Terry v. The Charitable Donor Advised Fund, L.P.

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JOSHUA N. TERRY, U.S. BANK, National Association, in its capacity as Trustee, ACIS CAPITAL MANAGEMENT, L.P., Plaintiffs, v. THE CHARITABLE DONOR ADVISED FUND, L.P., CLO HOLDCO, LTD., and NEXPOINT DIVERSIFIED REAL ESTATE TRUST, Defendants.

No. 1:21-cv-11059-GHW

United States District Court, S.D. New York

February 1, 2024

MEMORANDUM OPINION & ORDER

GREGORY H. WOODS, UNITED STATES DISTRICT JUDGE

This suit involves a dispute between a set of entities allegedly controlled by James Dondero, and another set affiliated with Joshua Terry.^[1] Mr. Dondero and Mr. Terry had what can generously be described as a “falling out” of such a magnitude that litigation ensued in New York state court, New York federal courts (four lawsuits),^[2] a Texas bankruptcy court,^[3] and the Royal Court of Guernsey.^[4] Plaintiffs/Counter-Defendants U.S. Bank Joshua N. Terry, and Acis Capital Management, L.P. (“ACM”) (collectively “Plaintiffs”) brought this lawsuit “to stop James Dondero, the former majority owner of Plaintiff ACM, from holding investors in subordinated notes issued by ACIS CLO 2014-4 Ltd. (‘ACIS 4'), ACIS CLO 2014-5 Ltd. (‘ACIS 5'), and ACIS CLO 2015-6 Ltd. (‘ACIS 6' and, collectively with ACIS 4 and ACIS 5, the ‘ACIS CLOs') hostage by threatening to bring meritless litigation against Plaintiffs.” Plaintiffs' Amended Complaint, Dkt. No. 15 (“Compl.”) ¶ 1.

Plaintiffs allege that Mr. Dondero, who “functionally controls” Defendants Charitable Donor Advised Fund (“DAF”) and CLO HoldCo (“CLOH”) (collectively, the “DAF Parties”), has previously brought “vexatious and meritless lawsuits against ACM for purported mismanagement of the ACIS CLOs' investments and against U.S. Bank, the Trustee of the ACIS CLOs, for purported failures to prevent ACM's alleged mismanagement.” Id. Plaintiffs allege that Defendants' lawsuits- actual and threatened-“have delayed distributions to the ACIS CLOs' subordinated noteholders by forcing the holdback of funds from the ACIS CLOs' final distributions to cover potential indemnity obligations to U.S. Bank, ACM, Mr. Terry (ACM's owner), and Brigade Capital Management, L.P. (‘Brigade') (ACM's sub-advisor).” Id. As a result, Plaintiffs seek a declaratory judgment that (a) the DAF Parties lack standing to bring their claims and (b) the DAF Parties' claims are barred by a 2021 settlement agreement between ACM and Highland CLO Funding (“HCLOF”), which is “the actual owner of the subordinated notes on which DAF and CLO HoldCo's threatened claims are based.” Id. The latter argument depends on a finding that the “settlement” agreements are valid and enforceable.

In their answer, the DAF Parties assert fourteen affirmative defenses and a counterclaim. They argue that the so-called “settlement” agreements are invalid and were wrongfully and collusively entered into, amounting to a breach of HCLOF's contractual duty of good faith to CLOH arising from a shareholder members agreement between the two of them, see Dkt. No. 155-2 (the “Members Agreement”); additionally, they argue that Plaintiffs tortiously interfered to prompt said breach, and were unjustly enriched as a result. See Counterclaim ¶¶ 3-7 (describing the counterclaims); id. ¶¶ 78-83 (alleging breach of contract against HCLOF for breaching the Members Agreement with CLOH); id. ¶¶ 84-93 (alleging tortious interference with contract against Plaintiffs for inducing said breach); id. ¶¶ 94-98 (alleging unjust enrichment against Plaintiffs for “retain[ing] the benefits of their misconduct” with respect to the tortious interference). As a result, the DAF Parties seek a declaratory judgment that the agreements executed between HCLOF and Plaintiffs in 2021 and 2023, respectively, are unenforceable. See id. ¶¶ 66-77.^[5]

In extensive briefing reminiscent of a law school issue-spotter, Plaintiffs and HCLOF moved to dismiss the DAF Parties' counterclaims-raising issues of standing, conflict of laws, personal jurisdiction, subject matter jurisdiction, forum non conveniens, international comity, collateral estoppel, and failure to state a claim. See Dkt. Nos. 106 (Plaintiffs' motion), 77 (HCLOF's motion). In addition, Plaintiffs moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). For the reasons that follow, Plaintiffs' and HCLOF's respective motions to dismiss are GRANTED, and Plaintiffs' motion for judgment on the pleadings is DENIED.

I. BACKGROUND

A. Parties and Relevant Non-Parties

Plaintiff U.S. Bank, a national banking association, is the Trustee of the ACIS CLOs under the ACIS Indentures. Compl. ¶¶ 9, 27; accord Answer ¶¶ 9, 27.^[6] Plaintiff Mr. Terry “is the President and sole executive of ACM.” Counterclaim ¶ 11.^[7] Plaintiff ACM is a Delaware limited partnership located in Texas; ACM is the Portfolio Manager to the ACIS CLOs, responsible for managing the ACIS CLOs' assets. Compl. ¶ 11.

Defendant DAF, a limited partnership organized in the Cayman Islands, owns 100% of CLOH. Id. ¶ 12. CLOH is a Cayman Islands company that owns 49% of HCLOF. Id. ¶ 13. Defendant NexPoint Strategic Opportunities Fund (“NexPoint”), which is not involved in these motions to dismiss, is a Delaware statutory trust managed by NexPoint Advisors, L.P. Id. ¶ 14.^[8]Plaintiffs contend that NexPoint is a minority investor in ACIS 6, which is primarily owned by HCLOF. See id. ¶¶ 44, 18.^[9] The DAF Parties assert that “NexPoint is unrelated to DAF and CLOH.” Counterclaim ¶ 64.

Non-parties “ACIS 4, ACIS 5, and ACIS 6 are exempted limited liability companies incorporated in the Cayman Islands.” Compl. ¶ 15. They conduct business through directors located in the Cayman Islands. Id. ACM manages the offshore ACIS CLO investment funds, which “issued, among other things, certain subordinated notes to investors pursuant to the ACIS Indentures in private offerings.” Id.; see also id. ¶ 25.

Non-party HCLOF is a collective investment scheme registered in Guernsey; HCLOF owns 100% of the subordinated notes issued by ACIS 4 and ACIS 5, as well as 87% of the subordinated notes issued by ACIS 6. Id. ¶ 17. Approximately 51% of HCLOF is owned by Highland Capital Management, L.P. (“Highland”). Id. ¶ 18.^[10] Again, CLOH owns the remaining 49% of HCLOF. Id. ¶ 13.

Non-party Mr. Dondero resides in Texas and, according to Plaintiffs, “functionally controls NexPoint,” id. ¶ 19, although the DAF Parties deny this, Answer ¶ 19. Plaintiffs allege that “[u]pon information and belief, Dondero also functionally controls DAF and, through it, CLO[H],” Compl. ¶ 19, although the DAF Parties dispute this too, see Answer ¶ 19.^[11] The parties agree that Mr. Dondero formerly owned ACM and formerly served as Highland's CEO. See Compl. ¶ 19; Answer ¶ 19.

B. Facts

1. HCLOF and CLOH's Members Agreement

In November 2017, HCLOF and its shareholders-including CLOH-entered into a “Members Agreement Relating to the Company,” providing that “[t]he Parties are entering into this Agreement to regulate the relationship between them and the operation and management of [HCLOF].” Counterclaim ¶ 22 (quoting Members Agreement at 5^[12]). Section 20.5 of the Members Agreement states: “Each Party shall at all times act in good faith towards the other Parties and shall use all reasonable endeavours to ensure that this Agreement is observed.” Members Agreement at 16 (the “Good Faith Clause”). The Members Agreement does not further define “good faith.”

2. ACM's Management and Bankruptcy

ACM, as Portfolio Manager, “is responsible for identifying and purchasing the assets that are held in the ACIS CLOs, monitoring those assets, and monetizing those assets in specified circumstances.” Compl. ¶ 26; accord Answer ¶ 26. The ACIS CLOs raise funds by selling secured notes and subordinated notes, purchasing corporations' senior-secured debt instruments with the proceeds; and any income that the investments generate is used, in turn, to pay the CLOs' expenses, as well as principal and interest owed to the CLOs' noteholders. Compl. ¶ 25; Answer ¶ 25.

According to Plaintiffs, Mr. Dondero, as former owner of ACM, “lost control” of the company through an “involuntary” bankruptcy proceeding. Compl. ¶ 28. The DAF Parties deny this. Answer ¶ 28. The bankruptcy was allegedly precipitated by Mr. Dondero's termination of Mr. Terry, who was ACM Portfolio's Manager; an arbitration proceeding followed. Compl. ¶ 28; Answer ¶ 28 (denying this). The parties do not dispute that the arbitrator found ACM and its general partner, Acis Capital Management GP, LLC (“ACM GP”) liable and awarded Mr. Terry $8 million in damages. Compl. ¶ 28; Answer ¶ 28.

Plaintiffs allege that, instead of directing ACM and ACM GP to pay the arbitration award, Mr. Dondero instead “attempted to frustrate Mr. Terry's ability to enforce it by stripping ACM and ACM GP of their assets”-a “scheme” that Mr. Terry “stopped . . . by commencing a bankruptcy case against ACM and ACM GP.” Compl. ¶ 29. The DAF Parties deny this. Answer ¶ 29. There is no dispute that the bankruptcy court ultimately approved a transfer of 100% of ACM and ACM GP's equity to Mr. Terry. Compl. ¶ 30; Answer ¶ 30.

3. Series of Lawsuits

Plaintiffs allege that Mr. Dondero then launched a series of lawsuits against Mr. Terry and ACM because he was “[u]nwilling to accept [the bankruptcy judge's] ruling” and aims “to harass Plaintiffs through the court system,” Compl. ¶ 31, which the DAF Parties deny, Answer ¶ 31. These filings include the 2019 Lawsuit, see Compl. ¶¶ 32-37, which was voluntarily dismissed without prejudice, id. ¶ 38; and the 2020 Lawsuit, see id. ¶¶ 39-40, which was likewise voluntarily dismissed without prejudice id. ¶ 41.^[13] The 2019 Lawsuit generally entailed allegations of mismanagement of the ACIS CLOs by ACM, see id. ¶ 32, and in turn U.S. Bank, id. ¶ 36, seeking...