The U.S. Supreme Court granted Dallas-based Highland Capital Management an emergency stay of a lower court decision that allowed the investment firm’s former CEO to pursue litigation against parties involved in Highland Capital’s bankruptcy.
Justice Samuel Alito issued a one-page order that temporarily pauses an order issued in March by the U.S. Court of Appeals for the Fifth Circuit that would allow James Dondero, who co-founded Highland Capital in 1993, to sue individuals and entities that a North Texas bankruptcy judge previously ruled were protected from litigation related to Highland Capital’s bankruptcy and restructuring.
In 2021, Chief Bankruptcy Judge Stacey Jernigan of the Northern District of Texas approved Highland Capital’s bankruptcy plan that allowed the court to be a gatekeeper of any future litigation brought by Dondero or others involved in the bankruptcy against the investment firm and its officers and directors.
In court documents, lawyers for Highland Capital argue that the firm’s 2019 Chapter 11 “was caused by its former CEO’s serial litigiousness, which strapped Highland with a myriad of massive, unrelated, business litigation claims after a decade or more of contentious litigation in multiple forums all over the world.”
“That man is James Dondero, and he has tried since 2019 to obstruct Highland’s bankruptcy at every turn after he was replaced as CEO,” Highland Capital argued.
Dondero and NexPoint Advisors appealed to the Fifth Circuit.
The Fifth Circuit ruled that Judge Jernigan exceeded her authority in potentially shielding people who are not in bankruptcy from liability. The appellate court ruled that Judge Jernigan did not narrowly define “protected parties.” The Fifth Circuit said that bankruptcy releases cannot be used to protect nonbankrupt parties from liability.
The Fifth Circuit’s order was set to take effect tomorrow, May 30.
Highland Capital filed an emergency appeal to the Supreme Court on Tuesday asking the justices to stay the Fifth Circuit’s order until the justices could decide whether to hear its appeal of the Fifth Circuit decision.
“This case presents multiple related circuit splits concerning a bankruptcy court’s power to protect from harassment those persons and entities who do the hard, unglamorous work of trying to turn around failing companies in bankruptcy,” Highland Capital argued in its emergency appeal to the Supreme Court. “In two decisions below, the Fifth Circuit has recognized that it has adopted a minority view on two issues on which there are circuit splits. These issues warrant this Court’s attention—as even the respondents have agreed previously.
“But a stay of the Fifth Circuit’s mandate is first needed to preserve the value of the reorganization, nearly six years of hard bankruptcy work, and the promises that induced the service of those who shepherded Highland through a contentious bankruptcy,” lawyers for Highland Capital stated in its petition.
Highland Capital is represented by Pachulski, Stang Ziehl & Jones and Kramer Levin Naftalis & Frankel.
While no lawyers for Dondero have made an appearance in the Supreme Court, he and his firm previously have been represented by Jeffrey Levinger and Joseph Carl Cecere, Jr. of Dallas.
The case is Highland Capital Management v. NexPoint Advisors, U.S. Supreme Court No. 24A1154.