Marblegate Asset Management, LLC v. Education Management Finance Corp.

United States Court of Appeals for the Second Circuit · Corporations

CorporationsTrust Indenture ActDebt restructuringTrust Indenture ActSection 316(b)indenturecore payment termscollective-action clauses

Facts

EDMC, a for-profit higher education company in severe financial distress, could not realistically use bankruptcy because doing so would jeopardize its eligibility for Title IV federal funds. Its unsecured notes were governed by a TIA-qualified indenture and guaranteed by EDMC, while its secured creditors held rights under credit agreements and security interests in virtually all of EDMC's assets. EDMC and a large majority of creditors implemented an Intercompany Sale under which secured creditors foreclosed on EDMC's assets, released EDMC from a secured parent guarantee, thereby triggering release of the notes parent guarantee under the indenture, and transferred the assets to a new subsidiary that distributed debt and equity only to consenting creditors. Marblegate, a non-consenting noteholder, retained its contractual right to payment under the notes, but the foreclosure would leave the issuer an empty shell and thus eliminate Marblegate's practical ability to recover payment.

Issue

Does Section 316(b) of the Trust Indenture Act prohibit an out-of-court restructuring that does not amend any payment term in the indenture or eliminate the holder's right to sue, but that destroys the holder's practical ability to collect payment? More specifically, did the Intercompany Sale and proposed release of the notes parent guarantee violate Section 316(b)?

Rule

Section 316(b) prohibits only non-consensual amendments to an indenture's core payment terms, namely the amount of principal and interest owed and the date of maturity, and separately protects the holder's right to institute suit for payment. It does not bar transactions, including foreclosure-based restructurings, that leave those indenture terms and the right to sue intact even if they impair the holder's practical ability to collect.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Studios, a media company based in Atlanta, issued notes under a TIA-qualified indenture. Facing liquidity problems, it obtained approval from 78% of noteholders for a supplemental indenture extending the notes' maturity date from 2027 to 2030, over the objection of Dana Kim, who holds 5% of the notes.

If Dana sues under § 316(b), which is the strongest argument?

Explanation. Section 316(b), as read by the majority, prohibits non-consensual amendments to core payment terms, including the date of maturity. A maturity extension is a formal amendment to a protected payment term, so unanimity is required as to the dissenting holder. The holder need not separately prove practical inability to collect.