United States: U.S. Court Of Appeals Overturns District Court In Decision On Trust Indenture Act Requirements

The U.S. Court of Appeals for the Second Circuit overturned the District Court decision of Marblegate Asset Management, LLC v. Education Management Corp. The issue for the Court was whether Education Management Corporation ("EDMC") had violated the Trust Indenture Act ("TIA") when it implemented a restructuring that impaired the rights of one of its unsecured note-holders, Marblegate Asset Management, LLC. The specific issue was whether Section 316(b) of the TIA prohibits: (i) any action that could affect a note-holder's practical ability to recover payment; or (ii) just actual amendments to the payment terms of an indenture.

Overturning the District Court, the Second Circuit concluded that the foreclosure and restructuring by EDMC violated Section 316(b) of the TIA. The Appeals Court held that the TIA "prohibits only non-consensual amendments to an indenture's core payment terms." The dissenting opinion supported the District Court's interpretation that Section 316(b) should protect note-holders from "collusively engineered" restructurings.

In a memorandum, Cadwalader attorneys William Mills and Adam Summers asserted that the ruling provided much-needed clarity to creditors and issuers involved in out-of-court restructurings affecting note-holders.

Commentary / Adam Summers

The Marblegate decision by the Appeals Court provides more clarity to issuers, creditors and market participants by limiting the remit of Section 316(b) to formal amendments of an Indenture's "core payment terms." The leverage of non-consenting noteholders has been significantly reduced, as they will have to rely much more heavily on other federal and state remedies, as the Appeals Court noted in its decision. That said, out-of-court restructurings are still not entirely free from risk. Absent the protection of a formal bankruptcy filing, third-party creditors and non-consenting noteholders could still disrupt out-of-court restructuring processes by seeking payment of principal, interest or other damages.

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