The Charitable DAF Fund LP v. Highland Capital Management LP
643 B.R. 162
N.D. Tex.2022Background
- Highland Capital Management, L.P. (HCM) filed Chapter 11; Charitable DAF (via CLO Holdco) owned ~49% of Highland CLO Funding, Ltd. (HCLOF) shares after purchasing on HCM advice.
- HarbourVest held the other major HCLOF interest and filed bankruptcy claims; as part of a bankruptcy settlement HarbourVest agreed to sell its HCLOF interest to HCM, which would give HCM majority control.
- CLO Holdco initially objected to the HarbourVest settlement asserting HCLOF’s Member Agreement included a right of first refusal (ROFR), but withdrew that objection at the Rule 9019 settlement hearing.
- Charitable DAF/CLO Holdco later filed an adversary complaint alleging breach of fiduciary duty, breach of contract (ROFR), negligence, RICO, and tortious interference arising from valuation and transfer issues; HCM moved to dismiss and Charitable DAF moved to stay.
- The bankruptcy court denied the stay and dismissed all claims with prejudice relying on collateral estoppel and judicial estoppel; the district court reversed and remanded the dismissal (holding collateral estoppel did not apply) but affirmed denial of the stay.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether court could sua sponte dismiss on collateral estoppel grounds without prior notice | Carroll requires notice and opportunity to respond; sua sponte dismissal without notice is reversible | Parties had litigated related preclusion issues before same bankruptcy judge; Fifth Circuit permits sua sponte collateral estoppel in these circumstances | Sua sponte invocation was permissible (no reversible error) |
| Whether Rule 9019 settlement hearing precludes Charitable DAF’s claims under collateral estoppel (identical issue/actually litigated) | Objection was withdrawn and the settlement hearing is not a full trial; settlement approval applies different legal standard so prior hearing was not actually litigated | Settlement hearing addressed valuation and ROFR and parties argued those issues at the hearing | Collateral estoppel does not apply because the settlement hearing used a different legal standard (not actually litigated); dismissal reversed and remanded |
| Whether judicial estoppel bars ROFR-based claims given CLO Holdco’s withdrawal of objection and on‑record statements (including transcript issues) | Withdrawal and a transcription error do not constitute an admission; Charitable DAF later discovered facts and did not act inconsistently or inadvertently | Withdrawal of objection amounted to adopting a contrary position that the court relied upon in approving the settlement; judicial estoppel elements satisfied | First two elements satisfied (inconsistent position and court acceptance); court abused discretion by not addressing inadvertence — remand required to decide inadvertence |
| Whether the Plan’s injunction/exculpation required staying or dismissal of this adversary proceeding | Plan’s injunction/exculpation prevents litigation against HCM and strips court of jurisdiction; stay or dismissal required | Exculpation/injunction do not bar claims for fraud, bad faith, gross negligence, willful misconduct; Charitable DAF may pursue those claims and did not meet stay factors | Bankruptcy court did not abuse discretion denying stay; denial of stay affirmed |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (conclusory allegations insufficient under Rule 8)
- Landis v. North American Co., 299 U.S. 248 (court's inherent power to stay proceedings)
- Nken v. Holder, 556 U.S. 418 (factors for stay pending appeal)
- In re Jackson Brewing Co., 624 F.2d 599 (bankruptcy settlement-approval test)
- TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414 (settlement fairness/best interests inquiry)
- Copeland v. Merrill Lynch & Co., 47 F.3d 1415 (preclusive effect of settlement hearings differs from full adjudication)
- In re Zale Corp., 62 F.3d 746 (different standards apply in settlement hearings vs. adversary proceedings)
- In re Coastal Plains, Inc., 179 F.3d 197 (judicial estoppel doctrine and its purpose)
- Carroll v. Fort James Corp., 470 F.3d 1171 (sua sponte dismissal requires fair procedure; notice and opportunity to respond)
- Bazrowx v. Scott, 136 F.3d 1053 (notice/opportunity to respond required for sua sponte dismissal)
- Pace v. Bogalusa City Sch. Bd., 403 F.3d 272 (elements of collateral estoppel)
- Bradberry v. Jefferson County, 732 F.3d 540 (collateral estoppel framework)
- Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (abuse of discretion where wrong legal standard applied)