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.
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.
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.
• 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
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.
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).
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,
Gotcha Djabidze [Notarization]
Director of Bradfield
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.
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.
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.
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?
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
In terms of requesting additional services from Highland your email should be re-written with the following introduction:
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
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?
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.
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).
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.
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