Anti-Suit Injunctions

Anticipating a lawsuit by the Fund Defendants based upon news articles and other 'public statements,' the Lender executed a shock and awe preventive strike by commencing the State Court Anti-Suit Action and obtaining an ex parte TRO to bar the Fund Defendants from filing tort claims against the Lender. The Lender sought refuge in its home state to take advantage of North Carolina's champetry law, which the Lender maintains bars the assignment of tort claims. The Fund Defendants opposed the preliminary injunction and filed a motion to dismiss for lack of jurisdiction. They also removed the State Court Anti-Injunction Action to the U.S. District Court for the Western District of North Carolina and sought dismissal or an order remanding the action to the U.S. District Court for the Western District of Pennsylvania, the district where the Bankruptcy Case is pending. The preliminary injunction has been granted by the State Court. The District Court refused jurisdiction and remanded back to the State Court.

Pending a full trial in North Carolina Superior Court, the Fund Defendants, and all others 'acting in active concert or participation with them,' as well
as future assignees of claims, are enjoined from pursuing virtually all tort claims (ranging from breach of fiduciary duty to racketeering) against Lender 'with respect to [Lender's] role relating to the Credit Agreement.' The Preliminary Injunction Order provides that the Fund Defendants can only assert their tort claim against the Lender in the Anti-Injunction Action as counterclaims. Finally, the court reserved decision as to whether personal jurisdiction had been obtained over the Fund Defendants.

Findings of Fact

The State Court granted the Preliminary Injunction with 18 findings of fact and nine conclusions of law. What the court deemed of particular importance is of interest. The Findings of Fact include the following:

• The Fund Defendants purchased their claims after Le-Nature's fraud became widely known and after the Bankruptcy Case was commenced.
• The Commitment Transfer Supple- ments, by which the Fund Defend- ants 'became lenders' (the documentation entered into with the Lender after taking the assignment of the claim from the assignor), which Supplements explicitly provided for assignment of all tort claims provided for application of North Carolina law, as did the original Credit Agreement.
• The LSTA forms by which the Fund Defendants took assignment of their claims, but to which Lender was not a party, provided for application of New York law and 'purport to override and contrary terms of the Supplements.'
• 'The Fund Defendants have taken actions making it clear that the Fund Defendants intend to assert and pursue tort claims, which the Fund Defendants assert have been assigned to them directly (or indirectly through intermediate assignments) by other members of the syndicate, against Wachovia '
• 'Unless this Court enters this Preliminary Injunction to ensure that the Fund Defendants assert any assigned Personal Tort Claims against Plaintiffs only in this action, it will be impractical for the Plaintiffs to obtain the determination they seek [that the assignment of the tort claims is impermissible] in a reasonable and orderly manner consistent with the ends of justice. Further, unless this Court enters this Preliminary Injunction to ensure that any person or entity to which any Fund Defendant assigns any such Personal Tort Claims is bound by this Order and consents to be joined in this action, it will be impractical for the Plaintiffs to obtain the determination they seek in a reasonable and orderly manner consistent with the interests of justice.'
• The controversy presented for resolution in this action should be fully and solely resolved in this Court to prevent the Plaintiffs from being subjected to a multiplicity of lawsuits concerning the effectiveness and enforceability of the assignments and any future assignments of Personal Tort Claims against the Plaintiffs arising from or relating to the Credit Agreement. Any other proceedings instituted concerning these issues would be duplicative, wasteful, vexatious, and harassing. Injunctive relief should be entered here, on a preliminary basis, to prevent duplicative litigation, which might produce inconsistent results.'

Conclusions of Law

The nine Conclusions of Law in the Preliminary Injunction are without citation to case law. There is only citation to the North Carolina preliminary injunction statute and its companion rule of civil procedure. The court concluded that: 'Anti-suit injunctions have been recognized as appropriate to address a threat to a court's jurisdiction, to prevent the evasion of important public policy, to prevent a multiplicity of suits, or to protect a party from vexatious or harassing litigation. Such an injunction is warranted here.'

Finally, the court also concluded that limiting the right of the Fund Defendants to bring their claims against Lender only as counter claims in the Anti-Injunction Case 'will not injure [Lender] and the Fund Defendants are entitled to assert their legal claims in some court of law.'

Champerty

At the core of Lender's preemptive strike is the legal doctrine of champerty and an apparent home court advantage, both of which date back centuries. Generally, champerty is a defense that prevents the assignment of claims made for the sole or primary purpose of pursuing litigation. Although the applicability of champetry to the facts at hand is hotly contested by the parties, it is beyond doubt that North Carolina interprets and applies the doctrine far more broadly than does New York, the other possible choice of law for the controversy, which the Lender asserted 'has no meaningful limitations on champerty and does not void assignment of tort claims.' Thus, the linchpin of the preemptive strike is the willingness of the North Carolina court to conclude: first, that, for the purposes of the Preliminary Injunction at least, it had personal jurisdiction over the Fund Defendants; and, second, that North Carolina law did in fact apply. Interestingly, in making the latter conclusion, the court chose to honor the choice of law provision contained in Lender-drafted Credit Agreement and the transfer Supplement between Lender and each Fund Defendant, rather than the standard LSTA assignment form between the assignors and each Fund Defendant as assignee, which contained New York as the choice of law.

Conclusion

Forum shopping is certainly not a new tactic to seek advantage in litigation. However, the prospect of pre-emptive, jurisdiction-grabbing lawsuits will not sit well with holders in the secondary market. If the ruling stands, it will likely become a more widely used strategy for parties looking for home court advantage to protect themselves against all manner of prospective plaintiffs claims. Thus, parties must carefully consider which facilities and applicable choice of law provisions they invest in.

The broad interpretation of champetry, the broad exercise of personal jurisdiction and rejection of the primacy of the universal LSTA assignment form, would seem to undermine the strong public policy in favor of the free alienability of property necessary to our financial markets. This policy has contributed significant and generally accepted benefits to the credit markets. Indeed, it would seem that originating lenders have been primary beneficiaries of the secondary market, making this case even more interesting. Moreover, this tactic may have the unintended consequence of encouraging more litigation and creating a 'race to the courthouse' mentality. Aggrieved parties may be forced to sue early and fast to beat the anticipated home court, pre-emptive strike. If this were to occur, parties in bankruptcy situations may need to consider jurisdictional provisions in DIP financing or similar orders.

Given this reality, it must asked if this case is an aberrational struggle brought on by the specific facts of this case, or is it a harbinger of an institutional rift between originating banks and secondary market participants.

Adam H. Friedman, a member of this newsletter's Board of Editors, is a partner and Fredrick J. Levy is of counsel at Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York.

In a case of significance to the secondary loan and distressed claim market, a North Carolina state court has entered an 'anti-suit injunction' barring a group of secondary, secured debt holders (the 'Fund Defendants'), from commencing any actions against Wachovia Bank. The case, Wachovia Bank, NA and Wachovia Capital Partners, LLC v. Harbinger Capital Partners, et al, Civ. Action No. 07-CVS-5097, is pending in the General Court of Justice, Superior Court Division (Mecklenburg, NC) (the 'State Court Anti-Suit Action'), but its parties and the underlying facts arise from the Chapter 11 case of In re Le-Nature, Inc., pending in United States Bankruptcy Court, Western District of Pennsylvania (the 'Bankruptcy Case').

The allegations in the Bankruptcy Case are lurid and filled with tales of fraudulent actions. Certain facts are clear. Shortly after Le-Nature and the Lender entered into the senior credit facility, fraud was discovered by court-appointed crisis managers and the bankruptcy followed soon thereafter.

In the Bankruptcy Case, the Fund Defendants and other secondary market purchasers not sued by the Lender formed an Ad Hoc Committee to, among other things, investigate claims available to the debtor's estate, including possible claims against the Lender. The Lender was a possible target because it, or its affiliates, had also acted as Le-Nature's financial adviser, underwriter for unsecured notes of the debtor, and investment banker to the debtor regarding a sale process. This relationship led the Fund Defendants to label the Lender as a 'trusted adviser' to the Le-Nature management team and an architect of the debtor's capital structure. The Fund Defendants maintain that no decision was made to commence any action, including against the Lender.

Anticipating a lawsuit by the Fund Defendants based upon news articles and other 'public statements,' the Lender executed a shock and awe preventive strike by commencing the State Court Anti-Suit Action and obtaining an ex parte TRO to bar the Fund Defendants from filing tort claims against the Lender. The Lender sought refuge in its home state to take advantage of North Carolina's champetry law, which the Lender maintains bars the assignment of tort claims. The Fund Defendants opposed the preliminary injunction and filed a motion to dismiss for lack of jurisdiction. They also removed the State Court Anti-Injunction Action to the U.S. District Court for the Western District of North Carolina and sought dismissal or an order remanding the action to the U.S. District Court for the Western District of Pennsylvania, the district where the Bankruptcy Case is pending. The preliminary injunction has been granted by the State Court. The District Court refused jurisdiction and remanded back to the State Court.

Pending a full trial in North Carolina Superior Court, the Fund Defendants, and all others 'acting in active concert or participation with them,' as well
as future assignees of claims, are enjoined from pursuing virtually all tort claims (ranging from breach of fiduciary duty to racketeering) against Lender 'with respect to [Lender's] role relating to the Credit Agreement.' The Preliminary Injunction Order provides that the Fund Defendants can only assert their tort claim against the Lender in the Anti-Injunction Action as counterclaims. Finally, the court reserved decision as to whether personal jurisdiction had been obtained over the Fund Defendants.

Findings of Fact

The State Court granted the Preliminary Injunction with 18 findings of fact and nine conclusions of law. What the court deemed of particular importance is of interest. The Findings of Fact include the following:

• The Fund Defendants purchased their claims after Le-Nature's fraud became widely known and after the Bankruptcy Case was commenced.
• The Commitment Transfer Supple- ments, by which the Fund Defend- ants 'became lenders' (the documentation entered into with the Lender after taking the assignment of the claim from the assignor), which Supplements explicitly provided for assignment of all tort claims provided for application of North Carolina law, as did the original Credit Agreement.
• The LSTA forms by which the Fund Defendants took assignment of their claims, but to which Lender was not a party, provided for application of New York law and 'purport to override and contrary terms of the Supplements.'
• 'The Fund Defendants have taken actions making it clear that the Fund Defendants intend to assert and pursue tort claims, which the Fund Defendants assert have been assigned to them directly (or indirectly through intermediate assignments) by other members of the syndicate, against Wachovia '
• 'Unless this Court enters this Preliminary Injunction to ensure that the Fund Defendants assert any assigned Personal Tort Claims against Plaintiffs only in this action, it will be impractical for the Plaintiffs to obtain the determination they seek [that the assignment of the tort claims is impermissible] in a reasonable and orderly manner consistent with the ends of justice. Further, unless this Court enters this Preliminary Injunction to ensure that any person or entity to which any Fund Defendant assigns any such Personal Tort Claims is bound by this Order and consents to be joined in this action, it will be impractical for the Plaintiffs to obtain the determination they seek in a reasonable and orderly manner consistent with the interests of justice.'
• The controversy presented for resolution in this action should be fully and solely resolved in this Court to prevent the Plaintiffs from being subjected to a multiplicity of lawsuits concerning the effectiveness and enforceability of the assignments and any future assignments of Personal Tort Claims against the Plaintiffs arising from or relating to the Credit Agreement. Any other proceedings instituted concerning these issues would be duplicative, wasteful, vexatious, and harassing. Injunctive relief should be entered here, on a preliminary basis, to prevent duplicative litigation, which might produce inconsistent results.'

Conclusions of Law

The nine Conclusions of Law in the Preliminary Injunction are without citation to case law. There is only citation to the North Carolina preliminary injunction statute and its companion rule of civil procedure. The court concluded that: 'Anti-suit injunctions have been recognized as appropriate to address a threat to a court's jurisdiction, to prevent the evasion of important public policy, to prevent a multiplicity of suits, or to protect a party from vexatious or harassing litigation. Such an injunction is warranted here.'

Finally, the court also concluded that limiting the right of the Fund Defendants to bring their claims against Lender only as counter claims in the Anti-Injunction Case 'will not injure [Lender] and the Fund Defendants are entitled to assert their legal claims in some court of law.'

Champerty

At the core of Lender's preemptive strike is the legal doctrine of champerty and an apparent home court advantage, both of which date back centuries. Generally, champerty is a defense that prevents the assignment of claims made for the sole or primary purpose of pursuing litigation. Although the applicability of champetry to the facts at hand is hotly contested by the parties, it is beyond doubt that North Carolina interprets and applies the doctrine far more broadly than does New York, the other possible choice of law for the controversy, which the Lender asserted 'has no meaningful limitations on champerty and does not void assignment of tort claims.' Thus, the linchpin of the preemptive strike is the willingness of the North Carolina court to conclude: first, that, for the purposes of the Preliminary Injunction at least, it had personal jurisdiction over the Fund Defendants; and, second, that North Carolina law did in fact apply. Interestingly, in making the latter conclusion, the court chose to honor the choice of law provision contained in Lender-drafted Credit Agreement and the transfer Supplement between Lender and each Fund Defendant, rather than the standard LSTA assignment form between the assignors and each Fund Defendant as assignee, which contained New York as the choice of law.

Conclusion

Forum shopping is certainly not a new tactic to seek advantage in litigation. However, the prospect of pre-emptive, jurisdiction-grabbing lawsuits will not sit well with holders in the secondary market. If the ruling stands, it will likely become a more widely used strategy for parties looking for home court advantage to protect themselves against all manner of prospective plaintiffs claims. Thus, parties must carefully consider which facilities and applicable choice of law provisions they invest in.

The broad interpretation of champetry, the broad exercise of personal jurisdiction and rejection of the primacy of the universal LSTA assignment form, would seem to undermine the strong public policy in favor of the free alienability of property necessary to our financial markets. This policy has contributed significant and generally accepted benefits to the credit markets. Indeed, it would seem that originating lenders have been primary beneficiaries of the secondary market, making this case even more interesting. Moreover, this tactic may have the unintended consequence of encouraging more litigation and creating a 'race to the courthouse' mentality. Aggrieved parties may be forced to sue early and fast to beat the anticipated home court, pre-emptive strike. If this were to occur, parties in bankruptcy situations may need to consider jurisdictional provisions in DIP financing or similar orders.

Given this reality, it must asked if this case is an aberrational struggle brought on by the specific facts of this case, or is it a harbinger of an institutional rift between originating banks and secondary market participants.

Adam H. Friedman, a member of this newsletter's Board of Editors, is a partner and Fredrick J. Levy is of counsel at Olshan Grundman Frome Rosenzweig & Wolosky LLP in New York.