New York court lets UBS pursue Highland Capital founder over unpaid judgments

A New York appeals court cleared the way for UBS to pursue the founder of Highland Capital Management personally for over $1 billion in unpaid judgments. 

The Appellate Division, First Department, modified a lower court order on September 24, keeping alter ego claims alive against the founder while dismissing them against the firm's former general counsel. 

The dispute traces back to 2007 and 2008, when UBS Securities LLC and UBS AG London Branch entered into a securitization deal - the "Knox Transaction" - with Highland Capital Management, L.P. and two affiliated hedge fund entities. The funds agreed to bear 100% of the risk of loss. When the 2008 financial crisis hit, the funds failed to meet a $10 million collateral call, breaching their obligations. UBS terminated the contracts and sued. 

By 2020, UBS held judgments exceeding $1 billion against the fund entities. Those judgments remain unpaid. 

In 2023, UBS filed a turnover proceeding alleging that the founder, who served as Highland Capital's president and CEO until 2020, and the former general counsel, who held that role from 2010 to 2021, had drained the judgment debtors' assets to keep them out of reach. UBS alleged the two transferred approximately $145 million through a series of moves - including a $3.7 million transfer from one entity ultimately to the founder, a $39.6 million shift to a newly created entity, and roughly $105 million routed through the purchase of "after-the-event" insurance from Sentinel Reinsurance Ltd. The "premium" for that policy, UBS alleged, was the funds' remaining assets. 

The court found the claims against the founder strong enough to proceed, pointing to "numerous badges of domination" - disregard of corporate formalities, overlapping ownership and officers, shared office space, and entities not treated as independent profit centers. 

The court also settled a question that matters for any fund principal facing judgment-enforcement proceedings. The "transaction attacked" in a veil-piercing claim does not have to be the original deal. It can be a later transaction designed to frustrate recovery - including post-judgment asset transfers. A narrower reading, the court wrote, "would perversely encourage abuse of the corporate form to avoid judgment debts." 

The former general counsel got a different outcome. The court found UBS's allegations described him as "an important deputy" to the founder but fell short of "complete domination" - the threshold for personal liability. Being a senior officer and someone's right hand is not the same as controlling the entities. 

The court did dismiss the alter ego claim against the founder as it related to two limited partnership entities, ruling that the applicability of veil piercing to limited partnerships under New York law was not properly before it. UBS received leave to replead on that point. New York law, not Texas law, governed the fraudulent conveyance claims. The decision was unanimous.