CompuCredit Holdings Corp. v. Akanthos Capital Management, LLC
Docket: Civil Action No. 1:11-CV-117-TCB
Court: District Court, N.D. Georgia; June 17, 2011; Federal District Court
Defendants have filed a motion for judgment on the pleadings and to strike allegations in the complaint, which has been granted by the Court, while the motion to strike is denied as moot. The parties involved include Defendants, who hold approximately seventy percent of convertible senior notes issued by Plaintiff CompuCredit Holdings Corporation in 2005. The notes are categorized into two series: the '2025 notes' maturing in 2025 and the '2085 notes' maturing in 2085.
Two related lawsuits exist between the same parties. In the first, referred to as the 'UFTA litigation,' Defendants alleged that CompuCredit violated the Uniform Fraudulent Transfer Act by planning to issue a substantial dividend while in financial distress, which they claimed was part of a strategy to deplete assets and impair creditor obligations. This lawsuit was transferred to the current Court on March 24, 2010. The second lawsuit, known as the 'antitrust litigation,' was filed shortly after the first and involves CompuCredit suing Defendants for conspiring to inflate the prices of its notes, subsequently transferred to this Court on January 18, 2011.
Defendants previously sought judgment on the pleadings and sanctions under Rule 11, and the Court is now considering the renewed motion for judgment. In December 2009, CompuCredit announced a $25 million dividend and a potential tax-free spinoff, which prompted Defendants to demand retraction and initiate the UFTA litigation. They sought a preliminary injunction against the dividend and spinoff, alleging CompuCredit was insolvent, despite the company reporting substantial equity. The request for a preliminary injunction was denied, with the Court finding that CompuCredit was not insolvent, even in light of conflicting expert testimony.
CompuCredit issued a dividend after a preliminary injunction was denied, prompting Defendants to file an amended complaint to enjoin a planned spinoff and seek damages related to the dividend. Following the dividend issuance on January 28, 2010, CompuCredit conducted a tender offer to repurchase up to $160 million of its outstanding notes, successfully repurchasing about eleven percent of its 2025 notes at fifty percent of face value and ten percent of its 2035 notes at thirty-five percent of face value. Defendants did not participate in this offer, citing the prices as too low, although CompuCredit argued that participating parties were knowledgeable of the notes' fair value.
On January 27, 2010, Defendants' counsel expressed doubts about CompuCredit's ability to continue as a going concern and attached an expert report declaring CompuCredit pro-forma insolvent. In early February, Defendants informed the SEC that CompuCredit was "already insolvent," omitting the district court's contrary finding. In March, Defendants claimed CompuCredit violated indentures to the indenture trustee, a claim not made in court. CompuCredit believes these actions were coercive, aimed at forcing a settlement in the UFTA litigation and inflated note repurchases.
Before a pretrial conference, Defendants demanded CompuCredit repurchase their notes at par, despite market values being significantly lower (53.5% for 2025 notes and 37% for 2035 notes). A representative indicated that they would only accept 65-70% of par. CompuCredit alleges that Defendants' increased holdings of its notes since initiating the UFTA litigation are part of a conspiracy to inflate prices. CompuCredit now claims Defendants' actions violate Section 1 of the Sherman Act, asserting they unreasonably restrained trade by inflating the repurchase price of its notes. The alleged anticompetitive activities include joint demands for par repurchase, communications regarding CompuCredit's financial status, additional note purchases post-litigation initiation, a boycott of the tender offer, and characterizing the UFTA litigation as a sham.
Count II of the complaint does not reference the UFTA litigation or the SEC letter, focusing instead on several actions by the Defendants: their joint demand for CompuCredit to repurchase notes at par, communications with CompuCredit’s auditor and the indenture trustee about CompuCredit’s financial condition, purchases of CompuCredit notes post-UFTA litigation, and an agreement to boycott a January 28, 2010 tender offer. Consequently, CompuCredit seeks a declaratory judgment that Defendants violated the Sherman Act, along with an order for Defendants to tender their notes at the January 28, 2010 prices. Alternatively, CompuCredit requests an injunction against Defendants from coordinating actions related to the pricing of CompuCredit notes or communicating regarding CompuCredit’s financial condition or any breach of indentures.
Legally, a party may move for judgment on the pleadings after the pleadings close but before trial, as per Fed. R. Civ. P. 12(c). This motion is appropriate when no material facts are disputed, allowing judgment based solely on the pleadings. The court accepts factual allegations as true and considers reasonable inferences in the plaintiffs' favor, but does not accept unsupported inferences or legal conclusions disguised as factual allegations. To withstand such a motion, a complaint must present factual allegations that are more than mere labels or conclusions and must provide a plausible claim for relief.
In their defense, the Defendants argue that the Sherman Act does not prohibit creditors from acting jointly to protect their rights or negotiate with a debtor, claiming no cases allow a debtor to sue creditors for allegedly conspiring during negotiations. They cite United Airlines, Inc. v. U.S. Bank, N.A. and Sharon Steel Corp. v. Chase Manhattan Bank, N.A. as precedents where antitrust claims against joint creditor negotiations were dismissed. In contrast, CompuCredit references two Supreme Court cases, Catalano, Inc. v. Target Sales, Inc. and Fortner Enter. Inc. v. U.S. Steel Corp., asserting that these decisions support a debtor's right to bring antitrust claims against creditors. CompuCredit contends that the cited cases differ significantly because it has not breached any indenture terms, is not in bankruptcy, and the Defendants are individual note holders, not indenture trustees.
The Court finds that the collusive activity alleged in CompuCredit's complaint does not breach the Sherman Act. CompuCredit's cited cases, Catalano and Fortner, involved creditors negotiating terms for extending future credit, which differs from the current situation where creditors are acting collectively to collect on existing debts. Catalano involved beer wholesalers who ceased offering short-term credit, thereby eliminating competitive discounts, violating the Sherman Act. Fortner dealt with a lender conditioning loans on the purchase of a home from its parent company, constituting a tying agreement. Both cases are deemed inapplicable here.
The Court notes that the Second and Seventh Circuits have previously rejected antitrust claims in similar scenarios. The Seventh Circuit in United Airlines dismissed an antitrust claim against lessors who coordinated to collect debts, stating that cooperation to recover amounts owed under competitive contracts does not violate antitrust laws. The Second Circuit characterized a debtor's antitrust claims against creditors negotiating jointly as nearly frivolous, emphasizing that such cooperation by creditors can lower borrowing costs and benefit consumers. Thus, the Court aligns with these views, concluding that the creditors' actions in this case do not constitute a violation of the Sherman Act.
The concerted actions of the indenture trustees in Sharon Steel did not have an anti-competitive purpose or effect harmful to consumer welfare, thus failing to establish an antitrust claim under the Sherman Act. CompuCredit's complaint alleges that Defendants' collective actions unreasonably restrained trade by inflating the price for extinguishing debt through Note purchases. This claim aligns with the principles from United Airlines and Sharon Steel, where similar collective actions aimed to maximize amounts due under competitively determined contracts were deemed permissible under antitrust laws.
CompuCredit's attempts to distinguish its case based on the absence of a default or bankruptcy, as well as the nature of the parties involved (individual note holders versus indenture trustees), lack substantive merit. The Court noted that collective actions to collect amounts due, regardless of default status, are not inherently anti-competitive. Additionally, the fact that the parties in previous cases were indenture trustees does not imply that individual investors should face antitrust claims for acting independently.
The Court concluded that the Sherman Act does not apply to Defendants' conduct, rendering further arguments unnecessary. Consequently, Defendants' motion for judgment on the pleadings was granted, while their motion to strike certain allegations was deemed moot. The case was directed to be closed, although the Court will maintain jurisdiction to consider potential sanctions against CompuCredit and its counsel under Rule 11. The factual allegations in the complaint were accepted as true for this motion.
