Charitable DAF Fund v. Highland Cap. Mgmt., L.P. (In re Highland Cap. Mgmt., L.P.)
- Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
- 9 months 5 days ago
- Case Type:
- Business
- Case Status:
- Reversed and Remanded
- Citation:
- No. 22-11036 (5th Circuit, Apr 04,2024) Published
- Tag(s):
-
- Ruling:
- The U.S. Court of Appeals for the Fifth Circuit held a bankruptcy court erred in sanctioning a law firm and its client by shifting $239,655 in legal fees. The fee-shifting amounted to a criminal contempt sanction under the circumstances and "bankruptcy courts have only civil contempt powers because that is all Congress has given them." The circuit court remanded for the bankruptcy court to re-evaluate the sanctions award. A dissent states the majority reached the wrong outcome by applying an incorrect standard of review and improperly framing the appellants' conduct below.
- Procedural context:
- The Fifth Circuit stated it reviewed the bankruptcy court's sanctions order for an abuse of discretion but, "because a court 'abuses its discretion when it bases its decision on an erroneous legal conclusion,'" it reviewed the bankruptcy court’s legal conclusions de novo. It thereafter considered whether the sanctions against Appellants were calculated to "(1) coerce the contemnor into compliance with a court order or (2) compensate another party for the contemnor’s violations" in accordance with Fifth Circuit precedent, and considered whether there was "a causal link[ ] between the litigant's misbehaviour and legal fees paid by the opposing party" pursuant to Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. 101, 108 (2017). The court explained "[a]bsent that because-of link, the sanction is punitive rather than compensatory and hence falls outside the bankruptcy court’s statutorily limited powers."
- Facts:
- Debtor Highland Capital Management, L.P. filed a chapter 11 bankruptcy petition in October 2019 in the U.S. Bankruptcy Court for the Northern District of Texas. The bankruptcy court approved an agreement in January 2020 whereby Debtor's principal, James Dondero, relinquished control to three independent directors. One director, James P. Seery, Jr., became Debtor's chief executive officer and chief restructuring officer in July 2020. "To protect Seery from vexatious litigation—and this case has been full of it[,]" the bankruptcy court adopted a gatekeeping order that required the court's permission before any claim or cause of action could be filed against Seery based on his roles with Debtor. After Dondero disagreed with a settlement decision Seery made (and the bankruptcy court approved), Dondero caused two entities he founded (Charitable DAF Foundation and CLO Holdco (collectively "DAF")) to file suit against Debtor in federal district court through a law firm, Sbaiti & Company PLLC ("Sbaiti"). The suit contended Debtor, through Seery, withheld material information and engaged in self-dealing in connection with the settlement. Shortly thereafter, DAF moved to add Seery as a defendant without having obtained the bankruptcy court's approval. The district court quickly denied the motion for other procedural reasons. On Debtor's motion, the bankruptcy court entered an order requiring DAF, Dondero, and Sbaiti to show cause why they should not be held in civil contempt and sanctioned for violating the gatekeeping order. The court allowed "extensive discovery" and "held a lengthy evidentiary hearing . . . not because there was any dispute that DAF filed the Motion, but rather to consider the 'explanations/rationales given by those involved'" insofar as the bankruptcy court "was especially curious about Dondero's role." Following the hearing, the bankruptcy court entered an order finding DAF, Sbaiti and two of its attorneys, and Dondero (collectively, "Appellants") in contempt for moving to add Seery as a defendant in the district court case in violation of the gatekeeping order. The court ordered Appellants to pay Debtor $239,655 based (in part) on the fees Debtor "paid its lawyers to litigate the contempt proceedings." The bankruptcy court also sanctioned Appellants $100,000, sua sponte, for "failed appeals, apparently to deter Appellants from seeking review of its contempt order." Appellants appealed this order to the district court, which vacated the $100,000 sanction but affirmed the remainder of the award. "The district court concluded that because the bankruptcy court 'expressly designed its award to compensate' [Debtor] for the costs it incurred in litigating the contempt proceedings, the award was compensatory and therefore civil." Appellants filed a subsequent appeal to the Fifth Circuit.
- Judge(s):
- Dennis, Engelhardt, and Oldham
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