Case of the Day: LV Highland Credit Feeder Fund v. Highland Credit Strategies Fund

The case of the day is LV Highland Credit Feeder Fund LLC v. Highland Strategies Fund, LP (Tex. Ct. App. 2015). The plaintiffs were investors in either Highland Credit Strategies Fund, LP, a Delaware limited partnership, or Highland Credit Strategies Fund, Ltd., a Bermuda mutual fund company. The defendants were the two funds as well as Highland Capital Management, LP, which managed the funds, and some of HCM’s executives.

Both the Delaware fund and the Bermuda fund invested in Highland Credit Strategies Maser Fund, LP, a Bermuda limited partnership. The claim was that in 2008, during the financial crisis, the funds began experiencing losses. The plaintiff investors were worried that other investors might begin to redeem their investments, and that due to the long waiting period before investors could receive their money after beginning the redemption process, the funds might not be able to satisfy the plaintiffs’ redemption requests if they waited too long. But, the plaintiffs claimed, the funds fraudulently misrepresented the number of redemption requests they had received, thus inducing the plaintiffs to delay. In October 2008, Highland Capital Management informed all investors that the funds were to be wound down. It proposed a plan of distribution that treated investors who had submitted redemption requests before a certain date more favorably than those who had not. The plaintiffs were in the unlucky group, and so they sued, claiming fraud, breach of fiduciary duty, and breach of Massachusetts’s statute on deceptive trade practices and its blue sky laws (some of the individual investor plaintiffs were from Massachusetts). The funds asserted that the claims of those investors who had invested in the Bermuda fund were barred by a release. The funds offered affidavits tending to prove that the Bermuda fund applied to the Bermuda courts for a “scheme of arrangement to liquidate the fund and pay off its creditors” in accordance with HCM’s plan of distribution. The creditors voted in favor of the scheme, and the Supreme Court of Bermuda approved the scheme. The scheme contained a release of HCM and both funds. The funds also submitted the Bermuda court order to the Texas court, and they moved for summary judgment. The court granted the motion, and the investors appealed.

On appeal, the court affirmed. The investors claimed that the UFCMJRA did not apply to the Bermuda court order because it is not a judgment for a sum of money (under UFCMJRA § 3, the statute apply to a foreign judgment to the extent it “grants or denies recovery of a sum of money”). The court correctly rejected this argument. Even if the judgment is not within the scope of the UFCMJRA, it may still be entitled to recognition in Texas. Under UFCMJRA § 11, the statute “does not prevent the recognition under principles of comity or otherwise of a foreign-country judgment not within the scope of this act.” The decision does not really discuss the comity issues, but that may be because the investors had no argument against recognition, other than a formal argument that the UFCMJRA didn’t apply.

The court went on to hold that the Bermuda judgment was indeed within the scope of the UFCMJRA. It pointed out that the scheme provided for the distribution of funds to investors as money became available, and that the judgment was, therefore, a judgment granting a sum of money. The court cited no authority here, and it’s conclusion does not seem plainly correct to me. We wouldn’t normally think of an order confirming a plan of reorganization in a Chapter 11 bankruptcy case, which seems to be a close equivalent to the Bermuda judgment, as a “money judgment.” Indeed, maybe the way for the funds to tee up the issue of release for the US courts should have been to begin a Chapter 15 ancillary proceeding under the bankruptcy law. But all that said, the outcome was correct. Even if the judgment was not within the statute, there did not seem to be any substantive argument against recognition.

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