Wachovia Bank and holders of Le-Nature's debt are sparring over which court should deal with a temporary restraining order filed by the bank blocking the debt holders from suing Wachovia. As first reported on CIN's Web site Friday morning, if the hedge funds are kept from suing, it could change the standard in the market and the way state laws are applied. Wachovia is claiming the transfer of debt was champertous--a legal term for the re-assignment of the right to sue--but as part of their strategy, vulture funds often invest in distressed debt with the intent to sue.
The TRO would stop the vulture funds from suing over the debt, which was syndicated before the company went bankrupt, but which the defendants, the debt holders named in the TRO, bought after Le-Nature's went bankrupt. In the past, the New York Circuit Court ruled that trade litigation claims connected to loans do not violate champerty laws, according to Elliott Associates v. Banco de la Nacion and the Republic of Peru.
According to an affidavit filed by Wachovia, since the credit agreement is governed by the state of North Carolina, the transfer of the loans must also be interpreted by North Carolina laws. Wachovia is also alleging that, under North Carolina law, transfers of litigation rights, including litigation rights connected to loan transfers, are champertous and unenforceable. However, the underlying transfer documents, the Loan Syndication and Trade Association's purchase and sale agreements, are governed by New York law where transfers of litigation rights in this context are recognized by the courts. An LSTA official declined comment.
Last Thursday, lawyers for the defendants filed a memorandum in support of a motion for dismissal or a transfer to the western district of Pennsylvania. Le-Nature's is headquartered in Pennsylvania, but according to the filing, if Le-Nature's does not provide a full recovery, the defendants will seek further recovery through litigation against a third party. A ruling on whether the defendants can hold tort claims against Wachovia will have a direct impact on the extent to which it exclusively looks to Le-Nature's estate for a recovery. Also, because the bankruptcy proceedings took place in Pennsylvania, the defendants' filing said the district court will already have familiarity with the proceedings.
"The attempt to remove action to the federal court does not affect Wachovia's intent to continue to pursue the matter. Because this is pending litigation we have no further comment on the matter," said a Wachovia spokeswoman
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 (CIN, 11/13) it "had engaged in a massive fraud and provided materially misleading financial information," according to the TRO. 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. Eric Lloyd, co-head of leveraged finance at Wachovia, did not return calls.