¨1¤}HV4!( %T« 1934054200108000000000005 · extend to parties other than James Dondero and argues...

DOCS_NY:40010.5 36027/002

PACHULSKI STANG ZIEHL & JONES LLP

Jeffrey N. Pomerantz (CA Bar No.143717) (admitted pro hac vice)

Ira D. Kharasch (CA Bar No. 109084) (admitted pro hac vice)

Maxim B. Litvak (Texas Bar No. 24002482)

Gregory V. Demo (NY Bar No. 5371992) (admitted pro hac vice)

10100 Santa Monica Blvd., 13th Floor

Los Angeles, CA 90067

Telephone: (310) 277-6910

Facsimile: (310) 201-0760

HAYWARD & ASSOCIATES PLLC

Melissa S. Hayward

Texas Bar No. 24044908

[email protected]

Zachery Z. Annable


[email protected]

10501 N. Central Expy, Ste. 106

Dallas, Texas 75231

Tel: (972) 755-7100

Fax: (972) 755-7110

Counsel and Proposed Counsel for the Debtor and Debtor in Possession

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

In re:

HIGHLAND CAPITAL MANAGEMENT, L.P.,1

Debtor.

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Chapter 11

Case No. 19-34054-sgj11

DEBTOR’S REPLY IN SUPPORT OF MOTION OF THE DEBTOR FOR APPROVAL

OF SETTLEMENT WITH THE OFFICIAL COMMITTEE OF UNSECURED

CREDITORS REGARDING GOVERNANCE OF THE DEBTOR AND

PROCEDURES FOR OPERATIONS IN THE ORDINARY COURSE

The above-captioned debtor and debtor in possession (the “Debtor”) hereby

submits this reply (the “Reply”) in support of the Motion of the Debtor for Approval of

1 The Debtor’s last four digits of its taxpayer identification number are (6725). The headquarters and service

address for the above-captioned Debtor is 300 Crescent Court, Suite 700, Dallas, TX 75201.

Case 19-34054-sgj11 Doc 329 Filed 01/08/20 Entered 01/08/20 17:30:16 Page 1 of 11

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1934054200108000000000005

Docket #0329 Date Filed: 01/08/2020

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Settlement with the Official Committee of Unsecured Creditors Regarding Governance of the

Debtor and Procedures for Operations in the Ordinary Course [Docket No. 281] (the

“Settlement Motion”).2

In further support of the Settlement Motion, the Debtor respectfully states as follows:

Preliminary Statement

1. The settlement, embodied in the Term Sheet, resolves months of litigation

between the Debtor and the Committee over the Debtor’s governance structure and operations

and allows the Debtor and the Committee to focus their efforts on moving this case to a

resolution that benefits all stakeholders. The Debtor, the Committee, and the Committee’s

members, who are the Debtor’s major creditors, agreed to the Term Sheet and have not objected

to the Settlement Motion.

2. Further, although the Settlement Motion was properly noticed, the only

party to file a full objection was the United States Trustee for Region 6 (the “UST”).3 In fact, (a)

other than certain issuers of collateralized loan and debt obligations (the “Issuers”),4 no investor

in any fund or entity managed by the Debtor has objected to the Settlement Motion; (b) no

governmental agency, including the Securities and Exchange Commission (the “SEC”), has

2 All capitalized terms used but not defined herein have the meaning given to them in the Settlement Motion. 3 See United States Trustee’s Objection to the Motion of the Debtor for Approval of Settlement with the Official

Committee of Unsecured Creditors Regarding Governance of the Debtor and Procedures for Operating in the

Ordinary Course [Docket No. 313] (the “UST Objection”). 4 On January 7, 2020, the Issuers filed the Limited Objection to Motion of the Debtor for Approval of Settlement with

the Official Committee of Unsecured Creditors Regarding Governance of the Debtor and Procedures for Operations

in the Ordinary Course [Docket No. 324] (the “Issuer Objection”). The Issuer Objection did not object to the

settlement per se and, in fact, expressed that the Issuers were “pleased that the Debtor and the Committee have

reached consensus early in this case on issues related to the Debtor’s management.” (Issuer Objection, ¶ 2.)

Instead, the Issuers’ limited objection was that the Term Sheet provided too much oversight of the Debtor’s

postpetition activities. The Debtor and the Committee are currently in discussions with the Issuers and hope to

resolve the Issuer Objection.


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objected to the Settlement Motion; and (c) no other party-in-interest has objected to the

Settlement Motion.5

3. In the UST Objection, the UST raises various concerns regarding the Term

Sheet and the manner in which the settlement embodied therein will be implemented. However,

at its core, the UST Objection is an attempt by the UST to substitute its judgment for the

judgment of the Debtor, the Committee, the Debtor’s creditors and other parties-in-interest

(including investors in the Debtor’s managed funds and related entities), and the governmental

agencies tasked with overseeing and regulating the Debtor, and to advocate for the appointment

of a Chapter 11 trustee.6 Although the UST is empowered with certain rights and duties under

28 U.S.C. § 586, substituting its judgment for the judgment of every major constituency in the

Debtor’s bankruptcy proceeding is not one of them.

Reply

4. In the UST Objection, the UST raises three general objections: (a) the

Term Sheet leaves certain items to be resolved in the future, including “important legal issues;”

(b) this Court lacks jurisdiction to implement the corporate governance matters or enforce the

corporate governance matters set forth in the Term Sheet; and (c) the Term Sheet does not

protect investors. Each of these three objections is addressed below.

5 Jefferies LLC (“Jefferies”) filed the Statement and Reservation of Rights of Jefferies LLC in Response to Debtor’s

Motion for Approval of Settlement with the Official Committee of Unsecured Creditors Regarding Governance of

the Debtor and Procedures for Operations in the Ordinary Course [Docket No. 312] (the “RoR”). The RoR was not

an objection to the Settlement Motion, and the Debtor and Jefferies have agreed to certain language to be added to

the proposed order approving the Settlement Motion, which resolves the RoR. 6 On December 23, 2019, the UST filed the United States Trustee’s Motion for an Order Directing the Appointment

of a Chapter 11 Trustee [Docket No. 271] (the “Trustee Motion”). Although the UST was informed that the

Committee and the Debtor were attempting to resolve the Debtor’s governance issues, the UST, through the Trustee

Motion, sought the appointment of a Chapter 11 trustee to oversee the Debtor’s estate. The Debtor intends to object

to the Trustee Motion, and, on information and belief, believes that no party-in-interest in this case supports the

Trustee Motion.


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I. The Term Sheet

5. Identity of Third Independent Director. The Settlement Motion identified

James Seery and John Dubel as proposed Independent Directors, but the UST objects that the

Term Sheet did not disclose the identity of the third Independent Director. After the Settlement

Motion was filed, the Debtor and the Committee agreed to a slate of four potential directors from

which Messrs. Seery and Dubel would select the third Independent Director, and they have

selected the Honorable Russell E. Nelms to be the third Independent Director. Judge Nelms’

curriculum vitae is attached to this Reply as Exhibit A.

6. Independent Director Compensation. The UST objects that the

compensation to be paid to the Independent Directors is not disclosed in the Term Sheet. Since

filing the Settlement Motion, the Debtor and the Committee have discussed with the Independent

Directors the amount of compensation to be paid to each Independent Director and have agreed

that each Independent Director will receive a monthly payment of (a) $60,000 for each of the

first three months, (b) $50,000 for each of the next three months, and (c) $30,000 for each of the

following six months, provided that the parties will re-visit the director compensation after the

sixth month (the “Director Compensation”). Although the Independent Directors will sit at

Strand, the Debtor is seeking authority from this Court to pay the Director Compensation.

7. Appointment of Chief Executive Officer (“CEO”). The Term Sheet does

not require the appointment of any CEO. Instead, the Term Sheet recognizes that the

Independent Directors may determine, for any number of reasons, whether a CEO is necessary

for the management of the Debtor. In that circumstance, the Independent Directors will consult

with the Committee as to who should be appointed as CEO. The Independent Directors’ ability


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to determine that a CEO is necessary to the effective management of the Debtor is an ordinary

and customary responsibility of a board of directors. As an ordinary course function, the

appointment of an executive officer would not require court approval. Similarly, the

appointment of a CEO for the Debtor would not require this Court’s approval.

8. Further, if a CEO is appointed, the Term Sheet provides that the CEO can

only be removed with the consent of the Committee or an order of this Court. This requirement

is in place to protect any appointed CEO from improper termination by the Debtor, not to avoid

the Bankruptcy Code or this Court, and is not unlike other cases where removal of a high ranking

officer is an event of default.

9. Appointment of a Chapter 11 Trustee. The Term Sheet reserves the

Committee’s right to seek the appointment of a Chapter 11 trustee. This provision is not

intended to limit the right of any other party-in-interest with proper standing to seek a Chapter 11

trustee.

10. Management Issues. The UST states that the Debtor’s management issues

extend to parties other than James Dondero and argues that because the Term Sheet does not

provide the Committee with the right to pursue insider claims against current employees, that

there may be “statute of limitations concerns.” (UST Objection, ¶ 6.) The UST, however, does

not specify its concerns nor does it indicate how any purported “statute of limitations concerns”

in this case differ from those in every other Chapter 11 proceeding, including cases where

(unlike here) a committee is not granted standing to pursue insider claims.

11. The Term Sheet, however, provides that that Independent Directors will

“conduct a review of all current employees,” and the Independent Directors will make their own


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determination regarding whether any persons have engaged in improper conduct. The Term

Sheet also provides that if an employee is terminated, then the Committee will have standing to

pursue insider claims against such employee. Finally, nothing in the Term Sheet limits the

Committee’s right to seek standing to pursue insider claims against then-current employees or

any other party, if the Committee believes that the statute of limitations is set to expire. Absent

the Term Sheet, the Debtor would have the sole right to pursue insider claims (absent contrary

order from this Court), no independent employee review would occur, and any statute of

limitations concerns would still exist. The Committee and the Independent Directors having

these rights is solely a function of the Term Sheet, and the Term Sheet ameliorates the concerns

raised by the UST.

12. Attorney-Client Material. Under the Term Sheet, the Debtor has agreed to

provide the Committee access to certain privileged documents and communications. The UST

argues that this is insufficient as it will lead to additional litigation and that, to avoid litigation, a

Chapter 11 trustee should be appointed to accede to all privileges afforded to the Debtor. This

argument is a gross overstep and the clearest example of the UST attempting to substitute its

judgment for the judgment of all other constituents in this case. The Debtor and the Committee

have agreed to a mechanism to determine which potentially privileged documents and

communications should be turned over to the Committee to facilitate the prosecution of the

Estate Claims for the benefit of all parties-in-interest. That process will be overseen by this

Court. It is not appropriate for the UST to substitute its judgment with respect thereto for that of

the Debtor, the Committee, and the Debtor’s major creditors.


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II. The Court’s Jurisdiction to Implement the Corporate Governance Matters

13. The UST argues that because Strand is not a debtor in this Case that the

Court lacks jurisdiction to appoint the Independent Directors at Strand and to limit Mr.

Dondero’s rights as Strand’s sole stockholder to remove those Independent Directors.7 This is

correct, and the Debtor does not contest the UST’s position on this matter.

14. However, the Debtor is not seeking authority from this Court to appoint

the Independent Directors. Nor is the Debtor seeking this Court’s authority, generally, to enter

into the Governing Documents. Strand, as a non-debtor entity, is appointing the Independent

Directors and executing the Governing Documents to effectuate such appointment of its own

volition consistent with Delaware corporate law and its governing documents.8 The UST has not

– and cannot – point to any provision in Delaware law prohibiting Strand’s appointment of the

Independent Directors or entrance into the Governing Documents.

15. In distinction, through the Settlement Motion, the Debtor is only

requesting authority from this Court to pay the Independent Directors the Director Compensation

and such other relief as the Court may determine is required to effectuate the appointment of the

Independent Directors and to enter into the Governing Documents. Because the Debtor is

seeking to use estate assets to pay directors of a non-debtor entity, the Debtor sought this Court’s

approval to make such payments. The Debtor is not seeking authority to appoint the Independent

7 The UST Objection reflects a misunderstanding of Strand. The Debtor is a limited partnership and is managed by

Strand as its general partner. Strand is the general partner of the Debtor only and does not manage or oversee any

other entities or partnerships. 8 Because the Debtor is a limited partner, it is managed by its general partner, Strand, rather than a board of directors

or similar governing body. The Committee requested the appointment of an independent fiduciary with oversight

authority over the Debtor, and it was determined that a change in Strand’s board of directors would be the most

efficient means of achieving that result.


8 DOCS_NY:40010.5 36027/002

Directors to the board of a non-debtor entity.

16. Further, the Debtor recognizes that this Court would not have the requisite

authority to limit Mr. Dondero’s right as the sole stockholder of Strand to remove the

Independent Directors or to take any other action that could neuter the settlement embodied in

the Term Sheet. To address that issue, the written consent of the sole stockholder of Strand

(included in the Governing Documents) contemplates the parties entering into a stipulation

which will address the concerns raised by the UST, among other things (the “Stipulation”). The

Stipulation is subject to this Court’s approval. As such, the Term Sheet provides an extra level

of protection and Court oversight without running afoul of the jurisdictional issues raised by the

UST. Ultimately, though, if Mr. Dondero attempts to remove the Independent Directors or

otherwise act in a way that contravenes the Term Sheet, the Committee has reserved its right to

immediately seek appointment of a Chapter 11 trustee.

III. The Term Sheet Protects Investors or Provides Transparency

17. Finally, the UST argues that “quantification” of “past issues” is not a

sufficient basis for approving the Settlement Motion and that transparency is needed for all

“investors and for government agencies charged with overseeing [the] Debtor.” (UST Objection,

¶ 12.) This, however, is not an argument against the Settlement Motion. Rather, it is an

argument for the UST’s Trustee Motion. The Trustee Motion is set for a hearing on January 21,

2019, and the Debtor will file an objection to the Trustee Motion at the appropriate time.

18. However, the UST’s purported objection still fails. The Term Sheet


9 DOCS_NY:40010.5 36027/002

creates the transparency for which the UST advocates.9 In addition to providing a mechanism by

which the Committee can investigate and potentially litigate prepetition transfers, it allows

substantial oversight of the Debtor’s postpetition activities, including transactions between

“Related Entities” (as such term is defined in the Protocols). The Protocols thus create three

layers of oversight of the Debtor’s postpetition activities. Those activities will be reviewed by

the CRO, the Independent Directors (consisting of two experienced professionals and a former

federal bankruptcy judge), and, in relatively expansive circumstances, the Committee. The

Protocols also require the Debtor to provide the Committee with regular reporting concerning its

postpetition trades and investments. Finally, all of the Debtor’s activities – both pre- and

postpetition – will ultimately be subject to this Court’s oversight. The substantial oversight

afforded by the Term Sheet should address the concerns of any investor in any entity or fund

managed by the Debtor.

19. For the foregoing reasons as well as those set forth in the Settlement

Motion, the UST’s arguments that the Settlement Motion does not provide transparency for both

governmental agencies charged with overseeing the Debtor and the Debtor’s investors or address

purported lapses in fiduciary duties are not well founded. The UST has not provided any

evidence that the Settlement Motion will not address these concerns. Instead, the UST has

simply stated that there is insufficient transparency for investors and governmental agencies.

20. Finally, it is also important to reiterate that, although the Settlement

Motion was properly noticed, no governmental agency, including the SEC, or investor has

9 Although not the subject to the Settlement Motion, it should be noted that during the pendency of this case, the

Debtor has provided the Committee with extensive formal and informal discovery concerning both the Debtor’s pre-

and postpetition activities.


10 DOCS_NY:40010.5 36027/002

objected to the Settlement Motion (with the exception of the Issuers, who believe the settlement

provides too much oversight and transparency). The only party that has objected is the UST, and

the UST does not have standing to object to the Settlement Motion on behalf of parties that

themselves received notice and chose not to act. If any governmental agency (including the

SEC) or any investor wished to object to the Settlement Motion, they had the right to do so but

determined not to.

[Remainder of Page Intentionally Blank]


11 DOCS_NY:40010.5 36027/002

WHEREFORE, for the reasons set forth above and in the Settlement Motion, the

UST Objection should be overruled in all respects and the settlement between the Debtor and the

Committee should be approved on the terms set forth in the Settlement Motion.

Dated: January 8, 2020 PACHULSKI STANG ZIEHL & JONES LLP

Jeffrey N. Pomerantz (CA Bar No.143717)

(admitted pro hac vice)

Ira D. Kharasch (CA Bar No. 109084)


Maxim B. Litvak (Texas Bar No. 24002482)

Gregory V. Demo (NY Bar No. 5371992)


10100 Santa Monica Blvd., 13th Floor

Los Angeles, CA 90067

Telephone: (310) 277-6910

Facsimile: (310) 201-0760

E-mail: [email protected]

[email protected]

[email protected]

[email protected]

-and-

/s/ Melissa S. Hayward

HAYWARD & ASSOCIATES PLLC

Melissa S. Hayward


[email protected]

Zachery Z. Annable


[email protected]

10501 N. Central Expy, Ste. 106

Dallas, Texas 75231

Tel: (972) 755-7100

Fax: (972) 755-7110

Counsel and Proposed Counsel for the Debtor and

Debtor in Possession


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