Private Credit Litigation Update: Defenses in Investment Company Act Cases

The number of litigations targeting private credit managers and business development companies or “BDCs”—the investment companies through which investors can access private credit assets—has continued to increase over the last quarter. Since O’Melveny’s last update on the topic in May 2026, cases have more than doubled in number.

All of the cases remain in early stages, but we now have insight into defense arguments emerging in some of the cases alleging violations of Section 36(b) of the Investment Company Act of 1940 (the “ICA”), the provision plaintiffs are using to challenge what they claim are disproportionate fees by credit managers. 

Background on the Cases 

In both Siegel v. Ares Capital Management LLC (S.D.N.Y.) and Delman v. Blue Owl Credit Advisors LLC (S.D.N.Y.), plaintiffs claim that private credit managers have violated Section 36(b) of the ICA by allegedly charging “excessive fees” to the BDCs they manage. In particular, they allege that the manager’s dual role creates a conflict of interest: on the one hand, the manager serves as adviser to the BDC, earning compensation based in part on the asset values of the BDC’s portfolio; on the other hand, it serves as the BDC’s “valuation designee,” responsible for determining the fair value of the portfolio from which its compensation derives. Plaintiffs argue that the managers are motivated to inflate portfolio valuations based on that alleged conflict. 

Plaintiffs also attack the incentive fees credit managers receive, which they say are based on income and capital gains.  In the case of investments with a deferred interest feature—such as debt instruments with pay-in-kind (“PIK”) interest—that incentive fee allegedly includes accrued income that the BDC may never receive. Plaintiffs claim that these fee arrangements allegedly result in excessive fees bearing no reasonable relationship to the value of the services provided. 

The plaintiff in Delman alleges that the defendant credit adviser collected the following fees over the last five years from the BDC it advised—representing a 47% increase in total fees from 2021 to 2025:

Similarly, the plaintiff in Siegel alleges that the defendant credit adviser collected the following fees from the BDC it advised over the last five years—representing a 53% increase in total fees over that period. These fees allegedly included a capital gains incentive fee payable annually in arrears equal to 20% of cumulative realized capital gains from the date of the BDC’s IPO, net of cumulative realized capital losses and unrealized capital depreciation:

Defense Arguments and Themes 

Several defense arguments have begun to emerge:

• No Private Right of Action for Valuation Claims. The defendants contend that the ICA delegates exclusive enforcement authority over valuation issues to the Securities and Exchange Commission. They characterize plaintiffs’ allegations that the investment advisers allegedly charged excessive fees to BDCs by inflating the value of the BDCs’ assets as valuation claims rather than excessive fee claims. They argue that since Section 36(b) focuses on policing the outer bounds of permissible fee structures and not challenging the valuation of securities, a private right of action under the ICA is not available.
• Failure to Meet Gartenberg Factors. The defendants also contend that the plaintiffs do not satisfy the factors for showing excessive fees that the United States Court of Appeals for the Second Circuit enumerated in Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir. 1982), and the United States Supreme Court endorsed in Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010).  In particular, the defendants argue that the plaintiffs fail to allege any specific deficiency in the nature and quality of the services the investment advisers provided to the BDCs, and effectively concede that the advisers’ fees fall within the range considered typical in the industry.
• No Valuation Impropriety. The defendants argue that even if plaintiffs’ overvaluation theory were cognizable under ICA Section 36(b), the plaintiffs do not adequately allege facts showing that the adviser failed to properly value the BDC’s assets. SEC Rule 2a-5 establishes process-based requirements for making fair value determinations of securities for which market quotations are not readily available. Public disclosures by BDCs describe a multi-step valuation process under which valuations are sourced from independent third parties, overseen by an independent board, and verified by the BDC’s independent auditor. The defendants contend that this publicly-disclosed process defeats the plaintiffs’ valuation allegations and that plaintiffs rely too heavily on generalized media coverage of the private credit industry and fail to specify any deficiency in the advisers’ valuation process.
• Allegations of Conflict of Interest Are Insufficient. Finally, the defendants argue that any alleged conflict of interest, standing alone, does not establish that the valuations must be overstated. Courts have long recognized that the mere showing of a conflict of interest alone is insufficient to plead a claim under Section 36(b). That principle is especially applicable here, the defendants maintain, because the advisers assumed the role of valuation designee under SEC Rule 2a-5. That rule provides that a BDC’s board may delegate performance of fair value determinations to a “valuation designee” and requires the BDC’s investment adviser to serve as valuation designee in that situation.  The defendants emphasize that the rule reflects a considered judgment by the SEC that takes into account investment adviser-conflict risk.

Conclusion 

The defense arguments in Siegel and Delman provide an early outline of potential bases for dismissal of ICA Section 36(b) claims challenging BDC portfolio valuation. We will continue to monitor these cases as the courts begin to rule on pending motions to dismiss, and rulings may help clarify the viability of “excessive fee” theories under Section 36(b) and could have implications for similar claims.  

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Matthew W. Close, an O’Melveny partner licensed to practice law in California; Pamela A. Miller, an O’Melveny partner licensed to practice law in New York; Meaghan VerGow, an O’Melveny partner licensed to practice law in the District of Columbia and New York; Lauren M. Wagner, an O’Melveny partner licensed to practice law in New York; and Craig McAllister, an O’Melveny counsel licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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