23

- 154 Chatham Capital Holdings, Inc. v. Conru 

## In the 

# United States Court of Appeals **For the Second Circuit**

_________________ August Term 2 0 2 3 Argued: October 4 , 202 3 Decided: January 31 , 2024 Docket No. 2 3

- 154
C HATHAM C APITAL H OLDINGS , I NC
. , C HATHAM C APITAL M ANAGEMENT IV, LLC , Plaintiff s - Appell ant s ,
v. A NDREW B. C ONRU , as Trustee for the Andrew B. Conru Trust , F RIEND F INDER N ETWORKS , I NC
. , I NTERACTIVE N ETWORK , I NC
. , Defendant s - Appell ee s , J OHN and J ANE D OES 1

- 5 , Defendants

.

_________________ Before: J ACOBS , W ESLEY , and R OBINSON , Circuit Judge s .

_________________ Plaintiffs

- Appellants , two investment firms , hold debt securities issued by Defendant

- Appellant FriendFinder Networks , Inc. , and a n affiliate

. FriendFinder issued the securities through an exchange offer

. Several years after the exchange offer , FriendFinder’s founder , acting through a trust in his own name , reduce d the securities’ payment terms under the governing I ndenture

. According to the2 Plaintiffs

- Appellants , FriendFinder’s founder sought to force the m to sell their stake back to FriendFinder at a discount. The Plaintiffs

- Appellants sued in state court, bringing common - law contractual claims related to the I ndenture . After the case was removed to federal court, the Plaintiffs

- Appellants sought leave to amend their complaint to add federal claims, contend ing primarily that the Trust Indenture Act (“TIA”), 15 U.S.C. § § 77aaa et seq. , protect ed the I ndenture and prevented FriendFinder and its founder from changing the payment terms without the Plaintiffs

- Appellants’ consent
. The United States District Court for the Southern District of New York (Cote, J .) disagreed, dismissed the case, and denied leave to amend to add claims under the TIA. T he TIA does not protect this I ndenture because the underlying exchange offer was a private placement under the Securities Act of 1933 , 15 U.S.C. §§ 77a et seq . The TIA , as relevant here, does not apply to private placements

. Absent the TIA’s protections, a “ n o - a ction ” c lause in the I ndenture bars the Plaintiffs

Appellants’ lawsuit. We therefore AFFIRM the district court’s judgment of dismissal

.

_________________ S TEVEN M. K AYMAN ( Stacy L. Ceslowitz , on the brief ) , Rottenberg Lipman Rich, P.C. , New York, NY , for Plaintiffs

- Appellants

. L AWRENCE R OBBINS ( Jeffrey R. Wang, Alexandra Elenowitz

- Hess , on the brief ) , Friedman Kaplan Seiler Adelman & Robbins LLP , New York, NY, for Defendants

- Appellees

.

_________________3 W ESLEY , Circuit Judge :
T h is case turns up on the scope of the Trust Indenture Act (“TIA”) , one of
our federal securities laws. “After rampant abuses in the securities industry led to the 1929 stock market crash and the Great Depression, Congress enacted a series of laws to ensure that ‘the highest ethical standards prevail in every facet of the securities industry.’” Kokesh v. SEC , 581 U.S. 455, 457

– 58 (2017) (quoting SEC v. Cap. Gains Rsch. Bureau, Inc. , 375 U.S. 180, 186

– 187 (1963)). The initial law wa s the Securities Act of 1933

. See 15 U.S.C. §§ 77a et seq. The Securities Act imposes registration requirements for public offerings of a broad array of securities. Id. § 77e

. Conversely , the Securities Act exempts p rivate offerings

— specifically, “transactions by an issuer not involving any public offering”

— from registration

. Id. § 77d(a)(2)

. This “Private Placement Exemption” recognizes that sophisticated private investors generally need fewer protections and can “fend for themselves” in the market. SEC v. Ralston Purina Co. , 346 U.S. 119, 125 (1953). 1

1 Although the Securities Act and the TIA are codified in Title 15 of the United States Code, courts and practitioners commonly refer to the original sections of each standalone securities law. Thus, the Private Placement Exemption, codified at 15 U.S.C. § 77d(a)(2) , is also known as Section 4(a)(2) of the Securities Act

.4 T he TIA joined the securities laws six years later , in 1939

. See 15 U.S.C. §§ 77aaa et seq. As a supplement to the Securities Act, the TIA address es problems particular to debt securities (for example, bonds or notes)

. Because debt securities provide fixed rates of payment, they are typically governed by a contract

— referred to in the industry as an “ indenture ”

— with a trustee who oversees the
securities. Before the TIA was passed , conflicts of interest between trustees and issuing companies had harmed investors in debt markets

. See id. § 77bbb

. T he TIA guards against such conflicts by providing indenture s with special protections.
For instance , an indenture will often purport to contain a “no

- action” clause which
blocks investors from suing the trustee or the issuing company for breaching the
indenture

. I f the TIA applies, it invalidates that no - action clause and guarantees those investors’ right to sue. See id. § 77ppp(b); Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp. , 846 F.3d 1, 7 (2d Cir. 2017) (citing Cruden v. Bank of New York , 957 F.2d 961, 96 7

– 6 8 (2d Cir. 1992))

. The TIA, however, does not protect every indenture. Rather, it mirrors the Securities Act’s general structure and invokes the Private Placement Exemption : It does not protect private offerings of debt securities. See 15 U.S.C. § 77ddd(b).
T he TIA’s scope is limited to indentures which govern securities offered publicly

.5 Here, p ursuant to an I ndenture, the Plaintiffs

- Appellants ( together, “Chatham”) acquired debt securities issued by FriendFinder Networks, Inc., and

an affiliated company Interactive Network, Inc. (together, “FriendFinder”). Chatham acquired its securities through an “exchange offer,” by which it exchanged preexisting FriendFinder notes for the new securities. Several years later, FriendFinde r’s founder gained voting control over the Indenture and
reduce d the securities’ payment terms

— allegedly, to strong

- arm Chatham in to sell ing its own stake back to FriendFinder at a steep discount

. The primary question is whether the TIA applies , invalidates the I ndenture’s no - action c lause , and guarantee s Chatham’s right to sue to remedy the devalued securities

. The TIA does not apply

. T he underlying exchange offer was a private

— rather than public

— offering limited to preexisting FriendFinder investors. The

no - action clause bars Chatham’s lawsuit because Chatham has not met the clause’s prerequisites to sue, and the TIA does not invalidate the no

- action clause. We
therefore affirm the district court’s judgment of dismissal

.6 BACKGROUND The Exchange Offer
. Chatham is a pair of affiliated private investment firm s . Some years ago, it acquired debt notes , issued by FriendFinder, worth millions of dollars

. Those original notes had a fixed maturity date and interest rate. The key transaction

— the exchange offer

— took place several years later. In

essence, FriendFinder sought to convince Chatham and other investors to
restructure their existing investments

. Upon accepting the exchange offer, each
investor would swap their original notes for a combination of new debt securities (with an extended maturity date) and FriendFinder stock. Only investor s who already h e ld notes with FriendFinder were eligible for the exchange offer . The general public could not participate.
Investors in the exchange offer fell into two categories under the Securities
Act

. The first category comprised domestic investors located “in the United States” who would complete “a private transaction in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2)
thereof

. . . .” Joint App’x at 250. The second category comprised investors located “outside the United States” who would complete “offshore transactions in7 compliance with Regulation S under the Securities Act.” Id. 2 T hese categories

— domestic and offshore

— matter because an investor’s location can implicate
different registration and filing requirements under the securities laws

. Chatham accepted the exchange offer

. It receive d its new securities t hrough

a domestic transaction. Several other investors receive d their new securities

t hrough an offshore transaction. Regardless of their location s , though, every investor had to acknowledge in the offering materials that their new debt securities were being “privately placed” with them

— such that the transaction did “not involv[e] a public offering.” Id. The Indenture.
Chatham’s debt securities are governed by the I ndenture. It contains two provisions which define a security holder’s ability to sue
.

2 The S ecurities and Exchange Commission (“S EC ”) has general authority to promulgate rules and regulations to carry out the provisions of the Securities Act. See 15 U.S.C. § 77s (a) . Regulation S is one such regulation. As discussed below, Regulation S sets forth categories of offshore transactions and explains that the SEC will not enforce the Securities Act’s registration requirements for those transactions

. In other words, Regulation S provides safe harbors from enforcement.8 First, the “no

- action” clause ( Section 5.7) limit s a holder’s ability to sue in
court
. 3 It notes that holders like Chatham “may not pursue any remedy with respect to this Indenture or the S ecurities unless ” five conditions are met. Id. at 358 (emphasis added). The first is that the holder must provide written notice to the
I ndenture’s trustee that an “Event of Default” is ongoing

. 4 The I ndenture lists
situations which would constitute an “Event of Default ,” including FriendFinder’s failure to pay principal, premium, or interest on the securities within 10 days of

3 As relevant here, the no - action clause read s: SECTION 5.7. Limitation on Suits . Subject to Section 5.8, a Holder may not pursue any remedy with respect to this Indenture or the Securities unless : (a) s uch Holder has previously given to the Trustee written notice stating that an Event of Default is continuing; (b) Holders of at least 25% in principal amount of the outstanding Securities have requested that the Trustee pursue the remedy; (c) s uch Holders have offered to the Trustee security or indemnity reasonably satisfactory to it against any loss, liability or expense; (d) t he Trustee has not complied with such request within 60 days after receipt of the request and the offer of security or indemnity; and (e) t he Required Holders have not given the Trustee a direction that, in the opinion of the Trustee, is inconsistent with such request during such 60

- day period. . . . Joint App’x at 358 (emphasis added).

4 The I ndenture’s trustee is not a party in this case and is not alleged to have participated in any wrongdoing.9 their due date. The parties agree that no “Event of Default” has occurred , and that
neither the no

- action clause’s first condition nor any of the other four have been
satisfied

. Second, the “payment carve

- out” clause ( Section 5.8 ) mak es clear that
holder s like Chatham can always “bring suit for the enforcement” of their

“ right

. . . to receive payment of principal of, premium (if any), or interest on the
S ecurities ” on or after those payments’ due dates

. Id. H older s may sue to enforce this payment right without needing to comply with the conditions in the n o - a ction

c lause. The Dispute. Several years after Chatham completed the exchange offer , another investor
increased its stake to become the Indenture ’s “Supermajority Holder

. ”
A Supermajority Holder is an investor who holds more th an 67% of the entire issuance. Critically, the Supermajority Holder can vote to amend the I ndenture and change the securities’ core payment terms ( their interest rate and maturity
date ) without consent from Chatham or the other minority holders. The Supermajority Holder who emerged was none other than a trust in the name of FriendFinder’s founder, Andrew Conru (the “Conru Trust”)

. The Conru10 Trust had bought up securities from other holders to increase its stake to around
85% of the entire issuance

. Wielding its newfound Supermajority Holder power , the Conru Trust allegedly began coordinating with FriendFinder to strong

- arm other investors

. In particular, Chatham claims that FriendFinder and its founder devalue d the
securities to try and coerce Chatham into selling its own stake at a steep discount.
The coercion allegedly worked as follows. Soon after the Conru Trust gained Supermajority Holder control, FriendFinder approached Chatham and offered to buy back its securities at 70% of their principal amount. Chatham
declined the offer. A few w eeks later , the Supermajority Holder voted to amend
the I ndenture (the “Amendment”). T he Amendment devalued the securities by reducing their core payment terms; it cut their interest rate in half and extended their maturity date by a decade

. Once the Amendment took effect , FriendFinder
made an even lower offer to buy back Chatham’s securities

— this time, for 65% of their principal amount. Chatham again declined.
Chatham then filed this action in New York state court against FriendFinder
and the Conru Trust, contending that the Amendment was invalid

. Chatham brought claims for breach of the I ndenture and breach of the covenant of good11 faith and fair dealing. It also sought a declaratory judgment that the Amendment

wa s unenforceable. After removing the case to federal court, FriendFinder and the Conru Trust
moved to dismiss the case, while Chatham moved to amend its complaint to reframe its contractual c laims under the TIA . The district court (Cote, J. ) dismiss ed
the case , reasoning that the I ndenture’s no - action clause barred Chatham’s lawsuit
and that amending the complaint would be futile because the TIA did not apply

. Chatham appeal s the dismissal

. DISCUSSION 5 The No
- Action Clause Bars this Lawsuit. At the outset, Chatham ’s lawsuit face s a contractual roadblock : T he
I ndenture’s n o - a ction c lause. “ Such no

- action clauses frequently are included in indentures to limit suits arising from those agreements.” McMahan & Co. v.

5 Our standard of review is well

- established. “We review the grant of a motion to dismiss de novo , accepting as true all factual claims in the complaint and drawing all reasonable inferences in the plaintiff ’ s favor.” Fat Brands Inc. v. Ramjeet , 75 F.4th 118, 125 (2d Cir. 2023). In so doing, we “may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint.” DiFolco v. MSNBC Cable L.L.C. , 622 F.3d 104, 111 (2d Cir. 2010). We likewise review de novo the district court ’ s interpretation of the TIA and its application to an indenture. See Marblegate , 846 F.3d at 6.12 Wherehouse Ent., Inc. , 65 F.3d 1044, 1050 (2d Cir. 1995). They are “strictly
construed” under New York law, 6 but “have been enforced in a variety of contexts
in both federal and state courts.” Id. ( quoting Cruden , 957 F.2d at 968). Here, the district court properly enforced the no

- action clause.
T he n o - a ction c lause prevents a holder like Chatham from seeking “any remedy” regarding the debt securities “ unless ” it satisf ies the five pre - suit conditions

. First , Chatham must provide notice to the I ndenture’s trustee that an
“Event of Default” has occurred. Given that there was no “Event of Default , ”
Chatham concedes that it did not

— and could not

— provide proper notice. Accordingly, Chatham has not satisfied the no - action clause’s conditions and presently cannot pursue “any remedy.” Chatham attempts to flip this condition to its advantage. It argues that the
lawsuit bar is not trigger ed until an “Event of Default” has occur red . In Chatham’s view, until a default occurs, there is nothing to notify the I ndenture’s trustee about

. T he no

- action clause would thus allow Chatham , in its view, to sue over dispute s that do not rise to the level of a default

.

6 The parties agree that the I ndenture is governed by New York law.13 Chatham misread s the no - action clause . The clause’s first part sets the status
quo: Chatham “may not pursue any remedy with respect to this Indenture or the
Securities

. ” The second part identifies the exception to the status quo : Chatham
cannot sue unless five requirements are met, including notice of an “Event of
Default.” T he five subparts are not preconditions before the entire c lause take s effect ; they are preconditions (they follow the word “unless”) before Chatham can

sue. See Walnut Place LLC v. Countrywide Home Loans, Inc. , 948 N.Y.S.2d 580, 581 ( 1st Dep’t 2012) (holding that plaintiffs were not “excused from complying with the ‘Event of Default’ provision because of the alleged impossibility of showing
such an event ” ); ACE Sec. Corp. v. DB Struct ured Prod., Inc. , 977 N.Y.S.2d 229, 231 (1st Dep’t 2013) (no

- action clause precluded claim when basis of claim was not a “default”), aff ’ d , 25 N.Y.3d 581 (2015). In other words, the preconditions do not turn the ability to sue off; they are required to turn that ability on. The no - action clause applies to this lawsuit by its own terms
. Nor are we persuaded that Chatham can invoke the payment carve

- out from the no

- action clause

. The payment carve

- out guarantees holders the right to

sue to enforce “payment” of the securities’ principal and interest if those amounts are not paid by their due dates

. Chatham says that its lawsuit seeks to enforc e the14 larger payments it was receiv ing before the securities were devalued

. But
Chatham does not allege that FriendFinder has failed to pay the principal and
interest at the new (lesser) rates authorized by the Amendment . In fact, the
I ndenture defines the non

- payment of principal or interest as an “Event of
Default , ” which Chatham agrees has not occurred. What Chatham really challenges is not missed payments, but the validity of
the Amendment to the I ndenture itself . We h ave explained , however, that claims
which “assert breaches of the Trust Indenture Act and the I ndenture[]” are “not”
claims “for non

- payment of principal or interest as such” that would fall within
this carve - out. Cruden , 957 F.2d at 968 ; see also Emmet & Co. v. Cath. Health E

. , 951 N.Y.S.2d 846 , 851 (N.Y. Sup. Ct. 2012) ( reasoning that construing the payment

carve - out to “allow all claims relating to the value of the bond ” would “ swallow
the no

- action clause”), aff ’ d , 980 N.Y.S.2d 762 ( 1st Dep’t 2014)

. The payment carve

out does not save Chatham’s lawsuit

. The TIA Does Not Invalidate the No
- Action Clause
. Because the no

- action clause applies on its face , Chatham’s lawsuit is barred
unless the TIA invalidates th at no - action clause. We conclude that it does not . T he
TIA does not apply ; the Indenture’s own provisions govern.15 Recall that t he TIA does not target private offerings

— only public ones. When offerings fall within the Private Placement Exemption, they are exempt from the Securities Act’s registration requirements, and are likewise exempt from the TIA’s protections. Here, the offering documents attached to Chatham’s pleadings make clear that the exchange offer was a completely private offering

. And the fact that the offering was made partially offshore does not affect its private nature

. i. The E xchange O ffer Falls Within the Private Placement Exemption
. FriendFinder’s exchange offer

— to Chatham and to every other offeree

— falls within the Private Placement Exemption, which encompasses any “transactions by an issuer not involving any public offering.” 15 U.S.C. § 77d(a)(2). In general, “ a limited distribution to highly sophisticated investors, rather than a general distribution to the public, is not a public offering.” SEC v. Platforms Wireless Int ’ l Corp. , 617 F.3d 1072, 1090

– 91 (9th Cir. 2010). This exchange
offer involved a limited distribution : It wa s made only to preexisting FriendFinder
investors who held preexisting FriendFinder notes. B efore offeree s could participate, e ach had to warrant that it was a n experienced investor who had
received sufficient financial and other information from FriendFinder to make an16 informed investment decision . Chatham , for example, style s itself as a private
investment firm “concentrating on investing in lower to middle

- market companies with sustainable cash flow from operations.” Joint App’x at 219. The Private Placement Exemption is designed for investors , like Chatham , who are able “to
fend for themselves.” Ralston Purina , 346 U.S. at 125. Chatham does not dispute any of this for domestic investors like itself , but speculates that offshore investors , outside of the United States, might have accepted their securities via a public offering

. Yet Chatham concedes that it has alleged no facts suggesting that any offshore investor actually did so. On the contrary, the offering documents make clear that the entire exchange offer was private , regardless of an offeree’s location

. Those documents required every investor

— including every offshore investor

— to warrant multiple times that their
securities were going to be privately placed with them. Because this offering falls under the Private Placement Exemption , the TIA ’s protections do not apply.
ii. Regulation S D oes N ot Displace the Private Placement Exemption
. Finally, Chatham maintain s that the TIA can still protect private offering s which are made (at least partially) offshore , because offshore regulations trigger17 the TIA even when the Private Placement Exemption does not

. We disagree . For purposes of the TIA, the offering’s private nature is what controls

. Regulation S governs offshore offerings. See 17 C.F.R. §§ 230.90 1 et seq. Under Regulation S, an issuer who makes an offshore offering need not file a registration statement with the SEC , just as an issuer who makes a private offering
need not do so

. Despite their overlapping goal s , Regulation S provides safe
harbors from registration requirements as a matter of SEC enforcement policy,
while the Private Placement Exemption waives them as a matter of statute

. Given this difference , however slight, between safe harbors and statutory exemptions , i t is possible that the TIA could reach some securities offered offshore under Regulation S

. 7 After all, the TIA applies to debt securit y offerings unless one of its exemptions applies, and it lists no exemption for offshore offerings

. See 15 U.S.C. § 77ddd. Seizing on this silence, Chatham reasons that the TIA must

7 Put differently , the TIA might reach offshore offerings made under Regulation S when they are public

. T he SEC itself has refrained from taking TIA enforcement action against Regulation S offerings

. See SEC, Offshore Offers and Sales , 55 Fed. Reg. 18306, 18320 (May 2, 1990) (“Regulation S Release”). T he SEC’s non - enforcement policy might bear on public offerings, but the Private Placement Exemption already provides the answer for offshore private offerings.18 apply to the entire exchange offer

— even if the entire offer was private

— because it was made partially offshore under a regulation that could implicate the TIA

. That argument misses the mark. W hether an offering is public or private does not depend on whether it occurs inside or outside the United States . T he TIA already provides a complete exemption for private offerings ; it need not provide an additional exemption for offshore offerings under Regulation S

. Chatham cites no authority indicating that Regulation S somehow displaces the plain text of the
TIA and the Private Placement Exemption

. 8 Again, the Private Placement Exemption encompasses “transactions by an issuer not involving any public offering.” 15 U.S.C. § 77d(a)(2). That language contains no geographic limitation treating private offerings any differently whether they are domestic or offshore.

8 Even if the TIA was unclear and we looked to SEC guidance, “ our holding is consistent with the SEC’s position” that the Private Placement Exemption overrides Regulation S

. Ret

. Bd. of the Policemen ’ s Annuity & Ben. Fund v. Bank of N.Y. Mellon , 775 F.3d 154, 169

– 70 (2d Cir. 2014)

. In its release accompanying Regulation S, the SEC confirmed that “[r]eliance on one of the safe harbors does not affect the availability of any exemption from the Securities Act registration requirements upon which a person may be able to rely.” Regulation S Release, 55 Fed. Reg. at 18308

. Likewise, the SEC reiterated that Regulation S does not alter the TIA’s baseline rule: The TIA “applies generally” to debt securities “unless an exemption is available.” Id. at 18320

. Here, an exemption is available for private offerings.19 We therefore hold that the I ndenture is exempt from the TIA’s protections

. Those protections do not apply to private offerings like the underlying exchange
offer made here

. Accordingly , we agree with the district court that the no

- action clause bars Chatham’s lawsuit , and that it would be futile for Chatham to amend
its complaint to add claims under the TIA.
CONCLUSION
We have considered Chatham’s remaining arguments and find them to be without merit. Accordingly, we AFFIRM the judgment of the district court

.