In the Matter of UBS Securities LLC, et al. v James Dondero, et al.
Attorneys and Parties
Brief Summary
This judgment-enforcement dispute arose from a failed structured-finance securitization known as the Knox Transaction and concerned whether alleged post-transaction asset transfers could support veil-piercing and fraudulent transfer claims against insiders.
Supreme Court denied James Dondero's and Scott Ellington's motions to dismiss the turnover petition brought under CPLR 5225(b) [turnover proceeding to recover property for judgment enforcement], including claims for alter ego liability, fraudulent conveyance under former Debtor and Creditor Law § 276 [fraudulent conveyance], and voidable transactions under Debtor and Creditor Law § 273 [voidable transactions].
The Appellate Division modified by dismissing the alter ego claim against Ellington entirely and dismissing the alter ego claim against Dondero insofar as it was based on piercing the veils of Highland Financial Partners, L.P. (HFP) and Highland CDO Opportunity Master Fund, L.P. (CDO Fund). It otherwise affirmed.
The petition sufficiently alleged Dondero's complete domination of the corporate judgment debtors and that he used that domination to strip assets and frustrate collection of New York judgments, but it did not adequately allege Ellington's complete domination. The claims tied to HFP and CDO Fund were defectively pleaded as corporate veil-piercing claims even though those entities were limited partnerships. The fraudulent conveyance claim was timely because New York law, not Texas law, governed.
Background
UBS Securities LLC and UBS AG London Branch entered into the Knox Transaction in 2007 and 2008 with Highland Capital Management, L.P. (HCM) and affiliated funds that agreed to bear all risk of loss. After the 2008 financial crisis, the funds failed to meet a $10 million collateral call, UBS terminated the contracts, and UBS sued in New York for breach of contract, fraudulent inducement, and fraudulent conveyance. In 2020, UBS obtained judgments exceeding $1 billion against the funds and HFP, which remained unpaid. UBS later filed this turnover proceeding alleging that Dondero and Ellington caused the judgment debtors' assets to be shifted through transfers involving SOHC, HFP, CLO HoldCo, Sentinel Reinsurance Ltd., Mainspring, Ltd., and Montage Holdings Ltd. so the debtors would be judgment proof.
Lower Court Decision
The motion court denied the CPLR 3211(a)(7) [rule allowing dismissal for failure to state a cause of action] and CPLR 3211(a)(5) [rule allowing dismissal based on statute of limitations] motions by Dondero and Ellington. It concluded that the petition adequately pleaded alter ego liability and that the fraudulent conveyance and voidable transaction claims were not time-barred. It also declined to convert the special proceeding into a plenary action.
Appellate Division Reversal
The Appellate Division held that the petition adequately stated an alter ego claim against Dondero because the 'transaction attacked' for veil-piercing purposes need not be the original Knox Transaction; it may be later asset transfers designed to frustrate recovery on obligations arising from that transaction, including judgments. The court also held that the petition sufficiently alleged that Dondero's domination caused wrongful transfers that deprived UBS of a source of recovery. But the court dismissed the alter ego claim against Ellington because the allegations showed, at most, that he was an important deputy to Dondero rather than someone who exercised complete domination. The court further dismissed the portion of the Dondero alter ego claim based on HFP and CDO Fund because those entities were limited partnerships, while the petition pleaded only corporate veil-piercing. The court otherwise affirmed, including the ruling that New York law governed the fraudulent conveyance claim and that the special proceeding need not be converted.
Legal Significance
The decision clarifies that, in a veil-piercing claim under Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141, the 'transaction attacked' can be a later transfer or scheme intended to frustrate collection of obligations or judgments, not only the original underlying deal. It also reinforces that veil-piercing allegations are fact-intensive and generally unsuitable for dismissal before discovery when sufficiently detailed. In addition, the court emphasized New York's strong interest in applying its fraudulent conveyance law to protect a New York-based creditor and the integrity of New York judgments.
A controlling insider who allegedly strips assets from corporate judgment debtors may face alter ego liability even if he did not sign the underlying contract, but a senior officer who merely assists the controller will not be liable absent allegations of complete domination. Claims aimed at limited partnerships must be pleaded on a legally appropriate theory, and New York will often apply its own fraudulent transfer law when enforcement of New York judgments is at stake.