Committee of Highland Credit Strategies Fund v. Highland Capital Management, Final Award, 6 avr. 2016

We, the undersigned arbitrators, having been designated in accordance with Section 8.04 of a certain Joint Plan of Distribution of Credit Strategies Funds ("the Plan"), and having duly heard the proofs and allegations of the parties, do hereby AWARD as follows:

1.

The Claimant is the Redeemer Committee of Highland Credit Strategies Fund ("the Committee" or "Claimant"). The Claimant represents investors in the Highland Credit Strategies Master Fund, L.P., a Bermuda Exempted Mutual Fund Company ("Credit Strat" or "the Fund") and indirectly, through the Fund, investors in the feeder funds that channeled money into the Fund. It was represented by Marc F. Feinstein, Stuart Sarnoff, Sonia L. Chan and Daniel M. Petrocelli of the Los Angeles office of the firm of O’Melveny & Myers LLP.

2.

The Respondent is Highland Capital Management, L.P. ("Highland" or "Respondent"). Highland is the Manager of the Fund. Highland was represented by Gary Cruciani of the Dallas office of the firm of McKool Smith, and Martin P. Desmery and Lauren J. Coppola of the Boston office of the firm of Partridge Snow & Hahn LLP. Christopher J. Panos of the Partridge firm acted as lead counsel for Highland through the pre-heating phases of the arbitration. Mr, Panos was appointed a U.S. Bankruptcy Judge in the final weeks leading to the scheduled hearings, and Mr. Cruciani was substituted in for Mr. Panos.¹

3.

The parties appointed Jonathan B. Marks of Bethesda, Maryland and Eric D. Green of Boston, Massachusetts as arbitrators. Robert B. Davidson of New York, New York was then selected as the Chair of the Tribunal. All of the arbitrators acted as neutral arbitrators.

4.

The agreement to arbitrate is found at Section 8.04 of the Plan and pro vides in pertinent part:

Any dispute related to or arising out of this Plan, which is not covered by or cannot be resolved through mediation... shall be subject to and decided by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof pursuant to applicable law. Arbitration shall be conducted in New York, New York.

5.

Section 8.05 of the Plan contains the choice of law clause. It provides:

This Plan and the rights of the parties hereto are governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of law rules thereof, and shall be binding upon and inure to the successors and assigns of each party.

6.

Highland manages the Fund which, until its liquidation, invested money received from limited partnerships funded by investors in two feeder funds: the Highland Credit Strategies Fund, L.P. (the "Onshore Fund") and the Highland Credit Strategies Fund, Ltd. (the "Offshore Fund"). The Fund, the Onshore Fund and the Offshore Fund are sometimes collectively referred to as "the Funds".

7.

On October 15, 2008 the Funds gave notice of their intent to liquidate and to redeem all limited partnership interests. At that point, many investors had already given notice of their intent to redeem their interests and other investors had not yet given such notice. The investors who sought to redeem prior to the Funds’ notice of intent to liquidate were referred to as the "Prior Redeemers". Those investors who held interests at the date the Funds gave notice of their intent to liquidate were referred to as the "Compulsory Redeemers".

8.

Disputes arose over the priority, if any, to be accorded the Prior Redeemers in the remaining assets of the Funds. Disputes also arose over Highland’s management of the Funds that led them to tire point of liquidation.

9.

After negotiation and mediation, Highland and the investors agreed upon a method of liquidating the Funds and distributing the remaining assets to the investors. The method that would govern the liquidation was set forth in a "Joint Plan of Distribution of Credit Strategies Funds" ("the Plan"). The hope was that all or most of the Prior Redeemers and the Compulsory Redeemers would agree to the terms of the Plan² and that that would result in an orderly liquidation of the Fund, the major assets of which consisted of debt and equity interests in private companies.

10.

The Plan called for the establishment of a "Redeemer Committee", i.e, the "Committee", which, according to the definition set forth in Article 1 of the Plan, would "represent all Consenting Redeemers" and oversee Highland’s continuing liquidation of the Fund’s assets. Highland agreed to liquidate the Fund’s remaining assets for no fee. JX-22 at Section 5.01.

11.

Disputes arose over Highland’s liquidation of the assets, and the Committee then commenced an arbitration to resolve these disputes. Claimant set forth its claims in "Claimant Redeemer Committee of Highland Credit Strategies Fund’s First Amended Demand for Arbitration" dated June 25, 2014 ("the Demand"). On August 15, 2014 the Respondent filed "Respondent Highland Capital Management, L.P.’s Answering Statement" ("Highland’s Answering Statement").

12.

In its Answering Statement, Highland moved to dismiss the arbitration on three grounds: (i) the Committee’s failure to mediate as a condition precedent to arbitration; (ii) the lack of the Committee’s standing to assert any claims against Highland; and (iii) even assuming that standing existed, the Committee’s lack of standing to assert claims against Highland for monetary damages.

13.

Highland’s motion was fully briefed and argued, and, on January 2, 2015, the Tribunal issued an "Interim Award (Decision on Motion to Dismiss)" denying Highland’s motion in its entirety.

14.

Discovery followed. Document demands were served and objections raised and resolved.³ Both sides requested the issuance of subpoenas for the taking of testimony and for the production of documents from third party witnesses, and the Tribunal essentially accommodated such requests albeit with narrowed demands for production. A telephone hearing was conducted in connection with one of the subpoenas directed to an entity named NexBank SSB.

15.

The parties agreed that they would take a limited number of depositions and several were conducted.

16.

Four Procedural Orders, in addition to the Interim Award, were issued. These included:

Procedural Order No. 1. This Procedural Order (later amended) set forth the procedures to be followed in the arbitration.

Procedural Order No. 2. This Procedural Order dealt with the permissible scope and timing of Third Party Subpoenas.

Procedural Order No. 3. This Procedural Order directed further disclosure upon the application of the Committee.

Procedural Order No. 4. This Procedural Order dealt with the Rescheduling of the Hearing after Mr. Panos was no longer available to act as lead counsel to Highland.

Procedural Order No. 4 set forth the conditions (later accepted by both parties) pursuant to which the hearing was adjourned.

17.

A prehearing conference was conducted with counsel on August 21, 2015 to establish procedures for the hearings.

18.

Eight days of hearings were conducted in New York City on September 2, 3, 8, 9 10, 11, 22 and 23, 2015. Twelve witnesses testified, including in order of their testimony:

• Ruth Eliel, an employee of the Colburn Foundation, one of the investors in the Credit Strat Fund and a so-called Prior Redeemer. Ms. Eliel, who testified by video conference, was one of the three members of the Committee.

• Heath Kihn, an individual employed by Concord Management ("Concord")⁴, another member of the Committee. Mr. Kihn, working for Concord, performed operational due diligence on the Credit Strat Fund prior to Concord’s recommendation to its clients that they invest.

• John Garvey, one of the Committee’s experts. Mr. Garvey testified regarding the value of Credit Strat’s 18.6% equity interest in Cornerstone Healthcare Group Holding, Inc. ("Cornerstone") at the time it was sold back to Cornerstone. The equity was valued as a stand-alone block and valued again, assuming that Credit Strat had sold in combination with the Crusader Fund, another fund that Highland managed.

• John Honis, a former partner at Highland Capital Management LP until his retirement in 2014. Mr. Honis was charged with liaising with the Committee and implementing any agreement to liquidate its assets.

• Isaac Leventon, Highland’s Assistant General Counsel. Mr. Leventon advised Credit Strat’s portfolio manager regarding the Plan and was designated as Highland’s 30(b)(6) witness in the discovery stage of the arbitration Tr. 1314-15.

• Thomas Surgent, Highland’s Chief Compliance Officer who was consulted regarding the Cornerstone sale.

• James Dondero, Highland’s President and one of its founding partners Tr. 2129-30.

• Brant Behr, an employee of Concord Management and Concord’s designee on the Committee.

• Matthew Jameson, a Managing Director at Highland and co-leader of the private equity group. Tr. 2420. Mr. Jameson testified by video conference.

• Steven Thel, a Professor at Fordham Law School. Prof. Thel testified regarding the legal duties that Highland owed to its investors under the documents that governed the Credit Strat Fund.

• Michael Pisani, a healthcare specialist and an employee of Houlihan Lokey, the investment bank charged with selling Cornerstone Tr. 2631-32.

• Scott Ellington, Highland’s Chief Legal Officer. Tr. 2729. Mr. Ellington testified regarding Highland’s settlement of claims asserted by Barclay’s Bank.⁵

19.

While hearings were pending, Highland, relying upon evidence alleged to be newly discovered in the course of the proceedings, again moved to dismiss the arbitration on the ground that Concord was not an investor in the Credit Strat Fund and, therefore, could not be a member of tire Committee. Assuming this to be correct, that would drop tire number of Committee members to two and, according to Highland, below the minimum required for a quorum. In addition, Highland asked the Tribunal to order two additional witnesses to testify on that issue.

20.

The Tribunal denied that motion but "reserve[d] the right to re-open the record to accept additional evidence if, upon further consideration, we deem it necessary to do so."

21.

The eight day hearing generated 2,955 pages of transcript. Numerous exhibits, as well as demonstratives, were entered into evidence and discussed.

22.

The parties submitted post-hearing written submissions on November 6, 2015. Reply submissions were served on December 4, 2015. These were reviewed and duly considered by the arbitrators. The hearings were declared closed on March 17, 2016.

23.

The Committee alleged that Highland breached its common law and contractual duties to the Fund in several respects: First, Highland sold one of Credit Strat's largest assets, a 18.6% minority interest in Cornerstone, a company in the long term acute care health business, for what the Committee contended was far less than the value that Highland should have received from the sale of the asset. Cornerstone was, at the time, 100% owned by Highland itself and by three funds (two funds in addition to Credit Strat) all controlled by Highland. According to the Committee, Highland secretly marketed and sold Credit Strat's minority interest back to Cornerstone at a bargain price, thereby benefitting itself and its other affiliates when it should have: (i) sold Credit Strat's interest as part of a majority block together with the equity interest of the Crusader Fund, another Highland fund in liquidation; (ii) sold 100% of Cornerstone in order to achieve the maximum price for Credit Strat's 18.6% minority interest; or (iii) at the least sold for a minority interest value substantially higher than the $24,000,000 final sales price.

24.

The Committee also alleged that Highland refused to authorize even an interim distribution to the Fund’s investors using as a pretext the need to preserve its assets to secure the possible loss of a lawsuit brought against it by United Bank of Switzerland ("UBS"). Highland then (according to the Committee) settled the UBS lawsuit on short notice to the Committee by paying part of the required consideration from the assets of the Funds (including Credit Strat) even though UBS’s claim accused Highland and not the Funds of wrongdoing, This claim, while discussed in the context of various interim applications during the arbitration, was never made the object of any claim for relief in the final briefing.

25.

The Committee further alleged that, in breach of an express undertaking under the Plan, Highland settled another claim—this one brought by Barclays Bank—without the required Committee approval and on very short notice, and that Highland improperly used some of Credit Strat’s money to fund the settlement.

26.

The Committee also contended that Highland—again in breach of the duties owed to the investors—placed the Fund’s remaining assets at risk by depositing them in NexBank SSB ("NexBank"), a small regional Texas bank owned and controlled by Highland’s principals. This, the Committee alleged, resulted in the unjust enrichment of Highland’s executives at the risk and expense of the investors. This claim, like the claim relating the UBS settlement, was not discussed in the final submissions, nor made the object of a claim for relief in the final briefing.

27.

Finally, the Committee complained that Highland is not fulfilling its undertakings under the Plan and is, instead, purposely "dragging its feet" or otherwise delaying the liquidation of the Fund’s assets. This, says the Committee, is part of a scheme to buy back the interests of frustrated Credit Strat investors at lowball prices.

28.

Highland contested every one of the Committee’s claims on their merits and, as explained above, further asserted that the Tribunal has no jurisdiction under the Plan to award any relief to the Committee, which, according to Highland, is not constituted in accordance with the requirements of the Plan and has no authority to prosecute the claims made in this arbitration.

29.

The Tribunal denied Highland’s first motion to dismiss the arbitration for lack of the Committee’s standing to assert the Fund’s claims. In doing so, it explained:

The provisions of the Plan and, specifically, the definition of "Redeemer Committee" found on page 3, defines the Committee as "A five-person committee composed of representatives of four Consenting Prior Redeemers... and a representative of one Consenting Compulsory Redeemer..." Highland points out that the Committee is actually composed of only three Consenting Prior Redeemers (rather than four), and that a required Consenting Compulsory Redeemer is not a member. In response, the Committee asserts that it has always been a committee of three members rather than five and has been liaising with Highland since 2011 without complaint.⁶ Moreover, in response to questions asked at oral argument, the Committee produced materials from one of its members demonstrating that one of its three members is a Consenting Compulsory Redeemer as well as a Consenting Prior Redeemer. Thus, the claims of both needed constituencies appear to be represented.

The Tribunal agrees with the Committee and, at least as a preliminary matter, accepts that its three members adequately represent the investors with respect to the Plan. While the Committee is composed of only three, rather than five, members, arid none of its members technically holds its seat as a Consenting Compulsory Redeemer, this deficiency—to the extent that it is a deficiency—has been ignored for the past three years. Indeed, accepting the statements made by counsel at oral argument, the Committee members were originally solicited and accepted by Highland. Highland only objected when the Committee instituted the instant arbitration. Assuming this to be the case, Highland’s original acceptance of the Committee and its failure to object at the time may well have effected a waiver of any right to object to the composition of the Committee at this stage⁷.

For purposes of the instant motion, we accept the present Committee as duly constituted and functioning in accordance with the Plan.

30.

In the course of the arbitration, Highland requested that the arbitrators revisit their prior ruling when testimony by a Concord witness disclosed that Concord was not itself an investor, but merely an "advisor" to certain third party Credit Strat investors. Highland professed surprise at this situation and argued that this meant that the Committee consisted only of two out of the required five members, and that this number was clearly insufficient to enable the Committee to purport to represent investors in accordance with the Plan.

31.

Highland renewed its motion to dismiss in a letter dated September 8, 2015, It there summarized the grounds for dismissal as follows:

This renewed motion is based on the recent testimony of Heath Kihn, who reveal ed that one of the Committee members, Brant Behr, does not represent an actual investor in the [Credit Strat Fund]. Instead, Mr. Behr is the representative of his employer, Concord Management... which is not an investor in the Fund. As a result, Mr. Behr is not eligible to serve on the Committee, which in turn means that the Committee has only two members instead of five as required by the [Plan]. Without a quorum, any acts of the Committee—including pursuing this arbitration—are void.

Letter of September 8, 2015, page 1 (emphasis in original).

32.

Based on the testimony of Mr. Kihn and Highland’s application of September 8th. the Tribunal set a briefing schedule and Highland submitted its "amended renewed motion to dismiss" for lack of standing on September 11, 2015. In its renewed motion, Highland summarized its position as follows: (i) The Plan defines the Committee as "A five-person committee composed of representatives of four Consenting Prior Redeemers... and a representative of one Consenting Compulsory Redeemer... which will represent all Consenting Redeemers with respect to those matter specified in Article 2 [of the Plan]" (ii) "The Plan defines ‘Prior Redeemers’ as ‘Investors of the Fund whose withdrawals/redemptions became effective on or before September 30, 2008..."; and (ii) "The Plan defines ‘Compulsory Redeemers’ as ‘Investors of the Fund who were compulsorily withdrawn/redeemed by the Fund on October 15, 2008’" (Highland’s letter brief dated September 11, 2015 at 2).;. Highland then concluded that, looking at the definitions together, "it is clear that the Committee members must be representatives of individual investors of the Fund" and "The committee has put forth no evidence that a Consenting Redeemer authorized Mr. Behr to serve on the Redeemer Committee and thus, the Committee has not been properly constituted." Id. at 2-3.

33.

Mr. Kihn testified that Concord represented two BVI investors, Bradfield Overseas Holdings., Ltd. ("Bradfield") and Netherfield Holdings Ltd. ("Netherfield") which each invested $45 million in the Fund upon Concord’s recommendation. Mr. Kihn identified Concord as a "small multifamily office/fund of funds operation" Tr. at 1695 and 1703.

34.

Highland provided the Subscription Agreements for each of Bradfield and Netherfield as Exhibits C and D to its September 11, 2015 submission. The Agreements both included a Confidential Investor Questionnaire that certified that the subscribers were qualified investors and provided the information needed to assure Highland’s administrator, JPMorgan Tranaut Fund Administration Limited ("JPMorgan") in Bermuda that Highland was dealing with a legitimate business, The Agreements identify the companies and their directors. The certification for both Bradfield and Netherfield is signed by Vilija Niculina as a Director with an address in Vilnius, Lithuania. A second Director is identified as Gotcha Djabidze with an address in Vienna, Austria. A page of each Agreement is entitled "Investor Contact Information". Each subscription identifies "Michael Matlin" of "Concorde Management LLC" as the company’s contact.

35.

Mr. Surgent identified JPMorgan as Highland’s agent retained to determine that Highland complied with all money laundering and other regulations. Apparently, all was in order because both Bradfield and Netherfield wired $45 million to Highland. Highland accepted the money and ultimately invested it in Credit Strat.

36.

In denying Highland’s motion to dismiss on the basis that Concord was not able to act as a representative of an investor on the Committee, the Tribunal also denied Highland’s companion application to compel the attendance of Michael Matlin or one of the companies’ directors to testify to the bona fides of Bradfield and Netherfield.

37.

In response to Highland’s motion, the Committee produced a letter signed by Gotcha Djabidze to Concord’s Brant Behr dated 11 September 2015. Mr. Djabidze’s signature was notarized by an Austrian notary. The letter stated:

Dear Mr. Behr,

This is to confirm that, as discussed at the time in April 2011, you are and at all times have been authorized to represent Bradfield Overseas Holdings Ltd and Netherfield Holding Ltd as a member of the Highland Credit Strategies Funds Redeemer Committee.

This letter is being sent on Bradfield letterhead because Netherfield has been consolidated into Bradfield.

Very truly yours,

_______/s/_________________

Gotcha Djabidze [Notarization]

Director of Bradfield

38.

Highland contends that this notarized document, even if authentic,⁸ would be insufficient. According to Highland, New York law equates a "representative" with "an agent" and Concord’s witnesses declined to attribute a principal-agent relationship between Concord arid either Bradfield or Netherfield.

39.

After due consideration, the Tribunal adheres to its determination that Concord is a proper representative of the two Fund investors Bradfield and Netherfield and, as such, is entitled to membership on the Committee. The Plan permits investors to appoint "representatives" for membership on the Committee. While a representative can sometimes be equated with an agent, that is not always the case. Indeed, Rule R-26 of the Commercial Rules of the American Arbitration Association, which govern the procedure in this arbitration, expressly provides that "Any party may participate without representation (pro se), or by counsel or any other representative of the party’s choosing, unless such choice is prohibited by applicable law..." Highland cites no rule of law that would prohibit an "advisor" to an investor to represent that investor on the Committee.

40.

Further, while Highland cites the absence of a quorum if the Committee were composed of only two members, the Plan itself does not require a "quorum" although the Plan does provide for a five member Committee and negotiating correspondence between the parties evidences that the concept of a quorum was discussed at one point. However, for the reasons set forth in the Tribunal’s first decision denying dismissal, the group of three—accepted and recognized by Highland, which interacted with the group and its counsel for many months prior to the institution of this arbitration—is sufficient to enable the Committee’s claims to proceed.

41.

As explained above, the Committee claims that Highland improperly orchestrated the sale of Credit Strat’s minority interest in Cornerstone back to Cornerstone at a bargain price. According to the Committee, Highland should have obtained a higher price, or sold the Fund’s interest together with the equity interest of the Crusader Fund, another Highland managed fund in liquidation (thereby realizing a premium for the sale of a majority controlling interest). In the alternative, the Committee contends that Highland should have sold the entire company and divided the proceeds pro rata among all Cornerstone shareholders.

42.

Instead, says the Committee, Highland arranged to sell the Fund’s equity interest in secret back to Cornerstone, which Highland wholly owned itself and through its other managed funds, at a bargain price, and in violation of Highland’s contractual and fiduciary obligations to the Committee and the Fund’s investors.

43.

Highland denies these allegations claiming that it was entitled to market and sell Cornerstone as it did, that it breached no duties, fiduciary or otherwise, owed either to the Committee or the investors, and should be thanked for obtaining what, in hindsight, turned out to be an excellent price.

44.

Highland further argues that, in view of the language of the Fund documents, which essentially give Highland free reign over sales decisions affecting multiple funds, Highland can only be found liable if, in selling the asset, it engaged in "willful misconduct" or "gross negligence" as those terms have been defined under Delaware law.

45.

An analysis of the Committee’s claims necessitates a recitation of the facts as we have found them that led to the sale. If the recitation below differs from any party’s position, this is due to determinations of credibility, and the weighing of evidence, both written and oral.

46.

Credit Strat held two main illiquid assets: Cornerstone and shares in Canopy Timberlands, a timber company located in Maine. During the life of the Funds, Highland engaged in a rigorous valuation process for illiquid assets that determined the price that Highland used for valuation purposes. That price was known as "the mark". It was intended to reflect a careful analysis leading to Highland’s best estimate of an asset’s fair market value.

47.

Section 2.02(iii) of the Plan calls for the Committee and the "Investment Manager"— for all intents and purposes, Highland—to "develop... and approve a quarterly plan for the liquidation of the assets of the Fund..." Various proposals went back and forth over time, but a complete quarterly plan, as envisioned by Section 2.02(iii), was never approved by both parties. The reasons for this are varied, but suspicion and mistrust emerged fairly early in the parties’ relationship.

48.

In July 2011 the parties’ discussed the possibility of Highland’s remaining funds purchasing Cornerstone. The Committee requested a valuation, and Highland retained T. Stewart PC ("T. Stewart") an independent valuation firm, to value Cornerstone’s equity. T. Stewart arrived at a June 30, 2011 value of $2,268.44 per share. (JX-25 at 1 and T. Stewart’s report dated August 8, 2011 at JX-25 beginning at Bates page 8714). Allegedly because of a deterioration in market conditions, Highland then asked T. Stewart to do a revaluation, and a week later T. Stewart expressed its opinion that Cornerstone’s stock, as of August 15, 2011, had fallen in value to $ 1,901.62 per share. Id. John Honis, then Highland’s designee dealing with the Committee, communicated T. Stewart’s appraisals to the Committee on August 17, 2011. JX-25.

49.

When Heath Kihn, a Concord employee and one of the three individuals who regularly attended Committee meetings and monitored the liquidation process, compared the two appraisals, he discovered that, unbeknownst to the Committees, T. Stewart had switched methodologies in its second valuation of Cornerstone’s terminal value which led to the $1,901.62 per share price. When the Committee subsequently requested that T. Stewart use the same methodology, Cornerstone’s per share value was calculated at $2,065 per share, rather than $1,901.62 per share. (Kihn Tr. 392-395). On September 8, 2011 the Committee instructed Highland to sell 1/3 of Cornerstone’s stock at $2,064 per share. Cornerstone’s Board rejected that offer and (not coincidentally) countered at $ 1,901.62 for 100% of Credit Strat’s equity interest. JX-46.

50.

At that point, the Committee realized that the T. Stewart numbers were being shared with Cornerstone’s management. Kihn Tr. 405-406. This led the Committee to view Highland’s intentions with suspicion and contributed significantly to the breakdown in communications that followed.

51.

Through 2011 and most of 2012, numerous proposals to liquidate Credit Strat’s Cornerstone position were exchanged between Highland and the Committee without success. (JX-46).⁹ The Committee then decided to "appoint a consultant to advise us on the funds’ holding and the industry..." Eliel Tr. 138-140; CX-80. In December 2012, that consultant, a company by the name of Quadriga Partners ("Quadriga") valued Credit Strat’s 18% equity interest in Cornerstone at $3,891 per share, some 12.6% above Highland’s mark. See Quadriga’s Report dated December 12, 2012 (JX-50 at 29). Quadriga also provided a valuation somewhere between $4,000 and $5,000 per share assuming that Credit Strat’s interest could be sold together as a block with the Crusader Fund’s equity interest. Eliel Tr. 154.

52.

Because the Committee was concerned that Highland would share the Quadriga valuation with Cornerstone (as it had shared the T. Stewart valuation), the Committee refused to give the Quadriga report to Mr. Honis. As Mr. Kihn testified (Tr. 406):

ARBITRATOR GREEN: so in your experience is that [turning over the results of an appraisal to the seller] common?

THE WITNESS: No. And that’s one of the reasons why we didn’t want to give the Quadriga report, because we thought that Highland might go and turn it over to Cornerstone and use that as a source. I mean, if you’re bargaining with someone, you’re not going to tip your hand and give them all your information right off the hop. If you want to get the price, you don’t want to give them.

53.

Honis, as well as Cornerstone, had worked diligently to gather information to provide to Quadriga to assist in the valuation exercise. (Honis Tr. 748). When the Quadriga report was issued, however, the Committee refused to share the results with Honis, (Id. 747), and, as explained further below, Honis took umbrage at the Committee’s refusal. Tr. 747-748.

54.

Cornerstone was not the only asset on the Committee’s mind. It was concerned generally with what it perceived to be the slow pace of liquidation, as well as (in its view) Highland’s failure to abide by the terms of the Plan. Thus, in late September 2012, The Committee objected to Highland’s charging Credit Strat with a portion of the settlement of a claim brought against Highland by Barclays Bank (JX-45). It got to the point where the parties discussed a formal mediation. (JX-47). By letter of November 16, 2012 (JX-48), Highland complained about its failure to earn compensation since the Plan was instituted, and its expenditure of "significant internal resources necessary to manage the Fund given the ever-increasing difficulty of such management". Highland’s letter suggested a liquidation plan that called for Highland to earn fees (Id.) which would have been contrary to Highland’s promise in the Plan to contribute its services to the Fund for no fee. Plan Section 5.01. The Committee rejected that proposal in a letter dated December 1, 2012 (JX-49) and countered with its own proposal, pointing out that the Plan called for Highland to liquidate Credit Strat without charging fees and complaining again about "the slowness of the liquidation process."

55.

At or about this time, other events conspired to poison the parties’ working relationship. In the Fall of 2012 Highland asked the Committee to sign a form that would have deferred about $7 million of Highland’s tax obligations. Dondero Tr. 2220. The Committee had agreed to the deferral the year before without exacting any concession for doing so (Eliel Tr. 180). This time, however, the Committee, in its letter dated December 1, 2012 (JX-49), which rejected one of Highland’s liquidation proposals and offered one of its own, ended with an offer to agree to an extension of the tax deferral "[i]n exchange for Highland agreeing to the above terms..." Id at 4. Dondero did not take kindly to this position. Dondero Tr. 1221 ("But, you know, the Committee decided to stick us in the eye for no good reason, really.")¹⁰

56.

It is apparent that, by this time, the parties considered their relationship to be adversarial. From the Committee’s point of view, Highland was dragging its feet on liquidation, refusing to comply with its obligations under the Plan by settling the Barclays claim over the Committee’s objection, improperly demanding fees to liquidate Credit Strat’s holdings and attempting to buy Credit Strat’s Cornerstone equity on the cheap. Highland, for its part, believed that the Committee was being ungrateful and obstinate by refusing to agree to several liquidation proposals that Highland had offered, refusing even to mediate its differences, and refusing to share the Quadriga report.

57.

By letter of December 12, 2012 (JX-51) Highland replied to the Committee’s letter of December 1, 2012 with another counterproposal, repeating a demand for fees. It included the following paragraph (emphasis in original):

The Committee’s critique of the pace of the Fund’s liquidation and rejection of Highland’s prior liquidation proposal without offering any practical alternative reflects the futility of the Committee’s position. The Committee simply demands Highland sell assets at a reasonable price while refusing to accept any proposal by Highland, or provide an alternative, as to how to obtain such prices. The Committee’s intransigence ill-serves the Fund’s stakeholders and runs counter to the Fund Plan and Scheme.

58.

The Committee’s response was, by this time, predictable. The first paragraph of its responsive letter dated December 23, 2012 states:

Your letter is filled with unfounded assertions and insinuations. There is no basis for your self-serving claims that the Committee has been intransigent, ill-served its constituency, refused to accept reasonable proposals made by Highland regarding the liquidation of the Fund, or otherwise acted contrary to the Fund Plan and Scheme. As you know, there has never been a proposal by Highland to sell Fund assets to a party unaffiliated with Highland that the Committee has rejected. The only times the Committee has rejected a proposal by Highland to sell Fund assets is when Highland was seeking to sell the assets to itself or a company it controls at an unfairly low price.

59.

A letter to the Committee dated January 24, 2013 (JX-53) from Jason Vanacour, Highland’s Assistant General Counsel referred to the "very contentious and unproductive relationship" and complained about "an unreasonable drain on the Manager’s resources...[which] has led to inconsistent messages and confusion by both parties." The letter instituted a regime whereby "All communications between the Redeemer Committee and the Manager shall be conducted by and between a single representative from each of the parties." Id. Ms. Eliel characterized this demand for limited communications as "a big shock" that "came out of the blue".¹¹ Eliel Tr. 188, 191.

60.

Then came a letter that no one on the Committee expected. By letter dated January 30, 2013 Mr. Vanacour announced on behalf of Highland that that the Manager "shall endeavor by the end of the first quarter of 2013 to Liquidate all or portions of the following positions held by the Fund with the goal of raising approximately $40 to $45 million dollars..." The letter then listed essentially all of Credit Strat’s assets. Ex. JX-54.

61.

Ms. Eliel testified that the letter was "crazy" as "the aggregate value of these assets was vastly greater than 40 to 45 million dollars." Tr. 193. The proposal, as she read it, also denied the Committee any voice in the sale of the assets (something that the Committee believed it had bargained for and received in the Plan). Tire proposal also ignored the previously agreed arrangement whereby Highland, through Mr. Honis, had agreed not to sell any Fund assets to a Highland affiliate without prior approval from the Committee. The Committee rejected what it understood to be Highland’s position. Ex. JX-71 at Bates pages 225097-99.

62.

This agreement by Highland that it would not sell any Fund assets to an affiliate without Committee approval was concededly made even though it does not appear in the Plan. JX-44 and Honis Tr. 1087. Honis embodied it in a "Resolution" that memorialized a phone meeting with the Committee that took place on August 17, 2011. That resolution stated: "Resolved: HCMLP [Highland] has authority to sell any position that IS NOT an affiliate trade. If it is an affiliate trade, HCMLP must get an independent valuation/RC approval". (JX-44 at Bates page 253233) (Emphasis in original). Highland argued at the hearings and in its briefing that such a commitment was void for lack of consideration and barred by the integration clause in Section 8.6 of the Plan. Highland Br. at 10. The Tribunal disagrees. Section 8.06 of the Joint Plan provides that the Plan "constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof. Except as otherwise provided herein, this Plan supersedes all prior written and oral agreements, and no representations, warranties, statements, promises, or conditions not contained in this Plan shall be binding or have any force or effect whatsoever." J-022 at Bates page 359615. As we read this language, it establishes that the integration clause applies to extrinsic agreements reached at or before the adoption of the Plan, not to agreements reached after the Plan was adopted. We also find that the agreement reached by Mr. Honis and the Committee and embodied in the "Resolved" language reflected a partially successful effort jointly to define elements of the quarterly plan envisioned by Section 2.02(iii) of the Plan, and thus did not need to be supported by separate consideration.

63.

On April 24, 2013, Isaac Leventon, another in-house lawyer working for Highland repeated the (unacceptable) offer that Vanacour had made back in January (JX-61). On May 12, 2013, Stuart Robertson, another Committee member, corresponded directly with Honis and Leventon and asked why Highland thought that the Credit Strat portfolio would realize only S45 million--38% of its December 2012 valuation. (JX-71 at Bates page 225098). Eliel followed up with an email on May 20, 2013 addressed directly to Jim Dondero ("We request you, as the ultimate decision maker the firm, please address how giving away Canopy Timberlands LP and Cornerstone Equity, which are (about) 50% of the fund’s NAV... for free are in the best interests of the Fund and it stakeholders.") Id. at Bates page 225096. Robertson followed up with a similar message to Dondero on May 21, 2013. Id.

64.

Dondero had a swift reaction when he saw a copy of the letter. In an email to Honis (copying other Highland officers) dated May 20, 2013, Dondero wrote (JX-63):

These emails establish they are idiots and that you guys have let them misunderstand the proposal..... its not surprising they are furious..... they think you are liquidating the portfolio for cents on the dollar versus the reality is you are liquidating part of it at fair prices to raise a targeted amount of cash..... these emails are from may 12 and 14th.... are you guys asleep? Who is spearheading this project??? Do you guys need me to respond?

64.

Dondero did correct the record with an email on May 21, 2013 to Ms. Eliel where he wrote (JX-71 at Bates page 225096):

As always it is charming to deal with sophisticated investors that think the best of us..., The liquidation request we proposed was to raise approximately $40mm of cash from the portfolio by selling SOME assets near their marked value.......WE ARE NOT PROPOSING TO SELL ALL ASSETS FOR $40mm........we continue to work hard, thanklessly, for the investors in the fund, even though you assume we are not........thanks jd

65.

Dondero responded in a similar vein to Robertson as follows (Id. at Bates page 225095):

In terms of requesting additional services from Highland your email should be re-written with the following introduction:

‘Dear Jim,

Although the committee has been heavy handed, punitive and disrespectful we would like to improve the working relationship and reduce the significant monthly legal expenses. We are willing to pay Highland 250k a month in Management fees and we will work responsively and in good faith with Highland to optimize and complete liquidation of the fund within 12 months.’

Stuart, if you can’t bring yourself to type the above please direct your correspondence through the lawyers, Best jd

66.

Sarcasm aside, it became painfully apparent that Highland, and Dondero in particular, was fed up with the whole process, including the Committee and what they perceived as its strident demands, especially when Highland was receiving no fees for its continuing services liquidating the Fund. Dondero, Tr. 2178, referred to the process as a "timesink" and a "time waste of our legal staff and investment professionals..."

67.

In June 2013, shortly after this exchange, Honis, in an apparent reaction to Dondero’s displeasure and his own frustration, decided to engage an investment banker, Houlihan Lokey ("Houlihan") to value, market and sell Credit Strat’s Cornerstone equity. Honis Tr, 745. Honis did not consult with the Committee before reaching the decision to engage Houlihan, nor did he ever seek or obtain the Committee’s consent for a sale in this manner. Honis testified that he did not have the Committee’s authorization, but that he thought he did not need it. Id. 747. The following colloquy appears in the transcript and evidenced his frustration at the time (Honis Tr. 747-748):

Q Did you consider at the time whether the Committee would be interested in having a say on whether to put Credit Strat’s Cornerstone shares up for sale?

A. No

Q. Did it cross your mind at all at the time whether the Committee would be interested in having a say?

A. I think the Committee would be—I think there might be an interest, but about five months prior to that, I tried working with the Committee on just that with this Quadriga group. And the Committee—as a matter of fact, Quadriga, I wanted to expand their mandate for other positions in the portfolio.

So we went to a lot of work getting Quadriga up to speed on the, on the mandate, on selling these positions. And the Committee just, once they received the report, stopped communicating with me. Wouldn’t provide me the report.

And so at that point, they didn’t want to talk to me about Cornerstone and sharing this valuable information with me. Didn’t want to. After I spent four months working with these guys on—and trying to expand their mandate, didn’t share that very, very important data with me. And decided to just ignore me, ignore the position and say you need to liquidate the assets.

Now, that might be a circuitous way of answering your question, but did they have authorization or would they have liked to have heard? I don’t know. I really don’t.

Five months earlier, they, they--I was persona non grata to them, after all that work I had done, working on getting Quadriga up to speed.

So that’s my answer.

68.

The Tribunal declines to credit Honis’s testimony that he did not know whether the Committee would like to be involved in the sale of one of its most valuable assets. He had been negotiating back and forth with the Committee all through 2011 and most of 2012 on an acceptable price. (JX-46). Honis was apparently angry over the Committee’s refusal to share the Quadriga valuation (although he may not have known why the Committee did not want to share that information, i.e. its fear that the valuation would be leaked to the putative seller).

69.

Whatever the reason, Highland, on June 10, 2013 engaged an investment banking firm, Houlihan Lokey ("Houlihan") to sell Credit Strat’s minority interest without informing the Committee or involving them in any way in the sale. JX-70; Eliel Tr. 216-217.

70.

Houlihan assigned Michael Pisani, a healthcare specialist, to assist Highland in the sale of Credit Strat’s equity interest in Cornerstone. Mr. Pisani was instructed only to sell the Fund’s minority stock interest. No one informed him of the commitment that Honis had made that no Fund assets would be sold to a Highland affiliate without the consent of the Committee. Pisani assumed from conversations with Mr. Leventon or Mr. Honis that the process of selling the asset "was a collaboration and partnership between Highland and that Redeemer Committee..." and that "the Redeemer Committee was set up to effectively govern the transaction of the stake that we [Houlihan] were selling." Pisani Tr. 2680-2682. He was unaware that the Committee was "completely in the dark" about the sale. Id. Tr. 2680.

71.

Houlihan prepared a Confidential Information Memorandum (a "CIM") that it sent to prospective buyers. JX-65. It described the asset (18.6% of the equity of Cornerstone, JX-65 at Bates page 3140) and contained such other information as usually accompanies such offers to sell. In this case it particularly included the facts that the buyer would be subject to a Stockholders’ Agreement (discussed further below) under which it would maintain a passive role (Id.) and that any offers to buy were subject to a right of first refusal (a "ROFR") held first by Cornerstone and then by Highland which "ha[d] the right to acquire the Seller’s remaining shares and apportion such Seller’s shares". Id. at Bates page 3141. In reality, the sale was not subject to a ROFR and the misinformation came from Leventon. Leventon Tr. 1461-1462.

72.

Houlihan sent the CIM to 97 potential third-party buyers (See Houlihan’s Marketing Summary at JX-97 at Bates page 47424) but received no offers. Id. There were several reasons that the asset proved difficult to sell, not the least of which was the fact that Cornerstone’s business (the running of long term acute care facilities) was subject to a difficult and changing regulatory environment. In addition, in highlighting the concerns of potential financial investors. Houlihan described the existence of the ROFR as "worrisome". Id. at Bates page 47426.

73.

When the auction failed to produce a bid, Honis approached Cornerstone about making a bid. Honis Tr. 940. As noted above, Cornerstone had previously bid for Credit Strat's interest. (JX-46). Houlihan valued Credit Strat’s minority share as between $27.8 million on the low end and $37.0 million at the high end. JX-97 at Bates page 47433. A discounted cash flow analysis showed a range of $30.0 million to $37.0 million. Id. at Bates page 47434. Highland’s mark was $28 million.

74.

Cornerstone initially offered $24 million. JX-107, at Bates page 001794. Honis’s counter-offer accepted the $24 million price and asked that Cornerstone pay Houlihan’s $850,000 transaction fee. R-0002; Honis Demonstrative 9. Cornerstone then countered with a $23,575 price, but agreed to pay the Houlihan fee. R-0013; Honis Demonstrative 9. The parties ended up agreeing to $24 million, plus the Houlihan fee. The Committee argued that the transaction was structured in this manner to evade the Plan’s requirement in Section 2.03 that any Fund expense over $100,000 be pre-approved by the Committee. It bears mention that various Highland executives, including Mr. Dondero, were on Cornerstone’s Board (Dondero Tr. 2159-2160) and were aware of the negotiations.

75.

The Committee first learned that its interest in Cornerstone had been sold on or about September 13, 2013 when it received a regular cash report from Mr. Leventon. Eliel Tr. 218; JX-115. The report listed $24,000,000 under "Asset Liquidations" as "Cornerstone sale proceeds." The footnote to that entry disclosed that "The entire Credit Strat position in Cornerstone Common was sold on 9/6/13 for $24.0mm..." Id. at Bates page 222412. Ms. Eliel testified that her reaction was "[c]omplete shock and disbelief". Eliel Tr. 219. The other two Committee members, Brant Behr and Stuart Robertson, also expressed great surprise at both the fact of the sale and the price that Cornerstone had paid. JX-116.

76.

The Claimant contends that Highland’s conduct in selling Credit Strat’s Cornerstone shares in the manner that they did, and for the price obtained, constituted both an actionable breach of contract and a violation of Highland’s fiduciary duty owed to the Fund investors.

77.

The parties differ on whether the various Fund documents that each investor executed completely preclude any cause of action based upon alleged self-dealing or a breach of a fiduciary duty. Highland argues that both Delaware law and the Investment Advisors Act permit investment managers in Highland’s position drastically to limit the fiduciary duties that they would otherwise owe to investors, provided that they do not act engage in willful misconduct or act with gross negligence. See, Highland’s Post-Hearing Br. at 21-22. By contrast, the Committee argues that certain fiduciary duties - those allegedly breached by Highland in this case—can never be disclaimed. Claimant’s Post-Hearing Reply Br. at Part II.

78.

The Tribunal need not, however, parse the Fund documents to determine whether or not any fiduciary duties remain under applicable law because the Tribunal finds that, under all the facts and circumstances, Highland not only breached its obligations under the Plan, but engaged in willful misconduct in its sale of the Fund’s Cornerstone equity.

79.

Highland reads Delaware law as setting an extremely high bar to a finding of willful misconduct. Citing DiRenzo v. Lichtenstein, No. 7094-VCP, 2013 WL 5503034 (Del. Ch. Sept. 13, 2013) ("DiRenzo"), Dawson v. Pittco Capital Partners, L.P., No. 3148-VLN, 2012 WL 1564305 (Del. Ch. Apr. 30, 2012) ("Dawson") and a definition of "willful misconduct" in the Delaware Trust Act, Del. Code Ann. Tit. 12 (the "DTA"), Sec. 3301(g), Highland contends that a finding of willful misconduct requires more than a "bad business decision" (DiRenzo, 2013 WL 5503034 at *30) but instead requires a showing that the party accused of willful misconduct "intentionally harmed" those to whom it owed a duty (Dawson, 2012 WL 1564305 at *33) or engaged in "intentional wrongdoing, not mere negligence, gross negligence or recklessness" with "wrongdoing" defined as "malicious conduct or conduct designed to defraud or seek an unconscionable advantage." DTA, supra; Highland’s Post-Hearing Br. at 23-24.

80.

The Committee argues that, to act willfully, one must simply make a "conscious decision to disregard the rights of others [or] to ignore consequences when it is reasonably apparent that someone will probably be harmed." Del. P.J.I. Civ. Sec. 5.10 (2000). Citing Porter v. Turner, 954 A.2d 308, 312 (Del. 2008) (Porter") and Brown v. United Water Del., 3 A.3d 272, 276 (Del. 2010 ("Brown"). Claimant further argues that Delaware law holds defendants to have engaged in willful misconduct when they act with a "conscious indifference" or an "I don’t care" attitude in disregard of another’s rights. Claimant’s Post-Hearing Br. at 20. The Committee also cites the Delaware Uniform Trade Secrets Act that defines willful misconduct as "awareness, either actual or constructive, of one’s conduct and a realization of its probable consequence." Kelly v. Blum, 2010 Del.Ch. LEXIS 3.1 at *52 (Del. Ch. Feb. 24, 2010) requiring no more than a showing of "reckless indifference". Id. at *51-52. Claimant’s Post-Hearing Br. at 20, f. 118.

81.

In addition, the Committee cites Venhill Limited Partnership v. Hillman, 2008 Del. Ch. LEXIS 67, at *93-94 (Del. Ch. June 4, 2008) (Venhill"), a case where a fund’s general partner, over the partnership’s objections, loaned and invested millions of dollars into an affiliate company of which he was the CEO.¹² Claimant’s Post-Hearing Br. at 20. There, the court found the general partner’s actions to be willful because the transactions were made without disclosure on "terms that were set entirely by himself" and not through "arms-length" negotiations. Id.

82.

Considering Highland’s contractual obligations under the Plan and the relevant legal standard, and examining the facts as we have found them, the Tribunal concludes that the Committee has established that Highland not only breached its obligations under the Plan, but acted with willful misconduct in its sale of Credit Strat’s minority interest in Cornerstone. In making this determination the Tribunal relies upon the following findings of fact:

1. The Houlihan retention and the Cornerstone sales process were done in secret without any disclosure to the Committee when Highland’s representatives were fully aware that the Committee had a substantial interest in the sale of the asset, and, indeed, for the better part of two years had actively negotiated with Highland over the terms of such a sale, Leventon, in a letter to the Committee of August 2, 2013 (JX-103)—after Houlihan’s retention and when the sales process was well underway—inexplicably discussed liquidation plans with the Committee without even mentioning the fact that the Fund’s Second largest asset was being actively marketed. The inescapable inference is that Highland wanted to rid itself of the burden of dealing with the liquidation demands of the Committee and therefore knowingly arranged for the sale of the asset when it knew of its obligation to do so only with the Committee’s consent or pursuant to an agreed plan of liquidation as required under Section 2.03(iii) the Plan.

2. Pisani gained the false impression from either Honis or Leventon that the Committee was aware of, and/or actively involved in, the sales process.

3. The equity interest was purchased by Cornerstone itself, an entity frilly owned and controlled by Highland and its other affiliated funds. While the sales process was kept secret from the Committee, the Cornerstone and Highland executives who were involved in the sale kept each other fully informed. See, e.g. CX-212, a July 30, 2013 email from Cornerstone’s President to Honis saying "FYI—I have contacted Jim [Dondero] to discuss Credit Strategies and next steps for Cornerstone." Further, Highland provided the Houlihan valuation, which had been paid for by Credit Strat, to Cornerstone.¹³

4. According to the agreed upon procedure, Highland needed the Committee’s preapproval, and Honis knew that. (JX-44). Notwithstanding that knowledge, he never sought to obtain the Committee’s approval, nor did he inform Thomas Surgent, Highland’s compliance officer (who was consulted on the transaction), of the "Resolution" that required the Committee’s pre-approval for any such sale. Surgent Tr. 1896-1898.

5. The price paid was to the benefit of Highland and the other funds that it managed. It was below Highland’s mark and below the low end of Houlihan’s appraised value. Highland’s negotiation strategy puzzlingly made no effort at all to test whether Cornerstone might be willing to pay an amount close to Highland’s mark or within the Houlihan valuation range, and is particularly questionable given that Highland’s only counter, asking Cornerstone to pay for the Houlihan fee, allowed Highland to avoid Plan’s requirement in Section 2.03 that any Fund expense over $ 100,000 be pre-approved by the Committee.

6. Immediately after arranging to sell Credit Strat’s shares back to Cornerstone, Highland caused Cornerstone to make the same offer to the Crusader Fund, which, as it happened, rejected the offer and retained its Cornerstone shares. We draw the inference that Highland was seeking to consolidate its own and its managed funds’ equity interests in Cornerstone at a relatively low price at the expense of Credit Strat and the Crusader Fund, which were both in liquidation and from which Highland earned either no management fee (in the case of Credit Strat) or a reduced fee (in the case of Crusader).

7. The fact that the entire transaction was kept secret from the Committee, evaluated in the context of the other elements of Highland’s behavior set out above, supports the inference that Highland intended to obtain assets at what was believed at the time to be an attractive price to the detriment of the investors. Highland’s reservation of its right in the Fund documents to self-deal or to favor one managed fund over another in its investment decisions does not immunize Highland from liability in the circumstances described above. Neither does the fact that the Cornerstone purchase was approved by Cornerstone’s independent directors. JX-106 at Bates page 4691).

86.

It is worth noting further that, independent of whether Highland engaged in willful misconduct, Highland breached its obligations under the Plan by failing to sell the asset pursuant to a jointly approved plan of liquidation as provided in Section 2.02(iii) of the Plan.¹⁴

87.

The Committee also alleges that Leventon’s misdescription of the ROFR in the Houlihan CIM was done intentionally. While the sales process was tainted by the erroneous description of the ROFR which in reality did not apply, the Tribunal finds Mr. Leventon’s testimony credible on this point and views this as a mistake and not the result of willful behavior. This factor does not enter into our determination that Highland engaged in willful misconduct.

88.

In making the finding of willfulness the Tribunal appreciates that the individuals who interacted with the Committee, and particularly Honis, may not have acted with malicious intent, but we do not read the willfulness standard as strictly as that urged by Highland. Highland acted willfully by knowingly failing to involve the Committee in the sale of its Cornerstone equity back to Cornerstone (which meant back to Highland and its affiliates) at a price below the mark and below the low end of Houlihan’s own appraised value. This is especially the case in view of Highland’s failure to liquidate the asset pursuant to an agreed plan¹⁵, and Honis’s knowledge and prior agreement that the Committee would be asked to approve any such transaction, and his knowledge that the Committee would undoubtedly balk at the price.

89.

The Tribunal is mindful that Highland found its interactions with the Committee and its counsel to be unpleasant and frustrating. The correspondence is replete with accusatory rhetoric and strident language, and an objective observer can understand Highland’s reluctance to engage.¹⁶ This, however, does not make Highland’s failures any less willful nor excuse it from abiding by its obligations,

90.

The damages due Credit Strat for Highland’s willful misconduct will be discussed below at Part VI.D of this Award.

91.

In July 2012 Highland and its various funds settled litigation with Barclays Bank PLC ("Barclays") pending in the courts of Delaware and New York. (JX-40). The Delaware action involved an unsettled Credit Strat trade. Approximately $13.7 was at issue in the Delaware action, not including interest. Ellington Tr. 2743. With interest, Credit Strat’s total exposure was about $20.0 million. Id. Tr. 2745; JX-37.

92.

In the New York lawsuits Barclays, among other things, complained of Highland’s failure to honor Barclays’ redemption in various of the Highland funds, including: Credit Strat. This redemption claim was, by far, the most serious. It arose out of Barclays’ financing of Highland’s business in return for collateral in tile form of the right to redeem partnership interests if the assets fell below a certain value. If the market fell, which it did in 2008, Barclays—using its own marks to value the assets—could declare Highland in default, submit a redemption request, and compel Highland to liquidate the assets of its various funds, including Credit Strat.¹⁷ Barclay’s was demanding over $400 million plus substantial interest from Highland. Ellington Tr. 2747-2748.¹⁸ The portion of Barclays’ claim against Credit Strat in the New York action was $14.5 million.

93.

Highland staved off the day of reckoning as best it could, but it all came to a head in the form of a trial set to commence on Barclays redemption claim in the Supreme Court of the State of New York on July 30, 2012. Id. Tr. 2758. The Judge, who was set to try the ease, signaled that she saw no question on liability and would be conducting a three-hour trial on damages alone. Id. Tr. 2749. This resulted in a flurry of activity and, ultimately, a settlement (JX-40). Scott Ellington, Highland’s General Counsel, handled the litigation and was Highland’s primary negotiator.

94.

After a significant amount of negotiation, (Ellington Tr. 2748) Ellington on behalf of Highland and Barclays reached a global settlement of $220 million together with other concessions. Id. The New York Judge had previously indicated a probable damages range of $250 million to $350 million. According to Ellington, Barclays settled for less largely based on collectability considerations. Id. Tr. 2751. If the trial occurred and resulted in damages within the Judge’s suggested range, the Credit Strat and Crusader funds would probably have had to be liquidated and the investors would have been wiped out completely. Tr. 2751. Ellington testified that he was "proud of himself" that he was able to settle globally for only $220 million. He characterized it as "an incredible deal." Tr. 2752.

95.

Ellington reached the settlement with Barclays on June 18, 2012. Tr. 2754. The deal included a $30 million personal guarantee from Dondero and Highland’s co-owner Mark Okada. Id. Tr. 2755.

96.

The partnership units¹⁹ allocated to Barclays as security for Barclay’s financing of Highland’s operations had originally come from Highland. Ellington Tr. 2827. Barclays, as part of the settlement was converted to a "consenting compulsory redeemer" as opposed to a nonconsenting compulsory redeemer (Barclays Settlement Agreement, JX-40 at para. 11.3). This enabled Barclays to receive $220 million in consideration for the units that it sought to redeem in the New York action and, in turn, tender those units back to the funds, including back to Credit Strat.

97.

Ellington created special purpose vehicles to receive back the units that Barclays returned. The vehicle that Ellington created for Credit Strat was named Corbusier Ltd. Dondero and Okada owned Corbusier. The Barclays units in Credit Strat were valued at $2.7 million. Barclays’ interest was tendered to Corbusier, and Corbusier kept those units for itself.

98.

Credit Strat’s share of the $220 million settlement, as allocated by Ellington, was $13.7 million, the amount previously reserved on Credit Strat’s books for the unsettled trades. Tr. 2756-2757. There was no real question as to the Fund’s liability for these unsettled trades, which could have reached as much as $21.7 million with accrued interest. The Committee, however, asks for the Tribunal to "allocate the Fund’s $13.7 million Barclays Settlement payment between the Master Fund account and the Redeemer Trust Account..." Committee’s Post-Hearing Reply Br. at 30. The Committee also complains about the manner in which the settlement: was reached and seeks the return of the $2.7 million (with interest) that Corbusier retained for itself. Id.

99.

The Committee argues that simply because $13.7 million matches the amount reserved for the unsettled trade at issue in the Delaware action does not a fortiori mean that this amount should have been contributed by Credit Strat as part of the overall Barclays settlement. See, Claimant’s Post-Hearing Reply Br. at f. 115. Barclays simply received $220 million. Ellington made the allocation based on his own judgment.

100.

Highland produced no documents or notes that reflect that the allocation was anything more than Ellington’s subjective estimate of what Credit Strat should contribute. His logic was based on his assessment that the unsettled trade liability was all but certain and that it had already been reserved on the books of Credit Strat. The Committee argues that without all of the documents that reflect the various payees’ relative liabilities and assets there is no way to determine whether Ellington’s allocation was fair or correct. Because these documents are in Highland’s possession and Highland chose not to disclose them, the Committee argues that the Tribunal should infer that, if produced, they would be unfavorable to Highland. Id.

101.

Highland, however, manages the funds, and the governing documents give it broad discretion to make business decisions that affect those funds. As the governing documents provide, Highland may favor one fund over another with only the overriding obligation to allocate trades (or liabilities in this case) on a fair and equitable basis and, of course, to avoid willful misconduct or gross negligence. While a more detailed analysis of Ellington’s allocation, based on all relevant documents, might disclose reasons against the allocation that he made, the Tribunal is not in a position to question his allocation based on mere speculation. In the Tribunal’s view, the fact that Highland did not disclose underlying documents is insufficient in itself to raise a presumption in the Committee’s favor on this point in light of the broad discretion given to Highland in the Funds’ governing documents and the prima facie fairness of an allocation that caused Credit Strat to pay what was for all intents and purposes a near-certain liability for the unsettled trade liability (without interest) that arose in 2008.

102.

Section 2.03 of the Plan entitled the Committee to approve any settlement under conditions.²⁰ On July 17, 2012, Leventon and Honis sent Feinstein an Executive Summary that outlined the proposed Barclays settlement and asked for comment. JX-134. Feinstein said that he would consult with the Committee and come back to Highland by July 24th. The New York trial, however, was set to commence on July 30th and Highland told Feinstein that it needed a response by July 19th. The urgency was dictated by the judge’s setting of an early trial date, and Barclays’ insistence that the settlement be finalized on or close to July 19th. Id.

103.

An email exchange involving Honis and Leventon on the one hand and Feinstein on the other (JX-38) reflects a request for documentation from Feinstein to enable him to evaluate the settlement, and a request for additional time. Events, however, were moving rapidly. Highland informed the Committee that it required its response by 5pm on July 19, 2012. JX-134 at Bates page 19176.

104.

At 4:55 pm on July 19, 2012 Feinstein returned a redlined version of the settlement draft. JX-39. Feinstein had a number of requested changes on provisions that had already been negotiated with Barclays and which were, at this point, set in stone. Tr. 2776-2778; 2783-2785. Feinstein also requested concessions outside of the Barclays-Highland settlement. Several requests, for example, asked for treatment for Credit Strat that would have favored the Fund over Highland’s other funds. Id.

105.

Ellington testified that, had Highland continued to negotiate with the Committee on these points, it would have missed the July 10 deadline set by Barclays and there would have been a substantial risk that the overall settlement would have failed. This would have led to a trial in New York and a probable judgment against Highland which would have been enforced primarily against the two funds with remaining assets—Credit Strat and Crusader. The result would have been "Armageddon" as Ellington phrased it. Tr. 2789, and Credit Strat (along with all the other funds) would have been wiped out. Id.

106.

Thus, in order to save the Fund from itself (and save the remainder of the Highland funds in the process), Ellington made a decision to go forward with the settlement without the Committee’s approval. As explained above, Credit Strat ultimately paid $13.7 million of the $220.0 million—the amount owed since 2008 for its unsettled trade at issue in the Delaware litigation and the amount already reserved on the Fund’s books since 2008. Tr. 2792. Ellington allocated Credit Strat’s payment to the unsettled trade and charged Credit Strat nothing for Barclays’ release of the redemption claim pending in New York. Tr. 2794.

107.

Ellington testified that, while Highland was willing to listen to the Committee and address its concerns as best it could, he did not think that he needed the Committee’s approval for the settlement. This is because: (i) the Committee had no right to bargain over the $13.7 million reserve as it was provided for on Credit Strat’s books to account for the unsettled trade in 2008 before the Committee was even formed and the Plan established; and (ii) Section 2.03 of the Plan, quoted above, provides that, in any event, the Committee cannot unreasonably withhold its consent to the settlement. Tr. 2800-2801. Ellington also believed that he owed fiduciary duties to the other Highland funds that would have been adversely impacted had the Barclays settlement failed. Id.

108.

In addition to its complaint about the $13.7 million allocation in the settlement, and the fact that it never gave its approval, the Committee asks for an order compelling Highland to return the $2.7 million, the presumed value of the Credit Strat units that Barclays transferred to Corbusier as part of the settlement.

109.

Highland contends that the urgency of the situation, coupled with the absurd negotiating positions advanced by the Committee, excuse any failure to obtain a needed consent. It further argues that consent was, in any event, not necessary and, even if it was, it would have been unreasonable for the Committee to withhold it. Thus, any claim for damages arising out of the settlement must be dismissed.

110.

In response, the Committee points out that the urgency that existed in mid-July 2012 and that required unreasonably fast responses from the Committee was an urgency of Highland’s own making. It points out that the Barclays claims, which arose in 2008, were the subject of negotiation (and at least two mediations) for at least a year and a half prior to Highland getting the Committee involved. Ellington Tr. 2838-2841²¹ Second, while it appears that Leventon and perhaps Honis as well represented to Ellington that the Committee’s demands for changes in the deal were non-negotiable (Tr. 2845-2846), save for one position that was not the case. Tr. 2838-2841 and Tr. 2865. The Committee also argues that none of its proposed changes were unreasonable. see, e.g. Tr. 2850-2852, and points out that neither Ellington nor Leventon even gave the Committee the courtesy of a response to its comments before settling the case. Tr. 2853-2854.

111.

As for the Committee’s claim relating to the $27 million that Corbusier received, the Tribunal notes that the summary of the settlement at JX-134 that Honis and Leventon sent to the Committee on July 18th (one day before Highland needed a response), does not articulate the fact that a provision of tire agreement converts Barclays’ claim to one of a consenting compulsory redeemer (Ellington Tr. 2920) vis a vis Credit Strat (and Crusader) thus entitling Barclays to receive money for the redemption of its Credit Strat units and enabling some entity (like Corbusier) to receive back those units in return.²²

112.

It is productive to pause here and permit the Tribunal to give its view as to why this all occurred in such haste. From the time that Highland shared the (downward revised) T. Stewart appraisal with Cornerstone and the Committee then declined to give the Quadriga report to Honis, any working relationship, which would have enabled Credit Strat to be liquidated in an orderly way with the meaningful participation of both parties, vanished. Highland executives, led ultimately by Dondero, assumed that the Committee were "idiots" and that its counsel. Mr. Feinstein, was an overbearing and unproductive participant. It is also fairly clear that Highland resented the fact that it underestimated the work that would be required to liquidate the Fund at no fee. As a result, the relationship turned adversarial and Highland took every opportunity to avoid interacting with the Committee or, especially, its counsel. This—not unpredictably—led to a back of the hand approach to the investors.

113.

While the Tribunal understands that no-holds-barred personalities drove this unproductive behavior, it is nonetheless charged with enforcing the terms of the Plan that the parties agreed upon to govern their relationship and the liquidation of Credit Strat. Applying those terms, and especially in this instance Section 2.03, the Tribunal—while it faults Highland for failing to open a dialogue with the Committee in a timely manner, thus making it impossible for the Committee to comment productively on the terms of the settlement—concludes that this failure did not lead to damages.

114.

As discussed above, the Tribunal sees no basis to conclude that Credit Strat was overcharged when Ellington made his $13.7 million allocation. As for the value of the Credit Strat units that were transferred to Corbusier, Highland contends that these were contributed in the first place by Highland when the financing arrangement with Barclays was established. Ellington, Tr. 2827-2828. The Committee contends that this fact, even if true, would not justify Corbusier’s receipt of Barclays’ payment for the Credit Strat units ultimately redeemed. (Committee’s Post-Hearing Reply Br. at 28). The Committee also points out that, absent paragraph 11.3 of the Barclays Settlement (JX-40), which the Committee never got a meaningful opportunity to question, the units transferred to Corbusier would have been transferred to the Redeemer Trust Account and, via the waterfall provision in Section 3.01 of the Plan, would have inured to the benefit of the investors. Ellington Tr., 2922-2923.

115.

Ellington, under oath, swore that it was Highland that pledged the collateral for the "loan" that Barclays made to all the funds, including Credit Strat. Tr. 2827 and that Barclays’ payment to Corbusier was, effectively, a return to Highland of that collateral. The Tribunal relies upon that testimony in its decision on this issue.

116.

The Committee offered no credible evidence to rebut this conclusion. Therefore, its claim for return of $2.7 million in value transferred by Barclays to Corbusier must be denied.

117.

As discussed above, Highland is liable to the Committee for its willful misconduct in the sale of Credit Strat’s Cornerstone equity. The Committee claims that Highland should have sold Credit Strat’s 18.6% equity interest at a higher price or, in the alternative, should have sold that equity: (i) either together with the Crusader Fund’s interest (thus enabling the sale of more than 50% of the company and garnering a control premium), or (ii) as part of Highland’s sale of 100% of Cornerstone thus yielding more than the $24 million Credit Strat received for its minority equity interest. Based on its expert’s report, the Committee seeks $39.1 million in damages. Committee Post-Hearing Reply Br. at 30.

118.

Highland rejects the Committee’s position and claims that it should be thanked for obtaining as high a price as it did, that it was well within its right to sell the Fund’s interest at the price that it did without combining it with Crusader’s Cornerstone equity and that Highland was not required to sell 100% of Cornerstone in order to satisfy the Committee’s unreasonable demands.

119.

Highland primarily relies upon the Fund documents that give it the ability to treat its commonly managed funds differently provided it does not engage in willful misconduct or act with gross negligence. It contends that the Tribunal cannot find that Highland engaged in willful misconduct in determining to sell the Fund’s minority interest without combining it with the equity interests of Highland’s other funds.

120.

Highland also points out that a Cornerstone Stockholders’ Agreement (the "CSA"), which existed well prior to the Credit Strat Cornerstone sales process, would have made a sale of the Fund’s interest with Crusader worth no more than Credit Strat’s proportionate interest standing alone. That is because the CSA would have prevented any buyer from controlling Cornerstone even if it purchased over 50% of the outstanding shares.

121.

The Committee contends that, at the time Highland decided to sell the asset, the CSA did not prevent a combination of Credit Strat and Crusader from selling their Cornerstone interests at a control premium. Instead, Highland (argues the Committee) purposely arranged for a last minute amendment to the CSA to prevent such a sale. Highland on the other hand contends that the amendment was simply intended to correct an earlier oversight, and that it was always the case that Highland had full control over Cornerstone for the benefit of all of the funds, and that any third party buyer could not have gained control of Cornerstone even if it had purchased Credit Strat’s and Crusader’s interests together.

122.

Highland also points out that, even absent the CSA, no third party buyer would have paid a control premium for Credit Strat’s and Crusader’s Cornerstone shares because Highland controlled all the debt. This, argues Highland, would have resulted in no control premium no matter what the percentage equity interest a buyer might elect to purchase.

123.

Finally, Highland refers to Crusader’s own plan which calls for a slower liquidation of its assets, including Cornerstone. Thus, selling Crusader’s equity on Credit Strat’s schedule would, Highland contends, have been unacceptable to the Crusader Fund.

124.

After due deliberation, the Tribunal agrees with Highland that Credit Strat is entitled only to damages related to the sale of its minority interest, and not to damages related to a hypothetical sale of a majority interest or a hypothetical sale of 100% of Cornerstone. The Tribunal finds, however, that the evidence establishes that the price that Credit Strat realized from the sale should have been greater than $24 million and awards damages on this basis.

125.

Credit Strat is entitled to damages based only the sale of its minority equity interest. Because of the CSA, the Committee would not have been able to transfer control of Cornerstone to a third party buyer even if Crusader agreed to sell its stock together with that of Credit Strat. The CSA provided that if Highland or any of its funds owned at least one share of Cornerstone, Highland would have full control of the company (Section 4.1 of JX-132).²³

126.

The CSA is dated March 24, 2010. (JX-132). Highland contends that it "was implemented as part of general housekeeping that involved Cornerstone and four other Highland portfolio companies." Leventon Tr. 1322-1323. Highland’s Post-Hearing Br. at 35. The particular section involved, Section 4.1, was not unique to the CSA, It appears in other Highland portfolio company agreements as well. Id. The purpose of the agreement was "to protect each Highland fund against counter-party exposure." Id. at 36. Highland feared that, after the events of 2008, Barclays or some other creditor might seize control of Highland’s portfolio companies and simply liquidate them. Indeed, in October 2008, Barclays had purported to seize 80% of the Fund’s assets in response to a margin call. Surgent Tr. 1911-1912; Highland’s Post-Hearing Br. at 36.

127.

Two other Highland funds, referred to collectively as "Restoration," purchased additional shares of Cornerstone in December 2010 and August 2011, subject to the provisions of the CSA. (CX-40; CX-57). For example, in CX-40, Section 2.2 (entitled Capitalization and Voting Rights), effectively provides in subsection (c) that Restoration’s voting rights are subject to the CSA. From that time forward, Restoration’s ownership interest gave Highland total control over Cornerstone.

128.

In March 2010, the CSA was originally signed by Credit Strat, among other Cornerstone stockholders (see, JX-132 at Bates page 79343 and Schedule A at Bates page 793445). At the time, however, Cornerstone’s equity was owned by a holding company, CHG Acquisition LLC ("CHG Acquisition") and Cornerstone’s shares were never distributed out of the holding company to the individual stockholders. Highland discovered this oversight in the summer of 2013 as it prepared to instruct Houlihan to sell Credit Strat’s equity. Leventon Tr. 1401-1406. Highland then prepared an agreement that caused CHG Acquisition to distribute its Cornerstone shares in kind to the various funds—including Credit Strat-- that should have received them back in 2010. CX-199 at Bates page 57436. This enabled Houlihan to more easily market Credit Strat’s Cornerstone equity. Leventon Tr. 1402-1406; 1411.

129.

The Committee sees a conspiracy in this series of transactions. In particular, it accuses Highland of causing the 2013 agreement (which distributed Cornerstone’s shares out of CHG Acquisition to Credit Strat) to be executed to complete its plan to enable Cornerstone to buy Credit Strat’s stock for an unfairly low price.

130.

The Tribunal, after due deliberation, finds no conspiracy or willful misconduct in the transactions surrounding the CSA. While one could debate whether it was in any of the Highland funds' interests to have Highland continue to control these funds, the preponderance of the evidence before us supports the conclusion that the March 2010 agreement had a legitimate business purpose; it is not up to the Tribunal to second-guess such business decisions. The Committee argües that the only real reason for the CSA was to entrench Highland as the controlling stockholder, but there is evidence before us of other reasons (protection against the forced sale or liquidation of the company by third parties, such as Barclays) that make the decision to enter into the CSA an exercise in legitimate business judgment.

131.

The Committee also points out that—even if the CSA was created for legitimate purposes—it did not preclude Highland from selling 100% of Cornerstone to a willing buyer. Highland’s Post-Hearing Br. at 17. Nor, argues the Committee, did Restoration’s execution of the CSA in 2010 permit Highland to control Cornerstone. Id. at f. 100. That may or may not be true, but Highland had reasons independent from an intent to harm the Credit Strat investors to refrain from selling the company as a whole. Restoration, for example, was not in liquidation and Highland could well have wanted Restoration to hold its equity interest as a long term investment. In addition, the Crusader plan had a schedule of liquidation goals that did not include a sale of Crusader’s Cornerstone equity at that time (which may explain why Crusader rejected Cornerstone’s offer to buy of its equity at the price paid to Credit Strat), It is also the fact that Highland’s disparate treatment of the other Cornerstone stockholders is expressly permitted by the terms of the Fund documents.

132.

Moreover, the Plan, which was adopted in April 2011, contains a release (JX-22 at Section 6.01). Highland’s Post-Hearing Reply Br. at 13-14. The CSA is dated March 24, 2011 and that release releases claims that may have accrued prior to the adoption of the Plan. The Committee’s conspiracy claim, which is essentially a fraud claim, might well be subject to that release, although the Tribunal recognizes that this would require a more detailed analysis.

133.

It also bears mention that the offers to and from Cornerstone and the Committee in 2011 and 2012 all related to the sale of Credit Strat’s minority interest.

134.

Finally, as Dondero testified, it was unlikely that any third party would buy Cornerstone’s equity when the company was a risky investment and Highland owned all of the debt. Highland’s modus operandi was to control debt and, if necessary, convert it into equity in the event of a default. This risk would have weighed heavily on any putative buyer for the company.²⁴ The Committee speculates that any willing buyer for 100% of Cornerstone’s equity would have also negotiated in some fashion for the debt. Committee’s Post-Hearing Reply Br. at 25. While that might be the case, this is not what Houlihan intended to sell at that point or what had been previously discussed between Highland and the Committee.

135.

Thus, for all of the above reasons, the Tribunal finds no fault in the decision to sell only Credit Strat’s minority equity position in Cornerstone.

136.

By contrast, the Tribunal finds that the price paid for the Fund’s Cornerstone equity did not reflect fair value under the circumstances and that Highland is therefore liable in damages.

137.

As an initial proposition, the fact that Highland engaged in willful misconduct in the way that it sold the Fund’s interest, vitiates Highland’s reliance on the disclaimers in the Fund documents and sets an objective standard of "entire fairness" for the transaction. Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 459 (Del. Ch. 2011). The Committee had a right to approve the sale or to have its interest sold pursuant to an agreed plan of liquidation and neither of these things happened.

138.

The legal standard for damages contemplates placing the investors in the position that they would have been in had Highland not breached its duty. In that regard, even if the quantum of damage is "inherently unknowable", damages may be calculated using a "responsible estimate". HMG/Courtland Props., Inc. v. Gray, 749 A.2d 94, 122-23 (Del. Ch. 1999). Cornerstone bought Credit Strat’s shares for a price of S24 million plus it paid the $850,000 fee owed to Highland on the sale. This was a 13% discount to Highland’s own mark. Highland’s Post-hearing Br. at 3. It was also below Houlihan’s value range of $27.8 to $36.0. JX-97 at Bates page 447433. The price paid by Cornerstone was subject to no meaningful negotiation.

139.

Based on the facts presented, it is reasonable to take the average value calculated by Houlihan as the price that Credit Strat should have received at the time of the sale of its Cornerstone equity.²⁵ Averaging $27.8 and $36.0 leads to price of $31.9 million. Deducting the price that Credit Strat received yields a figure of $7.9 million. In addition, in an actual sale at that price, the presumption is that Credit Strat would approve and pay the $850,000 fee for the transaction. Thus, the damages total $7,050,000 ($7.9 million less $850,000). The Credit Strat investors are entitled to this amount plus interest as determined below.

140.

The Canopy and Request for Relief. The Committee also seeks an order requiring Highland to cooperate with the Credit Strat and Crusader committees in selling Canopy, or, in the alternative, to appoint a receiver over Canopy to assure its sale at an optimal value. Claimant’s Post-Hearing Reply Br. at 30. Highland, in its Reply Brief (at page 29) states that "Dondero testified that Highland has already agreed with the Crusader Committee to market and sell Canopy as a whole and to grant Credit Strat ‘tag along’ rights." This testimony reiterated Highland’s statement in a June 23, 2015 email from Highland’s counsel to the Tribunal that Highland was "committed to proposing a plan of liquidation within 45 days of the lifting of the UBS injunction.²⁶ Highland’s proposed plan will certainly include Canopy Timberlands." The Committee, in letters to the Tribunal dated March 10, 2016 and March 15, 2016, voices alarm over Highland’s failure to involve the Committee in the sales process and, ultimately, to follow through with its commitment to sell Canopy at a fair price

141.

The Committee then argues that without some third party oversight —presumably from this Tribunal which would maintain continuing jurisdiction, or from ah independent receiver that this Tribunal would appoint—-Highland cannot be trusted to follow through on its commitment to sell Canopy, i.e., once this arbitration is over, Highland will return to its old ways and freeze the Committee out of the sales process and either sell Canopy or its assets to an affiliate at an unfairly low price, or simply do nothing until more Credit Strat investors throw up their hands and allow Cornerstone to buy them out at a deep discount.

142.

This Tribunal’s jurisdiction, however, is limited to those matters that—through the Plan—the parties have agreed to arbitrate. Nowhere in the Plan is there a provision permitting an arbitration tribunal to exercise supervisory authority over the Fund’s liquidation or to appoint a receiver to do so. Indeed, the Plan has a remedy, namely the Committee’s ability to fire Highland as set forth in Section 2.02(v) of the Plan.²⁷ The Committee also has the right, which is has exercised in this case, to arbitrate any grievances and to hold Highland responsible in damages for any wrongdoing. The Tribunal appreciates that the power to fire Highland is tempered by the reality that Canopy may well realize more value if marketed by Highland together with Crusader’s interest, but whether this justifies the Committee’s tolerating Highland’s continued control over the process is a choice that the Committee must make as it wishes. The Tribunal will not effectively re-write the Plan to impose deadlines for the liquidation of assets, or to accommodate circumstances that were clearly foreseeable at the time the Plan was drafted and that could have been incorporated into it.

143.

The Tribunal, therefore, declines to issue any orders relating to the sale of other Fund assets other than to remind the parties that the Plan requires the Fund to be liquidated pursuant to a joint plan of liquidation. If either party chooses to ignore that provision, or to avoid the communication that would make its implementation effective, it would risk an allegation that the asset in question failed to sell at a fair price. Similarly, if Fund assets are not liquidated in a reasonable amount of time, the Committee can start another arbitration if it believes it sustained damages as a result. In that regard, Highland advises in a letter to the Tribunal dated March 14, 2016 that it is actively attempting with the required approval of the Crusader Committee to appoint a broker to sell Canopy’s underlying assets. It would be well-advised to keep the Committee’s representative from Erast & Young informed.²⁸ Anunjustified delay in the liquidation of assets may well lead to an allegation that Highland breached the implied covenant of good faith and fair dealing in the performance of its obligations under the Plan.

144.

The reasoning above applies equally to the Committee’s request that the Tribunal: (i) "order that the Committee may replace Highland as investment manager" and (ii) "[order] that Highland must cooperate in transitioning duties to the new manager and pay its reasonable fees and costs." Claimant’s Post-Hearing Reply Br. at 30. As for (i), the Plan already gives the Committee that right and there is no need for a further order in that regard. As for (ii), the Tribunal infers that the duty to cooperate in the transition is certainly implied as a corollary to the right to replace a manager. However, there is no provision for costs in Section 2.02 of the Plan and thus no basis for an order compelling Highland to pay the costs of any such transition.

145.

The alleged breach of Confidentiality. The Committee’s March 10, 2016 letter also alleges that Mr. Leventon improperly wrote a letter to the Crusader Committee attaching transcripts of confidential testimony and documents from the arbitration, all in an attempt to interfere with Mr. Behr’s and Concord’s status vis a vis the Crusader Committee. Highland admits that it sent communications concerning its view of Concord’s status. There has been, to date, however, no allegation of any damage that has befallen the Committee, and the Tribunal, therefore, will not be granting any relief even though Highland’s use of hearing material would appear to be in violation of the Confidentiality Stipulation that governs the arbitration. Highland would be well-advised to avoid further gratuitous communications. If any damages are alleged to have been incurred, the Committee would be free to pursue matters in another arbitration. Concord, of course, could have its own claims which it could then pursue as it seems fit.

146.

Highland previously earned annual performance fees from the Credit Strat Funds and according to the Plan would not be earning performance fees going forward. Highland wanted to reserve its right to collect those fees (referred to as "deferred fees") and the Committee apparently objected. The disagreement was resolved in a certain "Agreement Regarding Deferred Fees" executed early in 2012. JX-30. The Agreement calls for Highland to collect such deferred fees "in the unlikely event that the Fund distributed over $372,808,892 to its investors". Highland’s Post-Hearing Reply Br. at 30. That eventuality is remote and may never occur. If and when it does, the Agreement provides for Highland to recover some or all of those fees.

147.

The Committee’s request for an order declaring that Highland would in no circumstances be entitled to deferred fees is denied. The Agreement referenced above (JX-30) deals with Highland’s entitlement, and the Tribunal declines to disregard it.

148.

The Committee’s claim that Dondero used an inappropriate bank that he partially owned for the Fund’s business thereby exposing the Fund to an unnecessary' risk was not briefed or argued. The Tribunal therefore deems that claim abandoned and no relief is warranted.

149.

While Highland engaged in willful misconduct in the manner of its sale of Credit Strat’s minority interest in Cornerstone, the Tribunal declines to award punitive damages. Under New. York law, such damages are warranted on a contract claim only if the public interest is implicated, and this is a dispute between private parties that does not implicate the public interest. Highland is not a. retail broker, for example, and its obligations to a fund such as Credit Strat are driven by carefully drafted documents executed by sophisticated investors.

150.

Interest. New York was the place of arbitration and the substantive law of the State of New York was chosen by the parties to govern the rights of the parties and the construction of the Plan. Plan Section 8.05. New York law provides for 9% simple interest on a contract claim commencing on the date of breach. New York CPLR Sec. 5004. The Parties, however, chose the AAA Commercial Arbitration Rules to govern their arbitration. Commercial Rule R-47(d)(i) provides that "The award of the arbitrator(s) may include... interest at such rate and from such date as the arbitrator(s) deem appropriate..." The Tribunal, therefore, has discretion in the rate of interest to be applied to a claim as well as the date when such interest should accrue. Manios v. Zachariou, 2015 U.S.Dist. LEXIS 42537 (S.D.N.Y. Mar. 31, 2015). In this situation, the Tribunal believes that a rate of 5% would adequately compensate the investors for their loss of the use of funds that should have been distributed.

151.

As for what date interest should accrue, and on what amount, the Committee argues that interest should run on the full amount that a buyer should have paid ($31.9 million) from the date of the sale, September 6, 2013. The Tribunal agrees and believes it appropriate to award pre-award interest on the undistributed proceeds of the Cornerstone sale (including the $7,050,000 damages component) commencing on October 6, 2013, thirty (30) days from the date that Cornerstone purchased the Fund’s equity interest.

152.

Costs. The Fund has been paying for all the costs of this arbitration including the administrative costs of the proceeding, the fees of the arbitrators and the fees of both sets of lawyers. The Committee asks that Highland be made to reimburse the Fund for all of the Committee’s fees and any fees that Highland’s counsel has previously billed to the Fund.

153.

Section 2.02 of the Plan expressly provides that the Fund shall pay reasonable and necessary third-party costs incurred by the Committee in the management and oversight of the Fund including reasonable costs of legal counsel. This is the provision that permitted the Committee ’s counsel to be paid currently out of the Fund as the arbitration progressed. Section 2.02, however, makes no mention of Highland’s entitlement to any fees or expenses.

154.

The entitlement to fees and costs, if not set forth in the Plan, would be governed by the arbitration rules applicable to the proceedings. This arbitration has been conducted pursuant the AAA’s Commercial Rules. Plan Section 8.04. AAA Rule R-47(d) provides that "The award of the arbitrator(s) may include:... ii. an award of attorneys’ fees if all parties have requested such an award or it is authorized by law or their arbitration agreement."

155.

Highland did not request fees (Highland’s Post-Hearing Reply Br. at 30) and vies for the "American Rule" that each side should bear its own. Id. As explained above, the Plan expressly permits the Committee to be reimbursed out of the Fund, but no such rule applies to Highland. Therefore, Highland will bear its own attorneys’ fees and costs in defense of the arbitration and must reimburse the Fund for any fees and expenses previously charged to, and collected from, the Fund.

156.

For the reasons set forth above:

A. Within sixty (60) days from the date of this Final Award, Highland shall cause an immediate distribution of that portion of the $24 million received as proceeds from the Cornerstone sale but not yet distributed (the "Remaining Proceeds") plus $7,050,000. Interest on the Remaining Proceeds plus $7,050,000 shall accrue on that sum at the simple rate of five percent (5%) per annum from October 6, 2013 until the earlier of (i) distribution to the investors; or (ii) confirmation of this Final Award and its entry as a judgment in a court of appropriate jurisdiction.

B. The Committee’s other claims are DENIED and DISMISSED.

C. The costs of the arbitration, including all fees and expenses of the Committee and its counsel shall be paid out of the Fund. The administrative fees and expenses of the AAA total $32,8.60.00 and the arbitrators’ fees and expenses total $941,893.23. Highland shall bear its own fees and expenses, including one-half of the AAA’s administrative fee and one-half of the arbitrators’ fees. Highland shall also pay the fees and expenses of its own counsel, and therefore shall, within sixty (60) days from the date of this Final Award, reimburse the Fund, if necessary, for: (i) one-half of any AAA administrative fees paid out of the Fund; (ii) one-half of any arbitrators’ fees paid out of the Fund; and (iii) any of Highland’s counsel fees and expenses that may have been paid out of the Fund.

D. This Final Award is in full settlement of all claims submitted to this arbitration. To the extent any such claim is not specifically mentioned herein, it is DENIED.

E. This Final Award may be executed in counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument.

We hereby certify that, for the purposes of Section I of the New York Convention of 1958, on the Recognition and Enforcement of Foreign Arbitral Awards, this Final Award was made in New York, New York, U.S.A.

Committee of Highland Credit Strategies Fund v. Highland Capital Management

Documents de l'affaire

Avocats, autres représentants, expert(s), secrétaire du tribunal

Final Award

I. INTRODUCTION

II. THE PARTIES, COUNSEL AND THE TRIBUNAL

III. the agreement to arbitrate and the governing law

IV. THE principal procedural history

V. THE DISPUTES

VI. ANALYSIS

A. Does the Committee Have Standing to Assert Credit Strat's Claims Against Highland?

B. Is Highland Liable to Credit Strat in Connection with its Sale of the Fund’s Equity Interest in Cornerstone?

1. The Standard for Liability Under Delaware Law

2. Did Highland engage in willful misconduct in its sale of Credit Strat’s Cornerstone equity?

C. Is Highland Liable to Credit Strat in Connection with the Barclays Settlement?

1. The Committee’s claim for the reallocation of the $13.7 million charged to Credit Strat in the Barclays Settlement

2. The Committee’s claim relating to Highland’s failure to consult with it in connection with the Barclays settlement, and for Highland’s return of the $2.7 million that Barclays paid to Corbusier as part of the settlement

D. Damages for the Cornerstone Sale

E. The Committee’s Claims relating to Canopy and Confidentiality

F. The Committee’s request for an order regarding Highland’s entitlement to "deferred fees"

G. The Committee’s claim for relief relating to NexBank

H. The Committee’s request for punitive damages

I. Interest and Costs

VII CONCLUSION

Cette fonctionnalité requiert un abonnement

Eric D. Green	Co-Arbitre
Robert B. Davidson	Président
Jonathan B. Marks	Président