A New York appellate panel has cleared the way for UBS to pursue Highland Capital Management founder James Dondero personally for more than $1 billion in unpaid judgments, while simultaneously freeing the firm's former general counsel from similar liability. The September 24 ruling from the Appellate Division, First Department, partially reversed a lower court order, keeping alive alter ego claims against Dondero but dismissing them against the former GC.
The dispute stems from a 2007-2008 securitization agreement known as the "Knox Transaction," under which UBS Securities LLC and UBS AG London Branch provided financing to Highland Capital Management, L.P. and two affiliated hedge funds. The funds contractually agreed to absorb 100% of the risk of loss. When the 2008 financial crisis triggered a $10 million collateral call that the funds failed to meet, UBS terminated the agreements and initiated litigation. By 2020, UBS had secured judgments exceeding $1 billion against the fund entities, which remain unpaid.
In 2023, UBS filed a turnover proceeding alleging that Dondero, who served as Highland's president and CEO until 2020, and the former general counsel, who held that role from 2010 to 2021, had systematically drained the judgment debtors' assets to render them judgment-proof. According to court documents, UBS alleged the two orchestrated transfers totaling approximately $145 million, including a $3.7 million transfer ultimately benefiting Dondero, 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 claimed, represented the funds' remaining assets.
The appellate court found the allegations against Dondero sufficient to proceed, citing "numerous badges of domination" such as disregard of corporate formalities, overlapping ownership and officers, shared office space, and entities not treated as independent profit centers. The ruling also settled a significant legal question for fund principals facing judgment-enforcement actions: the "transaction attacked" in a veil-piercing claim need not be the original deal but can include later transactions 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, however, received a more favorable outcome. The court determined that UBS's allegations portrayed him as "an important deputy" to Dondero but failed to establish "complete domination"—the threshold for personal liability. Merely being a senior officer and someone's right hand, the court reasoned, does not equate to controlling the entities. This distinction underscores the high bar for piercing the corporate veil against individual officers who are not principal owners.
The court did dismiss the alter ego claim against Dondero 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. The decision, which was unanimous, also confirmed that New York law, not Texas law, governs the fraudulent conveyance claims.
This ruling arrives amid a broader regulatory crackdown on financial misconduct. For context, the SEC recently shut down Navellier & Associates over fabricated returns, and federal charges were filed against the founder of Linqto in a $450 million scheme. While those cases involve different legal theories, they highlight the increasing scrutiny on fund managers and executives who allegedly misuse corporate structures.
For advisors and wealth managers, the decision serves as a reminder that post-judgment asset transfers can be challenged under alter ego theories, even when the original transaction occurred years earlier. The case also illustrates the limits of personal liability for non-owner executives, a nuance that may influence how firms structure governance and indemnification provisions.
