Tag Archives: Bankruptcy

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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Case of the Day: Stichting Shell Pensionenfonds v. Krys

The case of the day is Stichting Shell Pensionenfonds v. Krys [2014] UKPC 41. Shell, a Dutch pension fund, had invested in shares of Fairfield Sentry Ltd., a BVI mutual fund and the largest “feeder fund” for Bernard L. Madoff Investment Securities LLC, which needs no introduction. After Madoff’s arrest, Shell immediately sought to redeem its shares in Fairfield, but of course it received nothing. So Shell applied to a court in Amsterdam, its home jurisdiction, for an order attaching bank accounts of Fairfield held by Citco Bank Nederland BV, Fairfield’s asset custodian, in its Dublin branch. The Dutch court approved the attachment; everyone agreed that the Dutch court had jurisdiction over Citco. The High Court of the BVI ordered Fairfield to be wound up and appointed Krys and Lau as liquidators. Shell submitted a claim in the BVI insolvency claim but its claim was rejected. So the situation was that if Shell was allowed to litigate the merits of its claim in the Netherlands and succeeded there, then it would receive the full amount of its claim on account of the attachment, and in effect to have priority over other creditors, who could not hope for such a recovery in the BVI insolvency proceedings. Indeed, as Shell admitted, that was the point of the attachment. Krys and Lau moved in the BVI court for an anti-suit injunction enjoining Shell from prosecuting its claim in the Netherlands and requiring Shell to procure a release of the attachment. The BVI Court of Appeal held in favor of the liquidators, and Shell appealed to the Privy Council.
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Case of the Day: Kumkang Valve Manufacturing Co. v. Enterprise Products

The case of the day is Kumkang Valve Manufacturing Co. v. Enterprise Products Operating LLC (Tex. Ct. App. 2014). Enterprise purchased 1,000 high-pressure valuves from Kumkang, a Korean firm, for use in its gas-processing plants in Colorado and Wyoming. The valves failed, and Enterprise paid $11 million to replace them. Enterprise sued Kumkang in 2007 for breach of warranty in the Texas state court. In 2009, while the case was pending, Kumkang sought protection under Korean bankruptcy law, and it then filed a Chapter 15 petition in a bankruptcy court in the Southern District of Texas seeking recognition of the Korean main proceeding. The bankruptcy court recognized the Korean proceeding, which had the effect of staying the Texas litigation.

Enterprise did not appear in the Korean bankruptcy case, and it was not included on the list of creditors in the Korean proceeding, or mentioned in the plan of reorganization the Korean court approved. Kumkang did not inform the US bankruptcy court of the approval of the plan in Korea, and Kumkang’s US lawyer informed the US bankruptcy court that he had been unable to communicate with his client and had no information about the status of the Korean proceedings. The US bankruptcy court, after providing a final opportunity for the US lawyer to obtain information from his client, dismissed the Chapter 15 case and lifted the stay.

In the main case, the parties stipulated that Enterprise had suffered $11 million in damages due to breach of express warranty and breach of the warranty of fitness for a particular purpose, and Kumkang moved for summary judgment on the affirmative defense of discharge in bankruptcy. Enterprise cross-moved for summary judgment. The trial court gave judgment for Enterprise, and Kumkang appealed.
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