Court Opinion

ID: 9957628
Source: CourtListenerOpinion
Date Created: 2024-04-04 18:00:56.932874+00
Date Added: 2024-06-11T08:18:31.748922
License: Public Domain

Case: 22-11036   Document: 131-1      Page: 1   Date Filed: 04/04/2024

       United States Court of Appeals
            for the Fifth Circuit                            United States Court of Appeals
                                                                      Fifth Circuit

                        ____________                                FILED
                                                                 April 4, 2024
                          No. 22-11036                         Lyle W. Cayce
                        ____________                                Clerk

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

                                                                Debtor,

The Charitable DAF Fund, L.P.; CLO Holdco, Limited;
Mark Patrick; Sbaiti & Company, P.L.L.C.; Mazin A.
Sbaiti; Jonathan Bridges,

                                                           Appellants,

                             versus

Highland Capital Management, L.P.,

                                                              Appellee,
______________________________

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

                                                                Debtor,

James Dondero,

                                                            Appellant,
                             versus

Highland Capital Management, L.P.,

                                                              Appellee.
            ______________________________
Case: 22-11036       Document: 131-1        Page: 2    Date Filed: 04/04/2024

               Appeal from the United States District Court
                   for the Northern District of Texas
                USDC Nos. 3:21-CV-1974, 3:21-CV-1979
               ______________________________

Before Dennis, Engelhardt, and Oldham, Circuit Judges.
Andrew S. Oldham, Circuit Judge:
       A bankruptcy court held Appellants in civil contempt and ordered
them to pay $239,655 in compensatory damages. The bankruptcy court
abused its discretion. We vacate and remand.
                                       I.
       In 2019, litigation claims plunged Highland Capital Management, L.P.
into bankruptcy. James Dondero co-founded Highland and controlled it
when the firm filed its voluntary Chapter 11 petition. The bankruptcy
“provoked a nasty breakup between Highland Capital and . . . Dondero.”
Matter of Highland Cap. Mgmt., L.P., 48 F.4th 419, 424 (5th Cir. 2022).
Eventually, Highland, Dondero, and an unsecured creditors’ committee
entered into a settlement agreement. Id. at 425. Pursuant to that settlement,
Dondero relinquished control of Highland to three independent directors:
James P. Seery, Jr., John S. Dubel, and Russell Nelms. The bankruptcy court
approved the agreement.
       The directors then moved the bankruptcy court to appoint Seery as
Highland’s Chief Executive Officer, Chief Restructuring Officer, and
Foreign Representative. The bankruptcy court granted the motion. To
protect Seery from vexatious litigation—and this case has been full of it, see
Highland Capital, 48 F.4th at 426—the bankruptcy court adopted this
gatekeeping order:
       No entity may commence or pursue a claim or cause of action
       of any kind against Mr. Seery relating in any way to his role as
       the chief executive officer and chief restructuring officer of the

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        Debtor without the Bankruptcy Court (i) first determining
        after notice that such claim or cause of action represents a
        colorable claim of willful misconduct or gross negligence
        against Mr. Seery, and (ii) specifically authorizing such entity
        to bring such claim. The Bankruptcy Court shall have sole
        jurisdiction to adjudicate any such claim for which approval of
        the Court to commence or pursue has been granted.
ROA.1172 (“the Seery Order”). No interested party objected, so the Seery
Order became final.
        With Seery at the helm, Highland began untangling its estate. In late
2020, it entered into an agreement with one of its largest creditors,
HarbourVest, to settle a $300 million unsecured claim. Dondero objected,
but to no avail; the bankruptcy court blessed the settlement.1
        Not content to stand down, Dondero turned to two entities he
founded—the Charitable DAF Foundation and its affiliate CLO Holdco
(collectively “DAF”)—and DAF CEO Mark Patrick. Patrick then retained
the law firm Sbaiti & Company PLLC to investigate Highland. DAF
eventually filed suit against Highland in district court and alleged that
Highland, through Seery, withheld material information and engaged in self-
dealing related to the HarbourVest settlement.
        A week after filing the initial suit, DAF moved the district court for
leave to amend its complaint to add Seery as a defendant (“the Motion”). It
did not have the bankruptcy court’s approval to sue Seery. But DAF
reasoned that permission from the district court sitting over the bankruptcy
court would obviate this defect. The district court dismissed the Motion for

        _____________________
        1
          CLO Holdco, a DAF-controlled entity and an Appellant in this case, also lodged
an objection but withdrew it before the Bankruptcy Court ruled on the settlement.

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procedural reasons the day after it was filed. Therefore, DAF never sued
Seery.
         After the district court’s swift dismissal of the Motion, Highland
moved for an order requiring DAF, the persons who authorized the Motion,
and the Sbaiti Firm to show cause why they should not be held in civil
contempt for violating the Seery Order. The bankruptcy court granted the
motion and also required Dondero to show cause why he should not be
sanctioned. It then permitted extensive discovery, see ROA.9761–11237, and
held a lengthy evidentiary hearing, ROA.605. The bankruptcy court did so
not because there was any dispute that DAF filed the Motion, but rather to
consider the “explanations/rationales given by those involved . . . .”
ROA.44. The bankruptcy judge was especially curious about Dondero’s role.
         After the hearing, the bankruptcy court determined that the Motion
constituted “pursu[it] of a claim” against Seery in violation of the Seery
Order. ROA.53. Accordingly, it held all parties involved in filing the
Motion—DAF, Patrick, Sbaiti, Sbaiti attorneys Mazin Sbaiti and Jonathan
Bridges, and James Dondero (collectively “Appellants”)—in contempt and
ordered them to pay Highland $239,655. In making this estimate, the
bankruptcy court started by considering the expenses Highland actually
incurred—namely the fees Highland paid its lawyers to litigate the contempt
proceedings. But the bankruptcy court assumed Highland’s submissions
were “conservative,” so it added over $50,000 based on mere guesswork.
ROA.604–05. It declined Highland’s invitation to award treble damages but
imposed, sua sponte, a $100,000 sanction for failed appeals, apparently to
deter Appellants from seeking review of its contempt order.
         The district court vacated the bankruptcy court’s $100,000-per-
appeal sanction (without prejudice) because even Highland conceded that it
was excessive. But it affirmed the remainder of the award over Appellants’

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several objections. Most relevantly, Appellants argued that the sanction was
punitive and thus exceeded the scope of the bankruptcy court’s civil
contempt powers. The district court concluded that because the bankruptcy
court “expressly designed its award to compensate” Highland for the costs
it incurred in litigating the contempt proceedings, the award was
compensatory and therefore civil. ROA.12269 (quotation omitted).
        Appellants timely appealed to this court. We have jurisdiction under
28 U.S.C. § 158(d)(1). Our review is for abuse of discretion. See In re Bradley,
588 F.3d 254, 261 (5th Cir. 2009). But because a court “abuses its discretion
when it bases its decision on an erroneous legal conclusion,” Jeter v. Astrue,
622 F.3d 371, 376 (5th Cir. 2010) (citation omitted), we review the
bankruptcy court’s conclusions of law de novo.
                                           II.
                                           A.
        “Bankruptcy courts are not Article III courts.” Bradley, 588 F.3d at
266. Therefore, “they do not necessarily possess the inherent powers of such
courts.” Ibid. So while Article III courts have the inherent power to punish
violations of their orders through criminal contempt,2 see United States v.
United Mine Workers of Am., 330 U.S. 258, 294 (1947), bankruptcy courts
have only civil contempt powers because that is all Congress has given them.
See Bradley, 588 F.3d at 266; see also ibid. (noting that the source of
bankruptcy court’s contempt powers is statutory) (citing Placid Ref. Co. v.
Terrebonne Fuel & Lube, Inc., 108 F.3d 609, 612–13 (5th Cir. 1997)); see also 11
U.S.C. § 105(a) (“The [bankruptcy] court may issue any order, process, or

        _____________________
        2
          As long as they comply with the procedural safeguards that accompany criminal
contempt proceedings. See, e.g., United States v. Puente, 558 F. App’x 339 (5th Cir. 2013)
(per curiam).

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judgment that is necessary or appropriate to carry out the provisions of this
title.”). Accordingly, bankruptcy courts may issue contempt orders, but any
contempt sanction imposed by a bankruptcy court must be civil. See Bradley,
588 F.3d at 266.
       The civil contempt power is limited. That is because it “uniquely is
liable to abuse. Unlike most areas of law, where a legislature defines both the
sanctionable conduct and the penalty to be imposed, civil contempt
proceedings leave the offended judge solely responsible for identifying,
prosecuting, adjudicating, and sanctioning the contumacious conduct.” Int’l
Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 831 (1994)
(quotation and citations omitted). Thus, civil contempt sanctions may not
have the “primary purpose” of “punish[ing] the contemnor [or]
vindicat[ing] the authority of the court.” Lamar Fin. Corp. v. Adams, 918 F.2d
564, 566 (5th Cir. 1990). Rather, they must be “remedial, and for the benefit
of the complainant.” Bagwell, 512 U.S. at 827 (quotation and citation
omitted).
       That means civil contempt sanctions must be calculated either to
(1) coerce the contemnor into compliance with a court order or
(2) compensate another party for the contemnor’s violations. See Lamar, 918
F.2d at 566. Contempt sanctions imposed to coerce the contemnor into
compliance with a court order are civil only if they are “conditional on the
contemnor’s conduct.” Ibid.; see also Bagwell, 512 U.S. at 829 (“Where a fine
is not compensatory, it is civil only if the contemnor is afforded an
opportunity to purge.”). Contempt sanctions imposed for compensatory
purposes are civil only if they are “based upon evidence of complainant’s
actual loss.” United Mine Workers of Am., 330 U.S. at 304.
       A fee-shifting sanction—the kind we are tasked with reviewing here—
is supposed to be compensatory. See Goodyear Tire & Rubber Co. v. Haeger,

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581 U.S. 101 (2017). In Goodyear Tire, the Court reversed the sanction in
question because the district court failed to “establish a causal link[] between
the litigant’s misbehavior and legal fees paid by the opposing party.” Id. at
108. The required causal link means that a bankruptcy court may shift “only
those attorney’s fees incurred because of the misconduct at issue.” Id. at 109;
see ibid. (fee shifting awards “may go no further than to redress the wronged
party for losses sustained” (quotation and citation omitted)); ibid. (courts
must “calibrate[]” fee shifting awards “to the damages caused by the bad-
faith acts on which [they are] based” (quotation and citation omitted)).
Absent that because-of link, the sanction is punitive rather than
compensatory and hence falls outside the bankruptcy court’s statutorily
limited powers. Thus, if a contempt movant “would have incurred an
expense” even absent the non-movant’s contumacious conduct, “he has
suffered no incremental harm . . . and so the court lacks a basis for shifting
the expense.” Ibid.
                                      B.
       We start with common ground. DAF obviously could have filed the
Motion in the bankruptcy court. The Seery Order specifically states that an
entity may bring a covered claim with the bankruptcy court’s approval. See
ROA.1172. Thus, DAF (or any of the other Appellants for that matter) could
have filed the Motion in the bankruptcy court, sought the approval of the
bankruptcy judge, and committed no contempt.
       It is also common ground that DAF’s only contumacious conduct was
filing the Motion in the district court as opposed to the bankruptcy court. See
Oral Arg. at 17:05–21. We take the parties’ agreement on that as dispositive
of the scope and extent of Appellants’ misconduct.
       So the question presented is whether the bankruptcy court’s sanctions
award comports with Goodyear Tire. Both the bankruptcy judge and the

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district court reasoned that the award was compensatory because it shifted
expenses Highland reasonably and necessarily incurred in responding to the
Motion.3 Both courts were wrong.
        Highland incurred virtually all its contempt-related expenses because
the bankruptcy court permitted extensive discovery and conducted a
marathon evidentiary hearing to unearth Dondero’s role in filing the Motion.
But Dondero’s intentions were relevant only to criminal contempt—a
sanction the bankruptcy court was powerless to impose. See, e.g., Puente, 558
F. App’x at 341 (noting that, in criminal contempt proceedings, “the district
court must also find . . . that the defendant exhibited willful, contumacious
intent, or a reckless state of mind, at the time the prohibited conduct
occurred” (emphasis added) (quotation omitted)). Dondero’s intentions—
and virtually all of the discovery and the bankruptcy court’s mini-trial—were
irrelevant to civil contempt. The only question in civil contempt is whether
and to what extent Highland was damaged by DAF’s choice to file the

        _____________________
        3
          Neither court contended the sanctions award was designed to coerce Appellants
into obeying the Seery Order. See Lamar Fin. Corp., 918 F.2d at 566 (noting coercion is an
alternative basis for sanctions awards in bankruptcy courts). And no party before us
disputes this approach. That is for good reason: coercive sanctions must give the
contemnor an opportunity to purge the contempt. Ibid.; see also Bagwell, 512 U.S. at 829.
And the sanctions award in this case did not do so.
         Nor could the sanction be justified on the ground that the fees shifted were
incurred in proceedings necessary to fashion a sanction calculated to coerce prospective
compliance with the Seery Order. DAF disclosed the existence of the Seery Order in its
motion to amend before the district court, and it specifically asked the district court for
permission to commence a claim against Seery. Since bankruptcy courts exercise
jurisdiction at the sufferance of supervising district courts, see 28 U.S.C. § 151, Appellants
could have reasonably concluded that district court permission to commence a claim
against Seery would obviate the need for bankruptcy court approval. And in any event, we
can find no precedent for using sanctions to coerce a party into complying with an order
the party acknowledged and sought permission to obey (even if it sought permission in the
wrong forum).

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Motion in the wrong forum. Neither Highland nor the bankruptcy court was
permitted to seize on DAF’s error and leverage it into a punitive proceeding.
See id. at 342 (holding a punishment labeled “civil” was in fact criminal
“because the sanction imposed was apparently intended to punish past
conduct . . . rather than to secure future compliance or remedy some harm
resulting from noncompliance” (quotation omitted)).
                                        C.
       Highland offers two principal responses. The first came from oral
argument. The second came from Highland’s brief. Neither is persuasive.
       Oral argument first. When pressed for any remedial purpose behind
the sanctions award, Highland could only muster that a bankruptcy judge
“has every right and reason to vindicate its own authority by finding out who
is responsible for violating its orders.” Oral Arg. at 19:48-55 (emphasis
added). That is outcome-determinative here: We have explained that if “the
purpose of the sanction is to . . . vindicate the authority of the court, the order
is viewed as criminal.” Lamar Fin. Corp., 918 F.2d at 566. And because
“bankruptcy courts lack criminal contempt power,” Bradley, 588 F.3d at
266, they do not have inherent powers to impose sanctions for the purpose of
vindicating their own authority.
       Second, Highland points to unpublished opinions that have suggested
bankruptcy judges have wide discretion to shift expenses incurred during
civil-contempt proceedings. See, e.g., In re Skyport Glob. Commc’ns, 661 F.
App’x 835, 841 (5th Cir. 2016) (“Almost without exception it is within the
discretion of the trial court to include, as an element of damages assessed
against the defendant found guilty of civil contempt, the attorneys’ fees
incurred in the investigation and prosecution of the contempt proceedings.”
(citation omitted)). Of course, “[w]e are not bound by our unpublished
opinions.” United States v. Escalante, 933 F.3d 395, 402 n. 9 (5th Cir. 2019)

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(citing 5th Cir. R. 47.5.4). And in any event, these unpublished decisions
predate Goodyear Tire, so we would be obliged to reevaluate them even if they
were published. See, e.g., In re Bonvillian Marine Serv., Inc., 19 F.4th 787, 792–
93 (5th Cir. 2021).
       But more fundamentally, our unpublished decisions did not say
bankruptcy courts may shift fees to punish a party’s misconduct. Skyport, for
example, only established that civil contempt includes the power to “order
the award of attorneys’ fees for compensatory purposes where a party
necessarily expended fees in bringing an action to enforce the injunction.” 661
F. App’x at 841 (alteration adopted) (emphasis added) (quotation omitted)
(quoting Cook v. Ochsner Found. Hosp., 559 F.2d 270, 272 (5th Cir. 1977)).
The fees awarded to Highland bore no connection to redressing DAF’s
decision to file the Motion in the wrong court—much less were Highland’s
fees “necessarily expended.” Ibid. It is not as if the bankruptcy court awarded
fees to Highland that it incurred only because it responded to the Motion in
district court as opposed to bankruptcy court. Nor did Highland necessarily
expend fees to enforce an injunction requiring DAF to file the Motion in the
appropriate court, as in Skyport. So our unpublished decisions would not
control in any event.
       The judgment of the district court is VACATED, and the case is
REMANDED. On remand, the bankruptcy court is instructed to limit any
sanction award to the damages Highland suffered because DAF filed the
Motion in the wrong court—i.e., the expenses Highland reasonably incurred
in opposing the Motion in district court, less those it would have spent
opposing the Motion had it been filed in bankruptcy court.

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       James L. Dennis, Circuit Judge, dissenting:
       For the reasons assigned by the district court, I would affirm the
bankruptcy court’s $239,655 civil compensatory sanction award in full.
Charitable DAF Fund LP v. Highland Cap. Mgmt. LP, No. 21-1974, 2022 WL
4538466 (N.D. Tex. Sept. 28, 2022). “The bankruptcy court properly
constrained its compensatory award to fees incurred during the contempt
hearing, which would not have occurred in the absence of the sanctioned
conduct.” Id. at *7 n.82 (discussing Goodyear Tire & Rubber Co. v. Haeger,
581 U.S. 101 (2017)).
       To reach a contrary conclusion, the panel majority disregards the
three applicable standards of review. First, “[l]ike the district court,” we are
supposed to “review[] [the] bankruptcy court’s findings of fact for clear
error, and its legal conclusions de novo.” In re Bradley, 588 F.3d 254, 261 (5th
Cir. 2009) (citing Placid Ref. Co. v. Terrebonne Fuel & Lube, Inc., 108 F.3d 609,
613 (5th Cir. 1997)). Second, “[w]here the district court has affirmed the
bankruptcy court’s factual findings,” as is the case here, “we [should] only
reverse if left with a firm conviction that error has been committed.” Id.
(quotation omitted). And third, “[a] bankruptcy court’s assessment of
monetary sanctions for contempt [should be] reviewed for abuse of
discretion.” Id. (citation omitted).
       Instead, however, the majority selectively picks mere seconds of
Appellee counsel’s oral argument as constituting an agreement that
Appellants’ “only contumacious conduct” was filing their motion in the
wrong court, suggesting that the misfiling was a mere inadvertence. Ante, at
7 (majority opinion) (emphasis in original). The majority then asserts that
this “agreement” is “dispositive of the scope and extent of Appellants’
misconduct,” ignoring altogether Appellee counsel’s argument that “this
motion was filed in the wrong court in a very cynical and manipulative forum

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shopping move.” See Oral Argument Recording at 21:13-21:19, Charitable
DAF Fund v. Highland Capt’l Mgmt, 22-11036 (5th Cir. Sep. 5, 2023).
       I sincerely disagree with the majority. The record contains no facts or
evidence indicating that Appellee’s counsel agreed to such an incorrect and
rhetorically disadvantageous position. Nor is there any basis for the
majority’s unfair implication that the bankruptcy court seized on Appellants’
“error” and leveraged it into a punitive proceeding. Ante, at 9.
       After reviewing the record and applying the standards of review
required by our circuit precedents, I conclude that the bankruptcy court and
the district court committed no error of law, no clear error of fact, and no
abuse of discretion. For these reasons, I respectfully dissent from the
majority’s reversal of the bankruptcy and district courts’ judgments.

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