Oxford University Bank, Citizens Bank & Trust Company of Marks, Coastal Commerce Bank, Guaranty Bank and Trust Company, BankFirst Financial Services, as Successor-in-Interest to Newton County Bank, The First, A National Banking Association, Copiah Bank, N.A., PriorityOne Bank, Bank of Morton, Bank of Kilmichael, First Commercial Bank, First State Bank, Intervenors - Cross-Claimants - Appellants,
v.
Lansuppe Feeder, LLC, Plaintiff - Appellee. Holmes County Bank and Trust Company, Intervenor - Cross-Claimant, Wells Fargo Bank, National Association, as trustee for Soloso CDO 2005-1 Ltd., Soloso CDO 2005-1 Ltd., Defendants - Cross-Defendants,
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 ...