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NexPoint Advisors LP faced sharp questioning Wednesday in its Fifth Circuit appeal over a $2.6 million judgment tied to prematurely ending a service agreement with its bankrupt affiliate Highland Capital Management. The alternative investment firm is seeking to recoup $7.7 million it claims it paid for undelivered services but faced scrutiny for continuing payments despite knowing that staff reductions had occurred.

Payments Amid Termination Questions

The legal wrangling stems from agreements between NexPoint and Highland in 2018 for 25 shared employees and various services. NexPoint’s attorney, Davor Rukavina of Munsch Hardt Kopf & Harr PC, argued that his client had no practical choice but to continue payments after Highland filed for bankruptcy in 2019, freezing debtors’ rights.

“There was a period … during which my clients knew they were paying for employees who were not there,” Rukavina told U.S. Circuit Judge Jerry Smith. NexPoint, he said, had tried unsuccessfully to negotiate with Highland, which rebuffed their efforts.

Judge Smith expressed skepticism. “Your client knew that many of these employees had been terminated, but you continued to pay for about 35 months?” he asked.

Disputes Over Leadership and Control

Highland’s attorney, John Morris of Pachulski Stang Ziehl & Jones LLP, countered that NexPoint’s leadership was complicit in approving payments despite the staff reductions. He pointed to Frank Waterhouse, Highland’s CFO and NexPoint’s treasurer, who signed and authorized all disputed payments under flat-fee agreements.

“Mr. Waterhouse was in complete control,” Morris argued. “He had all of the information. He is their agent … approving every one of these payments until Highland gives notice of termination.”

Morris emphasized that NexPoint received the services outlined in the agreements, making the $2.6 million judgment equitable. “To suggest it would be inequitable for Highland to get paid … is kind of perverse,” he said.

Background of the Dispute

The case is part of broader litigation between NexPoint and Highland, which filed for Chapter 11 bankruptcy in 2019. The bankruptcy followed a multiyear legal battle, including a $189 million arbitration award against Highland in Delaware. NexPoint, led by Highland co-founder James Dondero, has also challenged Highland’s reorganization plan.

Highland’s independent board, installed during bankruptcy proceedings, did not alter the disputed agreements. The bankruptcy court found that Highland had not breached its contracts and ruled that NexPoint owed for the services provided.

Judges Probe Both Sides

The three-judge panel — U.S. Circuit Judges Jerry E. Smith, Carl E. Stewart, and Stuart Kyle Duncan — pressed both parties during oral arguments. NexPoint argued that the payments were unjustified given staff reductions, while Highland maintained that it fulfilled its contractual obligations and provided agreed-upon services.