270 F. Supp. 3d 716
S.D.N.Y.2017Background
- Citi issued margin calls to Highland CDO Opportunity Master Fund, L.P. (CDO Fund) in Oct. and Dec. 2008 related to credit default swaps; CDO Fund failed to meet the Dec. call, Citi foreclosed on collateral and auctioned it.
- CDO Fund (Bermuda LP) had no employees or offices and was managed by Highland Capital Management, L.P. (HCM) out of Texas; HCM also managed CDO Fund’s general partner and two feeder funds.
- CDO Fund bought HFP Notes issued by Highland Financial Partners (HFP) in Sept. 2008; the notes (and related transactions) are central to Citi’s claims about asset diversion and valuation.
- Citi counterclaimed seeking (1) recovery of a $24 million deficit and (2) indemnification from CDO Fund, Highland GP (the general partner), and HCM; Citi also sought to pierce the corporate form to reach HCM.
- After initial summary judgment rulings (finding Citi did not breach and that certain sales were lawful), the court allowed supplemental discovery focused on veil-piercing and choice-of-law; parties cross-moved again.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law for veil-piercing | New York law should apply because Citi (injured party) is in NY and key contracts are NY-governed | Texas should apply because HCM managed the fund from Texas | New York law applies under NY interest-analysis (veil-piercing treated as conduct-regulating; injury occurred in NY) |
| Whether HCM is liable under traditional veil-piercing | HCM exercised complete domination and used that control to strip assets, divert HFP cash, and misrepresent HFP Notes’ value to harm Citi | Even if HCM dominated CDO Fund, transfers repaid preexisting obligations or provided liquidity; no evidence of fraud or wrongful intent | HCM dominated CDO Fund but Citi failed to prove domination was used to commit a fraud or wrong; veil-piercing fails |
| Whether HCM is liable as equitable owner / de facto general or limited partner | HCM effectively controlled and managed CDO Fund and related entities, so it should be treated as the equitable owner or de facto partner and be liable | These theories are variants of veil-piercing and require proof of fraud/wrong; factual record does not show that | Theories fail for same reason—absence of fraud or wrong; HCM not liable and dismissed |
| Liability of CDO Fund on Citi’s counterclaims | Citi argues it performed and is entitled to judgment for the deficit/indemnity | Highland contends Citi didn’t fully perform (no deficit/demand letter or accounting) and raises affirmative defenses | Citi entitled to summary judgment on liability against CDO Fund (deficiencies are technical; substantial performance shown) |
Key Cases Cited
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir. 2007) (summary judgment materiality and genuine dispute standard)
- Anderson v. Liberty Lobby, 477 U.S. 242 (Supreme Court) (summary judgment and evaluation of evidence)
- Celotex Corp. v. Catrett, 477 U.S. 317 (Supreme Court) (movant’s burden on summary judgment)
- Thrift Drug, Inc. v. Universal Prescription Adm’rs, 131 F.3d 95 (2d Cir. 1997) (elements for veil piercing under New York law)
- Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131 (2d Cir. 1991) (multi-factor test for domination in alter-ego/veil-piercing analysis)
- Freeman v. Complex Computing Co., 119 F.3d 1044 (2d Cir. 1997) (equitable ownership doctrine and requirement of fraud/wrong)
- GlobalNet Financial.Com, Inc. v. Frank Crystal & Co., 449 F.3d 377 (2d Cir. 2006) (choice-of-law framework and conduct-vs-loss-regulating distinction)
- Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 739 F.3d 45 (2d Cir. 2013) (interest analysis for choice of law)
- Morris v. N.Y. State Dep’t of Taxation & Fin., 82 N.Y.2d 135 (N.Y.) (veil piercing requires domination used to commit fraud or wrong)