A Dallas bankruptcy judge has approved a restructuring plan for an investment adviser that was previously controlled by Highland Capital Management in a bankruptcy case that quickly became contentious between the two parties.
The plan, approved last Thursday by U.S. Bankruptcy Judge Stacey Jernigan, will allow Dallas-based Acis Capital Management and its general partner to repay its creditors upon emergence of bankruptcy. Once at that point, it will also be owned and operated by its previous leader, Joshua Terry. The plan was proposed by Acis’ Chapter 11 trustee, Dallas lawyer Robin Phelan.
“We are pleased the bankruptcy court saw a potential future for this company,” Winstead attorney Rakhee Patel, who represents Phelan and Terry, said in a statement. “We believe this case is a prime example of how the bankruptcy process can and should work for aggrieved creditors.”
But Acis may not be out of the woods just yet. Last Friday, Highland appealed the plan confirmation, arguing that Acis should not have been ordered into bankruptcy in the first place. Highland’s lawyers will argue their appeal at a hearing in U.S. District Judge Sidney Fitzwater’s court at the end of the month.
Highland has also asked Judge Jernigan to stay her order pending the appeal. She will decide whether she will do so after both sides weigh in at a hearing scheduled for Friday.
On the surface, Judge Jernigan’s order paves the way for a financially-troubled company to pay back its creditors and return under the control of Terry.
“At the outset of this bankruptcy case, it was not clear whether creditors would have a reorganized company to look to for repayment,” Forshey Prostok’s Jeff Prostok, Acis’ lead bankruptcy lawyer, said in a statement. “Acis can now pay back its creditors and provide meaningful returns for investors.”
But at a deeper level, the ruling is the latest development in an ongoing, bitter legal dispute between Terry and Highland Capital CEO James Dondero that is far from over. It surfaced in 2016 after Highland’s termination of Terry that resulted in an $8 million arbitration award in Terry’s favor.
In her ruling, Judge Jernigan called it an “astonishingly contentious” dispute.
Acis is in the business of managing hundreds of millions of dollars worth of collateralized loan obligations (CLOs) and has a total of $2 billion in assets under management. Co-founded in 2010 as an affiliate of Highland Capital, Acis and had a subcontractor relationship with Highland in which Highland would provide Acis front office personnel, advisors and back-office services in return for “handsome fees,” court documents say. From 2011 to 2016, Acis was led by Terry, the former head of Highland’s structured products team and an Acis co-founder.
Dondero terminated Terry in June 2016 for reasons that have been highly-disputed, and in the process, deemed Terry’s 25 percent limited partnership interest in Acis as forfeited. Highland sued Terry in September 2016 on a variety of claims, such as breach of fiduciary duty and self-dealing, which led to the $8 million arbitration award in Terry’s favor in October 2017. The liability technically weighed on Acis since the core of the dispute revolved around Terry’s termination from the CLO firm.
According to court documents, Terry’s lawyers later conducted post-judgment discovery for garnishment purposes, which included deposing Highland General Counsel Scott Ellington. This led to the discovery of what Terry’s lawyers argued was a scheme by Highland to transfer some of Acis’ key revenue sources to a Cayman Island affiliate of Highland in an attempt to make Acis assets judgment proof.
Terry’s lawyers asked a state court to issue a temporary injunction that would bar the revenue source (CLO management contracts) from being transferred away from Acis, a request that was granted after a Jan. 24, 2018 hearing.
Several days later, Terry filed an involuntary bankruptcy petition as the sole petitioning creditor against Acis and its general partner in an attempt to collect the $8 million from Acis. Highland and a couple of its affiliated entitles first came into the picture of the bankruptcy as interested parties a couple months later.
After a multi-day trial last May, Judge Jernigan converted the case to a full-blown Chapter 11 proceeding, and appointed Phelan trustee.
After a few revisions to a bankruptcy plan for Acis, the plan proposed by Phelan that Judge Jernigan ultimately approved last week included a temporary injunction, which was the most hotly-contested issue between the trustee and the Highland entities.
Highland is opposed to it because the injunction temporarily bars the Highland affiliates from “effectuating an optional redemption or liquidating the Acis CLOs and related actions” until one of the following happens first: the creditors of Acis (a.k.a. Terry and a few law firms) are paid in full, a pair of separate legal disputes between Highland and the trustee (also in Jernigan’s court) are resolved, there’s a material breach in the bankruptcy plan, or the bankruptcy court terminates the injunction upon request of a party-in-interest.
Highland argues the injunction tries to strip its CLO investors’ redemption rights, which in turn makes Highland’s investors the victims to the bankruptcy plan. It contends that it will do everything it can to protect its investors from the plan.
“We disagree with the bankruptcy court’s approval of Plan D and believe such approval will be reversed by the district court at a hearing scheduled on Feb. 28, which will address, among other appealed matters, whether the Acis debtors should have been ordered into bankruptcy at all,” a Highland spokesperson said.
In her order, Judge Jernigan said she made her ruling after a multi-day hearing in December that featured “testimony of more than a dozen witnesses, more than 700 exhibits and hundreds of pages of legal briefing.”
Highland Capital and affiliate Neutra Cayman’s lawyers are Holly O’Neil, Jason Binford and Melina Bales of Foley Gardere and Michael Hurst, Shonn Brown and Adrian Garcia of Lynn Pinker Cox & Hurst. The third Highland affiliate in the embittered bankruptcy battle, Highland CLO Funding, is being represented by King & Spalding lawyers in Atlanta.
Others on the team representing the trustee are Winstead lawyers Annmarie Chiarello, Jason Enright and Phillip Lamberson and Forshey Prostok lawyers Matthias Kleinsasser and Suzanne Rosen.