CLO HoldCo, Ltd. v. Kirschner (In re Highland Cap. Mgmt. LP)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
1 year 9 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

No. 23-10660 (5th Circuit, May 21,2024) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Fifth Circuit held a bankruptcy court did not abuse its discretion in refusing to allow a creditor-appellant's proposed second amended claim filed 11 months after confirmation of the debtor's chapter 11 plan (and 21 months after the bar date). The Fifth Circuit agreed with the bankruptcy court that post-confirmation amendments require a "heightened showing" of "compelling circumstances," which the creditor failed to satisfy.

Procedural context:

The Fifth Circuit reviewed the bankruptcy court's decision not to permit a late amendment of a proof of claim for an abuse of discretion, noting that this standard required de novo consideration of the bankruptcy court's conclusions of law. In analyzing the legal issue, the Fifth Circuit considered the creditor's reliance on In re Kolstad, 928 F.2d 171 (5th Cir. 1991), which involved an amendment to a proof of claim filed after the bar date but before plan confirmation.

Facts:

Highland Capital Management, L.P. ("Highland" or "Debtor") was the investment manager for the Highland Crusader Fund (the "Fund"). After Highland received redemption requests from many investors in the Fund during the 2008 financial crisis, the Fund underwent a wind-down process in Bermuda resulting in a Joint Plan of Distribution and Scheme Arrangement ("Plan and Scheme"), pursuant to which Highland would wind-down the Fund while supervised by a Redeemer Committee. In 2016, the Redeemer Committee accused Highland of breaching its obligations under the Plan and Scheme, and its fiduciary duty to the Fund and its former investors, by purchasing redemption claims of former Fund investors. In 2019, an arbitrator granted a $3 million award against Highland to the Redeemer Committee. The award also required Highland to either transfer the purchased redemption claims to the Redeemer Committee or cancel them. Before a court could confirm the arbitration award as a judgment, in October 2019, Highland filed a chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Northern District of Texas. The court set a bar date of April 8, 2020, for the filing of proofs of claim. Shortly before the bar date, CLO HoldCo, Ltd. ("Creditor") filed a claim for about $11 million. It asserted it had purchased interests in the redemption claims from Debtor. The Redeemer Committee and the Fund also filed proofs of claim in Debtor's bankruptcy case, but Debtor reached a settlement with them that, inter alia, provided Debtor would cancel the redemption claims in accordance with the arbitration award. After the bankruptcy court approved the settlement, Creditor filed a first amended proof of claim to reduce the amount it sought to $0 based on the cancellation of the redemption claims. In February 2021 the court confirmed Debtor's Fifth Amended Plan of Reorganization. In November 2021, the Litigation Trustee for a trust created under Debtor's plan objected to Creditor's first amended claim. And, 0n January 11, 2022--21 months after the bar date and well after plan confirmation and the plan's effective date--Creditor filed a second amended proof of claim based on a new theory of recovery, along with a "motion to ratify" this claim. The Litigation Trustee opposed the motion and the bankruptcy court, exercising its discretion, denied the motion to ratify, finding several circumstances weighed against allowing the second amended claim. The U.S. District Court for the Northern District of Texas affirmed, and Creditor timely appealed to the Fifth Circuit.

Judge(s):

Smith, Haynes, and Douglas

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