Antitrust Law Daily Wrap Up, ANTITRUST—11th Cir.: Res judicata bars appeal of debt issuer’s antitrust claims against noteholders, (Oct 29, 2013)

By Tobias J. Gillett, J.D., LL.M.

A debt issuer’s appeal of the dismissal of its antitrust counterclaims against holders of its notes was barred by the doctrine of res judicata because the counterclaims were identical to claims in a previously-dismissed lawsuit, the U.S. Court of Appeals in Atlanta has ruled (Akanthos Capital Management, LLC v. Atlanticus Holdings Corp., October 28, 2013, Per Curiam). Circuit Judge William H. Pryor, Jr. wrote a special concurrence, contending that the noteholders’ collective offer to sell back the debt to the issuer was procompetitive and not a per se violation of the Sherman Act.

In 2005, CompuCredit, now Atlanticus Holdings Corporation, issued two series of convertible senior notes, 70 percent of which were purchased by 21 hedge funds on the secondary market. In 2009, the noteholders sued to stop Atlanticus’ announced plans to issue a dividend and spin off its microloan business on the ground that the planned actions would constitute fraudulent asset transfers that would render Atlanticus insolvent. Atlanticus issued the dividend after the noteholders failed to obtain a preliminary injunction. Atlanticus then offered to repurchase some of its notes before they matured. However, some of the noteholders declined the offer and instead collectively offered to sell back the notes at par value, an amount higher than that at which they were trading on the secondary market.

Atlanticus filed suit against the noteholders, alleging that they had committed a per se violation of the Sherman Act by conspiring to force Atlanticus to repurchase its notes at inflated prices. Atlanticus alleged that the noteholders’ refusal of the tender offer was a “group boycott,” and that the joint offer to sell the notes was “price fixing.” Atlanticus also incorporated by reference the complaint in that lawsuit in its answer to the noteholders’ complaint, which the district court construed as counterclaims. The district court then dismissed the complaint in CompuCredit Holdings Corp. v. Akanthos Capital Mgmt., LLC, 916 F.Supp.2d 1326 (N.D. Ga. 2011) and the counterclaims in the present case for the same reasons. The appeals court denied Atlanticus’ motion to consolidate the appeals, and instead stayed the present action. The en banc court ultimately dismissed the appeal (CompuCredit Holdings Corp. v. Akanthos Capital Mgmt., LLC, 677 F.3d 1042 (11th Cir. 2012)), without an opinion because the court was evenly divided.

Res judicata. The court concluded that the doctrine of res judicata barred Atlanticus from pursuing its appeal in the present case. The noteholders did not waive the defense because they raised it at the earliest opportunity. Although the noteholders’ reply to the counterclaims did not use the term “res judicata,” it stated that the district court must dismiss the counterclaims because it planned to dismiss the antitrust lawsuit. The noteholders then raised the res judicata defense as soon as the en banc court dismissed the other lawsuit, and the stay on the present appeal was lifted. Even if the noteholders had not raised the defense, the court would have raised it sua sponte because Atlanticus had “already fully and fairly litigated the identical complaint,” and raising the res judicata issue would serve “the public interest in avoiding judicial waste and inconsistent judgments.”

The court declined to award fees and costs for pursuing a frivolous appeal, noting that Atlanticus had attempted to consolidate the appeals, but the court had denied its motion. Atlanticus’ failure to voluntarily dismiss its appeal after the en banc decision “should not subject it to paying fees and costs,” according to the court.

Special concurrence. In a special concurrence, Circuit Judge William H. Pryor, Jr., who served on both the panel that dismissed Atlanticus’ appeal in the antitrust lawsuit and on the en banc court that affirmed that appeal by a divided vote, wrote to express his continuing view that collective negotiation by noteholders with an issuer of debt “is not per se illegal because it is procompetitive.” Atlanticus attempted to distinguish decisions of the Second and Seventh Circuits that found collective action by creditors to secure outstanding debt to be procompetitive on the ground that its notes were actively traded in the secondary market. Pryor observed that Atlanticus’ argument failed because (1) “[a]s between these parties, the notes were not for sale on the secondary market; they were in the hands of the noteholders,” and the noteholders did not have “to compete against one another to ensure that the debt they purchased will be repaid,” and (2) “the group of noteholders did not distort the secondary market because they did not act exclusively as a group; any individual noteholder could leave the group and individually resell its debt to Atlanticus or sell it on the secondary market.”

“Atlanticus cannot be both the debt issuer and a buyer in the secondary market where its notes are bought and sold,” according to Pryor. Instead, Atlanticus and the noteholders were in a preexisting creditor-debtor relationship, under which the noteholders had rights they could exercise against Atlanticus. The competition had occurred at the time when the debt was purchased on the secondary market; the noteholders’ later cooperation in an effort to collect as much of the amounts due as possible was not “the sort of activity with which the antitrust laws are concerned.”

Moreover, the collective negotiations did not distort the secondary market “[b]ecause each noteholder was free to accept the tender offer, resell the notes to Atlanticus on individually negotiated terms, sell the notes on the secondary market, or hold the notes until they matured,” in Pryor’s view. Instead, the noteholders’ collective activity to obtain the maximum repayment on the debt they purchased was procompetitive, because it gave the debt holders “an incentive to keep the debtor solvent because the value of their investment in the debt depends on the debtor’s ability to pay its debts as they mature.” The ability of individual debt holders to abandon the group and resell their debt to the debtor acted as a check on the collective demands of the group, preventing them from pushing the debtor toward insolvency. In addition, allowing debt holders to work together to obtain maximum repayment would permit debt issuers to negotiate lower interest rates for future debt sales, thus making the credit market cheaper for debtors.

The case is No. 12-13467.

Attorneys: Karen B. Bragman (Arnall Golden & Gregory, LLP) for Akanthos Capital Management, LLC and CNH CA Master Account, L.P. Paul D. Clement (Bancroft, PLLC), Christopher William Madel (Robins Kaplan Miller & Ciresi, LLP), and Thomas B. Bosch (Troutman Sanders, LLP) for Atlanticus Holdings Corp.

Companies: Akanthos Capital Management, LLC; CNH CA Master Account, L.P.; Atlanticus Holdings Corp.

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