A recent Law 360 story by Martin O’Sullivan, “Arbitrator to Say If Highland Fee Dispute is Arbitrable,” reports that a Delaware Chancery judge has declared that an arbitrator must decide whether a dispute over legal fees between a hedge fund manager and investors can be decided in arbitration, saying the investors and the fund agreed to the arrangement in a prior settlement.

Vice Chancellor Sam Glasscock III said that Highland Capital Management LP, which manages the shuttered Crusader Fund, and a committee of investors must go to arbitration to determine whether or not the issue of the investors’ obligation to advance legal fees for Highland can also be arbitrated, saying the parties agreed to as much in a settlement surrounding the wind-down of the Crusader Fund.

“Because I find the contract generally provides for arbitration of all disputes, this case must be stayed for a determination of arbitrability by the arbitrator,” Vice Chancellor Glasscock said.

In August 2008, Highland announced it was freezing the Crusader’s proceeds, preventing investors from withdrawing their money.  A subsequent settlement with investors to wind-down the fund allowed Highland to continue serving as fund manager and created an investor committee with powers over Highland.

Investors sued Highland in July, seeking to have the fund manager removed from the Crusader Fund.  Highland, which was removed as manager in August, filed counterclaims, seeking indemnification for the suit.  According to Vice Chancellor Glasscock, the wind-down settlement agreement “provides for arbitration of disputes” between the investors and Highland.

“The parties bound themselves to arbitration, broadly, of issues among them,” Vice Chancellor Glasscock said.  “They adopted the [American Arbitration Association] rules which provide that the arbitrator must determine arbitrability.”

The case is Redeemer Committee of the Highland Crusader Fund v. Highland Capital Management, case number 12533-VCG, in the Court of Chancery of the State of Delaware.