Dugaboy Invst v. Highland Capital ( 2023 )

Case: 22-10983 Document: 00516838278 Page: 1 Date Filed: 07/28/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________ FILED
July 28, 2023
No. 22-10983 Lyle W. Cayce
____________ Clerk
In the Matter of Highland Capital Management, L.P.
Debtor,
The Dugaboy Investment Trust,
Appellant,
versus
Highland Capital Management, L.P.,
Appellee.
______________________________
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:21-CV-1295
______________________________
Before Wiener, Southwick, and Duncan, Circuit Judges.
Per Curiam: *
Appellant argues that the bankruptcy court lacked jurisdiction to
approve a settlement agreement among debtor Highland Capital
Management, L.P., the debtor’s largest prepetition creditor, and an entity
_____________________
*
This opinion is not designated for publication. See 5th Cir. R. 47.5.
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affiliated with Highland Capital but that was not a debtor under its Chapter
11 petition. We disagree. AFFIRMED.
FACTUAL AND PROCEDURAL BACKGROUND
In 2007, Highland Capital entered into an agreement with UBS
Securities LLC and UBS AG London Branch (together, “UBS”), under
which UBS would warehouse Highland Capital’s collateralized debts. UBS
made a margin call on Highland Capital’s account, which it could not meet,
and Highland Capital allegedly began to “comingle funds in an attempt to
mislead UBS.” Included in these alleged dealings was a $6,616,429 sham
transaction involving Highland Multi Strategy Credit Fund, L.P. (“Multi-
Strat LP”) and Highland Multi Strategy Credit Fund, Ltd. (we will refer to
these two parties as “Multi-Strat”). Highland Capital is Multi-Strat’s
investment manager and has “full authority over” that entity.
UBS filed suit in New York state court in 2009 based on that 2007
agreement. By 2011, after numerous procedural changes — including the
consolidating of two of UBS’s actions — UBS’s claims pending against
Highland Capital and Multi-Strat included ones for breach of contract and
fraudulent transfer.
The state court split the claims into two trial phases. Phase I included
UBS’s breach of contract claims against two of Highland Capital’s affiliates.
Phase II included claims against Highland Capital directly and Multi-Strat.
Highland Capital filed its Chapter 11 petition in Delaware in October 2019,
which resulted in the Phase II claims being stayed. In February 2020, the
New York state court entered a $1,039,957,799.44 judgment in favor of UBS
for the Phase I claims.
Highland Capital’s Chapter 11 petition was transferred to the
Bankruptcy Court for the Northern District of Texas. The proceedings have
been contentious, prompting numerous appeals to our court. Each has been
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brought by Highland Capital’s co-founder, James Dondero — who is no
longer affiliated with Highland Capital — or by entities that he controls, such
as Appellant here. 1
In the bankruptcy court, UBS filed joint-litigation claims against
Highland Capital’s estate for $1,039,957,799.40 based on the state court
action. The bankruptcy court ordered Highland Capital, UBS, and
numerous other parties to undergo mediation and attempt to settle UBS’s
claims. In the meantime, the court temporarily allowed UBS’s claim for
voting purposes in the amount of $94,761,076.
Eventually, UBS and Highland Capital reached a settlement which
included other related entities, including Multi-Strat. On April 15, 2021,
Highland Capital moved for an order approving the settlement agreement.
Among the terms of the agreement were these: (1) UBS would be allowed a
general, unsecured claim of $65,000,000 and a subordinated, unsecured
claim of $60,000,000; (2) Multi-Strat would pay UBS $18,500,000; (3)
Highland Capital would aid in UBS’s collection efforts in numerous ways,
including in “the investigation or prosecution of claims” against Multi-Strat
and Dondero; and (4) the parties would, subject to certain exceptions, release
all claims against each other, including those related to the New York action.
The only objections were by Dondero and his family trusts: The
Dugaboy Investment Trust (“Dugaboy” or “Appellant”) and Get Good
Trust (together, the “Trusts”). They maintained that the bankruptcy court
lacked jurisdiction to approve the portion of the agreement between UBS and
_____________________
1
See Dugaboy Inv. Tr. v. Highland Cap. Mgmt., L.P., No. 22-10831, 2023 WL
2263022 (5th Cir. Feb. 28, 2023); Highland Cap. Mgmt. Fund Advisors, L.P. v. Highland
Cap. Mgmt., L.P., 57 F.4th 494 (5th Cir. 2023); NexPoint Advisors, L.P. v. Highland Cap.
Mgmt., L.P., 48 F.4th 419 (5th Cir. 2022).
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Multi-Strat because the court lacks jurisdiction to settle a claim between two
non-debtors.
After a hearing, the bankruptcy court concluded that it had related-to
jurisdiction because the settlement had “a conceivable effect on the estate.”
It additionally concluded the settlement was a core proceeding under 28
U.S.C. § 157(b)(2). It relied in part on the fact that Highland Capital is Multi-
Strat’s “investment manager, with full authority over” it. Consequently,
there likely would have been objections if UBS and Multi-Strat attempted to
enter into an independent settlement on the grounds that Highland Capital
was using its control over Multi-Strat without the court’s consent. The
bankruptcy court did not see how this settlement agreement was any different
than those involving non-debtors regularly approved by bankruptcy courts.
Accordingly, it approved the settlement.
The Trusts appealed to district court, again challenging the
bankruptcy court’s jurisdiction. First, the district court rejected the Trusts’
position that the settlement consisted of multiple sub-agreements, i.e., one
between UBS and Highland Capital, and another between UBS and Multi-
Strat. Consequently, it examined the agreement as a whole. Because UBS
agreed to release its claim against Highland Capital as part of that agreement,
the settlement affected the bankruptcy estate and was within the bankruptcy
court’s jurisdiction.
Additionally, because Multi-Strat acts through Highland Capital, its
investment manager, Multi-Strat’s allegedly fraudulent transfers necessarily
were initiated by Highland Capital. Therefore, UBS’s state-court claims
against Multi-Strat involve Highland Capital’s behavior and are related to the
estate. Further, Highland Capital “had to exercise its management and
control rights over” Multi-Strat to approve the settlement. Those rights are
part of the bankruptcy estate; thus, Multi-Strat could not execute the
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settlement without Highland Capital’s exercising control over estate
property. Finally, the agreement, at the very least, constrained Highland
Capital’s rights, providing another alternative basis for jurisdiction.
The district court considered and affirmed the settlement. Dugaboy
timely appealed to this court.
DISCUSSION
Dugaboy raises only one issue on appeal: whether the bankruptcy
court had jurisdiction to approve the portion of the settlement agreement
between UBS and Multi-Strat.
We review the bankruptcy court’s decision, although “we may benefit
from the district court’s analysis.” See In re Age Refin., Inc., 801 F.3d 530,
538 (5th Cir. 2015) (quotation marks and citation omitted). Findings of fact
are reviewed for clear error and conclusions of law de novo. Id.District courts “have original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or related to cases under title
11.” 28 U.S.C. § 1334(b). Those courts are permitted to refer “any or all
cases under title 11 and any or all proceedings arising under title 11 or arising
in or related to a case under title 11” to the bankruptcy courts. 28 U.S.C. §
157(a). In assessing jurisdiction, there is no need “to distinguish between
proceedings ‘arising under’, ‘arising in a case under’, or ‘related to a case
under’, title 11” because “[t]hese references operate conjunctively.” In re
Wood, 825 F.2d 90, 93 (5th Cir. 1987). “Therefore, it is necessary only to
determine whether a matter is at least ‘related to’ the bankruptcy.” Id.“We have read this jurisdictional grant broadly, stating that the test
for whether a proceeding properly invokes federal ‘related to’ jurisdiction is
whether the outcome of the proceeding could conceivably affect the estate
being administered in bankruptcy.” In re TXNB Internal Case, 483 F.3d 292,
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298 (5th Cir. 2007) (emphasis added). “Certainty is unnecessary; an action
is ‘related to’ bankruptcy if the outcome could alter, positively or negatively,
the debtor’s rights, liabilities, options, or freedom of action or could influence
the administration of the bankrupt estate.” Id.Once bankruptcy jurisdiction is established, the bankruptcy court’s
adjudicative power varies based on whether the particular proceeding is core
or non-core. See In re OCA, Inc., 551 F.3d 359, 367 (5th Cir. 2008). For core
proceedings, the bankruptcy court may enter final judgment, subject to
review by the district court. 28 U.S.C. § 157(b)(1). For non-core
proceedings, the bankruptcy court’s power is generally limited to submitting
proposed findings and conclusions to the district court, in order for the
district court to enter final judgment. Id. § 157(c)(1). The bankruptcy court,
however, is permitted to enter final judgment over non-core proceedings if
the parties consent and if referenced by the district court. Id. § 157(c)(2).
I. “Core jurisdiction”
We begin with Highland Capital’s argument that its right to control
Multi-Strat is estate property. Highland Capital contends that, because the
settlement agreement was outside the ordinary course of business, it was
required to seek permission from the bankruptcy court before exercising
those rights to cause Multi-Strat to execute the agreement, citing 11 U.S.C.
§ 363(b). Finally, it argues the bankruptcy court has “core jurisdiction” over
proceedings under Section 363(b), not merely related-to jurisdiction.
Therefore, contends Highland Capital, the bankruptcy court had core
jurisdiction over the settlement agreement.
We disagree, at least in part. Whether the bankruptcy court has
subject-matter related-to jurisdiction is an inquiry separate from, although
similar to, whether it has the power to enter final judgment. See In re OCA,
551 F.3d at 367–69. We need not decide whether every event involving the
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use of a debtor’s property outside the ordinary course of business constitutes
a core proceeding and falls under the bankruptcy court’s jurisdiction. It is
enough to say that if the court has jurisdiction over a mutual compromise of
a claim against the estate, it possesses the power to approve that compromise.
See In re Gibraltar Res., Inc., 210 F.3d 573, 576 (5th Cir. 2000). In fact,
“compromises are a normal part of the process of reorganization.” In re
Cajun Elec. Power Co-op., Inc., 119 F.3d 349, 354 (5th Cir. 1997) (quotation
marks and citation omitted). Therefore, we focus on whether the settlement
was “at least ‘related to’ the bankruptcy.” See In re Wood, 825 F.2d at 93.
II. Related-to jurisdiction
Dugaboy claims the settlement was not related to Highland Capital’s
bankruptcy estate. First, Dugaboy argues UBS’s state court suit had no
conceivable effect on the estate. It maintains the “only possible difference”
between this case and one of our precedents in which we held the bankruptcy
court lacked jurisdiction to enjoin certain third-party actions is that Highland
Capital was the investment manager for the entity that UBS is suing. See In
re Zale Corp., 62 F.3d 746 (5th Cir. 1995). Dugaboy avers that because
Highland Capital could never be held liable for Multi-Strat’s actions, the
settlement had no conceivable effect on the estate.
Dugaboy also argues that even if Highland Capital’s interest in Multi-
Strat was estate property, Multi-Strat’s assets were not. Therefore, Dugaboy
asserts the court had no authority to approve an exchange of those assets.
Any effect the settlement had on the estate, Dugaboy concludes, was only
because Highland Capital manipulated the agreement for that purpose,
which should not be permitted.
In response, we begin with our observation that much of Dugaboy’s
briefing seemingly relies on the assumption that the bankruptcy court needed
jurisdiction over UBS’s underlying state-law claim. It did not. A settlement-
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and-release is not equivalent to an adjudication on the merits. See Matsushita
Elec. Indus. Co., v. Epstein, 516 U.S. 367, 381–82 (1996). “[I]t is widely
recognized that courts without jurisdiction to hear certain claims have the
power to release those claims as part of a judgment.” Grimes v. Vitalink
Commc’ns Corp., 17 F.3d 1553, 1563 (3d Cir. 1994). The bankruptcy court did
not assert jurisdiction over UBS’s state action. It approved a bargained-for
compromise of those claims. Accordingly, it needed jurisdiction only over
the settlement agreement itself and over the parties who entered it, not over
the underlying claims.
Additionally, Dugaboy views the settlement as two separate
agreements: one between UBS and Highland Capital, and another between
UBS and Multi-Strat. Dugaboy makes a vague, policy-oriented argument
that Highland Capital should not be allowed to “manipulate” the agreement
“in order to create bankruptcy court jurisdiction” and use Multi-Strat’s
assets for its own benefit. Significantly, though, it provides no authority
explaining why we should isolate the UBS/Multi-Strat portion of the
agreement, rather than analyzing the settlement in its entirety. We keep it
whole.
Next, Dugaboy’s reliance on Zale is misplaced because that case is
distinguishable. Most notably, the settlement agreement in Zale was
contingent on the bankruptcy court’s issuing an injunction that barred non-
parties to the agreement “from suing the settling parties for their actions in
relation to the settlement.” 62 F.3d at 749. In Zale, we emphasized the
significance of this, clarifying that “the issue before [the court] [was] not
whether the bankruptcy court had jurisdiction over the settlement . . . , but
whether [it] had jurisdiction over an attempt to enjoin actions” by the non-
parties. Id. at 755. No such injunction was issued here. Although Dugaboy
takes issue with how it was accomplished, Multi-Strat agreed to the
compromise.
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The settlement, as a whole, was undoubtedly related to the
bankruptcy. Among many other things, it resolved the in-excess-of $1 billion
claim that UBS was seeking and allowed UBS two claims in the aggregate
amount of $125 million. It released Highland Capital from further liability
to, and required it to relinquish any claims it may have had against, UBS.
Fundamentally, the agreement altered Highland Capital’s “rights,
liabilities, options, or freedom of action” and “influence[d] the
administration of the bankrupt estate.” See In re TXNB Internal Case, 483
F.3d at 298.
AFFIRMED.
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