AVENUE CAPITAL MANAGEMENT II, L.P., a Delaware limited partnership; AVENUE INTERNATIONAL MASTER, L.P., a Cayman Islands exempted limited partnership; AVENUE INVESTMENTS, L.P., a Delaware limited partnership; AVENUE SPECIAL SITUATIONS FUND VI (MASTER), L.P., a Delaware limited partnership; MANAGED ACCOUNTS MASTER FUND SERVICES-MAP10, a sub-trust of an umbrella unit trust constituted by a trust deed governed by the laws of Ireland; AVENUE-CDP GLOBAL OPPORTUNITIES FUND, L.P., a Cayman Islands exempted limited liability partnership; AVENUE SPECIAL OPPORTUNITIES CO-INVESTMENT FUND I, L.P., a Delaware limited partnership; AVENUE SPECIAL OPPORTUNITIES FUND I, L.P., a Delaware limited partnership; DRAWBRIDGE SPECIAL OPPORTUNITIES FUND L.P., a Delaware limited partnership; DRAWBRIDGE SPECIAL OPPORTUNITIES FUND LTD, a Cayman Islands company; FCI HOLDINGS I LTD, a Cayman Islands company; FCI HOLDINGS II LTD, a Cayman Islands company; FCOF II UB SECURITIES LLC, a Delaware limited liability company; FCOF UB INVESTMENTS LLC, a Delaware limited liability company; FTS SIP L.P., a Jersey limited partnership; PANGAEA CLO 2007-1 LTD, a Cayman Islands company; SARGAS CLO I LTD, a Cayman Islands company, WORDEN MASTER FUND II L.P., a Cayman Islands exempted limited partnership; WORDEN MASTER FUND L.P., a Cayman Islands exempted limited partnership, Plaintiffs-Appellants,
RICHARD F. SCHADEN, an individual; RICHARD E. SCHADEN, an individual; FREDERICK H. SCHADEN, an individual; GREG MACDONALD, an individual; DENNIS SMYTHE, an individual; ANDREW R. LEE, an individual; PATRICK E. MEYERS, an individual; JOHN M. MOORE, an individual; THOMAS RYAN, an individual; CONSUMER CAPITAL PARTNERS LLC, a Delaware limited liability company a/k/a Cervantes Capital LLC, Defendants-Appellees.
from the United States District Court for the District of
Colorado (D.C. No. 1:14-CV-02031-PAB-KLM)
Heinke, Akin Gump Strauss Hauer & Feld LLP, Los Angeles,
California (Jeffery A. Dailey, Akin Gump Strauss Hauer &
Feld LLP, Philadelphia, Pennsylvania, Jessica M. Weisel, Akin
Gump Strauss Hauer & Feld LLP, Los Angeles, California,
Stephen M. Baldini, Akin Gump Strauss Hauer & Feld, LLP,
New York, NY, and Allen L. Lanstra, Skadden, Arps, Slate,
Meagher & Flom, Los Angeles, California, with him on the
briefs) for Plaintiffs-Appellants.
Nathaniel P. Garrett, Jones Day, San Francisco, California
(Amanda K. Rice, Jones Day, San Francisco, California,
Timothy R. Beyer, Bryan Cave, Denver, Colorado, Bruce S.
Bennett and Christopher Lovrien, Jones Day, Los Angeles,
California, with him on the brief) for Defendants-Appellees.
LUCERO, BALDOCK, and BACHARACH, Circuit Judges.
BACHARACH, Circuit Judge.
securities-fraud case arises out of a transaction to
restructure Quiznos's debt. In this transaction, multiple
investment funds ("Avenue" and
"Fortress") purchased equity in Quiznos. After
Quiznos's financial condition plummeted, Avenue and
Fortress sued former Quiznos managers and officers, claiming
that they had fraudulently misrepresented Quiznos's
financial condition and invoking § 10(b) of the
Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5.
The district court dismissed the causes of action for
securities fraud based on failure to state a valid
1934 Act's definition of "security" includes an
investment contract, stock, or instrument commonly known as a
"security." 15 U.S.C. § 78c(a)(10). In
district court, Avenue and Fortress argued that the
transaction involved investment contracts, triggering the
1934 Act and Rule 10b-5. The district court rejected this
argument, reasoning in part that the transaction had given
Avenue and Fortress control over Quiznos. Ultimately, the
district court dismissed the securities-fraud causes of
action, concluding that Avenue and Fortress had failed to
identify facts showing that their newly acquired interests in
Quiznos constituted investment contracts.
Issues and Conclusions
and Fortress challenge the district court's conclusion on
three grounds, arguing that the transaction involved (1)
investment contracts, (2) stock, and (3) instruments commonly
known as securities. We reject each argument: The transaction
did not involve investment contracts, and Avenue and Fortress
failed to properly preserve their current arguments
characterizing the interests as stock or instruments commonly
known as securities.
We engage in de novo review.
district court ruled that the causes of action for securities
fraud had failed to state a valid claim. In addressing this
ruling, we engage in de novo review. Slater v. A.G.
Edwards & Sons, Inc., 719 F.3d 1190, 1196 (10th Cir.
survive the motion to dismiss, Avenue and Fortress had to
plead enough facts to create a facially plausible claim.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). In
applying this standard, we accept the truth of the
complaint's well-pleaded factual allegations. Cty. of
Santa Fe v. Pub. Serv. Co. of N.M., 311 F.3d 1031, 1034
(10th Cir. 2002). These factual allegations include not only
the statements in the complaint but also the documents
referenced in the complaint that are central to the claims.
GFF Corp. v. Associated Wholesale Grocers, Inc., 130
F.3d 1381, 1384 (10th Cir. 1997). Thus, we rely on
(1) the facts alleged in the complaint and (2) the central
documents referenced in the complaint.
Quiznos restructured its debt after experiencing a sharp
complaint and referenced documents show that Quiznos had
borrowed heavily before its business sharply declined. From
2007 to 2011, Quiznos lost roughly 3, 000 franchise
restaurants and profitability plunged.
this plunge, Quiznos could no longer satisfy its loan
covenants. As a result, Avenue, Fortress, and others could
foreclose on collateral, call in debt, or accelerate
payments. To avoid a calamity, Quiznos restructured its debt.
With the restructuring of the debt, Avenue and Fortress
gained control over Quiznos.
restructuring took place through a transaction involving
Quiznos, Avenue, Fortress, and others. This transaction made
Avenue and Fortress members of a manager-managed
limited-liability company that operated Quiznos. Avenue
acquired about 70% of the LLC's shares, and Fortress
acquired about 10% of the shares. In exchange, Avenue pumped
$150 million into Quiznos and Avenue and Fortress reduced
roughly 80% of the LLC's shares, Avenue and Fortress
collectively obtained the power to amend the LLC agreement
however they wished. In addition, the LLC agreement empowered
Avenue to appoint seven managers (one of whom would serve as
the chairperson of the board) and Fortress to appoint one
manager. Avenue and Fortress could also remove the managers
that they had appointed. The appointed managers would select
the Chief Executive Officer, who would serve ...