Delaware Bankruptcy Court Rejects Efforts of Moll Industries’ Unsecured Creditors to Recharacterize as Equity the Secured Debt Held by Highland Capital Funds and to Hold Highland Capital Liable as Moll’s “Alter Ego”

This adversary proceeding pits the committee of unsecured creditors (Committee) of Moll Industries, Inc. (Moll) against hedge fund manager Highland Capital Management, L.P. (Highland) and several Highland funds that were secured creditors of Moll (Funds).  The Committee claimed that the Moll senior debt held by the Funds should be equitably subordinated to Moll’s unsecured debt, or recharacterized as equity, thereby eliminating the priority that the Funds would otherwise have in the bankruptcy proceeding.  The Committee also claimed that Highland was liable to Moll’s unsecured creditors because it acted as Moll’s “alter ego.”  Finally, it sought to void a security interest held by the Funds in one of Moll’s bank accounts.  Highland and the Funds all moved to dismiss the Committee’s complaint.  The Court permitted the security interest avoidance claim to proceed but dismissed the equitable subordination, recharacterization and alter ego claims.  This article provides a comprehensive discussion of the Court’s decision and analysis.

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