The newest opinion from the Fifth Circuit in the chapter 11 liquidation of Highland Capital Management tells us that a defendant cannot defeat a motion for summary judgment by submitting an affidavit that “[n]o reasonable juror would believe.”

As Circuit Judge Jacques L. Wiener, Jr., said in his September 16 opinion, the sham-affidavit doctrine is not the only reason for disregarding affidavits submitted in opposition to summary judgment. Instead, he held that “unsubstantiated statements are ‘not the type of significant probative evidence required to defeat summary judgment’” when there are “internal inconsistencies about the contract formation itself and lack of detail.” United States v. Lawrence, 276 F.3d 193, 197 (5th Cir. 2001).

Most recently, the Fifth Circuit upheld $450,000 in civil contempt sanctions imposed by the same bankruptcy court against the debtor’s former chief executive. See Dondero v. Highland Capital Management LP (In re Highland Capital Management LP), 105 F.4th 830 (5th Cir. July 1, 2024). To read ABI’s report, click here. In another appeal this year, the Fifth Circuit said that the “case has been full of” what the appeals court called “vexatious litigation.” See Charitable DAF Fund LP v. Highland Capital Management LP (In re Highland Capital Management LP), 98 F.4th 170 (5th Cir. April 4, 2024). To read ABI’s report, click here.

Summary Judgment on Defaulted Notes

Soon after the debtor filed for chapter 11 reorganization, disputes arose between the official creditors’ committee and the debtor’s chief executive. To fend off appointment of a chapter 11 trustee, the chief executive relinquished control to an independent, court-appointed board.

Before bankruptcy, the debtor had made millions in loans to the chief executive and affiliates of the debtor that the chief executive controlled. The loans were in the form of demand notes or term notes.

Under new control, the debtor demanded repayment of the demand notes, and the affiliate-borrowers defaulted on payment of the term notes. After confirmation of the chapter 11 plan, the debtor filed five adversary proceedings and motions for summary judgment against the former chief executive and the affiliates to collect more than $60 million on the notes.

Following a motion to withdraw the reference, Judge Wiener said that the bankruptcy judge “acted ‘essentially as a magistrate judge for the District Court prior to trial,’ and recommended that both of the motions for summary judgment be granted.”

“The district court adopted the report and recommendations and entered judgment against” the former chief executive and the affiliates, Judge Wiener said. The defendants appealed to the circuit, without success.

Affidavits Must Be Credible

Judge Wiener said that the debtor had made out a “prima facie case by showing that the notes were valid, due, and owing.” For a primary defense opposing summary judgment, the former chief executive submitted an affidavit claiming there were oral agreements to forgive the notes.

Judge Wiener said that the former chief executive “entered into these oral agreements with himself,” because he controlled both the borrowers and the lender.

To defeat summary judgment and raise disputed, triable issues of material fact, Judge Wiener said that the “only evidence” was “declarations and depositions” by the former chief executive and his sister.

Citing U.S. v. Lawrence, 276 F.3d 193, 197 (5th Cir. 2001), Judge Wiener said that the “declarations are not the type of significant probative evidence required to defeat summary judgment.”’

“They differ,” Judge Wiener said, “with respect to such vital information as who entered into the alleged agreements and when.” He went on to say that the evidence was “inconsistent as to the date and intent of the agreements” and that the “proffered evidence also contradicts itself as to whether it was [the former chief executive or his sister who] entered into the agreements.”

In the case on appeal, Judge Wiener said that the “contradictions go to the heart of the oral-agreement defense” and that the “declarations were not the kind of fact-heavy testimony that suggests ‘veracity.’” Citing Fifth Circuit authority, he said that “a court may decide that there are so many inconsistencies that the testimony does not need to be put before a jury” because “[n]o reasonable jury would believe them,” given their “inconsistences” and “unsubstantiated statements.”

The defendants claimed that the notes were invalid because they had not been signed in ink by the affiliates’ treasurer and that the treasurer was not authorized to sign the notes. Judge Wiener rejected the arguments. He also explained why the defendants had not properly alleged a claim of mutual mistake as to one of the notes, because the proffered evidence only suggested that the borrower made a mistake.

Concluding that the “notes remain due and owing,” Judge Wiener decided that “summary judgment was proper” and affirmed the district court.