Supreme Court case, that it involved a fire and 

that the trustee who was operating the business, it was a 

consequence of him operating the business? Am I correct in 

remembering those facts? 

 MR. BRIDGES: That sounds correct to me, Your Honor, 

but I don't pretend to remember it well enough to disagree 

with you. I would like -- 

 THE COURT: Mr. Demo, -- 

 MR. BRIDGES: -- to distinguish it. 

 THE COURT: -- can you confirm or tell me if I'm 

wrong? 

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 MR. DEMO: Yeah. You're absolutely correct, Your 

Honor. The trustee in that case accidentally burned down the 

neighboring building, and the Supreme Court found that it was 

still an administrative expense claim under the "Reading" or 

"Reading" exception. And that exception provides that even 

though burning down somebody else's house does not benefit the 

estate, that it still counts as an administrative expense 

claim under 503(b). And we have other case that comes -- 

other case law that comes after that that even broadens that, 

Your Honor. 

 THE COURT: Yes. And I know the Fifth Circuit case 

has cited that case in different opinions. 

 Okay. So, going back to that, Mr. Bridges, I mean, you 

just argued 503(b) doesn't contemplate this type of claim that 

-- or claims you're alleging in the action, but hasn't the 

Supreme Court in fact said that it does apply to this kind of 

thing? 

 MR. BRIDGES: Your Honor, no, I don't think so. And 

the reasons are twofold. One is because the fire in that case 

is not, I don't believe, the actions being complained of by 

the plaintiff. Rather, actions that are to the benefit of the 

estate result in negligently, accidentally, causing a fire. 

And that is a significant difference from here, where the 

actions allegedly being -- that we're alleging, that are 

complained of, are actually actions against the interests of 

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the estate, selling out the estate on the cheap. Your Honor, 

that is one distinction. 

 The other is that we're relying on the defined term, which 

has different language from the actual Code, which was not at 

issue in the other case. 

 Those are the two distinctions that I draw, Your Honor. 

 THE COURT: Well, if this is not -- 

 MR. BRIDGES: The second issue -- 

 THE COURT: -- a 503-type claim, then what kind of 

claim would it be? It has to fit into some sort of category 

here. 

 MR. BRIDGES: Your Honor, honestly, our position is 

that the order itself creates -- the final plan creates a gap 

by not identifying this as -- as that kind of -- as an 

administrative priority claim. 

 THE COURT: Okay. 

 MR. BRIDGES: The second issue, Your Honor, concerns 

the consequences if we're wrong about the first issue and that 

the consequences need not be forfeiture. 

 Counsel raises concerns about the purpose of the 

administrative claim bar date and the ability to distribute 

funds. Those concerns certainly seen valid. But importantly, 

they go to priority, not validity. 

 Not one of their policy arguments supports outright 

dismissal of the complaint, which would amount to a default 

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and would have the effect of protecting the interests of 

equity in this matter over the interests of a creditor. 

 Rule 15 allows for relation back of allegations from a 

previous filing, and we believe it governs here. Highland 

doesn't deny that it had notice of the complaint, so they 

don't have prejudice from the timing of it. And there is 

authority under the Code for allowing timely filing or 

treating as timely the filing of one type of claim that was 

submitted as another type of claim. 

 And on this, I'd point the Court to the Delaware 

Bluestream [sic] Brands case, 2021 Bankr. LEXIS 1980, which 

cites to the First Circuit and other cases allowing a timely 

proof of claim to be treated as an administrative expense 

claim. 

 THE COURT: Doesn't that -- 

 MR. BRIDGES: I'm truly -- 

 THE COURT: Doesn't that run contrary to my Taco 

Bueno opinion? 

 MR. BRIDGES: Perhaps, Your Honor. It does cite your 

opinion in a "But see." And I again would defer to your 

knowledge of the proceedings in that case. But I saw in the 

opinion no argument whatsoever concerning the ability of the 

creditor to seek relief on its proof of claim regarding the 

same transaction. I read it not to exclude that. 

 Although the Court relied -- also, the Court relied on 

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prejudice to the creditors in that case if the administrative 

claim had been allowed. Importantly, in this case, where 

creditors can expect to be paid in full, no such prejudice 

exists, or at least at this stage of the claim -- of the case 

there is no evidence that any such prejudice to the creditors 

exists. 

 I'm truly unsure how to respond to the accusation that the 

decision to file this action in District Court was a strategic 

one, a strategic decision. In some regards, certainly, all of 

our decisions are strategic. But the implication that this 

was somehow a nefarious decision that should inflame the Court 

is simply untrue. 

 I think the timeline supports us in this, that at the time 

of the filing of this lawsuit the plan was not yet effective, 

so the route to bring an administrative claim, if that's what 

this is, did not appear to be available to us without the plan 

having gone effective. 

 Also, it appeared that it might not go effective for a 

year or more while the appeal to the Fifth Circuit was 

pending. 

 A few weeks later, I think it was less than three, 

approximately 20 days later, when Highland elected to make the 

plan effective, the injunction as we understand it precludes 

us from serving them from that point forward, as doing so 

would have been continuing with this case. The plan 

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injunction prevented us from doing so. 

 And so the accusation that we intentionally filed the 

lawsuit and didn't serve them with process is really about a 

three-week period that before we got them served we were 

enjoined, as we understand the injunction, from doing so. 

 I have not heard from them that we're wrong on that 

interpretation of the injunction. I know from their other 

pleadings in this matter that they view the injunction as 

applying to this matter. The only question I have is whether 

they agree with our take that serving process would have been 

continuing with the action. 

 THE COURT: Let me -- let me -- 

 MR. BRIDGES: The notion that we -- 

 THE COURT: -- double-check that I understand 

something you said. I think what I heard you say was, because 

the plan had not gone effective fee yet, therefore triggering 

the 45-day deadline for filing administrative expense claims, 

you had no other avenue here to pursue your claims except to 

file the District Court lawsuit. Is that what I heard you 

say, or am I misunderstanding? 

 MR. BRIDGES: Well, that's certainly more strongly 

than I intended to say it. I don't think so, Your Honor. But 

a similar vein, that the idea of filing a claim as required by 

the final plan was not -- was not something that had gone into 

effect yet. So thinking that that -- 

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 THE COURT: What do you mean? You can file a request 

for allowance of administrative claim, heck, in the first 30 

days of a bankruptcy case. You don't have to wait for the 

Court to set a deadline. 

 MR. BRIDGES: Your Honor, -- 

 THE COURT: You can file one at any time. 

 MR. BRIDGES: -- we did not have an effective 

deadline. We did not know when that effective deadline would 

go effective. That process, that procedure, did not appear to 

be the one that was, what, most available to us. 

 THE COURT: Why not? Why not? Why not? There is 

nothing that would have precluded you from filing a request 

for allowance of administrative expense claim. People file 

them throughout Chapter 11 cases frequently, -- 

 MR. BRIDGES: The -- 

 THE COURT: -- before there's ever a deadline set. 

 MR. BRIDGES: Your Honor, the answer to that question 

is that reading the definition of what it was did not cause us 

to believe that's what we had here. That is Issue #1 over 

again. 

 One question -- again, one question is whether we are 

right or wrong on Issue 1. And I'm hearing you loudly and 

clearly that you don't agree with us on that. 

 But in connection with that, I don't, Your Honor, I don't 

think a fair conclusion is that we knew better or should have 

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known better than to read the defined term and think that it 

does not apply to the case that we brought. 

 Certainly, the final order -- I'm sorry, the plan was not 

in effect yet, so we weren't governed by it at that time. And 

I believe and urge the Court to consider that a plain reading 

of that plan does not sound like on its face that our claim -- 

our complaint is within its four corners. 

 THE COURT: Did you worry about the automatic stay? 

 MR. BRIDGES: Yes, Your Honor. 

 THE COURT: Okay. What is your analysis there? 

 MR. BRIDGES: Your Honor, it was well more than a 

year ago. I don't think I can remember that. It wasn't in 

the briefing for today, and it's not fresh on my mind. 

 THE COURT: You're right. You're right, it wasn't in 

the briefing. But, again, I'm just trying to put myself in 

your brains and, you know, I don't -- I will say it's a gray 

issue, because these are not prepetition claims, and usually 

362 stays collection or actions aimed at pursuing prepetition 

claims. 

 On the other hand, the relief sought in the DAF's 

complaint asked for, among other things, disgorgement of all 

ill-gotten gains, and also voiding of certain agreements of 

Highland. This sounds potentially like exercising or an 

attempt to exercise control over property of the estate. So, 

again, it's something that weighs on me a little bit. 

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 But, again, it's not the subject of the hearing today, but 

I kind of am still interested in what your thought process 

was. You know, it's a very risky thing to file a lawsuit 

against a Chapter 11 debtor as opposed to filing a proof of 

claim or a request for allowance of administrative claim. So 

I just -- it would be helpful to hear what your analysis was 

on that. 

 MR. BRIDGES: Perhaps this would be helpful as well, 

Your Honor. At least as -- at least in my view and 

experience, you do not have to be a bankruptcy lawyer to know 

what the automatic stay is. An administrative expense claim 

isn't the same kind of recognized concept, I believe. 

Certainly, not to me. 

 And so the notion that what we were doing is sitting on 

our hands rather than serving the complaint because of some 

ulterior motive is just wrong. That's untrue. And generally 

speaking, in this day and age, cases aren't dismissed without 

reaching the merits simply because they weren't filed in the 

right place or with the right forum. 

 Your Honor, that brings us to the third issue, which is 

standing. Again, courts in this day and age do not dismiss 

cases without reaching the merits simply because they were not 

brought by the real party in interest. That's what Rule 17 

says quite clearly. An opportunity for the real party in 

interest to join must be provided. If -- if that's -- let me 

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back up. If -- because Highland admits that Plaintiff's 

subsidiary, CLO Holdco, is an investor who would have 

standing, that should end the matter there. 

 Moreover, the Plaintiff, the DAF, has alleged in 

Paragraphs 7 and 11 of the complaint that it is an investor. 

And frankly, Your Honor, I don't think that's incorrect when 

you view that someone can invest indirectly. That is not a 

peculiar concept, and I don't think it's a stretch to say that 

that pleading that we are indirectly an investor is an invalid 

one. And in Paragraph 54, it states quite clearly that, if 

necessary, we are seeking to plead our claim derivatively. 

 That's all I have today, Your Honor. If there's more I 

can answer, I will do my best. 

 THE COURT: Okay. So, am I hearing that the DAF 

acknowledges that CLO Holdco, its one-hundred-percent 

subsidiary, last I knew, that it is actually the investor in 

Multi-Strat, not DAF? Am I hearing that? 

 MR. BRIDGES: Mostly yes, Your Honor. I'd like to 

quibble around the edges. I believe it is not a one-hundredpercent-owned subsidiary. 

 THE COURT: Okay. 

 MR. BRIDGES: My recollection is that it's -- 

 THE COURT: Well, forget that hundred percent. But 

the point is I'm hearing DAF acknowledge that it's CLO Holdco 

that it is at least partly an owner of, if not mostly an owner 

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of, CLO Holdco is the one that invested in Multi-Strat. 

 MR. BRIDGES: I believe Highland is correct on that, 

Your Honor. Yes. 

 THE COURT: Okay. So your argument is that the DAF 

still would have standing because it should be considered an 

indirect owner of interest in Multi-Strat? 

 MR. BRIDGES: Slightly different from that, Your 

Honor. Not only is it an indirect investor, it also is 

receiving investment device -- advice from Highland for the 

purposes of directing its subsidiaries or counsel to these 

subsidiaries or aiding them in making investment decisions. 

So that investment advice and the contract claims are still 

relevant, whether the investment by the DAF is direct or 

indirect. The relationship is, in all important aspects, the 

same, regardless of whether the investment in the ultimate 

asset is a direct one or an indirect one. 

 And Your Honor, I don't believe there's anything unusual 

about that relationship between a subsidiary and its -- and 

its parent. 

 THE COURT: You don't think there's anything unusual 

about what? 

 MR. BRIDGES: About the relationship -- 

 THE COURT: About only naming the parent as a party, 

not the subsidiary that actually owns the investment? 

 MR. BRIDGES: No, Your Honor. That's not what I was 

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referring to. 

 The relationship between a parent entity that uses 

subsidiaries to make its investment is a not-unusual corporate 

arrangement. 

 THE COURT: Oh, well, certainly. I wouldn't think it 

would be. But I'm more focused on the parent being the 

Plaintiff in the lawsuit and not the subsidiary. 

 MR. BRIDGES: Your Honor, I think that's what 

derivative case law and the statutes that govern it are all 

about. This is not a novel thing. 

 THE COURT: I think you've got it flip-flopped, don't 

you? I mean, usually, derivative -- I mean, I guess I -- I 

see what you're saying. The entity has a cause of action and 

it won't bring it for whatever reason, so the shareholders -- 

here, I guess you're saying the DAF -- would ask for standing. 

It doesn't seem like the same thing we usually -- the same 

context we usually see derivative litigation brought in. 

Would you acknowledge that? 

 MR. BRIDGES: I think in the federal courts what 

you're referring to is shareholder derivative actions that 

indeed tend to fit the paradigm you're talking about. 

 It is not unusual at all, however, for a majority owner of 

an LLC to bring an action that is derivative on behalf of the 

LLC, or a minority but a significant minority member of an LLC 

or another type of company to bring such action. Shareholder 

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derivatives are not the only kind of derivative action. 

 THE COURT: Okay. I think that's all the questions I 

have. Anything else? 

 (No response.) 

 THE COURT: Anything else? Okay. I guess -- that 

was directed to you, Mr. Bridges. Anything else? 

 MR. BRIDGES: I'm sorry. Not from me, Your Honor. 

 THE COURT: All right. Mr. Demo, you have the last 

word. 

 MR. DEMO: Thank you, Your Honor. And I'll be fairly 

brief. 

 Mr. Bridges I think is still -- I'm sorry, not -- 

Plaintiff I think is still confused about what an 

administrative claim, expense claim is and how the Reading 

exception applies. In Reading, there was no benefit to 

burning down somebody's house. In A.I. [sic] Copeland, which 

is a Fifth Circuit case, a debtor improperly failed to turn 

over tax claims -- I'm sorry, tax distributions, tax payments, 

to the State of Texas, in violation of Texas statutes. That 

was an administrative expense claim. 

 All of the claims here arise from Highland's alleged 

intentional or negligent breach of its fiduciary duties to the 

DAF -- again, not an investor in Multi-Strat, but that's what 

was pled. All of those fall under the Reading exception. 

 And to Plaintiff's point about, you know, there not being 

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a benefit to the estate here, I would read you the last line 

of Paragraph 49, which says that one of the breaches includes 

utilizing the sale proceeds for its own names, namely -- I'm 

sorry. Utilizing -- let me start over, Your Honor. It says, 

"utilizing the sale proceeds for its own end, namely, to 

enrich itself." That's Mr. Bridges, that's Plaintiff's 

complaint. They are alleging that we took these actions to 

benefit Highland during the course of the bankruptcy. 

 Either way you slice it, Your Honor, this is an 

administrative expense claim. We think Reading is directly on 

point, that they have pled a substantial benefit to the 

estate. They basically pled that we took these assets and 

absconded with them. 

 Either way you slice it, under Reading, it applies. Under 

benefit to the estate, under their complaint, it applies. 

This is an administrative expense claim and had to be filed by 

the administrative expense claim bar date. 

 And, again, with respect to the plan injunction, Your 

Honor, even if Mr. Bridges was right -- I'm sorry. Even if 

Plaintiff were right, and they're not, and I do think a point 

needs to be made here, is that Plaintiff is the only party, 

Plaintiff and PCBM, are the only parties who did not 

understand the plan. Even Mr. Dondero's other affiliates -- 

NexPoint, NexPoint Advisors, Highland Capital Management Fund 

Advisors, and CPCM -- all were able to file administrative 

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expense claims in this Court on or substantially before the 

administrative expense claims bar date. Plaintiff's 

interpretation and confusion with the plan injunction applies 

only to Plaintiff. They are on an island here. 

 And yes, it's also wrong. And even if Plaintiff were 

confused about that when they filed their complaint in the 

Northern District of Texas, they cannot say they were confused 

about that after the November 2021 hearing, where Your Honor 

told them bluntly and blatantly that they misunderstood the 

plan injunction and where Highland told them that they were 

not without a remedy, that their remedy was to file an 

administrative expense claim in this Court. 

 So, even giving Plaintiff the benefit of the doubt that 

they did innocently misunderstand the plan injunction, that 

misunderstanding ended in November of 2021, eight months ago. 

During that eight-month period, Plaintiff again did nothing. 

Plaintiff only made a request, and a procedurally-improper 

request, to have the claim treated as late-filed when it 

responded to our motion to dismiss. 

 With respect to the policy here, Your Honor, I think Your 

Honor nailed it in Taco Bueno. Bar dates are important. 

Administrative expense bar dates are extremely important. And 

so now I understand under Federal Rule of Civil Procedure 15 

and all the other Federal Rules you do want to get to the 

merits, but 503 applies here, Your Honor. There are separate 

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procedures dealing with administrative expense claims, and 

those procedures are important to protect not just the Debtor 

but all creditors in this matter. 

 This is not a two-party dispute. Bankruptcy is not a twoparty game. There are other creditors here who have been 

waiting ten, ten years, a decade to be paid. And Plaintiff is 

coming in and saying, you know what, we should get an 

administrative expense claim. We should be able to take 

a-hundred-cent dollars off the top. And they're doing that, 

Your Honor, without any evidence whatsoever. No evidence of 

cause under 503(a). No evidence under Pioneer. And not even 

an attempt to plead them. 

 The policy here does not favor them. It favors the 

estate. It favors all other creditors in this action who are 

relying on the confirmed plan that has been confirmed for well 

over a year now, Your Honor. 

 And the last thing I'll say on standing, I do think 

Plaintiff's arguments on direct and derivative are just way 

off. But I don't think they matter, Your Honor, because, 

again, regardless of the liberal amendment standards in 15, 

and regardless of the language in 17, amendment here is 

futile. That is our point. It doesn't matter if they fix the 

standing issues. Their complaint is still going to be timebarred. And they still, like today, they still will have no 

evidence of cause or excusable neglect to justify that 

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complaint. 

 Again, happy to answer any questions, Your Honor, but we 

do think this is a straightforward matter. And with that, 

I'll cede my time. 

 THE COURT: Okay. Thank you. 

 The Court is going to grant the motion to dismiss. And 

I'm obviously going to write this up. But there's no question 

whatsoever that the purported claims against Highland that 

have been asserted in this action by the DAF concerning the 

Multi-Strat sales of assets, they arise from postpetition 

transactions, and to the extent the claims are valid, they 

would have given rise to postpetition administrative expense 

claims. There's just no -- there's no legitimate argument to 

the contrary on that. 

 And so that means this is a Section 503(b) issue, not a 

Rule 15 or a Rule 17 issue. 

 Not only did the plan provide a specific procedure for 

filing administrative expense claims, but 503 of the 

Bankruptcy Code also contemplates such a procedure. 

 And as this Court held in a lengthy opinion in the Taco 

Bueno case, these procedures have to be strictly complied 

with. It's very clear from the language of the Code, and the 

legislative history, if the language of the Code weren't 

clear, that proofs of claim are very different things than 

postpetition claims that arise. You file a proof of claim, a 

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simple form, for a prepetition claim. It's deemed allowed if 

no one objects. You don't even have to get an order. But, 

again, as I explained in Taco Bueno, a 503 administrative 

expense claim is a very different animal. Okay? You have to 

put the world on notice. 

 As Mr. Demo said, it's not a two-party dispute. It's a 

type of claim that potentially every unsecured creditor in the 

case would care about and want to weigh in on. You're held to 

strict proof. 

 And, again, as I noted from the Supreme Court Reading 

case, the Supreme Court has said technically there doesn't 

have to be a benefit to the estate. There are some things 

that are just a cost of doing business. A fire to a 

neighbor's building didn't benefit the estate, but still the 

victim of that fire was entitled to an administrative expense 

claim. But this is not even the stretch that a fire would be. 

So there's just zero room for argument, I think, here that the 

claims asserted in this action are of the nature of 

administrative expense claims, postpetition claims, and a 

request had to be filed by September 25th. 

 And to the extent a sentence or two in this response filed 

July 5th, 2022 is a request to file a late-filed 

administrative expense claim, I mean, it's procedurally 

improper in every way. And so I'm not going to grant any 

relief based on that. 

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 Last, the standing issue. While I have the view that CLO 

Holdco would have been the party aggrieved here if these 

claims are valid, and there does appear to be a problem with 

the standing of the Charitable DAF, I think this is a moot 

point or an irrelevant point. While under 17 I could, in 

different circumstances, allow the proper party to substitute 

in, it would be an exercise in futility here because, again, 

we're ten months past the deadline for a timely filing of an 

administrative expense claim. 

 So, I will draft up an opinion and order in this regard. 

 Let me just throw this out here so no one is surprised or 

on a different page. I don't think I have to do a report and 

recommendation on this. And anyone who wants to weigh in can 

weigh in, but as you know, -- 

 MR. DEMO: Your Honor? 

 THE COURT: Oh. 

 MR. DEMO: I'm sorry. I was just agreeing with Your 

Honor. This is the claims allowance process. This is a pure 

core proceeding at this point. 

 THE COURT: Okay. And so certainly I'll also hear 

from Mr. Bridges if he has a comment. 

 But the way I look at this is, okay, we start with the 

point of Judge Godbey, I think it was, had this one. He sua 

sponte referred this to the Bankruptcy Court. There wasn't a 

report and recommendation where I said, I think you should 

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either not withdraw or withdraw but let the Bankruptcy Court 

do pretrial matters. He just sua sponte did that. Okay? 

 But then a couple of additional points. Rule 7012(b) 

says that a responsive pleading to a 12(b)(6) or a 12(b)(1), 

any -- shall include a statement that the party does or does 

not consent to the entry of final orders of judgment by the 

Court. So I guess we could argue, does that apply to the 

Movant or does it apply to the Respondent? But I think it 

probably applies to the Respondent here, and so there was 

just nothing in the response as to whether Respondent did or 

did not consent to entry of a final order, so I would view 

that as a waiver. 

 But most importantly of all, I guess, my third point on 

this is I think this is an arising-in core matter, not merely 

related to, where consent is necessary. Because certainly 

the idea of do you need an administrative expense claim or 

not and were the proper procedures followed, I think that's 

core arising in. 

 So, for all of these reasons, I'm letting you know I'm 

not doing this in a report and recommendation. I'm just 

doing this in an opinion and order. 

 Mr. Bridges, anything you want to say about that? 

 MR. BRIDGES: Yes, Your Honor. If I could back up 

and correct myself first. I think I was mistaken about CLO 

Holdco. They are indeed, I am told, the hundred-percent 

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subsidiary of the Plaintiff, the Charitable DAF. 

 Secondly, yes, Your Honor, this is a Rule 12 motion in an 

adversary proceeding. We would object to a final order and 

ask you to issue a report and recommendation. 

 THE COURT: Well, you didn't put that in your 

response. What is your comment about that? 

 MR. BRIDGES: Your Honor, my comment on that is I 

feel -- I feel like my hands are tied by the injunction. We 

haven't been able to file any motion for leave on fear of -- 

on pain of getting a ruling from this Court against us as to 

the injunction, but we don't have clarity as to what we're 

enjoined from and what we are not. And I guess that would be 

my basis. 

 THE COURT: Okay. Well, I don't know what that has 

to do it with putting a sentence in a response that's required 

by 7012(b) saying whether you consent or don't consent. I 

don't know what an injunction has to do with that. 

 But anyway, I do view this as an arising-in matter where 

consent is probably irrelevant, but I'm just dotting all our 

I's here. 

 All right. I will -- I've got one law clerk working on 

one under-advisement of Highland that I think is pretty close. 

I've got another law clerk working on another under-advisement 

in Highland that is getting there. So I think I'll probably 

just jot out a pretty fast opinion and order on this one, 

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because the facts on it are pretty simple, and I think 

probably in a few days you'll have it. 

 All right. We're adjourned. 

 THE CLERK: All rise. 

 MR. DEMO: Thank you. 

 (Proceedings concluded at 3:44 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 08/04/2022 

______________________________________ ________________ 

Kathy Rehling, CETD-444 Date 

Certified Electronic Court Transcriber 

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INDEX 

PROCEEDINGS 3 

WITNESSES 

-noneEXHIBITS 

Judicial Notice to be Taken 6 

RULINGS 39 

END OF PROCEEDINGS 44 

INDEX 45 

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