Akanthos Capital Management, LLC v. CompuCredit Holdings Corp.

Summarized by Kathleen DiSanto , Bush Ross, PA
13 years 10 months ago

Citation:

Case No. 11-13227 (11th Cir. April 25, 2012)

Tag(s):

Ruling:

The Eleventh Circuit determined that a standard “no-action clause” in a trust indenture prevents noteholders who are not within a stated exception to the clause from asserting fraudulent transfer claims against the issuer of the securities and its directors and officers.

Procedural context:

Interlocutory appeal of a certified question of law relating to the noteholders’ ability to maintain a cause of action under Georgia’s Uniform Fraudulent Transfer Act without satisfying conditions precedent in accordance with the “no-action clause” in the trust indentures and arising from the United States District Court for the Northern District of Georgia’s order denying motions to dismiss filed by CompuCredit Holdings Corporation (“CompuCredit”) and the directors and officers also named as defendants. The Eleventh Circuit reversed the district court's ruling and remanded the case for dismissal of Plaintiffs’ claims.

Facts:

In December 2009, Plaintiffs, consisting of collection of hedge funds that hold notes issued by CompuCredit, brought suit under Georgia’s Uniform Fraudulent Transfer Act against CompuCredit and insiders consisting of officers and directors. The notes issued by CompuCredit were subject to a trust indenture governed by New York law which contained a “no-action clause,” precluding the noteholders from pursuing any remedies with respect to the indenture or the securities. The “no-action clause” contained two exceptions. The first exception, which was the only one at issue in this case, permitted the noteholders to bring suit if they satisfied the following five conditions precedent: (1) noteholders give written notice to the trustee of the occurrence of a default, (2) the holders of at least 25% of the notes make written demand to the trustee to pursue a remedy, (3) the noteholder agrees to indemnify or offer security to the trustee for costs, (4) trustee does not respond to demand of noteholders within sixty days of receipt of notice and security, and (5) majority of shareholders do not give trustee contrary instruction within the sixty day period. In June 2010, Compucredit, the directors, and the officers filed motions to dismiss predicated on the “no-action clause” and Plaintiffs’ failure to satisfy the conditions precedent to bringing suit under the first exception. The district court denied the motions to dismiss because (1) Plaintiffs were the majority of the noteholders, (2) because CompuCredit could pay dividends on less than sixty days’ notice, it was impracticable for Plaintiffs to wait sixty days to bring suit as required by the exception to the “no-action clause,” and (3) Plaintiffs’ claims were extra-contractual. At the request of the officers, the district court certified question of law relating to the noteholders’ ability to maintain a cause of action under Georgia’s Uniform Fraudulent Transfer Act without satisfying conditions precedent in accordance with the “no-action clause” in the trust indentures. The Eleventh Circuit addressed several procedural issues as to which defendants were properly party to the appeal. Even though only the officers petitioned the district court to certify the interlocutory appeal, the Eleventh Circuit determined that CompuCredit and the directors were also properly party to the appeal. The Eleventh Circuit also determined that even though the “no-action clause” issue was only minimally addressed in CompuCredit’s reply brief, the issues were adequately raised before the district court to be addressed on appeal. In addition, Plaintiffs argued that the officers and directors could not seek dismissal based on the “no-action clause” because they were not parties to the indenture. Based on several rulings applying New York law, the Eleventh Circuit also rejected this argument. In finding that the district court was incorrect in its conclusion that the “no-action clause” did not bar Plaintiffs’ fraudulent transfer action, the Eleventh Circuit first addressed whether extra-contractual claims are subject to the “no-action clause” under New York law. Based on prevailing case law, the Eleventh Circuit determined that fraudulent conveyance claims are properly brought by the trustee, not the noteholders. The Eleventh Circuit recognized that a trustee’s unjustifiable unwillingnesss to bring suit or conflict of interest as consistent exceptions to the general rule regarding the enforceability of a “no-action clause,” but noted that neither was alleged by Plaintiffs in this case. Turning to whether Plaintiffs’ majority ownership of the notes served as a basis for refusing to apply the “no-action clause,” the Eleventh Circuit noted the dual purposes of a “no-action clause”- one being to deter suits brought by the minority, and the other being to prevent suits by noteholders that would disrupt corporate affairs. While Plaintiffs’ majority ownership of the notes may have been consistent with the first policy reason for “no-action clauses,” it was not consistent with the second. The Eleventh Circuit also noted that the indenture did not provide any exception to the five condition precedents to the exception to the “no-action clause,” and as such, majority ownership of the notes was not a valid basis for bringing suit in derogation of the “no-action clause.” Finally, the Eleventh Circuit rejected the argument that the prevention doctrine barred Plaintiffs’ compliance with the “no-action clause” based on the fact that CompuCredit could make distributions on less than sixty days notice. The Eleventh Circuit determined that the prevention doctrine was inapplicable because the indenture provided that CompuCredit could make distributions on twenty days notice, and the prevention doctrine does not apply where one party assumes the risk that performance of a condition precedent will be prevented based on other terms of the contract. Inasmuch as CompuCredit complied with the terms of the indenture and gave notice in accordance with the indenture, the Eleventh Circuit found no basis for not enforcing the “no-action clause,” a standard provision found in trust indentures.

Judge(s):

Wilson and Martion, Circuit Judges, and Albritton, District Judge

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