SBAITI & COMPANY PLLC
Mazin A. Sbaiti (TX Bar No. 24058096) Jonathan Bridges (TX Bar No. 24028835) J.P. Morgan Chase Tower
2200 Ross Avenue, Suite 4900W Dallas, TX 75201
T: (214) 432-2899 F: (214) 853-4367
Counsel for The Charitable DAF Fund, L.P. and CLO Holdco, Ltd.
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION _____________________________________________
In re: §
§ Chapter 11 §
HIGHLAND CAPITAL MANAGEMENT, L.P., § Case No. 19-34054-sgj11 §
Debtor. §
______________________________________________
REPLY IN SUPPORT OF MOTION FOR MODIFICATION OF ORDERS REGARDING GOVERNANCE OF THE DEBTOR AND RETENTION OF JAMES P. SEERY, JR.
SBAITI & COMPANY PLLC Mazin A. Sbaiti
Texas Bar No. 24058096
Jonathan Bridges
Texas Bar No. 24028835 JPMorgan Chase Tower
2200 Ross Avenue – Suite 4900W Dallas, TX 75201
T: (214) 432-2899 F: (214) 853-4367 E: mas@sbaitilaw.com jeb@sbaitilaw.com
I. INTRODUCTION
The Charitable DAF Fund, L.P. and CLO Holdco, Ltd. (“Movants”) respectfully submit this Reply in support of their Motion for Modification of Order Authorizing Retention of James P. Seery, Jr., Due to Lack of Subject Matter Jurisdiction (the “Motion”).
Movants’ motion raises a simple question: Can this Court strip the district court of jurisdiction by issuing an order declaring that it has “sole jurisdiction” over all lawsuits naming James Seery that are in any way related to his role post-petition role with the Debtor?
Movants have provided several reasons why the answer is “no.” In short, this Court lacks that power: (1) because 28 U.S.C. § 1334 explicitly vests the district court with original jurisdiction, (2) because asserting exclusive jurisdiction here is prohibited by the Constitution and the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462, 499 (2011), and (3) because any alternative interpretation of law would create considerable tension with the plain language of 28 U.S.C. § 959 and run directly counter to the mandatory withdrawal-of-the-reference provision in 28 U.S.C. § 157(d).
The Debtor and those who join its arguments here respond largely with surliness, rhetoric, and procedural niceties. The Motion is “blatant,” “brazen,” and “disrespectful,” they say without support. It is too late (due to finality), and too soon (due to ripeness), they argue simultaneously. These arguments are wrongheaded for the reasons explained below. But more importantly, they are irrelevant. They are irrelevant because they do not alter—indeed they do not even challenge the fact—that this Court lacks the power to divest the district court of original jurisdiction. It is that simple.
Movants intend to assert claims against Seery, including claims that arise under the Investment Advisers Act of 1940 (the “Adviser’s Act”) and the RICO statute. Because the district
court has original jurisdiction over the proposed claims, this Court’s Order of July 16, 2020 (“Order”),1 which purports to assert “sole jurisdiction” over such matters, should be modified.
The Debtor does not contest that this Court lacks the power to deprive the district court of jurisdiction. It argues only that this Court also has jurisdiction, asserting that § 157(d)’s mandatory withdrawal-of-the-reference provision is inapplicable. Again, this is wrong and beside the point. The Order is erroneous not because it asserts concurrent jurisdiction but because it purports to divest the district court of jurisdiction. This is error regardless of whether this Court also has concurrent jurisdiction. Thus, the Debtor’s § 157(d) argument is unavailing.
But the argument is also wrong. The proposed claims against Seery under the Adviser’s Act and RICO plainly fall within § 157(d) because those claims require consideration of both bankruptcy law and federal laws “regulating organizations or activities affecting interstate commerce.” Thus, withdrawal of the reference is mandatory, and this Court lacks over the power to decide those claims.
Moreover, this Court recognized and addressed that very problem in its March 22, 2021, order confirming the Debtor’s reorganization plan (“Confirmation Order”).2 There, this Court
made an important edit to its previous language asserting “sole and exclusive jurisdiction” over claims against Seery, noting that such jurisdiction extends “only to the extent legally permissible.”3
1 Order Approving Debtor’s Motion Under Bankruptcy Code Sections 105(a) and 363(b) Authorizing
Retention of James P. Seery, Jr., as Chief Executive Officer, Chief Restructuring Officer, and Foreign Representative Nunc Pro Tunc to March 15, 2020 [Doc 854]. As noted in the opening brief, a related but ultimately inapplicable order dated January 9, 2020, contains a similar provision with regard to Seery’s role as an “Independent Director.” Order Approving Settlement with Official Committee of Unsecured Creditors Regarding Governance of the Debtor and Procedures for Operations in the Ordinary Course, ¶ 5 [Doc. 339].
2 Order (I) Confirming the Fifth Amended Plan of Reorganization of Highland Capital Management,
L.P. (As Modified) And (II) Granting Related Relief [Doc. 1943].
3 Id. at 77, ¶ AA (“The Bankruptcy Court will have sole and exclusive jurisdiction to determine whether
Movants, here, ask for nothing more. This Court’s assertion of exclusive jurisdiction is, of course, limited to the extent it is legally permissible. The Order should be modified to acknowledge that limitation. For these reasons, Movants’ Motion should be granted.
II. ARGUMENT
Preliminarily, Movants note that the Debtor responded to their 10-page Motion with 21 pages of briefing, choking the record with irrelevant history, ad hominem attacks, and characterizations. Yet nowhere does the Response address the arguments presented in Movants’ Motion, save for the aforementioned one concerning § 157(d). There is no response of any kind to these three arguments from the Motion: (1) that this Court lacks the power to strip the district court of jurisdiction, (2) that asserting exclusive jurisdiction here is prohibited by the Constitution and the Supreme Court’s decision in Stern v. Marshall, 564 U.S. 462 (2011), and (3) that the contrary position advanced by the Debtor creates considerable tension with the plain language of 28 U.S.C. § 959. Neither does the Debtor’s brief address the edited language in the Confirmation Order, which expressly recognizes legal limits to this Court’s jurisdiction over future litigation. Movants submit that the Debtor’s failure to respond to these arguments constitutes a waiver and an abandonment both here and on appeal.4
With regard to the arguments that do appear in the Response, Movants submit that only the two pages devoted to 28 U.S.C. § 157(d) are even relevant to the issue before the Court. The remainder is red herring after red herring. Movants address each issue below:
Article XI of the Plan, shall have jurisdiction to adjudicate the underlying colorable claim or cause of action.”) (emphasis added).
4 See Kellam v. Metrocare Servs., 560 F. App’x 360 (5th Cir. 2014) (“Generally, the failure to respond to
arguments constitutes abandonment or waiver of the issue.”) (citations omitted); Magee v. Life Ins. Co. of
N. Am., 261 F. Supp. 2d 738, 748 n.10 (S.D. Tex. 2003) (observing that the “failure to brief an argument in
A. THIS COURT LACKS THE POWER TO STRIP THE DISTRICT COURT OF JURISDICTION It is unsurprising the Debtor’s Response fails to argue this Court can strip the district court of jurisdiction. It is a first principle of bankruptcy law that bankruptcy courts derive their jurisdiction from the district court in which they are situated and not the other way around.
The Debtor’s Response likewise raises no challenge to Movants’ argument that the Barton doctrine is inapplicable. Although it does contend that the Order’s gatekeeper provisions are analogous to/consistent with the Barton doctrine, it does not state that the Barton doctrine applies.
The reason is readily apparent. The Debtor cannot claim that this Court “appointed” Seery to the positions he holds as an executive of the Debtor, at least not in the classic sense of an appointment. The Debtor asked this Court to defer to its own “corporate decisions” with regard to Seery’s appointment and argued that this Court should not “interfere.” See Motion at 7 n.10. Because court “appointment” is a prerequisite to application of the Barton doctrine, that doctrine simply does not apply. The Debtor’s passing references by analogy do not state otherwise.
Because the Debtor does not contend that this Court has the power to strip the district court of jurisdiction, and because the district court indisputably has original jurisdiction over Movants’ action, the assertion of “sole jurisdiction” in the Order cannot and does not prohibit jurisdiction in the district court. Establishing this was the primary objective of Movants’ Motion. And on that issue, the Motion is aptly considered unopposed.
B. THE CONSTITUTION PROHIBITS THE ORDER’S JURISDICTIONAL OVERREACH
The Debtor’s Response does not mention the separation of powers doctrine or the Supreme Court’s landmark decision in Stern v. Marshall, 564 U.S. 462, 499 (2011). It argues only that the statutory prerequisites for related-to jurisdiction are met. Because a statute cannot trump the Constitution, that argument misses its mark. Thus, this argument is essentially unopposed as well.
C. THE ORDER’S JURISDICTIONAL OVERREACH IS PROHIBITED BY STATUTE
As noted, the Debtor’s Response does not mention and therefore waives any argument concerning 28 U.S.C. § 959 (“Trustees, receivers or managers of any property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property.”).
Regarding mandatory withdrawal of the reference under 28 U.S.C. § 157(d), the Debtor’s Response does not contest Movants’ position that the proposed claims in the district court case involve both bankruptcy law and other federal laws “regulating organizations or activities affecting interstate commerce.” The Adviser’s Act and the RICO statute are such laws, and Movants’ proposed claims arise under them.
But the Debtor does argue that prerequisites of § 157(d) are not present here, hanging its hat on an awkward parsing of the term “consideration.”
In whole, § 157(d) states,
The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.
(Emphasis added). Thus, withdrawal of the reference under § 157(d) is mandatory when a matter “requires consideration” of other federal laws regulating interstate commerce. Because Movants’ action in the district court plainly involves such laws, Debtor’s entire argument against withdrawal of the reference turns on whether those laws must be “considered.”
It is remarkable that the Debtor suggests these statutes need not be considered. The briefing here and in the district court already puts at issue significant, hotly contested issues regarding the interplay of bankruptcy law and the Adviser’s Act, including
1. Whether the Order constitutes a waiver of unwaivable fiduciary duties by purporting to immunize Seery against claims for negligence and breach of fiduciary duty;
2. Whether the heightened fiduciary obligations imposed by the Adviser’s Act were violated and whether those obligations elevate what otherwise might have been ordinary negligence to recklessness or gross negligence;
3. Whether the Order constitutes a material change in the relationship between Seery, as a Registered Investment Advisor, and his advisees, such that a failure to disclose that material change—to advisees or to the SEC— constitutes a breach of the Adviser’s Act or its regulations, a breach of fiduciary duties, negligence, gross negligence, or recklessness; and
4. Whether the Adviser’s Act anti-fraud provisions and other statutes were violated, which forms the predicate for civil RICO liability, among other significant legal issues.
None of the cases the Debtor cites even remotely suggests that resolving these kinds of difficult, contested issues does not require “consideration” of these laws. The Debtor’s bald assertion that applying these complex federal laws will be “straightforward” and will not involve “significant interpretation” verges on ludicrous.
The principal case the Debtor relies on, the Seventh Circuit’s opinion in In re Vicars Ins. Agency, Inc., 96 F.3d 949, 954 (7th Cir. 1996), merely holds that the need for consideration of non-bankruptcy federal law must be more than “speculative” or “hypothetical.” Plainly no speculation or hypothesis is needed here. For example, the presiding court necessarily will have to decide what exculpating effect, if any, the Order can have on Seery’s duties under the Adviser’s Act. No Article III court, to Movants’ knowledge, has decided any such thing.
Indeed, the closest authority appears to be the Fifth Circuit’s decision in In re Pac. Lumber Co., 584 F.3d 229, 251-52 (5th Cir. 2009). That case prohibits bankruptcy courts from entering prospective, non-consensual, non-debtor exculpatory orders, such as the one at issue here. Whether
The Debtor’s other Article III court authority, the Second Circuit’s opinion in City of N.Y. v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991), actually holds against the Debtor’s position. In that case, the court affirmed mandatory withdrawal of the reference under § 157(d) because the bankruptcy court’s “yet to be made” determinations were “likely to require further interpretation of CERCLA.” Id. Specifically, the court reasoned that determining which costs would be “recoverable” under the statute necessarily involved more than “simple application” of federal law.
That standard is easily met here. Most obviously, determining which of Seery’s duties under the Adviser’s Act5 can be waived or deemed unenforceable due to the exculpatory provisions
of the Order is a “yet to be made” decision “likely to require” interpretation of the Adviser’s Act and related regulations. That withdrawal of the reference under § 157(d) necessitates a showing of something more—some unusual complexity or the absence of settled law—is simply not supported by the Debtor’s authority. And the Debtor’s recitation of what it would like to be the rule—that “mandatory withdrawal is only proper when a bankruptcy court would have to interpret and apply federal law on a novel and unsettled question” (Response at 19)—is entirely made up.
Because the proposed claims against Seery do indeed require consideration of non-bankruptcy, federal laws affecting interstate commerce, withdrawal of the reference is mandatory under § 157(d). This Court’s lack of jurisdiction over the proposed claims makes it all the more obvious that the district court’s jurisdiction has not been divested. The Order should be modified to acknowledge as much.6
5 See Seery Testimony, Trans. of Hearing at 65-66 [Doc. 571] (“We owe a duty under the Advisor’s Act
to the funds and to the investors in those funds. . . . And what’s important in the Advisor’s Act, and it’s an interesting part of U.S. law. At least my understanding, it’s been confirmed by outside counsel, is if the manager, which would be Highland, has an interest, it’s actually required to subordinate that interest to the interest of the investors in the funds it managed.”).
6 The Debtor’s insistence that the Order not be modified is a bit perplexing. To Movants’ knowledge, the
D. THE DEBTOR’S REMAINING ARGUMENTS ARE RED HERRINGS
Movants respectfully submit that the remainder of the Debtor’s brief is devoted to arguments that are not relevant to the relief sought here for the reasons described below.
1. This Motion Is Not Too Late
The Debtor argues that this Motion comes too late due to “finality” or the doctrine of “law of the case.” This is both wrong and irrelevant.
It is odd, to say the least, that Debtor thinks this Court has jurisdiction, and the district court lacks it, due to Movant CLO Holdco’s failure to appeal the Order last July. Importantly, there is no allegation that the other Movant, the DAF, had notice and failed to appeal. (See Resp. at 4-5.) Nor is there any legal or factual support for the bald assertion that the Order has final and preclusive effect. The Debtor’s lone authority for its res judicata/preclusion argument, Republic Supply v. Shoaf, 815 F.2d 1046, 1049-50 (5th Cir. 1987), merely “held that confirmation of a clear and ‘unambiguous plan’ of reorganization that ‘expressly released’ a third-party guarantor has a res judicata effect on a subsequent action against the guarantor who is also a creditor.” In re Applewood Chair Co., 203 F.3d 914, 918 (5th Cir. 2000) (quoting Shoaf).
Here, the Order does not confirm a clear and unambiguous plan of reorganization. There is no express release of Movants’ claims under the Adviser’s Act or the RICO statute. Neither are Movants’ rights as advisees or Seery’s obligations as a Registered Investment Advisor even mentioned. Moreover, the Shoaf opinion is an outlier—one that has been questioned, cautioned, and distinguished repeatedly by the Fifth Circuit and elsewhere. That the Debtor opted not to inform this Court of that history is telling.
In In re Applewood Chair Co., 203 F.3d 914 (5th Cir. 2000), the court addressed a very similar motion—one asking for reconsideration of the scope of exculpatory language in a confirmation order. Although confirmation had not been appealed and had therefore become “final,” the Fifth Circuit held that it was nonetheless within the court’s jurisdiction to review and modify that order. Id. at 918-19. As to the Debtor’s authority—Shoaf—the Fifth Circuit expressly declined to extend it, explaining that “[t]he issue stated in Shoaf illustrates the limited nature of its holding.” The court also explained that Shoaf was “inapposite” because in the case before it, unlike in Shoaf, the order at issue contained “no provision specifically releasing” the claim sought to be precluded. Id.
The Applewood court also explained what kind of specificity is required in order for the res judicata effect of Shoaf to apply: the claim at issue must be “enumerated” in and its discharge must be “approved” by the underlying order. Id. at 919 (“No specific discharge or release of the [allegedly precluded claim] was enumerated or approved by the bankruptcy court in this matter.” “The lack of a specific discharge distinguishes this situation from that in Shoaf and thus, does not warrant the application of its holding.”). Plainly the Order fails to enumerate Movants’ proposed claims against Seery—let alone do so in a confirmation order. Shoaf is therefore inapposite.
The Debtor’s footnote argument regarding law of the case fares no better. It wholly depends on the res judicata effect of the Order. Because the authority discussed above unequivocally rejects the Debtor’s res judicata argument, law of the case is likewise unavailing.
2. This Motion Is Not Too Early
Ironically, the Debtor not only argues that Movants’ Motion is too late, it also argues the Motion is too early, asserting that it will not be ripe until this Court determines whether the proposed claims against Seery are colorable. But this argument is foreclosed by the Debtor’s
failure to contest Movants’ very first argument. Because this Court lacks the power to strip the district court of jurisdiction, it cannot prevent the district court from deciding the issue of colorability—whether on a Rule 12(b)(6) motion or otherwise.
Importantly, the district court may refer the issue to this Court for a report and recommendation. Indeed, while this Motion was pending, the Debtor filed a motion to enforce the reference in the district court.
That motion—and the Debtor’s resort to it—illustrates the main thrust of Movants’ arguments here: It is up to the district court to say what matters are referred to this Court and which it will decide itself. It is not within the power of bankruptcy courts to reverse that process.
3. The Related-to/Core Jurisdictional Arguments Are Beside the Point
The Debtor devotes considerable effort to arguing that the general jurisdictional standards of 28 U.S.C. § 157(b) are met. The core premise of that argument is wrong. The district court action does not attempt to undo or reverse the Harbourvest settlement. It simply seeks damages resulting from breaches of duty and violations of law that occurred in connection with that settlement. Thus, there is no basis for claiming that the district court action is a core proceeding.
But even that is quite beside the point. Withdrawal of the reference is mandatory in both core and non-core proceedings.
More to the point, meeting the jurisdictional prerequisites of § 157(b) does not mean this Court has the power to divest the district court of jurisdiction. The district court has jurisdiction. Thus, this Court should modify the Order, because otherwise it appears to say the district court does not. That this Court lacks jurisdiction under § 157(d) merely makes the point stronger.
III. CONCLUSION
Dated: May 21, 2021 Respectfully submitted,
SBAITI & COMPANY PLLC
/s/ Jonathan Bridges
Jonathan Bridges
Texas Bar No. 24028835
Counsel for Movants
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing Application has been served electronically via the Court’s CM/ECF system upon all parties.
/s/ Jonathan Bridges Jonathan Bridges
