620 F.Supp.3d 36
S.D.N.Y.2022Background:
- Nexpoint, a noteholder in Acis-managed CLOs (notably ACIS-6), sued Acis (portfolio manager), its president Joshua Terry, sub-adviser Brigade, and indenture trustee U.S. Bank for alleged portfolio mismanagement that reduced CLO value.
- Allegations: Acis (under Terry) bought longer-term and lower-quality loans, increased expenses, caused failing WAL/WARF scores, and engaged Brigade in delegated advisory/back-office roles; U.S. Bank allegedly permitted these actions.
- Plaintiff asserted federal claims under the Investment Advisers Act (IAA) and Trust Indenture Act and state-law claims (breach of fiduciary duty, breach of contract, conversion, negligence).
- Court held (1) no private right of action under IAA §206 (Transamerica), and §215 permits rescission only where a contract was illegally made or requires illegal performance; Plaintiff did not allege either; claims against Acis, Brigade, and Terry under the IAA dismissed.
- U.S. Bank fiduciary-duty claim dismissed: trustee duties are defined by the indenture, no Event of Default as defined occurred (collateral-quality test failures expressly not Events of Default), and Plaintiff did not plead required notice from the Majority of the Controlling Class.
- Court declined supplemental jurisdiction over remaining state-law claims, dismissed the federal case, denied fees, and granted limited leave to amend only as to U.S. Bank claims (Edge Act jurisdiction), with a filing deadline noted in the opinion.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a private plaintiff may sue under IAA §206 | §206 claims lie against advisers for misconduct | TAMA bars any private right under §206 | Dismissed — no private right under §206 (Transamerica controls) |
| Scope of relief under IAA §215 (voiding contracts) | §215 allows rescission for any adviser violation of the IAA (not just illegal contracts) | §215 rescission limited to contracts made illegally or requiring illegal performance | Dismissed — §215 limited to contracts illegally made or requiring illegal performance; PMA not alleged to be illegal |
| Whether non-party sub-adviser (Brigade) or individual (Terry) can be sued under §215 | Brigade/Terry are liable for adviser misconduct and §215 relief | §215 rescission is available only against parties to the advisory contract; Brigade not party; §206 has no private right against Terry | Dismissed — Brigade not a party to PMA/Indenture; Terry not subject to private §206 claim |
| Fiduciary duty of indenture trustee (U.S. Bank) pre- and post-Event of Default | U.S. Bank failed to enforce indenture protections, allowed collateral-test failures, and thus breached fiduciary duties | Trustee’s duties are limited by indenture; collateral-quality failures are not Events of Default; trustee acts upon notice by Majority of Controlling Class | Dismissed — duties limited by indenture; alleged collateral-test failures are not Events of Default; no Majority notice pleaded |
| Supplemental jurisdiction over state-law claims | Federal court should retain and adjudicate all claims | Court should decline supplemental jurisdiction after dismissing federal claims | Court declined to exercise supplemental jurisdiction and dismissed remaining claims |
| Leave to amend | Plaintiff should be allowed to replead federal and state claims | Amendment futile for IAA claims absent allegations of illegal formation/performance | Limited leave granted only to amend U.S. Bank claims; IAA amendment denied as futile |
Key Cases Cited
- Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979) (no private right of action under §206 of the Investment Advisers Act)
- Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030 (2d Cir. 1992) (§215 rescission and restitution are the sole private remedies under the Advisers Act)
- In re Evergreen Mut. Funds Fee Litig., 423 F. Supp. 2d 249 (S.D.N.Y. 2006) (district-court discussion of §215 scope; treated as non-controlling/dicta here)
- Oxford Univ. Bank v. Lansuppe Feeder, LLC, 933 F.3d 99 (2d Cir. 2019) (companion statute interpretation supports narrow reading of statutory rescission remedies)
- Beck v. Manufacturers Hanover Trust Co., 632 N.Y.S.2d 520 (App. Div. 1995) (after an Event of Default, an indenture trustee’s obligations more closely resemble ordinary fiduciary duties)
- Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162 (S.D.N.Y. 2011) (pre-Event of Default trustee duties are limited to indenture terms)
- Royal Park Invs. SA/NV v. HSBC Bank USA, Nat'l Ass'n, 109 F. Supp. 3d 587 (S.D.N.Y. 2015) (post-default trustee duties expand but remain constrained by the indenture)