Lead Wachovia Bank and holders of Le-Nature's debt are sparring over which court should deal with a temporary restraining order by the bank that blocks the debt holders from suing. The TRO will stop the vulture funds from suing over the debt which was syndicated before the company went bankrupt, but in which the defendants, the debt-holders named in the TRO, bought after Le-Nature's went bankrupt. If the TRO is upheld, it could set a precedent in which firms could take a preemptive punch using laws, in this case North Carolina, which does not allow champerty—a legal term for the re-assignment of the right to sue. New York in the past has ruled that champerty is permissible in Elliott Associates versus Banco de la Nacion and the Republic of Peru.
The latest legal move came last Thursday when the debt holders filed to get the TRO heard in federal court rather than in North Carolina state court. Wachovia, however, will have the opportunity to file a motion to bring it back to state court. Some speculated it could be just legal maneuvering, though it is unclear the exact reason the debt holders' lawyers wanted the location moved. In a filing yesterday, lawyers for the defendants filed a memorandum in support for a motion for dismissal or a transfer to the western district of Pennsylvania.
Wachovia syndicated a $265 million loan to Le-Nature's in September and the company was forced into involuntary bankruptcy after it became known around Nov. 2 it "had engaged in a massive fraud and provided materially misleading financial information," according to the TRO (CIN, 11/13). The defendants named in the TRO that bought into the debt after Nov. 2 include: Harbinger Capital Partners Master Fund I, Aurelius Capital Master, Aurelius Capital Partners, Taconic Opportunity Fund, Schultze Master Fund, UBS Willow Fund, Arrow Distressed Securities Fund, and Latigo Master Fund. Calls to Edward Weisfelner, a lawyer at Brown, Rudnick, Berlack, Israels, the law firm for the defendants, was not returned. Calls to a Wachovia spokeswoman were also not returned.
Some speculated that if Wachovia's TRO stays in place and the creditors are not allowed to sue, this could affect future trading with banks located in the U.S. but outside of New York. For example, one market player said that if some of Wachovia's trades continue to be governed by North Carolina law, dealers may be less willing to trade with them in light of the Le-Nature's outcome. It is unclear how many of Wachovia's trades are governed by North Carolina law and how many are governed by New York law.
