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When Potentially Violating “Gatekeeping” Orders, Asking for Permission May Be Easier (And Cheaper!) Than Begging for Forgiveness

Judge Stacey Jernigan did not mince words in a recent opinion sanctioning the former CEO of Highland Capital Management, LP.  Entities related to the former CEO brought suit against Highland (the debtor in a Chapter 11 bankruptcy proceeding), and sought leave from the district court to add Highland’s replacement CEO as a defendant.  In Judge Jernigan’s view, such conduct violated her “gatekeeping” orders that required the bankruptcy court’s approval before “pursuing” actions against the new CEO. 

On February 22, 2021, Judge Jernigan approved Highland’s Chapter 11 plan.  As part of the reorganization process, James Dondero left his position as Highland’s CEO and was replaced by James Seery, Jr.  Mr. Seery was one of three independent directors appointed by the court to manage Highland, and was selected by that group to replace Mr. Dondero as CEO.

In two orders, which were not appealed, Judge Jernigan asserted the bankruptcy court’s “gatekeeping” role to protect Mr. Seery, ruling that:

No entity may commence or pursue a claim or cause of action of any kind against Mr. Seery relating in any way to his role as the chief executive officer and chief restructuring officer of the Debtor without the Bankruptcy Court (i) first determining after notice that such claim or cause of action represents a colorable claim of willful misconduct or gross negligence against Mr. Seery, and (ii) specifically authorizing such entity to bring such claim.

On April 12, 2021, entities related to Mr. Dondero brought suit in the district court against Highland for allegedly tortious conduct.  The entities—led by an associate of Mr. Dondero’s and with the assistance of a law firm recommended by another associate of Mr. Dondero’s (collectively, the “Contemnors”)—complained of improper conduct by Mr. Seery in connection with a settlement agreement entered into during the bankruptcy proceedings.  Shortly after filing suit against Highland, the plaintiff-entities moved for leave from the district court to add Mr. Seery as a defendant (the “Motion”). 

Highland moved for sanctions in the bankruptcy proceeding.  In awarding sanctions, Judge Jernigan found that filing the Motion qualified as “pursuing” litigation against Mr. Seery in violation of her order even though such litigation had not yet been “commenced” against him.  As the Contemnors did not receive the bankruptcy court’s approval before filing the Motion, the Contemnors violated the bankruptcy court’s orders.  Judge Jernigan further found that “Mr. Dondero sparked this fire (i.e., the idea of bringing the District Court Action to essentially re-visit the [] Settlement and to find a way to challenge Mr. Seery’s and [Highland]’s conduct)” while his co-Contemnors “were happy to take the idea and run with it.”[1] 

Having found the Contemnors in contempt, Judge Jernigan turned to what sanctions to apply.  She calculated roughly $239,655 of fees and expenses that the bankruptcy estate incurred relating to “the[] contemptuous acts,” and ordered the Contemnors jointly and severally liable in that amount.  In addition, though she denied Highland’s request that the court impose a penalty of triple its expenses for any future violation of any order, Judge Jernigan imposed “a sanction of $100,000 for each level of rehearing, appeal, or petition for certior[]ari that the Alleged Contemnors may choose to take with regard to this Order, to the extent any such motions for rehearing, appeals, or petitions for certiorari are not successful.”[2]

Other than in a prior opinion in the same proceeding,[3] we have never seen a similar $100,000 wager added to a party’s decision to appeal.  Whether Contemnors take the appellate bet—and thereby test Judge Jernigan’s authority to issue such an order—is yet to be seen.

[1] In re: Highland Capital Management, L.P., 19-34054-SGJ11, 2021 WL 3418657 at *10 (Bankr. N.D. Tex. Aug. 4, 2021).

[2] Id. at * 14.

[3] In re Highland Cap. Mgmt., L.P., 19-34054-SGJ11, 2021 WL 2326350 (Bankr. N.D. Tex. June 7, 2021).