A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit unanimously upheld a contempt order against the cofounder and former CEO of Highland Capital Management on Monday, rejecting the executive’s argument that errors in the way the sanction was awarded mandated its undoing.
James Dondero had appealed to the Fifth Circuit in September 2022, arguing the bankruptcy judge, Chief Judge Stacey G.C. Jernigan, wrongly found him in contempt of a temporary restraining order and awarded compensatory damages to Highland. Dondero had filed an adversary proceeding against Highland, raising objections to the disposition of the company’s assets in bankruptcy.
The temporary restraining order was issued after Judge Jernigan agreed with Highland Capital that it was needed to prevent Dondero’s interference with Highland’s business operations. And the contempt order — which included a $450,000 compensatory monetary sanction against Dondero — was handed down after Judge Jernigan found Dondero had violated the order both by interfering with Highland’s intended sales of assets and by having certain communications with Highland employees.
Dondero argued on appeal that the judge failed to limit the sanction to cover only fees the Highland Capital legal team incurred after the entry of the temporary restraining order; that the judge found him in contempt of the TRO without clear and convincing evidence he violated its terms; and that awarding the sanction itself was error.
Oral arguments were heard by the court on Sept. 6. Judge Leslie H. Southwick authored the court’s 15-page opinion, joined by Judges Jerry E. Smith and Stephen A. Higginson.
Judge Southwick wrote that the “minor factual issues” Dondero raised on appeal do not “support error.”
“Undergirding our analysis of the sanctions award here is a recognition of the goal of such awards everywhere: ‘to do rough justice,’” he wrote. “Complete accuracy is neither required nor expected. The bankruptcy court’s judgments in these matters are entitled to our ‘substantial deference.’”
According to the opinion, Highland filed for Chapter 11 bankruptcy in 2019, and to avoid appointment of a trustee, Highland, Dondero and the Official Unsecured Creditors Committee reached an agreement to “overhaul Highland’s governance structure.”
That deal led to James Seery taking over as CEO and chief restructuring officer and Dondero resigning as CEO but staying on as an unpaid employee of Highland. Amid tensions over the company’s winddown, Dondero agreed to resign in October 2020.
The opinion notes that Highland’s organizational structure “encompasses up to 2,000 other investment entities.”
“The bankruptcy court observed that many of these related entities ‘appear to be under the de facto control of Mr. Dondero,’ who acts as the president and portfolio manager for many of them,” Judge Southwick wrote. “Even after his resignation, Dondero continued managing these affiliates, most notably NexPoint Advisors LP and Highland Capital Management Fund Advisors LP.”
In December 2020, Highland asked the court for a temporary restraining order and injunction that would put an end to Dondero’s alleged interference with Highland’s operations, pointing to evidence that Dondero told Highland employees “not to carry out the planned sale of securities owned by Highland.”
The TRO was granted and in January 2021 Highland moved to have Dondero held in contempt for violating the TRO by interfering with Highland’s intended sales of assets and by communicating with members of Highland’s legal team where he appeared to be coordinating his own legal strategy against Highland.
In June 2021, the court found Dondero in contempt for both interfering with Highland’s trading activities and communicating with Highland’s employees in a manner that violated the TRO.
In April, a different panel of Fifth Circuit judges issued a 2-1 ruling finding it was an abuse of discretion when the bankruptcy judge held Dondero in contempt and slapped him with a $239,655 sanction. The sanction was issued after the court found Dondero violated an order barring him from suing Highland’s current CEO outside of bankruptcy court when entities he controls added court-appointed CEO James P. Seery as a defendant in a district court lawsuit.
Judge Andrew S. Oldham, joined by Judge Kurt D. Engelhardt, wrote that the “civil contempt power is limited” and sanctions must be calculated to either “coerce the contemnor into compliance with a court order or compensate another party for the contemnor’s violations.”
“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,” Judge Oldham wrote. “But Dondero’s intentions were relevant only to criminal contempt — a sanction the bankruptcy court was powerless to impose.”
Judge Oldham’s opinion instructed the bankruptcy court to “limit any sanction award to the damages Highland suffered” because the motion was filed in the wrong court.
Judge James L. Dennis wrote in a dissent that he “sincerely” disagrees with the majority and would have affirmed the bankruptcy court’s sanction in full.
In Monday’s ruling, the Fifth Circuit explained in a footnote that its earlier ruling was issued in Dondero’s favor because the sanction awarded was tied to the bankruptcy judge’s decision to conduct a “lengthy evidentiary hearing” to determine Dondero’s intent in violating the court’s order.
“Intent does not matter except for criminal contempt sanctions, and the bankruptcy court erred in conducting a lengthy hearing on intent when it did not have authority to impose criminal contempt sanctions,” Judge Southwick wrote. “No such error exists in the proceedings before us.”
Counsel for the parties did not respond to messages seeking comment Tuesday.
Dondero is represented by Jeffrey Levinger and Joseph Carl Cecere Jr. of Dallas.
Highland Capital is represented by John A. Morris, Jeffrey N. Pomerantz, Gregory V. Demo and Hayley R. Winograd of Pachulski Stang Ziehl & Jones in Los Angeles and Melissa S. Hayward and Zachery Z. Annable of Hayward in Dallas.
The case number is 22-10889.