[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
APRIL 25, 2012
No. 11-13227
________________________ JOHN LEY
CLERK
D.C. Docket No. 1:10-cv-00844-TCB
AKANTHOS CAPITAL MANAGEMENT, LLC,
ARIA OPPORTUNITY FUND LTD.,
CNH CA MASTER ACCOUNT, L.P.,
GLG INVESTMENTS PLC: SUB-FUND GLG
GLOBAL CONVERTIBLE UCITS FUND,
GLG INVESTMENTS IV PLC: SUB-FUND GLG
GLOBAL CONVERTIBLE UCITS (DISTRIBUTING) FUND, et al.,
llllllllllllllllllllllllllllllllllllllll Plaintiffs - Appellees,
CC ARBITRAGE, LTD, et al.,
llllllllllllllllllllllllllllllllllllllll Plaintiffs,
versus
COMPUCREDIT HOLDINGS CORPORATION,
DAVID G. HANNA,
FRANK J. HANNA, III,
RICHARD R. HOUSE, JR.,
RICHARD W. GILBERT,
K. K. SRINIVASAN,
J. PAUL WHITEHEAD, III,
THOMAS G. ROSENCRANTS,
GREGORY J. CORONA,
llllllllllllllllllllllllllllllllllllllll Defendants - Appellants.
________________________
Appeal from the United States District Court
for the Northern District of Georgia
________________________
(April 25, 2012)
Before WILSON and MARTIN, Circuit Judges, and ALBRITTON,* District Judge.
WILSON, Circuit Judge:
This case concerns the applicability of a standard “no-action clause” in a
trust indenture governing a company’s notes. The clause at issue states that a
noteholder cannot “pursue any remedy with respect to this Indenture or the
Securities” unless the noteholder falls within one of two exceptions. This appeal
asks whether noteholders who do not fall within a stated exception to the clause
may nonetheless bring fraudulent transfer claims against the issuer of the
securities and its directors and officers. Although the district court found the no-
action clause inapplicable to the claims, we disagree and hold that the language of
*
Honorable W. Harold Albritton, United States District Judge for the Middle District of
Alabama, sitting by designation.
2
the no-action clause controls, barring noteholders from bringing this suit.
I.
The district court in its March 15, 2011 order laid out the long and litigious
history among the parties in this appeal, so we confine our recitation of the facts to
those most relevant to this appeal. Defendant-Appellant CompuCredit Holdings
Corporation (“CompuCredit”) is a publicly traded financial services provider that
serves the subprime market. Additional Defendants-Appellants are CompuCredit
insiders that fall within two groups: Officers and Directors. Plaintiffs are a
collection of hedge funds that hold notes issued by CompuCredit; they allege to
collectively own the majority of CompuCredit’s notes and claim status as
CompuCredit’s creditors under the Uniform Fraudulent Transfers Act (“UFTA”).
See O.C.G.A. § 18-2-70 et seq.1
Each series of CompuCredit’s notes was issued pursuant to a trust indenture
containing a standard “no-action clause.”2 The clause states that noteholders “may
not pursue any remedy with respect to this Indenture or the Securities.” However,
the clause also contains two exceptions that a noteholder may fall within if it
1
Georgia’s Uniform Fraudulent Transfers Act is based upon and substantially similar to
the Uniform Fraudulent Transfer Act, successor to the Uniform Fraudulent Conveyance Act.
2
For the purposes of this appeal, the trust indentures governing each series of notes held
by Plaintiffs are identical and shall be collectively discussed.
3
satisfies certain conditions precedent. The first exception, referred to by the
parties as the “trustee demand exception,” is satisfied if: (1) a noteholder gives the
Trustee written notice that a Default3 has occurred and is continuing; (2) holders
of at least 25% of the notes make a written demand to the Trustee to pursue a
remedy; (3) a noteholder agrees to indemnify or offer security to the Trustee for
any costs incurred; (4) the Trustee does not respond to the request of the
noteholders within sixty days of receipt of the notice and the offer of security or
indemnity; (5) during the sixty-day window, the majority of the noteholders do not
give the Trustee an instruction inconsistent with the request for a remedy. The
second exception to the no-action clause is the “right to payment” exception,
which is not at issue here. The trust indentures have a choice-of-law provision
specifying that New York law governs the agreement.
In December 2009, Plaintiffs brought UFTA claims against CompuCredit.4
Plaintiffs alleged that CompuCredit was in financial distress but had nevertheless
issued a dividend to shareholders—the majority of whom were company
insiders—and planned to spin off the company’s profitable microloan lending
business. Plaintiffs argued that these actions were fraudulent transfers intended to
3
Section 1.01 of the Indentures defines the term “Default.” The parties agree that no
Default has occurred here.
4
Directors and Officers were added as defendants in May 2010.
4
benefit company insiders. Plaintiffs also asserted that CompuCredit was operating
on the brink of insolvency and depleting its available funds, endangering its ability
to redeem Plaintiffs’ notes when they came due. In June 2010, each of the three
groups of Defendants—CompuCredit, Directors, and Officers—individually filed
a motion to dismiss. The Officers raised in their motion the argument that is at
issue in this appeal: that the no-action clause in the trust indentures governing
CompuCredit’s notes barred Plaintiffs from bringing their claims. The Directors
adopted and joined the motions to dismiss filed by the other Defendants.
CompuCredit did not reference the no-action clause in its initial motion, but it
stated in its reply brief: “As set forth in the opening brief and reply brief in support
of [Officers’] Motion to Dismiss the Second Amended Complaint, Plaintiffs’ claim
also should be dismissed because Plaintiffs have not complied with the Indentures’
requirements for bringing suit.”
On March 15, 2011, the district court ruled on all the motions jointly,
finding that although no-action clauses are generally upheld, the clause did not bar
Plaintiffs’ UFTA claims under the circumstances of this case. The court
predicated its ruling on three factors it found to be determinative: (1) the
noteholders bringing the suit constituted a majority of the noteholders, therefore
satisfying the purpose of the clause to prevent suits not in the majority’s best
5
interest; (2) CompuCredit announced its intent to pay a dividend less than sixty
days in advance, thereby making it impracticable for Plaintiffs to satisfy the sixty-
day waiting period requirement of the trustee demand exception; and (3)
Plaintiffs’ claims were extra-contractual and the terms of the clause contemplated
a contractually-defined Default predicating a suit.
On April 1, 2011, the district court pursuant to 28 U.S.C. § 1292(b) certified
the following question of law for interlocutory review:
Under New York Law, may noteholders sue under Georgia’s Uniform
Fraudulent Transfer Act where the noteholders have not complied
with the conditions precedent to filing suit specified in the “no-action
clause” in the trust indentures governing the notes?
Defendants then petitioned this court for permission to file an interlocutory appeal
regarding the certified question, and we granted Defendants the right to appeal.
II.
As an initial matter, we must sort out which parties are proper participants
in this appeal. Plaintiffs first challenge whether CompuCredit may appeal, given
that it (1) did not join its co-Appellants in petitioning the district court to certify its
March 15, 2011 order for interlocutory review and (2) only discussed the no-
action clause in its reply brief in support of its motion to dismiss Plaintiffs’ claims.
Plaintiffs also contest whether Directors and Officers have the ability to argue for
6
the applicability of the no-action clause, given that they are not parties to the trust
indentures. For the reasons stated below, we find that CompuCredit, Directors,
and Officers are all proper parties to this appeal.
A.
Plaintiffs point out that only Officers, not CompuCredit, petitioned the
district court to certify its March 15, 2011 order denying Defendants’ motions to
dismiss; Plaintiffs argue that CompuCredit therefore cannot participate in this
appeal.5 This court generally only reviews final orders of the district court, but
under some circumstances we have jurisdiction over interlocutory appeals.
Relevantly, we have jurisdiction over a district court order not otherwise
appealable if (1) a district judge states in the order that he is “of the opinion that
such order involves a controlling question of law as to which there is substantial
ground for difference of opinion and that an immediate appeal from the order may
materially advance the ultimate termination of the litigation,” and (2) application
to appeal is made to this court within ten days of such an order. See 28 U.S.C. §
1292(b). On April 1, 2011, the district court, responding to Officers’ motion to
5
Plaintiffs actually state in their brief that Officers and Directors filed a motion for
interlocutory appeal, but that motion bears only Officers’ names. Regardless, as our discussion
below evidences, it is immaterial which parties filed the motion at the district court level. We
include both CompuCredit and Directors in our discussion of this matter for the sake of
completeness.
7
certify its order for interlocutory review under § 1292(b), issued an order granting
Officers’ motion for certification and amended its March 15, 2011 order to state
that the no-action clause question presented “a controlling question of law as to
which there is substantial ground for difference of opinion and that an immediate
appeal from the order may materially advance the ultimate termination of the
litigation.” On April 11, CompuCredit, Directors, and Officers jointly filed a
notice of appeal to this court, requesting permission to appeal the amended order.
We granted permission to appeal to all Defendants. We had jurisdiction to do so
because both prongs of § 1292(b) had been satisfied: the district court had stated
the required language in its order and Appellants had then filed an application for
interlocutory appeal within ten days of that statement. For purposes of
determining proper parties to this appeal, it is simply not relevant that the district
court amended its Order at the request of Officers alone because we properly
granted all Defendants the right to appeal.
Plaintiffs next contest whether CompuCredit has the ability to make its no-
action clause argument given that it only cursorily discussed the issue in its reply
brief in support of its motion to dismiss Plaintiffs’ claims. Plaintiffs rely on
Thomas v. Crosby for the proposition that an appellant’s failure to press an
argument before the district court forecloses that appellant’s right to present the
8
argument on appeal. 371 F.3d 782, 800 (11th Cir. 2004).6 However, even if we
were to agree with Plaintiffs’ proposition that the issue was not sufficiently raised
below, we do not join in its conclusion that appeal of the issue is prohibited.
Thomas, to which Plaintiffs cite, instructs that our circuit’s “rule foreclosing
review of issues not presented below is not a jurisdictional limitation but is instead
a rule which may be abrogated in our sound discretion.” Id.; see also First Ala.
Bank of Montgomery, N.A. v. First State Ins. Co., 899 F.2d 1045, 1060 n.8 (11th
Cir. 1990).
At the heart of this rule is the concept that “a court will not consider on
appeal for the first time a question that requires development of factual issues.”
Troxler v. Owens-Illinois, Inc. 717 F.2d 530, 533 (11th Cir. 1983) (emphasis
added). As the Supreme Court has articulated, our procedural scheme makes it the
sole province of lower courts to develop the factual record, and it is essential that
the issues of a case be fully argued below “in order that litigants may not be
surprised on appeal by final decision there of issues upon which they have had no
opportunity to introduce evidence.” Hormel v. Helvering, 312 U.S. 552, 556, 61
6
Here, it is unclear whether the district court considered the issue adequately raised.
Although Officers, Directors, and CompuCredit all filed separate motions to dismiss, the district
court’s order addressed all Defendants jointly and did not specify that any of its holdings
regarding the no-action clause were specific to any one party. Additionally, the district court’s
conclusions were rooted in principles of law that would have applied to all Defendants.
9
S. Ct. 719, 721 (1941). Essentially, we seek to avoid prejudicing the parties. See
Ochran v. United States, 117 F.3d 495, 503 (11th Cir. 1997). A second reason for
the rule is a “concern for judicial economy.” Id.; see also Roofing & Sheet Metal
Servs. v. La Quinta Motor Inns, Inc., 689 F.2d 982, 990 (11th Cir. 1982).
In the instant case, Officers and Directors raised the no-action clause issue
below, arguing the same points that CompuCredit now wishes to assert.
CompuCredit seeks to address only issues already raised before the district court;
none of its arguments would require development of the factual record. Plaintiffs
had the opportunity below to respond to and present evidence regarding the no-
action clause question, and the district court had the opportunity to make findings
of fact and legal conclusions. Therefore, Plaintiffs would not be prejudiced were
we to consider the precise issue raised by CompuCredit’s co-appellants. See
Ochran, 117 F.3d at 503 (“There is no prejudice to the [defendant] in this case
since it fully briefed all the issues that we address.”) Furthermore, in this case
considerations of judicial economy would weigh against declining to consider this
argument because the issues are fully briefed and ripe for appellate review.
We have previously identified some circumstances under which we have
found it appropriate to exercise our discretion to hear issues not argued below:
First, an appellate court will consider an issue not raised in the
district court if it involves a pure question of law, and if refusal to
10
consider it would result in a miscarriage of justice. Second, the rule
may be relaxed where the appellant raises an objection to an order
which he had no opportunity to raise at the district court level. Third,
the rule does not bar consideration by the appellate court in the first
instance where the interest of substantial justice is at stake. Fourth, a
federal appellate court is justified in resolving an issue not passed on
below where the proper resolution is beyond any doubt. Finally, it
may be appropriate to consider an issue first raised on appeal if that
issue presents significant questions of general impact or of great
public concern.
Dean Witter Reynolds, Inc. v. Fernandez, 741 F.2d 355, 360–61 (11th Cir. 1984)
(alteration, footnotes, and quotation marks omitted). This case presents a pure
question of law that we believe was answered incorrectly below. Furthermore, the
significant question presented in this appeal has general impact, given that it
relates to a standard clause present in most indentures of this type. For the
foregoing reasons, we find it appropriate to consider CompuCredit’s appeal.
B.
Plaintiffs also argue that the applicability of the no-action clause cannot
properly be asserted by persons—such as Officers and Directors—who are not
parties to the indentures containing that clause. A number of courts applying
New York law have addressed this argument, both explicitly and implicitly, and
have held that non-party defendants may still assert the no-action clause. See Peak
Partners, LP v. Republic Bank, 191 F. App’x 118, 126–27 (3d Cir. 2006)
(applying New York law) (finding no-action clause applicable despite plaintiff’s
11
argument that defendant was not a party to the trust indenture); Sterling Fed.
Bank, F.S.B. v. DLJ Mortg. Capital, Inc., 2010 WL 3324705, at *7 (N.D. Ill. Aug.
20, 2010) (applying New York law) (holding that no-action clause barred plaintiff
from bringing suit against mortgage-servicer defendant who was not party to the
trust indenture); In re Enron Corp. Sec., Derivative & “ERISA” Litig., 2008 WL
744823, at *17 (S.D. Tex. Mar. 19, 2008) (applying New York law) (stating that
courts have allowed non-parties to enforce no-action clauses and citing in support
Lange v. Citibank, N.A., 2002 WL 2005728, at *6–7 (Del. Ch. Aug. 13, 2002)
(applying New York law) and Feldbaum v. McCrory Corp., 1992 WL 119095, at
*8 (Del. Ch. June 2, 1992) (applying New York law)). In Feldbaum, the court
explained that “in consenting to no-action clauses by purchasing bonds, plaintiffs
waive their rights to bring claims that are common to all bondholders,” and that
waiver “applies equally to claims against non-issuer defendants as to claims
against issuers.” 1992 WL 119095, at *7. The court also pointed out that the
clauses at issue in Feldbaum, like the clauses here, “explicitly make their scope
depend on the nature of the claims brought, not on the identity of the defendant.”
Id. Here, Plaintiffs agreed to the terms of the no-action clause when they
purchased the notes, and that clause bars the pursuit of “any remedy with respect
to this Indenture or the Securities” (emphasis added). We therefore find that
12
Officers and Directors may assert that the no-action clause prevents Plaintiffs from
bringing this suit.
III.
CompuCredit, Officers, and Directors argue that the district court erred in
denying their motions to dismiss Plaintiffs’ claims because the court relied upon
an incorrect finding of law—namely, that the no-action clause did not bar
Plaintiffs’ claims. We review de novo a district court’s denial of a motion to
dismiss. See Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1187 (11th Cir.
2002).
It is undisputed that the language of the no-action clause states that
noteholders may not bring any actions with respect to the “Indenture or the
Securities.” It is also clear that Plaintiffs’ suit relates to the trust indentures or the
securities. The clause itself lists only two possible exceptions to its prohibition on
suits—the trustee demand exception and the right to payment exception—and
Plaintiffs acknowledge that they have not taken the steps required to qualify for
either of the exceptions. Therefore, the question before us is whether the district
court was correct in relying upon three alternative reasons to find the clause
inapplicable, despite the background principle that no-action clauses have
“generally been upheld by courts.” Murray v. U.S. Bank Trust Nat’l Ass’n, 365
13
F.3d 1284, 1289 n.9 (11th Cir. 2004).
A.
First, we must answer whether under New York law extra-contractual
fraudulent transfer claims are exempted from the operation of the no-action
clause.7 This issue was addressed directly in Feldbaum, in which plaintiffs
bringing fraudulent conveyance claims argued that no-action clauses apply only to
claims for breaches of express indenture provisions. 1992 WL 119095, at *6. The
Delaware Chancery Court rejected that argument, concisely stating: “The clause in
question bars all action ‘with respect to’ the indenture or the securities. A
fraudulent conveyance action is such an action.” Id., at *7. It explained that
“‘no-action’ clauses in the indentures constitute waivers by plaintiffs” of their
rights to bring claims relating to the securities, id. at *5, and instead vest those
rights in the trustee (or in “the holders of a substantial amount of bonds,” provided
that the trustee has “the right to prosecute such a suit in the first instance”), id. at
*6. The court reasoned that because the plaintiffs’ fraudulent transfer claims
“allegedly arise from transactions by issuers of their bonds and assert injuries
arising from the bondholder status of plaintiffs . . . [,] [plaintiffs] are hurt
7
Plaintiffs argue (and the district court found) that because the trustee demand exception
contemplates an event of Default, the entire no-action clause only applies to claims predicated on
a Default. We do not agree that the scope of an exception to a rule should necessarily define the
scope of the rule itself.
14
derivatively . . . . and thus should share any remedy they receive on a pari passu
basis with other bondholders.” Id. at *8. Therefore, the claims could only be
properly be brought by the trustee. Id.
The Delaware Chancery Court in Lange also dismissed fraudulent transfer
claims of securityholders, finding that a no-action clause prevented their suit.
2002 WL 2005728, at *5. In that case, plaintiffs were holders of Fairwood
Corporation’s (“Fairwood”) debentures and brought an action against the directors
of Fairwood; Consolidated Furniture Company (“Consolidated”), a subsidiary of
Fairwood; and affiliates of a company that allegedly controlled Fairwood. Id. at
*1. Plaintiffs alleged that defendants had made fraudulent transfers by selling
some subsidiaries of Consolidated at unfairly low prices. Id. at *4. Plaintiffs
acknowledged that their debentures contained a no-action clause but argued that
the clause did not apply to their claims. Id. at *6. The court summarized
Plaintiffs’ argument to be “that the [no-action clause] somehow does not apply to
their claims, because the amended complaint attempts to state fraudulent
conveyance claims and because the complaint alleges that Fairwood and
Consolidated were either insolvent or on the brink of insolvency at all relevant
times.” Id. The court responded that “[n]either of the Debentureholders’
arguments helps them escape the clear import of [the no action-clause.]” Id. It
15
explained that Feldbaum controlled and that “the particular nature of a claim that
is asserted on behalf of the Debentureholders as a class is not determinative of the
applicability of [the no-action clause]; what is determinative is whether the claim
is one with respect to the Indenture or the Debentures themselves.” Id. at *7.
Ernst v. Film Production Corp., 264 N.Y.S. 227 (N.Y. Sup. Ct. 1933)
employed a similar logic. Ernst featured bondholder plaintiffs that—wishing to
set aside allegedly fraudulent conveyances of contracts and property by the issuer
to the defendant—petitioned the court to appoint a receiver of the property at
issue. Id. at 228. Defendants argued that by the terms of the trust indenture,
plaintiffs could not bring suit unless a prior demand had been made upon the
trustee by the holders of a quarter of the outstanding bonds—a condition
analogous to a condition of the trustee demand exception in the instant case. Id.
The court framed the issue as: “If plaintiffs have no capacity to bring an action
under the indenture, the question arises whether under the present form of action
they may obtain a receiver pendente lite[.]” Id. It determined that the plaintiffs’
claim related to the bonds and that plaintiffs were “presuming to speak for all the
bondholders and not for themselves alone.” Id. at 229. Therefore, the court found
that the indenture condition barring suit applied to the action and ultimately denied
plaintiffs’ motion. Id. Courts applying New York law have consistently held, in
16
accordance with the rationale of Feldbaum, Lange, and Ernst, that no-action
clauses bar fraudulent conveyance claims. See, e.g., Enron, 2008 WL 744823, at
*9; McMahan & Co. v. Wherehouse Entm’t, Inc., 859 F. Supp. 743, 749 (S.D.N.Y.
1994), rev’d in part on other grounds, 65 F.3d 1044 (2d Cir. 1995); Victor v.
Riklis, 1992 WL 122911, at *6 (S.D.N.Y. May 15, 1992).
Although courts applying New York law have found no-action clauses
applicable as a general rule, they have been willing to abrogate that rule under one
consistently acknowledged exception: when the trustee, by reason of conflict of
interest or unjustifiable unwillingness, cannot properly pursue a remedy for trust
beneficiaries. See, e.g., CFIP Master Fund, Ltd. v. Citibank, N.A., 738 F. Supp. 2d
450, 477–78 (S.D.N.Y. 2010) (“[I]t is well established under New York law that
where . . . trustees are under a duty to enforce [a] claim and have improperly and
unjustifiably failed to do so, the beneficiaries may bring a suit on behalf of the
trust, analogous to stockholders’ derivative suits on behalf of a corporation.”
(internal quotation marks omitted)) (excusing failure to comply with the no-action
clause where trustee allegedly violated its fiduciary duties); Feldbaum, 1992 WL
119095, at *7 (“I do not mean to imply that courts will apply no-action clauses to
bar claims where misconduct by the trustee is alleged”). Because a standard no-
action clause vests in the trustee all of the securityholders’ rights to bring suit,
17
making the trustee the only path to a remedy, courts have been unwilling to
enforce such clauses when the trustee’s conflicts or irrationality bar that path to
relief. As the Feldbaum court explained:
For the same reason that equity has long recognized that, in some
circumstances, corporate shareholders will be excused from making a
demand to sue upon corporate directors, but will be permitted to sue
in the corporation’s name themselves, bondholders will be excused
from compliance with a no-action provision where they allege
specific facts which if true establish that the trustee itself has
breached its duty under the indenture or is incapable of
disinterestedly performing that duty.
1992 WL 119095, at *7.
Given this established trustee misconduct exception, we find the present
case—involving no allegations of misdeeds by the Trustee—factually
distinguishable from cases in which claims are brought against the trustee.
Therefore, we reject Plaintiffs’ reliance on Howe v. Bank of N.Y. Mellon, 783 F.
Supp. 2d 466 (S.D.N.Y. 2011) and Metropolitan West Asset Management, LLC v.
Magnus Funding, Ltd., 2004 WL 1444868 (S.D.N.Y. June 25, 2004) (“Metro
West”) because both of those cases involved allegations that the trustee had
breached its fiduciary duties. The court in Metro West acknowledged that the
presence of trustee misconduct was a determinative factor in its decision, stating
“Feldbaum . . . is inapplicable because there was no claim in that case that the
Trustee participated in any wrongdoing, as opposed to this case, where such
18
alleged wrongdoing is a central issue.” 2004 WL 1444868, at *5 n.4. Howe relied
explicitly on Metro West in permitting plaintiffs to bring claims against the trustee,
and the court explained it would “not presume that the parties intended to limit the
noteholders’ rights to sue on claims arising out of the Trustee allegedly taking
extra-contractual action or breaching its fiduciary duties to the noteholders.” 783
F. Supp. 2d at 474 (emphasis added). Because courts in the absence of allegations
of trustee misconduct have adhered to the general rule that no-action clauses bar
fraudulent conveyance claims, we find no persuasive reason to deviate from that
rule in the present case.
B.
Second, we must address whether Plaintiffs’ majority ownership of the
notes should serve as grounds to refuse to apply the no-action clause. In New
York, contracts are construed to effectuate their purposes. Bijan Designer for
Men, Inc. v. Fireman’s Fund Ins. Co., 705 N.Y.S.2d 30, 33 (N.Y. App. Div. 2000).
An important purpose of no-action clauses is to “protect against the exercise of
poor judgment by a single bondholder or a small group of bondholders, who might
otherwise bring a suit against the issuer that most bondholders would consider not
to be in their collective economic interest.” Feldbaum, 1992 WL 119095, at *5–6
(reciting rationale for clause stated in Commentaries on Indentures § 5.7 at 232
19
(1971)). Therefore, Plaintiffs urge that “[e]nforcing the no-action clause in the
instant case would not serve the purposes for which it was placed in the
Indenture.” Whitebox Convertible Arbitrage Partners, L.P. v. World Airways, Inc.,
2006 WL 358270, at *4 (N.D. Ga. Feb. 15, 2006).8
There are two problems with this argument urging us to look into the
purposes of the no-action clause. First, “a court must be concerned with what the
parties intended, but only to the extent that they evidenced what they intended by
what they wrote.” Broad v. Rockwell Int’l Corp., 642 F.2d 929, 947 (5th Cir. Apr.
1981) (en banc) (applying New York law) (emphasis added).9 In other words,
“[t]he best evidence of what parties to a written agreement intend is what they say
in their writing. Thus, a written agreement that is complete, clear and
8
Plaintiffs also argue that because Section 6.05 of the indentures gives the majority the
ability to direct the “time, method and place of conducting any proceeding for any remedy
available to the Trustee” and Section 6.06(e) of the indentures gives the majority veto power over
Trustee actions, the majority de facto controls litigation proceedings. Plaintiffs reason that
demanding compliance with the other conditions of the trustee demand exception to the no-
action clause is futile and serves no purpose because Plaintiffs hold ultimate control. However,
Section 6.05 of the indentures also states that “the Trustee may refuse to follow any direction [by
the majority] that conflicts with law or this Indentures or that Trustee determines is unduly
prejudicial to the rights of other Securityholders or would involve the Trustee in personal
liability. . . .” Therefore, the majority’s right to control the manner in which a suit is brought and
to veto suits brought by the Trustee does not equate to empowerment to direct all litigation
decisions; majority ownership alone is not sufficient to eviscerate the need for compliance with
the conditions of the trustee demand exception.
9
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), we
adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to
October 1, 1981.
20
unambiguous on its face must be enforced according to the plain meaning of its
terms.” Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (N.Y. 2002)
(citation and internal quotation marks omitted). Here, the no-action clause’s terms
are absolute: noteholders “may not pursue any remedy with respect to this
Indenture or the Securities” unless they complete the conditions precedent
allowing them to fall within one of the two stated exceptions. It is true that
majority ownership is one of the necessary elements to qualify for the trustee
demand exception to the clause. Yet in addition to majority ownership, the
exception also requires that noteholders (1) give the Trustee notice of a Default,
(2) make a demand on the Trustee to pursue a remedy, (3) offer the Trustee
reasonable security or indemnity, and (4) give the Trustee sixty days to take action
before noteholders pursue remedies independently of the Trustee. Looking at the
unambiguous text of the clause, we see no intent to allow noteholders to fall
within an exception if they have not satisfied all the stated pre-conditions to that
exception.
Second, even if we were to look outside the text of the clause and evaluate
whether its purposes were fulfilled, Plaintiffs’ arguments would remain
unconvincing. Although one purpose of the no-action clause is to deter suits
brought by the minority, other purposes of the clause are to “prevent rash,
21
precipitate, or harassing suits by bondholders who disrupt corporate affairs,” Watts
v. Missouri-Kansas-Texas R.R. Co., 383 F.2d 571, 574 (5th Cir. 1967), and to
protect the issuer from a multiplicity of lawsuits, Quirke v. St. Louis-San
Francisco Ry. Co., 277 F.2d 705, 709 (8th Cir. 1960). Majority ownership offers
no guarantee that those purposes are fulfilled. We conclude that the plain
language of the no-action clause gives no indication that majority ownership in
and of itself is reason to allow noteholders to bring suit when they do not fall
within a stated exception, and an examination of the purposes of the clause
confirms that our conclusion is correct. We therefore reject the “novel proposition
that a party to a contract should be excused from complying with a condition
precedent merely because it was capable of compliance.” McMahan, 859 F. Supp.
at 749 (quoting the magistrate judge’s report and recommendation).
C.
Third, we must address whether it is relevant that CompuCredit made it
impossible for Plaintiffs to comply with one of the conditions of the trustee
demand exception. Plaintiffs argue that because the trustee demand exception
requires noteholders to wait sixty days after making a demand on the trustee and
CompuCredit announced its dividends less than sixty days in advance, Plaintiffs
were estopped from complying with the no-action clause when they sought to
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enjoin the issuance of dividends. The “prevention doctrine,” upon which
Plaintiffs’ argument relies, dictates that a party cannot insist that a condition
precedent be performed when the non-performance was caused by the party itself.
See Bank of N.Y. v. Tyco Int’l Group, S.A., 545 F. Supp. 2d 312, 324 n.81
(S.D.N.Y. 2008). “Under such circumstances, the prevention doctrine will operate
to excuse [a] condition precedent which was wrongfully prevented from occurring
. . . .” Lomaglio Assocs. Inc. v. LBK Mktg. Corp., 892 F. Supp. 89, 93 (S.D.N.Y.
1995) (emphasis added). The “prevention doctrine is substantially related to the
implied covenant of good faith and fair dealing implicit in every contract.” Cauff,
Lippman & Co. v. Apogee Fin. Group, Inc., 807 F. Supp. 1007, 1022 (S.D.N.Y.
1992). However, “the prevention doctrine does not apply where, under the
contract, one party assumes the risk that fulfillment of the condition precedent will
be prevented.” Mobile Commc’ns Corp. of Am. v. MCI Commc’ns Corp., 1985
WL 11574, at *4 (Del. Ch. Aug. 17, 1985); see also Doherty v. Am. Home Prods.
Corp., 2000 WL 777948, at *2 (2d Cir. June 15, 2000).
There are a number of grounds upon which we find the prevention doctrine
inapplicable to the case at hand. First, the rationale behind the doctrine is that:
One who unjustly prevents the performance or the happening of a
condition of his own promissory duty thereby eliminates it as such a
condition. He will not be permitted to take advantage of his own
wrong, and to escape from liability for not rendering his promised
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performance by preventing the happening of the condition on which it
was promised.
Ellenberg Morgan Corp. v. Hard Rock Café Assocs., 500 N.Y.S.2d 696, 699
(N.Y. App. Div. 1986) (quoting 3A Corbin on Contracts § 767, p. 540). Here,
CompuCredit escaped no duty by failing to give sixty-days notice; in fact, the
conditions precedent at issue in this case are not pre-conditions to contractual
duties of either party. Instead, they are conditions allowing Plaintiffs to fall within
an exception to an agreed-upon contractual bar to suits brought by Plaintiffs.
Plaintiffs fail to offer—and we cannot find—any cases to justify extending the
prevention doctrine far beyond its established limits to apply under these
circumstances.
Second, “[t]he key operative language in the definition of the prevention
doctrine is the term ‘wrongfully prevented.’ If . . . defendant’s alleged
‘prevention’ is authorized by the contract, then naturally it does not constitute a
breach and cannot be considered ‘wrongful.’” A.I.C. Ltd. v. Mapco Petroleum Inc.,
711 F. Supp. 1230, 1238 n.24 (D. Del. 1989). Even if the prevention doctrine
were to apply in this case, Section 10.01 of the trust indentures requires
CompuCredit to give only twenty-days notice before it issues a dividend.
CompuCredit gave such notice. Therefore, CompuCredit complied with the terms
of the contract and its act of giving less than sixty-days notice of a dividend was
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not wrongful.
IV.
We find unpersuasive all of the proffered reasons for deviating from the
plain language of the no-action clause barring holders of securities from bringing
any claims “with respect to this Indenture or the Securities.” The clause itself
identifies two exceptions to that rule—the trustee demand exception and the right
to payment exception—and we have identified one judicial exception to the
rule—when the trustee is accused of misconduct. None of these exceptions apply
to the present case, but Plaintiffs urge us to find new exceptions. We find their
arguments unconvincing.
The no-action clause here is not an individualized contract condition
particular to these parties; it is a standard provision present in many trust
indentures. As such, it “must be given a consistent, uniform interpretation.”
Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir.
1982) (discussing “boilerplate” contract language). Such uniform interpretation of
standard contract language ensures effective functioning of our financial markets,
Broad, 642 F.2d at 943, and begets stability, Sharon Steel, 691 F.2d at 1048.
Because we find no persuasive, legally grounded reason to depart from the
established law that no-action clauses are generally applicable, we REVERSE and
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REMAND for dismissal of Plaintiffs’ claims.
REVERSED and REMANDED.
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