Fact or Fiction? Texas Judge Faces Call for Recusal After Hedge Fund Manager in Case Was Cast as 'Major Villain' in Her Novel

Stacey Jernigan, Chief Bankruptcy Judge for Northern District of Texas, appears to have violated serious ethical rules by writing and publishing novels about characters that bear a striking resemblance to both herself and a hedge fund manager in the Highland Capital Management bankruptcy cases.

As a result, a motion filed by hedge fund manager Jim Dondero’s Dugaboy Investment Trust want their cases related to an ongoing Highland Capital Management bankruptcy proceeding to be transferred to another judge.

"In the first novel, the protagonist judge makes negative comments about the hedge-fund industry. In the second, one of the villains (who conspires with others to kill insured retirees) is a hedge-fund founder who, like Dondero, operates from Dallas and has several specialized and complicated portfolios. Under 28 U.S.C. § 455(a), which requires a judge to 'disqualify himself in any proceeding in which his impartiality might reasonably be questioned,' should Judge Jernigan be disqualified from presiding over bankruptcy cases involving Dondero’s hedge funds and other parties related to Dondero?" an opinion letter, by former federal appellate judge named Professor Steve Leben, filed as an exhibit in support of the positions.

According to the motion, Leben noted the novel's protagonist "closely modeled on Judge Jernigan, . . . made strong negative comments about hedge-fund operators” and featured "a hedge-fund operator with similarities to Dondero” as a “major villain in the second book."

Professor Leben opined that "a reasonable observer would question Judge Jernigan’s impartiality in presiding over bankruptcy cases involving Dondero’s hedge funds.”

Leben concluded, "Judge Jernigan should be disqualified from presiding over any remaining proceedings in either case or any other bankruptcy of a Dondero-related hedge fund.”

Highland Capital Management initially filed for bankruptcy in Delaware in 2019, per reports, but the petition was transferred to the U.S. Bankruptcy Court for the Northern District of Texas, where Jernigan presides.

"Judge Jernigan has presided over two bankruptcy proceedings involving hedge funds that had been operated by James Dondero," Leben's letter states.

"In the Highland Capital Management case, Judge Jernigan has twice found Dondero in civil contempt. Dondero and related parties have moved to disqualify Judge Jernigan; some motions to disqualify have been denied and at least one is pending," the statement continues.

For her part, Judge Jernigan said that her novels were “entirely fiction” and “not about Mr. Dondero or the hedge fund industry in general.”

"She also emphasized that each book contains a preface stating that the books are 'work[s] of fiction' and that resemblance to actual events or real people “is entirely coincidental," the opinion letter said. "She added that 'there are no characters or entities in her books that have been inspired by or modeled after' Dondero or parties related to him that participated in the Highland bankruptcy case."

"Based on the publication of these two novels during the Acis and Highland Capital Management bankruptcy proceedings, Judge Jernigan should be disqualified from presiding over any remaining proceedings in either case or any other bankruptcy of a Dondero-related hedge fund," Leben concluded.