CLO Holdco Ltd et al v. Kirschner

Filing 19

MEMORANDUM OPINION AND ORDER: The Court finds that the bankruptcy court did not abuse its discretion in denying CLO Holdco's amendment to its proof of claim. Accordingly, the bankruptcy courts denial of CLO Holdco's Motion to Ratify is AFFIRMED. The appeal is DISMISSED WITH PREJUDICE. (Ordered by Judge Jane J Boyle on 5/22/2023) (svc)

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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
In re:
HIGHLAND CAPITAL
MANAGEMENT, L.P.,
Debtor,
--------------------------------------------------CLO HOLDCO, LTD.,
Appellant,
v.
MARC KIRSCHNER
Appellee.

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CIVIL ACTION NO. 3:22-CV-2051-B

MEMORANDUM OPINION AND ORDER
Before the Court is Appellant CLO Holdco, Ltd.’s appeal from the bankruptcy court’s
Order Denying Motion to Ratify Second Amended Proof of Claim and Expunging Claim. R.
249.1 Because the Court finds the bankruptcy court did not abuse its discretion in denying the
amendment, the decision is AFFIRMED, and the appeal is DISMISSED WITH PREJUDICE.
I.
BACKGROUND
This appeal concerns the propriety of amending a proof of claim. In a motion to the
bankruptcy court, CLO Holdco sought to amend its proof of claim following the confirmation of
the debtor’s reorganization plan. Following a hearing, the bankruptcy court denied the motion.

1

For brevity, the Court will cite to the record singularly, since the appellant and appellee’s submitted
records are consecutively paginated. See Doc. 11, Appellant R., 1–2677; Doc. 12, Appellee R., 2678–3629.

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The key question before the Court is whether the bankruptcy court abused its discretion in not
permitting CLO Holdco’s amendment.
A.

The Crusader Funds Wind Down and Arbitration Is Initiated Against Highland Capital
In the early 2000s, Debtor Highland Capital Management, L.P. (“Highland Capital”)

served as the investment manager for the Highland Crusader Funds (“Crusader Funds”), which
were formed by pooling together various sources of capital. R. 2462. The capital was primarily
invested in “undervalued senior secured loans and other securities of financially troubled firms.”
R. 2463. During the 2008 financial crisis, however, the Crusader Funds became overwhelmed by
redemption requests from investors as the Crusader Funds’ assets simultaneously lost value. Id.
Thus, in October 2008, Highland Capital placed the Crusader Funds in wind-down to liquidate
assets and distribute the proceeds. Id.
Litigation soon commenced, however, following allegations of misconduct against
Highland Capital and disputes over investor redemptions. See id. After several years of litigation,
in 2011 the Supreme Court of Bermuda ultimately approved a “Joint Plan of Distribution of the
Crusader Funds” and “Scheme of Arrangement” (together, the “Joint Plan and Scheme”), which
was aimed at the “orderly management, sale, and distribution of the assets” of the Crusader
Funds. R. 2462–63. Under the Joint Plan and Scheme, Highland Capital continued to serve as
the investment manager, but a committee of Crusader Funds investors who had redeemed their
interests in the Crusader Funds (the “Redeemer Committee”) was elected to oversee Highland
Capital’s management of the fund’s liquidation and distribution. See R. 2464.
Eventually, disputes arose between the Redeemer Committee and Highland Capital,
which, in 2016, culminated in the Redeemer Committee terminating Highland Capital as
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investment manager and initiating arbitration proceedings against it. R. 2465. The Redeemer
Committee alleged, among other things, that Highland Capital had breached its fiduciary duty
and the Joint Plan and Scheme by purchasing the redemption claims of former Crusader Funds
investors (the “Redemption Interests”). Doc. 13, Appellant Br., 8; see R. 2469.
In 2019, following a multi-day evidentiary hearing, the arbitration panel issued a final
award, which found that Highland Capital had breached its fiduciary duty and the Joint Plan and
Scheme by purchasing the Redemption Interests. R. 2491. The arbitration panel ordered
“rescission,” which required Highland Capital to transfer the Redemption Interests back to the
Redeemer Committee and pay the committee “whatever financial benefits Highland [Capital]
received from the . . . transactions, less what Highland [Capital] paid for the [Redemption
Interests], plus interest at the rate of 9%.” R. 2492.
In October 2019, a hearing was set in Delaware Chancery Court to confirm the
arbitration award. See R. 2686. But on the morning of the hearing, Highland Capital filed a
voluntary petition for relief under chapter 11 of the Bankruptcy Code, which halted the
Delaware proceeding. See R. 326, 3621. Bankruptcy proceedings followed.
B.

Various Entities File Proofs of Claim Against Highland Capital, Including CLO Holdco
In early March 2020, the bankruptcy court issued an order setting April 8, 2020, as the

general bar date for filing proofs of claim against Highland Capital. R. 2723. Relevant here, the
Redeemer Committee filed a general unsecured claim for roughly $191 million, and the Crusader
Funds filed a general unsecured claim for roughly $23.48 million. R. 921–43. Those entities’
claims were based on the arbitration award or, alternatively, the disgorgement of all

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management, distribution, and deferred fees paid to Highland Capital based on the “faithless
servant” doctrine. R. 928–30, 939–40.
Most importantly for purposes of this appeal, CLO Holdco also filed a general unsecured
claim for roughly $11.34 million based on “participation interests and tracking interests” it had
acquired in “shares of certain funds.” R. 2142, 2149. Specifically, CLO Holdco had acquired
participation and tracking interests in the Redemption Interests held by Highland Capital (the
“Participation and Tracking Interests”). See R. 2141; Doc. 13, Appellant Br., 6–7; Doc. 15,
Appellee Br., 4. These Participation and Tracking Interests derived value from the underlying
Redemption Interests. See R. 2176–77.2
C.

Highland Capital Reaches a Settlement Agreement, CLO Holdco Amends Its Proof of Claim to
Zero, and the Plan Is Confirmed
In September 2020, Highland Capital, the Redeemer Committee, and the Crusader

Funds reached a settlement agreement. R. 853–72. The settlement agreement provided that the
Redeemer Committee’s proof of claim would be allowed in the amount of $137.69 million, and
the Crusaders Funds’ proof of claim would be allowed in the amount of $50,000, both as general
unsecured claims. R. 856–57. The settlement agreement further provided for the “cancelling or
extinguishing” of the Redemption Interests held by Highland Capital. R. 857. The cancellation of
these interests was intended to implement the arbitration panel’s final award. See id.
Highland Capital filed a motion seeking the bankruptcy court’s approval of the settlement
agreement, and CLO Holdco was served with notice of the motion and agreement. See R.

2

Specifically, Highland Capital had agreed to “promptly pay to the holder of the Participation
Interest an amount equal to such holder’s share of each amount received and applied by [Highland
Capital] . . . . in payment of distributions, Plan Claims . . . and proceeds of any sale, assignment, or other
disposition of any interest . . . with respect to . . . the Participating Shares.” R. 2176–77.

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486–87 (showing certificate of service). The bankruptcy court held a hearing on the motion and,
on October 23, 2020, entered an order approving the settlement agreement. R. 1200–01.
Following the settlement agreement, CLO Holdco amended its claim against Highland
Capital from $11.34 million to zero. R. 2220. In its filing, CLO Holdco indicated that,
“[a]ccording to [Highland Capital], the termination of [Highland Capital]’s interests in [the
Redemption Interests] served to cancel CLO [Holdco]’s participation interests in . . . those
funds. Accordingly, CLO [Holdco]’s Claim Amount is reduced to $0.00.” Id. (emphasis omitted).
On February 22, 2021, the bankruptcy court entered an order confirming Highland
Capital’s reorganization plan, and the plan took effect on August 11, 2021. R. 1541–42. When
the plan went into effect, a Litigation Trustee took over investigating and monetizing causes of
action on behalf of Highland Capital. See R. 3574. Part of those efforts included an adversary
proceeding that was pending against CLO Holdco. See R. 3572, 3574. Later that August, in a
hearing on the adversary proceeding, the bankruptcy court asked the parties if the defendants
had any proofs of claim. R. 3579–80. Counsel for the Litigation Trustee indicated that one claim
remained from CLO Holdco, but counsel for CLO Holdco quickly indicated that was “not
correct.” R. 3580. He stated that CLO Holdco had “no pending proofs of claim” because the
underlying interests had been “canceled,” and CLO Holdco’s proof of claim had thus been
“amended . . . to reflect a zero amount.” Id. When the bankruptcy court asked why CLO
Holdco’s counsel did not simply withdraw the claim, he indicated he could “certainly withdraw it
because it is a zero amount.” R. 3580–81.

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D.

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CLO Holdco Seeks to File Second Amended Proof of Claim
In November 2021, the Litigation Trustee filed an objection to certain claims, including

CLO Holdco’s amended proof of claim for zero dollars. R. 1202. But on January 11, 2022, CLO
Holdco filed a second amended proof of claim, which amended the previous zero-dollar claim to
between $3.7 and $5.7 million. R. 2284, 2297. The second amended claim was based on a “new
theory of recovery” relating to the same Tracking and Participation Interests previously in
dispute. Doc. 13, Appellant Br., 16. That theory contended that Highland Capital had “received
a credit against the damage award for the purchase price of the cancelled [Redemption
Interests],” which constituted “proceeds of a disposition of the [Redemption Interests].” R. 2296.
In other words, CLO Holdco contended this “credit” Highland Capital received from the
Redemption Interests implicated the Tracking and Participation Interests and entitled CLO
Holdco to payment in that amount. Id.
E.

The Bankruptcy Court Denies the Motion
CLO Holdco filed a Motion to Ratify the Second Amendment to Proof of Claim,3 R.

1220–36, to which the Litigation Trustee objected, R. 1237–85. The bankruptcy court held a
hearing on the motion on August 4, 2022. R. 12. After considering the parties’ arguments, the
bankruptcy court denied the motion. Ruling from the bench, the court first held that it had
discretion to allow an amendment to the proof of claim based on the Fifth Circuit’s In re Kolstad
opinion. R. 74; see In re Kolstad, 928 F.2d 171, 172 (5th Cir. 1991).

3

Despite the title of the motion, the parties seemingly agree—as indicated in the bankruptcy
court’s hearing and subsequent briefs on appeal—that the question is ultimately the permissibility of the
amendment. See R. 22–23; see also Doc. 13, Appellant Br., 20 (basing argument on the Fifth Circuit’s
standard regarding “whether to allow an amendment”).

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But, exercising that discretion, the bankruptcy court found several circumstances
weighed against such an amendment. The bankruptcy court first noted the timing of the
amendment, emphasizing not only that it was post plan confirmation, but also that it came “one
year and nine months after the bar date” and “ten months after confirmation.” R. 75. The
bankruptcy court further discussed what it termed the “whipsaw” of CLO Holdco’s shifting
amendments—from over $11 million, down to zero, and back to $3 million or more. R. 76. The
court also noted the representations of CLO Holdco’s counsel, who had stated previously that
CLO Holdco did not have a proof of claim. Id. To the bankruptcy court, these representations
suggested CLO Holdco had “stepped at least almost in the lane of waiver and estoppel.” Id. The
court similarly raised concerns of “gamesmanship” in not withdrawing the claim. R. 76–77. And
finally, the court concluded that the amendment was ultimately premised on a frivolous theory
that would cause Highland Capital prejudice to litigate. R. 77.
F.

CLO Holdco Files the Present Appeal
CLO Holdco filed the present appeal contesting the bankruptcy court’s ruling. CLO

Holdco argues, in short, that the bankruptcy court failed to apply In re Kolstad and instead
imposed an improperly rigorous standard in determining whether to allow the amendment. See
Doc. 13, Appellant Br., 2–3. Because the Court finds that the bankruptcy court properly
considered and applied In re Kolstad and otherwise appropriately exercised its discretion, the
bankruptcy court’s decision is AFFIRMED.

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II.
LEGAL STANDARD
Final judgments, orders, and decrees of a bankruptcy court may be appealed to a federal
district court. 28 U.S.C. § 158(a). Because the district court functions as an appellate court in
this scenario, it applies the same standards of review that federal appellate courts use when
reviewing district court decisions. In re Webb, 954 F.2d 1102, 1103–04 (5th Cir. 1992). A
bankruptcy court’s decision to permit an amended proof of claim is reviewed for an abuse of
discretion. See In re Kolstad, 928 F.2d at 173. A court abuses its discretion if its decision is based
on an erroneous view of the law or a clearly erroneous assessment of the evidence. Certain
Underwriters at Lloyd’s, London v. Axon Pressure Prod. Inc., 951 F.3d 248, 256 (5th Cir. 2020).
III.
ANALYSIS
The parties do not dispute that the bankruptcy court had the discretion to permit an
amendment. See Doc. 13, Appellant Br., 2; Doc. 15, Appellee Br., 23 n.11. Rather, the primary
issue on appeal is whether the bankruptcy court’s decision was based on an erroneous legal
standard or a clearly erroneous assessment of the evidence. See Certain Underwriters, 951 F.3d at
256.
A.

The Bankruptcy Court Applied the Proper Legal Standard
CLO Holdco contends the bankruptcy court “eschewed” In re Kolstad. Doc. 13, Appellant

Br., 20. The Court disagrees. Rather, the bankruptcy court correctly considered In re Kolstad
while also understanding its limitations.

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In In re Kolstad, the debtor himself filed a claim on behalf of the Internal Revenue Service
(“IRS”) to bring his potential tax liability within the ambit of bankruptcy relief. 928 F.2d at 174.
Otherwise, the debtor’s tax liability was nondischargeable and could hinder a plan of
reorganization with other creditors. Id. The question on appeal was whether the IRS could
amend the proof of claim to a higher amount after the bar date had passed. Id. at 172. The Fifth
Circuit held it could. Id. at 175. Placing a heavy emphasis on the purpose underlying each stage
of bankruptcy, the court reasoned that “[a]mendments do not vitiate the role of bar dates.” Id.
Rather,
while bar dates establish the universe of participants in the debtor’s case, they
have little correlation to the final relative amounts in which creditors will share
any distribution. The goal of claims adjudication, on the other hand, is to assure
that each creditor which is part of that universe ultimately participates in the
voting and distribution from the estate in the proper amount determined by the
priority and nature of its claim and bankruptcy’s bargaining process.
Id. at 174 (emphasis omitted).
Consistent with bar dates’ purpose of “establish[ing] the universe of participants in the
debtor’s case,” the Fifth Circuit required that courts authorizing amendments “ensure that
corrections or adjustments do not set forth wholly new grounds of liability.” Id. at 175. And the
court set out two considerations to guide that discretion: (1) whether the amending party “is
attempting to stray beyond the perimeters of the original proof of claim and effectively file a ‘new’
claim” and (2) “the degree and incidence of prejudice” caused by the delay in amending. Id. at
175 & n.7. In re Kolstad therefore suggests that when a district court has discretion to permit an
amendment to a proof of claim, the court should nonetheless exercise that discretion with due
consideration for the current stage of the bankruptcy and any resulting prejudice to the other
parties. See id.
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The confirmation of a bankruptcy reorganization plan marks a significant stage in
bankruptcy proceedings and is fundamentally different than the bar date. As the Seventh Circuit
recognized, “One milestone of particular significance in bankruptcy is the bar date. . . .
Confirmation of the plan of reorganization is a second milestone, equivalent to a final judgment
in ordinary civil litigation.” Holstein v. Brill, 987 F.2d 1268, 1270 (7th Cir. 1993); see also
Eubanks v. F.D.I.C., 977 F.2d 166, 170 (5th Cir. 1992) (“[A] plan of reorganization is given the
same effect as a district court’s judgment on the merits for claim preclusion purposes.”).
Accordingly, the Seventh Circuit noted that “passing milestones in the litigation make
amendment less appropriate,” and once the plan is confirmed, further amendments “should be
allowed only for compelling reasons.” Holstein, 987 F.2d at 1270.
CLO Holdco contends that the bankruptcy court erred by disregarding In re Kolstad in
favor of Holstein’s “compelling reasons” standard. Doc. 13, Appellant Br., 18. First, CLO Holdco
overstates the bankruptcy court’s reliance on Holstein, as the bankruptcy court also considered
factors beyond the post-confirmation posture in determining whether an amendment was
appropriate. See R. 75–77 (discussing the overall delay, prior representations of counsel, concerns
of gamesmanship, and futility of amendment).
In any event, the Court does not find Holstein and In re Kolstad incompatible. Instead,
Holstein and In re Kolstad dovetail by recognizing that the stages of the bankruptcy proceeding
must guide courts’ discretion in permitting amendments. See Holstein, 987 F.2d at 1270; In re
Kolstad, 928 F.2d at 175. Holstein applies this principle in the context of post-confirmation
proceedings: Because plan confirmation functions much like a final judgment, courts should

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exercise their discretion with that intended finality in mind. See Holstein, 987 F.2d at 1270–71;
see also Eubanks, 977 F.2d at 170.
In re Kolstad, by contrast, provides two factors to guide courts’ discretion in amendments
after the bar date. Those factors are largely rooted in the purpose of that stage of the bankruptcy
proceeding. See, e.g., In re Kolstad, 928 F.2d at 174–75 & n.7 (providing the first factor, which
seeks to prohibit a “new” claim from being filed, after discussing bar dates’ purpose of establishing
the universe of claims). Holdco’s argument that In re Kolstad’s factors must be rigidly applied
regardless of the underlying stage in the bankruptcy therefore proves too much. Accordingly, the
bankruptcy court duly considered In re Kolstad but properly recognized that it is “factually
somewhat different.” R. 157.
Because the Court finds the proper legal standard was applied, it now considers whether
the bankruptcy court’s ruling was based on a clearly erroneous assessment of the evidence. The
Court finds it was not.
B.

The Bankruptcy Court’s Assessment of the Circumstances Was Not Clearly Erroneous
In denying the amendment, the bankruptcy court expressed concerns regarding the

timing of the amendment, potential waiver or estoppel, gamesmanship, and the futility of
amendment. The bankruptcy court’s conclusions were well within its discretion.
In discussing the timing, the bankruptcy court recognized the significance of a postconfirmation amendment and agreed with other cases that the “circumstances ought to be
compelling.” R. 158. But it also noted more generally that “one year and nine months” had
passed since the bar date and “ten months” since the confirmation, which constituted a
significant delay. Id.
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The bankruptcy court also noted that CLO Holdco’s statements indicating it had no
pending proof of claim and could withdraw its zero-dollar claim “stepped at least almost in the
lane of waiver and estoppel . . . . if not . . . precisely there.” R. 159. In its appeal, CLO Holdco
contends that waiver and estoppel were not implicated because, among other things, the
statements in the bankruptcy proceeding were not legal positions or made knowingly. Doc. 13,
Appellant Br., 30–32. The Court need not address these arguments head-on, however, because
the bankruptcy court expressly did not rely on those doctrines in its ruling. See R. 159. Rather,
the bankruptcy court seemingly referenced the doctrines as shorthand for the prejudicial effect of
CLO Holdco’s shifting representations regarding its proof of claim. See also R. 124 (describing
CLO Holdco’s repeated amendments as a “whipsaw”). Put differently, the bankruptcy court did
not need to find waiver or estoppel to properly recognize and consider the effects of CLO
Holdco’s changing statements. Similarly, the bankruptcy court expressed a concern of
“gamesmanship” by CLO Holdco in amending the proof of claim versus simply withdrawing it. R.
159–60. Nothing in the record suggests that the bankruptcy court abused its discretion in coming
to this conclusion.
And finally, the bankruptcy court noted that, based on various exhibits and documents, it
“seem[ed] pretty clear . . . that [Highland Capital]’s interest in the Crusader Funds was canceled
as part of the . . . settlement, and that mean[t] CLO Holdco’s participation and tracking interests
were canceled.” R. 160. Thus, the bankruptcy court found, the debtor would be prejudiced if it
had to litigate this “frivolous theory so late in the case.” Id.

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The record supports the bankruptcy court’s finding.4 CLO Holdco’s “new theory” of
recovery for the Tracking and Participation Interests, which is based on a “credit” received by
Highland Capital, contradicts damages principles and the underlying arbitration award. Indeed,
the settlement agreement between Highland Capital, the Crusader Funds, and the Redeemer
Committee was intended to implement the final arbitration award. See R. 857 (“[Highland
Capital] . . . consent[s] to the Crusader Funds . . . cancelling or extinguishing all of the limited
partnership interests and shares in the Crusader Funds . . . as provided for in the Arbitration
Award.”). And the final arbitration award recognized, because the final award was “rescission,”
that the Redemption Interests could either be transferred back to the Redeemer Committee or
extinguished. See R. 2548, 2550. In addition to the transfer or cancellation of these interests, the
arbitration panel ordered the payment of any financial benefits Highland received from the
transactions, “less what Highland [Capital] paid for the [Redemption Interests], plus interest at
the rate of 9%.” R. 2492.
CLO Holdco interprets the arbitration award—and in turn, the settlement
agreement—as providing Highland Capital with a “credit” because the payment of damages
subtracted “what Highland [Capital] paid for the [Redemption Interests].” See id. Accordingly,
the argument goes, the credit Highland Capital received was an “other disposition of any
interest,” triggering the Tracking and Participation Interests. See R. 2296.

4

CLO Holdco contends that the Court must apply a de novo standard of review when the
bankruptcy court’s denial of leave to amend was based on futility. Doc. 13, Appellant Br., 4. The Court
disagrees. The case CLO Holdco cites in support indicates that the de novo standard of review applies only
in cases where the “denial of leave to amend was based solely on futility.” See City of Clinton v. Pilgrim’s
Pride Corp., 632 F.3d 148, 152 (5th Cir. 2010) (emphasis added). Accordingly, the Court reviews the
bankruptcy court’s conclusion regarding futility for an abuse of discretion. See id.

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The bankruptcy court did not abuse its discretion in deeming this theory frivolous. The
settlement agreement expressly provided for the cancellation of the Redemption Interests, from
which the Tracking and Participation Interests derived value. See R. 857, 2176–77. And, even
assuming the settlement agreement incorporated the damages methodology from the arbitration
agreement, Highland Capital received no actual value or “proceeds” from the Redemption
Interests. Rather, the purported “credit” was instead a way of calculating Highland Capital’s illgotten gains, a common damages remedy.
To borrow from the Litigation Trustee’s example in argument to the bankruptcy court, if
a director usurps a corporate opportunity, buying an asset for $1 million and later selling it for $5
million, his ill-gotten gains are $4 million. See R. 232–33. To say the director received $1 million
in proceeds is incorrect. The director paid the $1 million, and the corporation is made whole by
the profits it would have received from the corporate opportunity. See id. If the director had to
pay $5 million to the corporation, the corporation would receive a $1 million windfall because it
never paid for the initial opportunity.
Or take, for example, an individual that has wrongfully obtained $100 of stock in a
corporation. A proper damages remedy for the corporation might be the transfer of the stock
back to the corporation or the cancellation of the individual’s interest. The individual may
likewise have to pay back the dividends he received while he held that stock. But in no case has
the individual received a $100 “credit.” Indeed, requiring an additional payment of $100 would
doubly punish the individual and doubly reward the corporation. Accordingly, the Court finds
that the bankruptcy court did not abuse its discretion in determining Highland Capital would be
prejudiced by having to litigate this frivolous theory “so late in the case.” R. 160.
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IV.
CONCLUSION
In sum, the Court finds that the bankruptcy court did not abuse its discretion in denying
CLO Holdco’s amendment to its proof of claim. Accordingly, the bankruptcy court’s denial of
CLO Holdco’s Motion to Ratify is AFFIRMED. The appeal is DISMISSED WITH
PREJUDICE.
SO ORDERED.
SIGNED: May 22, 2023.

______________________________
JANE J. BOYLE
UNITED STATES DISTRICT JUDGE

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