June 18, 2026  ·  United States District Court for the Southern District of New York, No. 1:26-cv-05183

By David Brunk, civil litigation attorney

Read the complaint

Siegel v. Blue Owl and Related Case Highlight Adviser Fee Dispute in Software Lending Sector

Two federal lawsuits filed in 2026 against affiliates of Blue Owl Capital Inc. (NYSE: OWL) have been assigned to the same judge in the Southern District of New York, setting up what may become the most significant test of investment adviser fiduciary duty law in the business development company sector in nearly a decade. An initial pretrial conference is scheduled for September 10, 2026, before Judge Katherine Polk Failla. The two cases present a coordinated legal theory: that Blue Owl's advisory subsidiaries extracted excessive fees from their respective funds by collecting cash compensation tied to income and asset values that may never be realized by investors.

The Two Cases

The first case, Delman v. Blue Owl Credit Advisors LLC, No. 1:26-cv-03468 (S.D.N.Y., filed April 27, 2026), targets Blue Owl Capital Corporation (NYSE: OBDC), the second-largest externally managed publicly traded BDC in the United States. Plaintiff Richard Delman, an OBDC stockholder, brings the action derivatively on behalf of the fund against Blue Owl Credit Advisors LLC, the fund's external investment adviser. OBDC held $17.2 billion in assets across 234 portfolio companies as of December 31, 2025. Total advisory fees paid to the defendant rose from $282.5 million in 2021 to $414.4 million in 2025, an increase of 47 percent, while the fund's assets grew only 30 percent over the same period.

The second case, Siegel v. Blue Owl Technology Credit Advisors LLC, No. 1:26-cv-05183 (S.D.N.Y., filed June 18, 2026), targets Blue Owl Technology Finance Corp. (NYSE: OTF), a BDC focused on software and technology company lending. Plaintiffs Martin Siegel and Thomas Kelly bring the action derivatively on behalf of OTF against Blue Owl Technology Credit Advisors LLC, a separate Blue Owl advisory subsidiary. OTF held $14.1 billion in assets across 203 portfolio companies as of March 31, 2026, with approximately 70 to 80 percent of its portfolio concentrated in software and technology. Advisory fees paid to the Siegel defendant rose from $95 million in 2021 to $276 million in 2025, an increase of 191 percent, while fund assets grew 134 percent over the same period, much of which came from a March 2025 merger with an affiliated fund whose portfolio overlapped 84 percent with OTF's existing holdings.

On June 22, 2026, the Siegel case was referred to Judge Failla as possibly related to Delman, and on June 25, 2026, it was formally accepted as related and associated with the Delman docket. The consolidated cases are now scheduled for a joint telephonic pretrial conference on September 10, 2026 at 11:00 a.m.

The Legal Framework: Section 36(b) and the Gartenberg Standard

Both complaints are brought under Section 36(b) of the Investment Company Act of 1940, which imposes a fiduciary duty on investment advisers of registered investment companies with respect to their receipt of compensation. A violation of Section 36(b) occurs when an adviser charges a fee that is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Jones v. Harris Associates L.P., 559 U.S. 335, 344 (2010), affirming the six-factor analytical framework established in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982).

Section 36(b) actions are derivative actions brought by shareholders on behalf of the fund. Recovery, if any, goes to the fund, not to individual plaintiffs. Damages are limited to the period beginning one year before the complaint filing date. The Delman damages window opens approximately April 27, 2025; Siegel's opens approximately June 18, 2025.

The Delman complaint adds a second count under Section 47(b) of the ICA, which renders contracts made in violation of the ICA subject to rescission. If the advisory fee structure violates Section 36(b), Delman argues, the entire Investment Advisory Agreement is subject to rescission, not merely one year of damages. Siegel seeks similar equitable relief including rescission.

The only published federal decision applying Section 36(b) to a BDC before 2026 is Paskowitz v. Prospect Capital Management LP, No. 16-cv-6988, 2017 WL 319239 (S.D.N.Y. Jan. 24, 2017), which dismissed a complaint that alleged only above-average fee rates. Both 2026 complaints attempt to move beyond Paskowitz by identifying a specific structural mechanism that explains why the fees fall outside what arm's-length bargaining would have produced.

The Central Theory: Fees on Phantom Income

Both cases share a common structural critique. Blue Owl's advisory subsidiaries simultaneously serve as the valuation designees for their respective funds under SEC Rule 2a-5, meaning they determine the fair value of the funds' illiquid private credit assets. Those same valuations then form the basis for the advisory fees the subsidiaries collect. The complaints allege that this creates a direct financial incentive to maintain or inflate marks on illiquid Level 3 assets, because higher asset values produce higher management fees and higher income-based incentive fees.

The Siegel complaint develops the payment-in-kind income theory in particular detail. In a PIK financing, a borrower pays interest by adding it to the loan's principal balance rather than paying cash. The loan balance grows throughout the term. At maturity, the borrower owes substantially more than it originally borrowed. PIK structures are concentrated in leveraged borrowers that cannot fully service their debt in cash, which the complaints identify as the highest-default-risk profile in private credit portfolios.

When OTF or OBDC holds a PIK instrument, the fund records investment income each quarter without receiving cash. The adviser then charges an incentive fee on that accrued but uncollected income and collects that fee in cash from the fund. If the borrower later defaults and the PIK interest is never collected, the adviser has already been paid and is not obligated to return those fees. OTF's own 2025 Form 10-K states directly that the adviser "is not obligated to return the Incentive Fee it receives on PIK interest that is later determined to be uncollectible in cash."

The Siegel complaint identifies three channels through which a single PIK dollar inflates the adviser's total compensation. First, PIK interest is capitalized into the principal balance of the underlying loan, increasing the loan's carrying value and therefore OTF's total gross assets, which form the base for the 1.5 percent annual management fee. Second, PIK flows directly into net investment income even though no cash has been received, triggering the 17.5 percent income incentive fee. Third, by increasing reported asset values and delaying recognition of unrealized losses, PIK income inflates the capital gains incentive fee base. The complaint calculates that every one percent of portfolio inflation adds approximately $2.1 million in annual base management fees on OTF's $14 billion portfolio, before accounting for incentive fee effects.

The Numbers: PIK at OTF

The Siegel complaint provides specific financial data for the first quarter of 2026. OTF reported total non-cash PIK income of $42.5 million for the quarter: $24.8 million in PIK interest (up from $16.4 million in the first quarter of 2025), $14.3 million in PIK dividends, and $4.2 million from non-controlled affiliated investments. PIK income represented 13.1 percent of OTF's total investment income for the quarter, compared to a peer average of approximately 9 percent, and represented approximately 25 percent of OTF's net investment income of $172.6 million. The complaint estimates that approximately $7.4 million of the adviser's management fee for the first quarter of 2026 was attributable to PIK income, implying an annualized run rate of approximately $30 million in management fees alone attributable to non-cash PIK accruals.

Over the three fiscal years 2023 through 2025, OTF reported approximately $1.252 billion of GAAP net investment income, of which approximately $454 million consisted of non-cash PIK income. After excluding PIK, OTF had approximately $798 million in cash net investment income available, while it declared approximately $1.215 billion in distributions to stockholders. That left an approximately $417 million cash shortfall, meaning distributions declared exceeded actual cash earnings by approximately 52 percent over three years. During the same period, the adviser extracted approximately $468 million in total advisory fees, including an estimated $62 million in incentive fees attributable specifically to PIK income.

During the first quarter of 2026, OTF reported net investment income after taxes of approximately $171.3 million, but simultaneously reported total net realized and unrealized losses of approximately $391.2 million, producing a net decrease in net assets of approximately $219.9 million, or $(0.47) per share. During that same quarter, the adviser earned approximately $28.1 million in income-based incentive fees and approximately $53.9 million in management fees. OTF's NAV per share fell 4.8 percent to $16.49. As of early March 2026, OTF's common stock was trading at a 32 percent discount to NAV. As of May 12, 2026, OTF traded at a price-to-NAV ratio of 0.66 times, compared to a sector average of 0.81 times.

Named Portfolio Positions

The Siegel complaint identifies specific portfolio positions to support the inference that PIK income is generating fees on instruments whose economics are inconsistent with near-par valuations. Among the high-rate PIK debt positions named in the complaint: Associations Finance, Inc., an unsecured note with a 14.25 percent all-PIK coupon, carried at approximately par despite its unsecured status and entirely non-cash interest. TK Operations Ltd. (TravelPerk), an 11.5 percent all-PIK first-lien loan, was marked above cost in the first quarter of 2026 while OTF's related TravelPerk warrants were simultaneously marked down materially. Inovalon Holdings, Inc., a second-lien senior secured loan at 8.5 percent PIK, was carried at approximately 98 percent of amortized cost despite structural subordination beneath multiple layers of senior debt.

Among PIK equity positions, several were marked below cost at the time of filing, including Romulus/PetVet (15 percent PIK preferred, $11.9 million cost, $10.1 million mark), Knockout/Kaseya (10.75 percent PIK perpetual preferred, $61.6 million cost, $48.2 million mark), and Cornerstone OnDemand (10.5 percent PIK preferred, $42.7 million cost, $24.7 million mark). The complaint characterizes these as positions accruing non-cash fee-generating income into the fee base while simultaneously declining in value: the adviser books income and earns fees from instruments that are not paying cash and are losing value.

The No-Clawback Argument and Peer Comparison

Both complaints emphasize the absence of a clawback provision requiring the adviser to return incentive fees earned on PIK income that is later determined to be uncollectible. The Siegel complaint grounds this in peer data: a survey of 43 publicly traded BDCs showed that half include a look-back or clawback feature requiring the adviser to return incentive fees based on deferred income to account for credit losses. The absence of such a provision in OTF's Advisory Agreement is not a matter of fee rate, but of structural design. The complaint argues this places OTF's fee structure "less favorable to OTF than those employed by a substantial portion of comparable BDCs," particularly during periods of elevated PIK income and widening credit risk.

This framing is central to distinguishing the cases from Paskowitz. Both the Delman and Siegel complaints acknowledge that the nominal fee rates, 1.5 percent of gross assets for the management fee and 17.5 percent of qualifying net investment income for the incentive fee, fall within the range charged by comparable BDCs. The structural defect alleged is not the rate but the base: fees charged on phantom income the fund has not received, from a base the adviser itself controls through its role as valuation designee, with no mechanism to reconcile compensation with realized performance.

Board Independence and the Arm's-Length Question

Both complaints attack the board approval process as failing to satisfy the arm's-length standard that Section 36(b) requires. OTF and OBDC share the same five purportedly independent directors: Edward D'Alelio (board chair at both funds), Christopher M. Temple, Eric Kaye, Melissa Weiler, and Victor Woolridge. Each of these directors also serves on the boards of the other Blue Owl BDCs, meaning each individual simultaneously oversees five Blue Owl vehicles: OTF, OBDC, OBDC II, OCIC, and OTIC. In 2025, each director earned between $1.36 million and $1.44 million in total compensation from their five Blue Owl board seats.

The Siegel complaint argues that this compensation structure gave each director a systemic financial incentive not to challenge valuation practices at any single Blue Owl vehicle, because a challenge at OTF would necessarily raise the same valuation question across all five funds simultaneously. Blue Owl's five public BDCs share more than 70 percent portfolio overlap. A write-down at one vehicle would cascade across the platform, placing downward pressure on Blue Owl's publicly traded equity (OWL) and creating adverse fundraising narratives across all affiliated funds. The complaint characterizes this as a structural reason why the board approval process does not cure the fee excessiveness: the "independent" directors faced cross-vehicle economic incentives to approve any fee structure that kept marks stable and maintained the platform's reported performance.

Broader Market Context

Both complaints situate the fee disputes within a broader deterioration in private credit market conditions during 2025 and 2026. Blue Owl's private BDC, OBDC II, faced redemption requests above its 5 percent quarterly limit beginning in late 2025 and permanently halted redemptions in February 2026, beginning the liquidation of certain assets to raise cash. By April 2, 2026, two additional Blue Owl private credit vehicles, OCIC and OTIC, were facing a combined $5.4 billion in redemption requests, and Blue Owl announced that each fund was limiting outflows to 5 percent of its value. Blue Owl Capital Inc. itself lost approximately 40 percent of its market capitalization in 2026 alone.

A proposed merger between OBDC and OBDC II, announced in November 2025, collapsed within weeks after OBDC's publicly traded shares were trading at a discount to NAV. Private investors in OBDC II, holding shares at full reported NAV, objected to being merged into a public vehicle that immediately valued their holdings at a discount, effectively confirming the market's view that the underlying assets were overvalued at reported marks.

On the regulatory front, Bloomberg and the Financial Times reported in May 2026 that the U.S. Attorney's Office for the Southern District of New York was examining valuation practices at BlackRock TCP Capital Corp., another publicly traded BDC, following a sharp reduction in its reported net asset value. The SDNY U.S. Attorney stated publicly that where a market participant marks assets materially higher than others "particularly if they're making fees off it," that is a place for prosecutors to ask questions, and that "if people are mismarking in order to generate fees, that's always been a no-no." The Blue Owl complaints invoke those statements as confirmation that the core conflict presented in both cases, an adviser controlling marks while earning fees based on those marks, is precisely the conduct regulators have identified as warranting scrutiny.

In February 2026, the SEC issued an enforcement order in In re Madison Capital Management, LLC, Investment Advisers Act Release No. 6948, finding that a credit fund adviser breached its fiduciary duty by pricing loans based on internal conventions without adequately accounting for market dislocation, notwithstanding the existence of valuation policies and third-party review mechanisms. Both complaints cite this enforcement action as establishing that formal compliance with valuation procedures does not discharge an adviser's fiduciary obligations if those procedures produce marks inconsistent with prevailing market and credit conditions.

What Comes Next

Blue Owl is represented by Ropes & Gray LLP. No answer or motion to dismiss has been filed in either case as of July 2026. Judge Failla's September 10, 2026 pretrial conference will establish the briefing schedule. In a typical SDNY complex civil case, an initial scheduling order would give the defendant 30 to 45 days from the conference to file a motion to dismiss, followed by opposition and reply deadlines. A decision on the motion to dismiss, which is the critical threshold question for any Section 36(b) BDC case after Paskowitz, could arrive in the first half of 2027.

The combined fees at issue across both funds total approximately $690 million in 2025 advisory compensation: $414.4 million at OBDC and $276 million at OTF. The one-year damages window for both cases runs from approximately April/June 2025 forward, covering the period after both funds' post-listing fee increases took effect. For OTF specifically, the listing date of June 12, 2025 triggered an increase in the management fee from 0.90 percent to 1.50 percent and in the income incentive fee rate from 10 percent to 17.5 percent. The 2025 advisory compensation figures therefore reflect the full post-listing fee schedule for OTF and are the primary damages period for the Siegel action.

Both complaints seek not only damages but structural equitable relief: an order requiring that advisory compensation be aligned with realized investment performance and imposing a clawback of incentive fees paid on deferred income not ultimately realized by the fund. If granted at the merits stage, such relief would effectively require amendment of the Advisory Agreement in ways that would affect Blue Owl's economics across its entire BDC platform.

Newman Brunk represents clients with fiduciary duty claims involving investment advisers, financial intermediaries, and complex investment products. If you have questions about advisory fee structures, BDC investments, or related investor rights, contact the firm at david@newmanbrunk.com.