Oxford University Bank v. Lansuppe Feeder, LLC

          Argued: November 13, 2017

         Intervenors, financial institutions that hold junior notes issued by trust defendant Soloso, appeal from the grant of summary judgment in favor of Plaintiff, senior noteholder Lansuppe, and the denial of Intervenors' cross- motion for summary judgment and dismissal of Intervenors' cross-claims by the United States District Court for the Southern District of New York (Laura Swain, J.). The district court ordered distribution of the assets of the trust according to the terms of the trust's governing Indenture. AFFIRMED.

          ANDREWSTUARTCORKHILL, Quinn Emanuel Urquhart & Sullivan LLP, New York, N.Y. (Jonathan Edward Pickhardt and Blair Alexander Adams, Quinn Emanuel Urquhart & Sullivan LLP, New York, N.Y., on the brief), for Plaintiff-Appellee.

          ROBERT B. BIECK, JR., Jones Walker LLP, New Orleans, L.A., (Peter Dee, Mavronicolas & Dee LLP, New York, N.Y., on the brief), for Intervenors-Cross- Claimants-Appellants.

          Before: PIERRE N. LEVAL, PETER W. HALL, Circuit Judges, and COLLEEN McMAHON, District Judge. ^[*]

          LEVAL, CIRCUIT JUDGE

         This is an appeal by Intervenors, entities which hold junior notes issued by nominal Defendant Soloso CDO 2005-1 Ltd., from the judgment of the United States District Court for the Southern District of New York (Laura Swain, J.), which granted summary judgment in favor of Plaintiff, senior noteholder Lansuppe Feeder LLC, and which denied Intervenors' cross- motion for summary judgment and dismissed Intervenors' cross-claims.

         The case arises from a dispute between Lansuppe and Intervenors related to the liquidation and disposition of the assets of the Soloso trust. Lansuppe, which holds more than two-thirds of a class of senior notes issued by Soloso, initiated this trust instruction proceeding to seek a declaratory judgment and an order of specific performance directing Wells Fargo Bank, as Trustee, to liquidate the trust's assets and distribute the proceeds pursuant to the trust Indenture. If the liquidated assets are distributed according to the Indenture scheme, senior noteholders will be substantially compensated for their investment, while junior noteholders will receive nothing. Intervenors cross-claimed, alleging that Soloso violated the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a et seq., thereby entitling them to rescission of their investment in notes issued by Soloso, under ICA § 47(b), or in the alternative to pro rata distribution of Soloso's assets. The district court granted summary judgment in favor of Lansuppe, finding that ICA § 47(b) does not create a private right of action, and that even if it did, Intervenors' cross- claims fail on the merits.

         We conclude that the district court erred in finding that ICA § 47(b) does not provide a private right of action. However, we agree with the district court that Lansuppe has demonstrated that it is entitled to summary judgment ordering distribution of Soloso's assets according to the terms of the Indenture and that Intervenors' cross-claims fail. Accordingly, we affirm the district court's grant of summary judgment to Lansuppe, denial of summary judgment to Intervenors, and dismissal of Intervenors' cross-claims, albeit on the different ground that Intervenors failed to state a claim under the ICA.

         BACKGROUND

         I. Facts

         Soloso is a special purpose investment vehicle. It issued notes to investors pursuant to the terms of an Indenture dated August 24, 2005. Using proceeds from its sale of the notes, Soloso purchased Trust Preferred Securities ("TruPS"), which it held as collateral to secure its obligations to noteholders, and which generated interest used to pay noteholders a return on their investment. Soloso's notes include Class A-1 Notes ("senior notes"), as well as several tranches of junior notes. Plaintiff Lansuppe holds senior notes, which are entitled to priority of payment in the event of a liquidation, whereas the Intervenors hold junior notes, which receive a higher rate of return but lower priority of payment in relation to senior notes. Intervenors did not purchase their junior notes directly from Soloso, but rather on the secondary market.

         In April 2013, Soloso failed to pay the periodic interest due on senior notes, which constituted, according to the terms of the Indenture, an "Event of Default." Indenture § 5.1(a)(iii)(A). The occurrence of an Event of Default triggers certain noteholder rights, including the right of holders of two-thirds of the senior notes (the "Requisite Noteholders") to direct the Trustee to liquidate the trust's assets. Id. § 5.2(a). Lansuppe, which holds more than two- thirds of the senior notes and thus qualifies as the Requisite Noteholders, directed the Trustee on July 31, 2015 to liquidate the estate. Under the distribution scheme set forth in the Indenture's "Waterfall Provision," the Trustee is to use the liquidated assets first to satisfy outstanding obligations to senior noteholders, and second-if any assets remain-to satisfy outstanding obligations to junior noteholders. Id. §§ 5.4, 11.1. Prior to liquidation, the Trustee notified all noteholders that the Requisite Noteholders had instructed it to liquidate and distribute trust assets.

         Junior noteholders-now Intervenors in this action-objected to the planned liquidation on the ground that Soloso had violated the ICA by issuing notes to a purchaser who was not a "Qualified Purchaser" within the meaning of the ICA. See 15 U.S.C. § 80a-3(c)(7). The ICA requires investment companies to register with the Securities and Exchange Commission ("SEC") but exempts from this requirement issuers whose notes are owned only by persons who at the time of their acquisition were Qualified Purchasers under the ICA. Id. § 80a-3(c) ("[N]one of the following persons is an investment company . . . (7)(A) Any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers . . ."). The Indenture contains provisions meant to ensure that Soloso remains exempt from the ICA's registration requirement, including, as relevant here, that notes may be sold or transferred only to Qualified Purchasers as defined under the ICA, and that "no transfer of a Note . . . may be made if such transfer would require registration of the Issuer or Co-Issuer under the [ICA]." Indenture § 2.5(d). Additionally, according to the terms of the Indenture, a purchaser of Soloso securities is deemed to have represented that it is a Qualified Purchaser. Id. § 2.5(i).

         The basis for the junior noteholders' objection is its claim that certain notes issued by Soloso were resold by initial purchasers from Soloso to an entity (Bank of Morton) that was not a Qualified Purchaser.^[1] As a result of this resale to a purported non-Qualified Purchaser, and in light of Soloso's reliance on the exemption for issuers that sell notes only to Qualified Purchasers, junior noteholders argued that the transfer of a note to Bank of Morton constituted an Event of Default under § 5.1(e) of the Indenture. According to junior noteholders, the Trustee could not proceed with liquidation and distribution on the basis of the Requisite Noteholders' instruction because of this alleged Event of Default.^[2] In light of the dispute, the Trustee requested a judicial determination of its obligations under the Indenture before proceeding with the liquidation. Plaintiff disputes the consequences that would flow from such a transfer under the ICA and the Indenture, as well as that notes were transferred to any non-Qualified Purchaser.

         II. Procedural History

         In an earlier-filed action, the Intervenors brought suit against the Trustee in the U.S. District Court for the Northern District of Mississippi, seeking injunctive relief to prevent the liquidation. Oxford University et al. v. Wells Fargo Bank, No. 3:15-cv-00145 (N.D. Miss. filed Aug. 24, 2015). While that case was pending, Lansuppe initiated this trust instruction action in the Southern District of New York, alleging that the court in Mississippi lacked jurisdiction over two necessary parties-Soloso and Lansuppe-and that Mississippi was therefore not a proper venue for Intervenors' ICA claim.^[3]

         Lansuppe filed a motion for summary judgment on its complaint in the New York action, seeking a judicial construction of the Indenture to the effect that Requisite Noteholders were entitled to direct liquidation, and an order for specific performance. Intervenors filed an unopposed motion to intervene and cross-claimed for summary judgment on their ICA claims.^[4] In their cross- claim, Intervenors sought a declaration that Soloso's failure to register violated ICA §§ 7 and 8, and entitled Intervenors to rescission pursuant to § 47(b) the ICA.

         The district court granted the motion to intervene, and granted partial summary judgment for Lansuppe, directing the Trustee to liquidate the trust estate to preserve the value of the trust and further directing the Trustee to hold the assets pending resolution of this dispute. It is undisputed that if the liquidated trust assets are distributed in accordance with the Indenture, such distribution will largely satisfy senior noteholders' claims but will be insufficient to fund any distribution to Intervenors. In subsequent orders, the district court granted summary judgment in ...