NexPoint Diversified Real Estate Trust v. Acis Capital Management, L.P.

Background

NexPoint Diversified Real Estate Trust held notes and equity connected to collateralized loan obligations managed by Acis Capital Management, L.P. NexPoint alleged that Acis, Brigade Capital Management, L.P., Joshua N. Terry, and U.S. Bank, N.A. mismanaged the obligations’ assets, increased expenses, purchased unsuitable or longer-term loans, and allowed failures of portfolio-quality measures. NexPoint alleged that these actions reduced the value of its interests and violated investment-management agreements and an indenture.

NexPoint asserted claims under the Investment Advisers Act and the Trust Indenture Act, as well as state-law claims for breach of fiduciary duty, breach of contract, conversion, and negligence. The defendants and intervenor Highland Capital Management L.P. moved to dismiss.

Investment Advisers Act claims

The court held that the Investment Advisers Act does not provide a private right of action under Section 206. It explained that the Act’s limited private remedy under Section 215 allows rescission and restitution when an investment-advisory contract was made illegally or requires illegal performance.

NexPoint did not dispute that the portfolio-management agreement was legally made and did not require illegal performance. Instead, it argued that later misconduct violating any provision of the Act should be enough to void the agreement. The court rejected that argument, adopted the reasoning of an earlier Southern District of New York decision, and concluded that NexPoint had not sufficiently pleaded an Investment Advisers Act claim against any defendant. The defendants’ motions to dismiss those claims were granted.

The court also stated that the claim against Brigade would fail for the independent reason that Brigade was not a party to the relevant indenture or portfolio-management agreement. The court likewise stated that the claim against Mr. Terry could not proceed under Section 206 because that section has no private right of action.

Claim against U.S. Bank

NexPoint clarified that its only claim against U.S. Bank was for breach of fiduciary duty. The court exercised federal jurisdiction over that claim under the Edge Act, a statute allowing federal jurisdiction over certain disputes involving United States-chartered banks and international financial operations.

The court held that an indenture trustee’s duties are generally limited by the indenture. Before an event of default, the trustee’s duties are especially limited, subject to duties to avoid conflicts of interest and perform basic ministerial tasks with due care. After an event of default, the trustee’s duties expand, but remain limited by the indenture.

The court dismissed the fiduciary-duty claim to the extent it relied on conduct before an event of default. It also held that the indenture expressly provided that failures of certain collateral-quality and coverage tests were not events of default, so those failures could not support the claim.

The indenture further required notice of a material default from a majority of the controlling class before U.S. Bank would owe the expanded duties relied on by NexPoint. NexPoint did not allege that Highland, which the parties did not dispute held the majority of the relevant notes, provided that notice. The court declined to consider a letter NexPoint cited because the letter was not mentioned in the complaint. U.S. Bank’s motion to dismiss the fiduciary-duty claim was granted.

State-law claims and costs

After dismissing the federal claims and the only claim NexPoint pursued against U.S. Bank, the court declined to exercise supplemental jurisdiction—the court’s discretionary authority to hear related state-law claims. The court therefore declined to hear any state-law claims that could be construed from the second amended complaint. The opinion does not state that those claims were dismissed; it states that the court declined supplemental jurisdiction over them.

The court declined to award Acis attorney’s fees or other costs. Each party was ordered to bear its own costs.

Leave to amend and disposition

Judge Woods denied NexPoint leave to amend its Investment Advisers Act claims because amendment would be futile: NexPoint did not attempt to allege that the portfolio-management agreement was illegally made or required illegal performance. Because the court had not considered NexPoint’s state-law claims against defendants other than U.S. Bank, it did not grant leave to amend those claims.

The court granted leave to amend only NexPoint’s claims against U.S. Bank that fell within the court’s Edge Act jurisdiction. Any amended complaint had to be filed by August 22, 2022. The court stated that, if no amended complaint was filed by that date, it would remand the case to state court. In its conclusion, the court stated that the defendants’ and Highland’s motions to dismiss were granted.