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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.
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