80 F.4th 413
2d Cir.2023Background
- NexPoint, a subordinated noteholder in a CLO, sued Acis (portfolio manager), Joshua Terry, Brigade (subadvisor), and U.S. Bank, alleging advisers breached fiduciary duties under IAA §206 and contractual duties under the PMA and Indenture by buying poor-quality collateral, mis-timing trades, and charging excessive expenses.
- The Indenture and PMA required portfolio-quality tests (e.g., WAL and WARF) and limited reimbursable expenses; NexPoint alleges purchases and expense allocations violated those contract terms and fiduciary duties.
- NexPoint sought rescission under IAA §215(b) of: (1) agreements between Acis and third parties in transactions violating the IAA, and (2) the Advisers’ rights under the PMA and Indenture.
- The District Court dismissed the §215(b) claim for failure to allege that any contract was illegally made or that contract performance requires illegal conduct; it declined supplemental jurisdiction over state-law claims.
- On appeal, the Second Circuit affirmed, holding §215(b) allows rescission only where performing a contractual duty requires conduct prohibited by the IAA (not merely where a party performs a lawful contract in an unlawful way).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §215(b) permits rescission where a contract is lawful on its face but was performed in violation of the IAA (e.g., breaches of §206 during performance). | NexPoint: §215(b)’s phrase “performance of which involves” is broad; rescission available when contractual performance was carried out in violation of the IAA even if the contract does not require illegality. | Defendants: §215(b) targets contracts whose formation or performance requires unlawful conduct; rescission is not a vehicle to convert every §206 violation into a contract voidability claim. | The court held §215(b) applies only when performing a contractual duty requires conduct prohibited by the IAA; mere unlawful performance of otherwise lawful contractual duties is insufficient. |
| Whether §215(b) requires the contract to be facially illegal or merely that actual performance would be illegal under the circumstances. | NexPoint: No facial-illegality requirement; rescission may follow if, in practice, performance violated the IAA. | Defendants: §215(b) does not demand ex ante facial illegality, but performance must, under the actual circumstances, require prohibited conduct. | The court clarified there is no requirement of facial illegality, but rescission requires that performance (as actually due) requires unlawful conduct. |
Key Cases Cited
- Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11 (1979) (§215 implies a private remedy of rescission; §206 does not create an implied private damages action)
- SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) (context for the IAA’s purpose — regulating adviser conduct)
- Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030 (2d Cir. 1992) (recognizes §215 claims may be premised on any IAA provision but must be tethered to contract formation or performance)
- Oxford Univ. Bank v. Lansuppe Feeder, LLC, 933 F.3d 99 (2d Cir. 2019) (ICA §47(b) — closely analogous contract-focused rescission interpretation)
- EdgePoint Capital Holdings, LLC v. Apothecare Pharmacy, LLC, 6 F.4th 50 (1st Cir. 2021) (Exchange Act §29(b) decisions holding contract need not be facially illegal but performance must require unlawful conduct under circumstances)
- Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006) (§29(b) jurisprudence requiring that contract performance be unlawful to permit rescission)