Highland Capital GC ‘Pleased’ with Settlement Result in Marathon Trial

Highland Capital GC ‘Pleased’ with Settlement Result in Marathon Trial

By Natalie Posgate


(Dec. 1) – Highland Capital Management General Counsel Scott Ellington said he is “pleased” with the settlement that was signed yesterday afternoon between the Dallas hedge fund’s Cornerstone Healthcare Group, private equity firm Nautic Partners, and a consortium of defendants the Texas hospital chain has spent the last nine weeks in trial against.

Jurors sitting in the trial, which was underway in State District Judge Martin Hoffman’s court in Dallas, were slated to hear closing arguments Tuesday when the parties began settlement talks instead.

Terms of the settlement are confidential.

“It’s good to get the matters resolved,” Ellington said. “We’re very pleased with the result. A lot of time and effort went into the matter. We think it was resolved favorably and we’re glad we could realize a solution for our investors.”

Lawyers for the defendants did not immediately return messages seeking comment.

Since early October, lawyers for Highland Capital had been arguing to jurors that a group of former Cornerstone executives unlawfully stabbed the company in the back when those officials secretly worked for months with Rhode Island-based Nautic Partners instead of their own company to acquire a lucrative inpatient rehabilitation facility and then jumped ship to spearhead the management team of the new prospect.

Highland Capital’s lawyers argued that the executives breached their fiduciary duty to Cornerstone by not pitching the deal to their current employer’s board and knowingly going to another firm when Cornerstone had made it clear that it was seeking opportunities to get into the inpatient rehab space, court documents say.

The former executives wrongfully leveraged their access to Cornerstone’s confidential and trade secret information during the due diligence phase of the deal with Nautic Partners, Highland Capital argued. In addition, the hedge fund claims the former employees illegally destroyed evidence by deleting incriminating emails tied to the case before and after leaving Cornerstone, which resulted in several sanction orders.

In March 2011, Nautic purchased Reliant Hospital Partners for $46 million and appointed former Cornerstone CEO Michael Brohm, ex-Cornerstone Vice President of Operations Kenneth McGee and ex-Cornerstone Vice President of Business Development Patrick Ryan to Reliant’s new management team. Former Cornerstone CFO Chad Deardorff and Cornerstone Vice President of Finance and Accounting Ryan Huggler shortly followed.

Four years later, the firm sold Reliant to Alabama-based HealthSouth Corp. for $730 million. Michael K. Hurst, one of the lead attorneys for Cornerstone in the trial, said some executives got as much as $34 million individually out of the deal.

“Reliant was a once in a lifetime opportunity,” said Hurst, a partner at Lynn Pinker Cox & Hurst in Dallas. “Any healthcare company would have bought it.”

Nautic Partners contended throughout the case that Highland Capital never would have purchased Reliant because it historically had only owned long-term acute care facilities and because Reliant was sold at a premium price. Nautic said Highland Capital only focuses on distressed assets at certain EBITDA levels.

Meanwhile, McGee countersued his former employer, claiming that he left the company because Highland Capital pulled a “bait and switch” on him by denying him a $4.65 million equity stake.

In addition to the trial being the longest Hurst has handled in his 26-year career, the process for the case to reach the trial stage posed its own unique challenges.

The case jumped through two major appellate court hurdles after Judge Hoffman initially excused Nautic Partners and three of its subsidiary funds from the lawsuit, ruling the private equity firm could not be sued in Texas because it did not have enough contacts in the state, despite indirect ownership in hospitals there.

The Court of Appeals for the Fifth District in Texas in June 2014 upheld Judge Hoffman’s ruling, but the Supreme Court of Texas reversed earlier this year, ruling that Nautic’s use of subsidiary entities did not necessarily block it from Texas jurisdiction.

Before the case settled, jurors had seen hundreds of emails, secret presentations between the former Cornerstone executives and Nautic Partners, and other types of documents, Hurst said.

Settlement discussions were entertained throughout the case’s life, but Hurst said the parties were unable to reach a resolution during mediation. Ultimately, he said the settlement agreement that came to fruition yesterday was the result of both sides reaching out to each other.

“Every representative on each side at different points were dancing around the ‘S’ word,” he said.

Hurst said Judge Hoffman has instructed the jury to return next Tuesday in the chance the settlement does not completely go through, but that there’s a “good possibility” the judge will call jurors before then and excuse them from their service.

“I can only imagine the sacrifices that the jury had to make over the last couple of months to meet their civil duties and stay attentive to the facts and extensive evidence that was presented to them,” Hurst said. “The feeling [of settling] is cathartic for me, but I also feel just immense gratitude to our jury system, to the jurors and to the court and our trial team that worked on this case.

“Our lawyers, paralegals, secretaries and our intern ran on virtually no sleep for two months,” he said.

Dallas Andrews Kurth Kenyon partner Marc Katz was Hurst’s co-pilot in leading Cornerstone’s trial team, which also Katz’s law partner, Scott Brister and Lynn Pinker partner Shonn Brown, among others.

Chicago Kirkland & Ellis partner John Hartmann led the trial team for the Nautic defendants, which also included Kirkland partner Patrick Philbin and Jackson Walker partners Mark Josephs and Patrick Steiner in Dallas.

Dallas attorneys Keith Clouse and Alyson Brown of Clouse & Dunn represent McGee and Huggler.

Dallas litigator Jonathan LaMendola of Cobb Martinez Woodward represented former Reliant CEO Chester Crouch, who was another named defendant in the lawsuit.

Brohm, the former Cornerstone CEO, was pro se throughout most of the trial.