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Amid crisis-era litigation uncertainty, Highland Capital heads for bankruptcy

A lawsuit born out of the financial crisis has pushed Highland Capital Management LP into bankruptcy a decade later.

The alternative credit manager, which invests in everything from retail mutual funds to collateralized loan obligations, initiated voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware on Oct. 16.

Highland Capital Management elected to go into bankruptcy to stay ahead of a potential judgment that could exceed its current liquid assets, the company said in a statement. It marks the latest development in a years-long legal fight between the Dallas-based company and a group of institutional investors including Muirfield Capital Management LLC, Grosvenor Capital Management L.P. and Baylor University, which sued Highland Capital in 2016 over its management of what was once its flagship hedge fund the Highland Crusader Fund.

The legal spat traces back to 2011 when Highland Capital began the process of liquidating the Crusader Fund, three years after closing it down following what The Wall Street Journal reported was a 50% collapse in value.

At that time, the fund's liquidation plan established a committee of fund investor representatives to oversee the process. Highland Capital then spent the next five years distributing more than $1.55 billion of the roughly $1.7 billion in the original account balance in the fund.

"Rather than liquidating the fund at the height of the crisis for pennies on the dollar, [Highland] carried out a liquidation process over time intended to maximize recoveries for investors," the company said in its Oct. 16 statement.

But the investors on the Crusader Fund's Redeemer Committee ended up suing Highland Capital in 2016 for allegedly taking fees it was not entitled to and delaying the liquidation process. The investors also fired Highland Capital as manager of the Crusader Fund around that same time. Alvarez & Marsal LLC has since taken over managing the fund, according to The Wall Street Journal.

Today, the investors are behind a $189.3 million unsecured claim against Highland Capital. That was the largest debt listed on Highland Capital's bankruptcy filing.

"Following a thorough legal process, the Redeemer Committee secured an arbitration award of approximately $189 million based on findings of multiple instances of willful misconduct and breaches of fiduciary duty by Highland in its management of the Crusader Fund," a spokesperson for the committee of investors said in a statement. "We were prepared for a hearing to confirm the award, when Highland filed for bankruptcy. We are confident that we will recover the full amount of our award through the bankruptcy process."

Still, the company disputes the underlying claims behind the investors' lawsuit. But the company said in a statement that the decision to file for bankruptcy was ultimately driven by "its present liquidity position." Highland Capital warned back in April that it did not have enough cash to pay $175 million to investors in its Crusader Fund.

"Highland believes that [Highland Capital] acted in the interest of investors and disputes the Redeemer Committee's claims," the company said in the statement. "However, in consideration of its liquidity profile, [the company] determined that it was necessary to commence the voluntary Chapter 11 proceedings at this time."