Ubs Sec. LLC v. Highland Capital Mgmt., L.P.

• Decision Date: 25 November 2013
• Parties: UBS SECURITIES LLC and UBS AG, London Branch, Plaintiffs, v. HIGHLAND CAPITAL MANAGEMENT, L.P., Highland Special Opportunities Holding Company, Highland CDO Opportunity Master Fund, L.P., Highland Financial Partners, L.P., Highland Credit Strategies Master Fund, L.P., Highland Crusader Offshore Partners, L.P., Highland Credit Opportunities CDO, L.P., and Strand Advisors, Inc., Defendants. UBS Securities LLC and UBS AG, London Branch, Plaintiff(s), Highland Crusader Holding Corporation, Defendant(s). UBS Securities LLC and UBS AG, London Branch, Plaintiff(s), v. Highland Crusader Holding Corporation, Defendant(s).
• Court: New York Supreme Court

42 Misc.3d 580

977 N.Y.S.2d 610

2013 N.Y. Slip Op. 23397

UBS SECURITIES LLC and UBS AG, London Branch, Plaintiffs,

v.HIGHLAND CAPITAL MANAGEMENT, L.P., Highland Special Opportunities Holding Company, Highland CDO Opportunity Master Fund, L.P., Highland Financial Partners, L.P., Highland Credit Strategies Master Fund, L.P., Highland Crusader Offshore Partners, L.P., Highland Credit Opportunities CDO, L.P., and Strand Advisors, Inc., Defendants.

UBS Securities LLC and UBS AG, London Branch, Plaintiff(s), Highland Crusader Holding Corporation, Defendant(s).

UBS Securities LLC and UBS AG, London Branch, Plaintiff(s),

v.Highland Crusader Holding Corporation, Defendant(s).

Supreme Court, New York County, New York.

Nov. 25, 2013.

Andrew Clubok, Esq., Kirkland & Ellis., New York, for Plaintiff.

Kieran Corcoran, Esq., Lackey Hershman LLP, New York, for Defendant.

MARCY S. FRIEDMAN, J.

These actions arise out of a failed transaction for securitization of collateralized loan obligations. Plaintiffs UBS Securities LLC and UBS AG, London Branch (collectively UBS) sue defendants Highland Capital Management, L.P. (Highland Capital) and various affiliated entities for nearly $700 million in damages that UBS allegedly sustained as a result of diminution in the market value of investments held by UBS in a collateralized debt facility (the Warehouse Facility). UBS' claims fall into two broad categories: breach of contract and fraudulent inducement against certain of the Highland defendants, and fraudulent conveyance against all of the Highland defendants.

More particularly, Highland Special Opportunities Holding Company (SOHC) and Highland CDO Opportunity Master Fund, L.P. (CDO Fund) (collectively the Fund Counterparties) were parties, along with Highland Capital, to agreements, made with UBS in 2007, which established the Warehouse Facility. The agreements contemplated that UBS would hold assets in the Warehouse Facility pending securitization of collateralized loan obligations (CLOs). The original transaction expired by its terms in August 2007, without a securitization occurring. UBS alleges that at the time of the expiration, the assets in the Warehouse Facility had lost in excess of $86 million in value. The same parties subsequently entered into a Restructured Transaction, by agreements dated March 14, 2008. The 2008 agreements authorized UBS to make margin calls requiring the posting of additional collateral by the Fund Counterparties in the event of decline in value below a certain amount of the assets in the Warehouse Facility. The Fund Counterparties satisfied UBS' first and second margin calls, but failed to satisfy the third. UBS terminated the Restructured Transaction, and this litigation followed.

The procedural history of the litigation is extensive, and has been discussed at length in prior decisions of the Appellate Division, familiarity with which is presumed. The first action (2009 Action) was commenced by filing on February 24, 2009 against Highland Capital, SOHC and CDO Fund. The action asserted a claim against Highland Capital for indemnification which was dismissed on an appeal from an order of this court (Fried, J.), entered on October 8, 2009. (UBS Secs. LLC v. Highland Capital Mgt., L.P., 70 A.D.3d 526, 893 N.Y.S.2d 869.)

UBS subsequently served a second action (2010 Action) against Highland Capital, alleging causes of action, among others, for fraudulent inducement, breach of the covenant of good faith and fair dealing, fraudulent conveyance, and tortious interference with contractual relations. By order entered on August 9, 2010, this court (Fried, J.) denied the motion to dismiss except as to the tortious interference claim. The Appellate Division upheld the dismissal of the tortious interference claim, and modified the determination to the extent of dismissing the fraudulent inducement claim as against Highland Capital, and dismissing those portions of the breach of covenant and fraudulent conveyance claims “that rely on conduct pre-dating the commencement of the prior action.” (UBS Secs. LLC v. Highland Capital Mgt., L.P., 86 A.D.3d 469, 469, 927 N.Y.S.2d 59 [July 2011 Decision].) In holding that the dismissed portions of the claims were barred by res judicata, the Court reasoned: “Here, to the extent the claims against Highland [Capital] in the new complaint implicate events alleged to have taken place before the filing of the original complaint, res judicata applies. That is because UBS's claims against Highland [Capital] in the original action and in this action all arise out of the restructured warehousing transaction.” (Id. at 474, 927 N.Y.S.2d 59.)

A motion to dismiss the first amended complaint in the 2009 Action was subsequently brought by defendants Highland Financial Partners, L.P. (Highland Financial), Highland Credit Opportunities CDO, L.P., and Strand Advisors, Inc. The determination of this court (Fried, J.), entered on March 3, 2011, was appealed to the Appellate Division, which modified the determination “to the extent of granting the motion with respect to claims arising before February 2009.” (UBS Secs. LLC v. Highland Capital Mgt., L.P., 93 A.D.3d 489, 490, 940 N.Y.S.2d 74 [March 13, 2012 Decision].) The Court reasoned that its July 2011 Decision “warrants dismissal of a portion of plaintiff's claims in this action due to res judicata since defendants are in privity with the defendant [Highland Capital] in the other action.” ( Id.) The Court further noted that the complaint seeks to hold Highland Financial liable as the alter ego of defendant SOHC, and held that the alter ego claim was sufficiently stated based on the allegations, among others, that “SOHC's sole board member is on Highland Financial's board, Highland Financial did not distinguish between its debts and obligations and those of SOHC, and that it operated SOHC and Highland Financial as a single economic entity.” ( Id.) The Court also held that the fraudulent conveyance claim was pled with sufficient detail. ( Id.)

This court has before it two motions to dismiss. Defendants Highland Credit Strategies Master Fund, L.P. (Credit Strategies) and Highland Crusader Offshore Partners, L.P. (Crusader) move to dismiss the second amended complaint in the 2009 Action. Defendant Highland Crusader Holding Corporation (HoldCo.) moves to dismiss a third action (2011 Action) in which it is the sole defendant. By separate motion, UBS seeks a preliminary injunction enjoining Credit Strategies and Crusader from transferring or disposing of certain property. The motions are consolidated for disposition.¹

The second amended complaint in the 2009 action does not materially change the allegations of the first amended complaint. The complaints plead substantially similar allegations against Credit Strategies and Crusader. The material allegations, which involve domination of these and other Highland affiliates by Highland Capital and Highland Financial, include that Highland Financial is SOHC's alter ego, and that Highland Capital and Highland Financial operated Highland Financial and its subsidiaries, including SOHC, as a single economic entity. (Second Am. Compl., ¶ 25.) As also alleged, almost immediately after the Restructured Transaction was entered into, Highland Capital and the Fund Counterparties knowingly began to dissipate the Fund Counterparties' assets and to make it impossible for the Fund Counterparties to repay UBS what they owed. For example, on March 26, 2008, Highland Capital caused SOHC assets to be encumbered by entering into a transaction with Barclays Bank. At about the same time, it caused CDO Fund to transfer $100 million cash out of CDO Fund. ( Id., ¶ ¶ 69–71.)

As the complaints further allege, pursuant to note offerings made in September and October 2008 (the Fall 2008 Note Offerings), Highland Financial acquired over $371 million dollars in risky CLO assets and life settlement insurance contracts from Credit Strategies, Crusader, and Highland Credit Opportunities CDO, L.P. (the Credit Opp. Fund) (collectively the Affiliated Transferee Defendants) in exchange for senior secured notes. ( Id., ¶ 83.) Highland Financial was also required to transfer a security interest to the Affiliated Transferee Defendants in shares of two other wholly owned subsidiaries into which Highland Financial transferred the assets it had received from the Affiliated Transferee Defendants. ( Id.) “The granting of this security interest and related asset transfers constituted fraudulent conveyances, which made payment by the Fund Counterparties and Highland Financial of their obligations to UBS impossible and defrauded UBS. At the time of the September 2008 Note Offering, Highland Financial, as SOHC's alter ego, owed UBS hundreds of millions of dollars that it could not pay.” ( Id., ¶ 84.) After the Fall 2008 Note Offerings, Highland Capital caused Highland Financial and SOHC to use the assets that they acquired to pay down a substantial portion of SOHC's debt to Barclays to the detriment of UBS. These payments to Barclays were made at a time when SOHC was insolvent or within the zone of insolvency, and constituted fraudulent conveyances. ( Id., ¶¶ 86–88.) Other payments by CDO Fund to satisfy obligations to Citibank (Citi), made at a time when CDO Fund was insolvent, also constitutedfraudulent conveyances. ( Id., ¶ 89.)

Finally, in March 2009, Highland Capital allegedly caused Highland Financial to transfer virtually all of its assets to Highland Capital and back to the Affiliated Transferee Defendants. ( Id., ¶ 111.) This transfer, to which UBS refers as the “March 2009 Fraudulent Conveyance” ( id.), interfered with the Fund Counterparties' ability to meet their obligations to UBS under the Warehouse agreements. ( Id., ¶ 114.) As further elaborated by UBS on this motion to dismiss, in the alleged March 2009 fraudulent conveyance, Highland Financial transferred $239 million of assets to Credit Strategies, Crusader, and...