Texas Bankruptcy Judge Says There’s ‘No End in Sight’ to 4-Year-Old Highland Capital Management Case After Facing Calls for Recusal
Feb. 29 2024, Published 5:37 p.m. ET
The federal judge overseeing the four-year Highland Capital Management bankruptcy case said at a hearing earlier this month that the case will "go on forever."
Parties led by James Dondero, hedge fund manager of Dugaboy Investment Trust, have repeatedly sought the recusal of Stacey G.C. Jernigan, Chief Bankruptcy Judge for the Northern District of Texas, citing bias. Jernigan is accused of writing a novel featuring a villain based on Dondero and was implicated in insider trading allegations connected to Amazon's 2021 purchase of MGM for $8 billion.
The latest controversy in the Highland saga centers on Dondero's request for information concerning $122 million left in the reserve set aside by the estate for additional legal and professional fees, especially amid large, ongoing payments to court-appointed Highland Trustee James Seery.
Seery is earning $150,000 per month for the duration of the case — a $1.8 million yearly salary — and attorneys for parties led by Dondero believe he could receive additional bonuses and benefits on top of that.
At a hearing in February, lawyers for the Dondero parties argued that the "case can end," they just need transparency. They believe the extra cash and assets could settle debts in the tens of millions and enable multiple classes of claimants to be meaningfully paid.
Lawyers for the Dondero parties said it “defies belief that [the Debtor] could reasonably spend” that $122 million on legal and professional fees and is so unwilling to share financial information.
The Dondero parties' attorneys say Jernigan's statement that the case will “go on forever whether [the Dondero parties] get this information or not” indicates "a troubling barrier to justice."
“The famous quote of Walt Disney, when someone asked him about the theme park and when it would be finished, and he said, Disneyland will never be finished as long as there are creative people with imaginations. I mean, this is like the Disneyland case. It will never be finished as long as there are certain parties and lawyers who have imagination and keep filing stuff," Jernigan said at the February hearing.
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The Dondero parties argue Jernigan is complicit in draining a "solvent but diminishing estate." They say the case's continuation benefits Seery and the estate's lawyers rather than creditors, which include Dondero.
Jernigan even mentioned that the prolonged case was drawing attention from other judges.
"Another judge in Texas…told me that Highland has spawned more appeals at the Fifth Circuit than any other — I don't know if he said bankruptcy case in history or Chapter 11," Jernigan said.
In January, lawyers for the Dondero parties once again sought Jernigan's removal from the case through a writ of mandamus, an order from a higher court that would require Jernigan to recuse herself due to bias. But during a hearing on Jan. 24, she expelled parties including lawyers, media and members of the public from the courtroom in apparent defiance of recent policy revisions by the Judicial Conference of the United States expanding public access to bankruptcy proceedings.
Last year, there were calls for Jernigan's recusal from the case on the grounds that she has a strong bias against hedge fund managers, and Dondero in particular, based on novels she wrote.
Judge Avery Lassiter, the protagonist in Jernigan’s first self-published novel, He Watches All My Paths, and its sequel, Hedging Death, makes “strong negative comments about hedge-fund operators in both books,” according to an expert report from former federal appellate judge and law professor Steve Leben, and a "major villain" in the second book bears a striking resemblance to Dondero.
Attorneys for Dondero say Jernigan engaged in "unethical promotion" of her novels based on Dondero while he still has proceedings before her court.
Twitter account @SJNovels, post dated August 28, 2022
Jernigan promoted the novels on her social media and travel blogs – where she recounts trips to places like Malta and Tanzania – and in industry events with lawyers that practice before her, underscoring how they mirror real life, writing: “I’m not going to reveal the name of the hotel, since this website is not about advertising things. Rather, I will merely mention that the hotel is referred to by name in Chapters 32 and 33 of my first novel, He Watches All My Paths. So if you really want to know …. (oh wait, maybe that sounds like advertising).”
The Dondero parties' lawyers say the allegations of judicial bias, financial mismanagement, SEC violations and legal obstructions cast a shadow over the integrity of the legal process and the potential for a fair resolution to the case.
TMX contributed to this story.