The Fifth Circuit Court of Appeals has upheld a bankruptcy court's decision to sanction NexPoint Real Estate Partners, L.L.C. for bad faith conduct in its dealings with Highland Capital Management, L.P. This ruling, issued on August 14, 2026, affects NexPoint, Highland, and their stakeholders, emphasizing the importance of good faith in bankruptcy proceedings.
The case, identified by docket number 25-11185, stems from a complex financial dispute involving Highland Capital, which filed for Chapter 11 bankruptcy in 2019, and its former executives, including James Dondero. The court's decision reinforces the principle that parties in bankruptcy must act honestly and transparently, as bad faith actions can lead to severe penalties.
Background
NexPoint Real Estate Partners, formerly known as HCRE Partners, is a company involved in various real estate investments. The dispute began when Highland Capital Management, under the control of Dondero, filed for bankruptcy due to significant debts and liabilities. This filing was part of a broader financial strategy that included Project Unicorn, a plan to acquire multiple residential properties.
The conflict escalated when Dondero, acting on behalf of NexPoint, filed a Proof of Claim in the bankruptcy court, asserting that his company was entitled to distributions from SE Multifamily Holdings, LLC, a joint venture created for Project Unicorn. Highland objected to this claim, leading to years of litigation marked by allegations of bad faith and frivolous actions by NexPoint.
Throughout the proceedings, NexPoint's actions drew scrutiny. The bankruptcy court noted that the company filed claims it knew to be baseless and engaged in tactics to avoid legal obligations, such as trying to withdraw its claim just before critical depositions were scheduled.
The Ruling
The Fifth Circuit affirmed the bankruptcy court's sanctions against NexPoint, stating that the company acted in bad faith during the litigation process. The court noted, "A bankruptcy court holds the inherent power to sanction litigants for bad faith conduct—a critical safeguard to curtail abuse of the bankruptcy process." This ruling emphasizes that the court has the authority to impose penalties when parties do not adhere to the principles of good faith.
The judges involved in this ruling included Circuit Judges Stewart, Graves, and Wilson. They found that clear and convincing evidence supported the bankruptcy court's determination that NexPoint filed its claim without proper investigation and continued to litigate it in bad faith. The court stated that NexPoint's actions were not just misguided but were calculated to manipulate the bankruptcy process.
Impact
This ruling has significant implications for NexPoint and the broader bankruptcy landscape. It serves as a reminder that companies must approach bankruptcy proceedings with integrity and transparency. The court's decision reinforces the idea that bad faith actions will not be tolerated and can result in severe financial consequences.
Moreover, the ruling sets a precedent for future bankruptcy cases, highlighting the importance of accountability among litigants. Companies involved in bankruptcy must be aware that the courts will scrutinize their actions, and any attempt to manipulate the process could lead to sanctions.
What's Next
NexPoint has the option to appeal the Fifth Circuit's ruling to the Supreme Court, although it is unclear whether they will pursue this route. There are no related cases pending that directly connect to this ruling, but the outcome may influence how other companies approach their bankruptcy claims in the future.