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Highland Capital Management, L.P. – Court Sides with Debtors and Creditors’ Committee as to Efficacy of Corporate Governance Steps, Rejects U.S. Trustee’s Efforts to Install Chapter 11 Trustee

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February 5, 2020 – Further to a February 4th hearing and having considered the input of the Debtor's and the Debtor's Official Committee of Unsecured Creditors (the "Committee"), the Court hearing the Highland Capital Management case denied the U.S. Trustee’s request for the appointment Chapter 11 Trustee; holding that "no cause exists" for such an appointment [Docket No. 428]. The Court appears to have been convinced by arguments that the late December settlement (approved January 9th) between the Debtor and the Committee had sufficiently addressed corporate governance concerns. The fact that the Court was willing to approve the settlement (and actually scale back its terms as to James Dondero), probably fairly demonstrative as to how the Court would end up ruling on the Trustee's motion.

In its motion [Docket No. 271], the U.S. Trustee had argued, “Documented management concerns mandate a trustee in this case. This court has recognized that Highland’s management concerns involve a culture that surpasses the officers and board. Steps such as replacing the board or having a chief restructuring officer who reports to the court rather [sic] do not fix Highland’s problems. Prior efforts to use external oversight to curtail Highland management’s self-dealing have failed. As the Acis case demonstrated, the Highland Capital cases have many inter-connected relationships. A trustee can nimbly evaluate whether the inter-company transactions are in the best interests of the estate and creditors. In the Acis case, the trustee concluded other options were either superior, cheaper, or less-conflicted. A board is farther from the impact of the related-entity transactions and the culture of the debtor. It meets periodically. Here, the inter-connected relationships include the Debtor’s bank as well as other legal entities.”

Settlement Agreement

On January 9th, the Court approved (as modified) the Debtors' December 27th motion seeking approval of a settlement reached amongst the Debtors and the Debtors' Official Committee of Unsecured Creditors [Docket Nos. 281 and 339, respectively]. The settlement as requested had two key elements: (i) "the appointment of an independent board of directors (the 'Independent Directors') at Strand Advisors, Inc. ('Strand'), the Debtor’s general partner and ultimate party in control, and the implementation of certain protocols governing the operation of the Debtor’s business in the ordinary course" and (ii) that "effective upon entry of the Order, James Dondero will no longer be a director, officer, managing member, or employee of the Debtor or Strand and will have no authority, directly or indirectly, to act on the Debtor’s behalf."

The order modified, against considerable grumbling, the latter ask, allowing Dondero to stay on "including maintaining his title as portfolio manager for all funds and investment vehicles for which he currently holds that title; provided, however, that Mr. Dondero’s responsibilities in such capacities shall in all cases be as determined by the Independent Directors and Mr. Dondero shall receive no compensation for serving in such capacities."

Debtor's Objection

In its objection to the motion, the Debtor responded [Docket No. 362], “The appointment of a chapter 11 trustee in this case would be a completely needless and wasteful exercise, and it would be wholly inconsistent with the interests of creditors, most of whom are represented by the Official Committee of Unsecured Creditors (the 'Committee'). This Court has already approved (over the objection of the UST and no other economic stakeholder) the settlement between the Debtor and the Committee regarding governance issues and certain operating protocols. The Debtor’s estate is now managed by a new independent board of directors (the 'Independent Board') at Strand Advisors, Inc. ('Strand'), the Debtor’s general partner… The UST filed the Trustee Motion four days before the Debtor filed the Settlement Motion, despite knowing that the Settlement Motion might be filed shortly thereafter. By not waiting to see the definitive terms of the settlement between the Debtor and the Committee, the Trustee Motion fails to take into account that James Dondero, the Debtor’s co-founder and prior principal in control, has been irrevocably replaced and removed from any continuing management role with the Debtor (or its general partner, Strand). The Trustee Motion also fails to consider that the Independent Board has assumed control of the Debtor’s management functions… The UST bases the Trustee Motion on prepetition misconduct that is no longer relevant now that the Debtor is governed by the Independent Board, which has the full support of the Committee. The UST cites to no precedent, and the Debtor is aware of none, that would support the extraordinary remedy of the appointment of a chapter 11 trustee under the circumstances here. In fact, no outcome could be possibly worse from the perspective of this estate and the interests of stakeholders than appointing a single as yet unknown person to manage the Debtor’s complex business and replace the highly qualified Independent Board that was just appointed with the Committee’s support and this Court’s approval.”

Committee's Objection

The Committee added in its own objection [Docket No. 364], “The Settlement completely overhauls the Debtor’s governance structure that was in place at the time the Trustee Motion was filed…The U.S. Trustee fails to show how a court appointed Chapter 11 Trustee would be better positioned than the Independent Board to address the Debtor’s challenges. The Independent Board has significant experience and expertise in operating complicated financial organizations, overseeing companies in chapter 11 and satisfying the legal requirements of chapter 11… The Committee believes that the Debtor’s new corporate governance structure, as embodied in the Settlement, provides the Debtor with the best opportunity to maximize value for its stakeholders. Appointing a Chapter 11 Trustee at this time would eviscerate the recently-approved Settlement and harm the Debtor’s estate and its creditors.”

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The post Highland Capital Management, L.P. – Court Sides with Debtors and Creditors’ Committee as to Efficacy of Corporate Governance Steps, Rejects U.S. Trustee’s Efforts to Install Chapter 11 Trustee appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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