The Second Circuit has backed the dismissal of mismanagement and fraud counterclaims lodged by a real estate investment trust and its subsidiary in a dispute involving a collateralized loan-obligation investment fund, ruling that related agreements for the fund don't support their counterclaims.

In its unpublished opinion filed on Nov.19, a three-judge panel rejected NexPoint Diversified Real Estate Trust and its subsidiary NHF TRS LLC's breach of fiduciary duty, negligence and tortious interference counterclaims, which were previously dismissed by a New York federal court in March 2024.

The counterclaims, which mainly revolved around "asset quality tests," were filed against ACIS 6 fund manager ACIS Capital Management, ACIS Capital's owner and principal Joshua N. Terry, and ACIS Capital's sub-adviser Brigade Capital Management LP.

The tests are part of an agreement that established ACIS 6 and a related portfolio management agreement, according to the panel.

NexPoint's counterclaims are about the asset quality tests featured in the portfolio management agreement, the panel said. NexPoint has conceded that it isn't a part of that agreement because it and its subsidiary are subordinated noteholders for the fund, according to the panel.

Additionally, the panel said the fund establishment agreement doesn't state that the fund will be in default if the subordinated noteholders don't get paid or if the fund doesn't meet the standards set by the asset quality tests. NexPoint also failed to show how the agreement allows it to sue over the tests, the panel ruled.

According to the Second Circuit, NexPoint's tortious interference and breach of fiduciary duty counterclaims alleged the counter-defendants were obligated to manage the fund in ways that weren't contractual.

However, the panel ruled that New York law bars these types of tort claims, and it also pointed to the New York Court of Appeals' 2023 decision in IKB International SA v. Wells Fargo Bank NA.

"In IKB International, the New York Court of Appeals directed the dismissal of a claim alleging a breach of post-event-of-default fiduciary duties," the panel said. "The court held that 'the action should proceed under a contract theory' because 'plaintiffs use identical language when describing their contract-based claims' and '[t]he harm alleged.'"

"That parallels what the NexPoint parties are doing here, where their duty-based claims rely on factual allegations of breach of contract," the panel added.

U.S. Circuit Judges Debra A. Livingston, Barrington D. Parker and Maria A. Kahn sat on the panel for the Second Circuit.

Counsel for NexPoint, Terry, ACIS Capital and Brigade Capital didn't respond to requests for comment Thursday.

Terry and ACIS Capital are represented by William B. Adams, Jonathan E. Pickhardt and Blair A. Adams of Quinn Emanuel Urquhart & Sullivan LLP.

Brigade Capital is represented by Jason C. Hegt of Latham & Watkins LLP.

NexPoint and NHF TRS are represented by Mazin A. Sbaiti and Griffin S. Rubin of Sbaiti & Company PLLC.

The case is U.S. Bank National Association v. The Charitable Donor Advised Fund LP, case number 25-643, in the U.S. Court of Appeals for the Second Circuit.