When a firm borrows money by selling an issue of bonds or notes to the public, it does so under an "indenture" that sets out the loan terms and creates a trust in favor of the buyers. The indenture also names a trustee to run the trust for the benefit of people who acquire the bonds or notes, and it lists the trustee's rights and duties.

Many such indentures include a "no-action clause", which aims to bar most lawsuits by holders of the debt, leaving the right to sue to protect their interests largely in the hands of the trustee.

The Eleventh Circuit this week ruled on the effect of one such provision. The panel held that the clause required the district court to dismiss a complaint in which holders of a majority (by face amount) of the notes alleged claims under the Georgia Fraudulent Transfer Act against CompuCredit (a sub-prime lender) and its officers and directors.

The court thus rejected the holders' arguments (1) that only CompuCredit (and not the officers and directors) could enforce the no-action clause, (2) that the clause didn't apply because they almost complied with an exception that in some instances allowed holders of a majority of the notes to sue (having failed to follow the literal terms of the exception), and (3) an extra-contractual exception for when a trustee has a conflict of interest in doing its duty did not apply either. Akanthos Capital Mgmt., LLC v. CompuCredit Holdings Corp., No. 11-13227 (11th Cir. Apr. 27, 2012) (applying New York law).

Blawgletter suspects that the holders' status as hedge funds didn't help their cause.

We also note that the hedge funds didn't even try to show that the trustee had a conflict of interest. Because most trustees — banks, by and large — do often have a great many interests, at least some of which may conflict with the interests of debt owners.