Neutra, Ltd. v. Terry (In re Acis Capital Mgmt., L.P.)

• Decision Date: 18 July 2019
• Docket Number: Civil Action No. 3:19-CV-0291-D,18-30265-SGJ-7,C/w Civil Action Nos. 3:18-CV-1057-D, 3:18-CV-1073-D, 3:18-CV-1084-D,18-30265-SGJ-11,Bank. Ct. Nos. 18-30264-SGJ-7,Civil Action No. 3:18-CV-1056-D,Civil Action No. 3:18-CV-1822-D,Bank. Ct. Nos. 18-30264-SGJ-11
• Citation: 604 B.R. 484
• Parties: IN RE ACIS CAPITAL MANAGEMENT, L.P., et al., Debtors. Neutra, Ltd., et al., Appellants, v. Joshua N. Terry, et al., Appellees. In re Acis Capital Management, L.P., et al., Debtors. Highland CLO Funding, Ltd., et al., Appellants, v. Robin Phelan, Chapter 11 Trustee, et al., Appellees. In re Acis Capital Management, L.P., et al., Debtors. Highland Capital Management, L.P., et al., Appellants, v. Robin Phelan, Chapter 11 Trustee, et al., Appellees.
• Court: U.S. District Court — Northern District of Texas

604 B.R. 484

IN RE ACIS CAPITAL MANAGEMENT, L.P., et al., Debtors.

Neutra, Ltd., et al., Appellants,

v.Joshua N. Terry, et al., Appellees.

In re Acis Capital Management, L.P., et al., Debtors.

Highland CLO Funding, Ltd., et al., Appellants,

v.Robin Phelan, Chapter 11 Trustee, et al., Appellees.

In re Acis Capital Management, L.P., et al., Debtors.

Highland Capital Management, L.P., et al., Appellants,

v.Robin Phelan, Chapter 11 Trustee, et al., Appellees.

Civil Action No. 3:18-CV-1056-D

C/w Civil Action Nos. 3:18-CV-1057-D, 3:18-CV-1073-D, 3:18-CV-1084-D

Bank. Ct. Nos. 18-30264-SGJ-7

18-30265-SGJ-7

Civil Action No. 3:18-CV-1822-D

Bank. Ct. Nos. 18-30264-SGJ-11

18-30265-SGJ-11

Civil Action No. 3:19-CV-0291-D

Bank. Ct. Nos. 18-30264-SGJ-11

18-30265-SGJ-11

United States District Court, N.D. Texas, Dallas Division.

Signed July 18, 2019

Mark Mitchell Maloney, William Austin Jowers, King & Spalding LLP, Atlanta, GA, Holland Neff O'Neil, Jason Bradley Binford, Melina Niaz Bales, Foley Gardere, Foley & Lardner LLP, Ben A. Barnes, David S. Coale, Michael K. Hurst, Lynn Pinker Cox & Hurst LLP, Stacy R. Obenhaus, Gardere Wynne Sewell LLP, Dallas, TX, Paul R. Bessette, Rebecca Teryn Matsumura, King & Spalding LLP, Austin, TX, for Appellants.

Jeff P. Prostok, Forshey & Prostok LLP, Fort Worth, TX, for Debtors.

Rakhee V. Patel, Annmarie Antoniette Chiarello, Jason Alexander Enright, Joseph J. Wielebinski, Phillip Lewis Lamberson, Winstead PC, Elizabeth Nicolle Boydston, K & L Gates LLP, John N. Schwartz, Fulbright & Jaworski, Louis Raymond Strubeck, Jr., Norton Rose Fulbright US LLP, Dallas, TX, Jeff P. Prostok, Forshey & Prostok LLP, Fort Worth, TX, Robert J. Liubicic, Pro Hac Vice, Eric Ralph Reimer, Pro Hac Vice, Milbank Tweed Hadley & McCloy LLP, Los Angeles, CA, Brian Kinney, Pro Hac Vice, Dennis Francis Dunne, Pro Hac Vice, Milbank Tweed Hadley & McCloy, New York, NY, for Appellees.

APPEALS FROM THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS

FITZWATER, Senior Judge:

In multiple appeals taken from two involuntary bankruptcy cases, the principal questions presented are whether the bankruptcy court erred by issuing orders for relief and denying the debtors' motion to dismiss or compel arbitration; whether the bankruptcy court erred by approving a seven-figure break-up fee in favor of a potential transaction partner; and whether the bankruptcy court erred by confirming a reorganization plan ("the Plan") that enjoins a non-debtor, non-creditor entity from exercising certain contractual rights. The court must also decide questions of the bankruptcy court's subject matter jurisdiction and of one appellant's standing to appeal. For the reasons that follow, the court DISMISSES the appeal from the orders for relief, AFFIRMS the break-up fee order, and AFFIRMS the order approving the Plan. The court need not address the bankruptcy court's denial of the motion to dismiss.

I

The following factual summary is based on the bankruptcy court's findings of fact in support of the orders for relief and the Plan confirmation order. See In re Acis Capital Mgmt., L.P. (Acis II ), 2019 WL 417149, at *2-7 (Bankr. N.D. Tex. Jan. 31, 2019) (Jernigan, J.) (confirmation order); In re Acis Capital Mgmt., L.P. (Acis I ), 584 B.R. 115, 119-42 (Bankr. N.D. Tex. 2018) (Jernigan, J.) (orders for relief).¹

A

Appellant Highland Capital Management, L.P. ("Highland") is a Dallas-based registered investment advisor that manages nearly $15 billion of assets through an organizational structure comprised of roughly 2,000 different entities. Its investment vehicles include mutual funds, private equity funds, and (relevant here) collateralized loan obligation funds ("CLOs"). Highland conducted its CLO business through an entity called Acis Capital Management, L.P. ("Acis LP") and Acis LP's general partner, Acis Capital Management GP, L.L.C. ("Acis GP") (collectively, "Acis," unless otherwise indicated), both debtors in these appeals.

In 2005 Highland hired appellee Joshua Terry ("Terry") as a portfolio analyst. Terry rose through the ranks at Highland until he became the portfolio manager for Highland's CLO business, and, in turn, received a 25% limited partnership interest in Acis LP. Terry successfully managed billions of dollars of assets on Highland's behalf until June 2016, when Highland terminated him. The reason for Terry's termination is disputed.² As a result of the termination, Terry's partnership interest in Acis LP was deemed forfeited without compensation.

In September 2016 Highland sued Terry in the 162nd Judicial District Court of Dallas County, seeking to recover, inter alia , on theories of breach of fiduciary duty, disparagement, and breach of contract. Terry asserted counterclaims against Highland, Acis, and others, and demanded arbitration. The state court stayed the proceeding and ordered arbitration, and in October 2017 the arbitration panel rendered an award in Terry's favor for $7,949,749.15, plus post-judgment interest, against Acis ("the Award"). Terry sought and obtained confirmation of the Award in the 44th Judicial District Court of Dallas County.

After the Award was confirmed, Terry began conducting post-judgment discovery, which revealed some transactions that appeared suspicious to Terry. Terry thought that Highland was denuding Acis of assets in an effort to make Acis judgment-proof. At a January 24, 2018 hearing, Terry requested a temporary restraining order ("TRO") to restrain Acis LP from transferring any more assets pending a January 31 temporary injunction hearing. Acis LP agreed to the request, and the court issued a TRO. Five days later, Terry filed supplemental pleadings alleging that Acis LP was engaging in more wrongdoing, and requested appointment of a receiver. Instead of proceeding with the January 31 state-court hearing, however, Terry took a different tack. At 11:57 p.m. the night before the hearing, Terry filed involuntary bankruptcy petitions against both Acis LP and Acis GP.³

B

To comprehend some of the key issues in these appeals, it is helpful to recount some of the fundamentals of CLOs and how Highland structured its CLO business.

At the most basic level, a CLO is a "basket of loans." Acis I , 584 B.R. at 123. A special-purpose CLO entity ("CLO-SPE") purchases variable-rate commercial loans at the direction of the CLO manager, and collects them into a pool of loans. The obligors of the loans are usually large, well-known companies. Investors, such as pension funds, life insurance companies, and others, buy into the CLO by purchasing fixed-rate, secured notes on which the CLO-SPE itself is the obligor. These notes are typically sold in tranches representing different levels of risk. The CLO-SPE pays its obligations on the secured notes using the income it receives from its pool of loans, starting with the top tranche of notes and then proceeding through the lower tranches. These payments are made according to the terms of certain indenture agreements between the CLO-SPE and the indenture trustee (here, U.S. Bank, N.A.) to whom the CLO-SPE pledges collateral to secure the notes.

The last investor to be paid is the "equity" holder, who does not own actual equity but instead holds a subordinated, unsecured note. The equity investor earns money when the variable interest rates paid to the CLO-SPE on the commercial loans exceed the fixed interest rates that the CLO-SPE must pay to the secured note holders. Although the equity investor assumes the most risk, it also possesses certain rights that allow it to control the CLO—most significantly, the right to call for an optional redemption of the CLO.⁴ When an optional redemption is effected, the CLO's pool of loans is liquidated and the resulting cash is used to pay back the outstanding secured notes, beginning with the top tranche and proceeding downward.⁵

In the present cases, Acis LP acts as the portfolio manager—not as the equity holder—of four CLO-SPEs, and is contractually entitled to receive portfolio management fees from them. Appellant Highland CLO Funding, Ltd. ("HCLOF"), a Guernsey⁶ entity formerly known as Acis Loan Funding, Ltd.,⁷ is the primary equity investor in the CLOs. HCLOF does not own Acis; to the contrary, Acis LP once owned an indirect 15% stake in HCLOF for regulatory compliance reasons. Acis itself has never had any employees. Instead, it subcontracts all front office advising and back office support services to another entity. Highland was originally Acis LP's subcontractor, but, under the Plan, an entity called Brigade Capital Management, L.P. ("Brigade") fills that role (for a much lower cost).

Historically, all of these entities—Acis LP, Highland, HCLOF, and the CLO-SPEs—operated within an ecosystem of contracts that allowed Acis to manage the CLOs effectively. First, Acis LP had various fee-generating portfolio management agreements ("PMAs") with the CLO-SPEs. These contracts remain in place under the Plan. Second, Acis LP and Highland had a sub-advisory agreement, which obligated Highland to provide advisory and management services in exchange for substantial fees. Third, Acis LP and Highland had a shared services agreement, through which Highland provided back office services to Acis for a significant fee. And, fourth, Acis LP had a separate PMA with HCLOF ("the Equity PMA"). While the parties dispute the exact effect of the Equity PMA—i.e., to whom it gave power over whom—it is undisputed that Acis LP earned no fees from this contract.

C

Circumstances changed after the state-court litigation between Highland and Terry began. As noted above, Highland and Acis LP engaged in numerous transactions that caused Terry to believe "that Highland was dismantling and denuding Acis LP of all of its assets and value." Acis I , 584 B.R. at 144. In October 2017, four days after Terry obtained the Award, Acis LP sold its stake in HCLOF back to HCLOF in exchange for about $990,000 in cash. As a result, Acis LP could no longer lawfully manage any new...