Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Daniel Gill
A split federal appeals panel approved an out-of-court restructuring agreement over the objection of a single creditor, interpreting and potentially eroding creditor protections found in the Trust Indenture Act of 1939 and giving debtors more options for restructuring ( Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp. , 2017 BL 12251, 2d Cir., No. 15-2141-cv(CON), 1/17/17 ).
Judge Raymond Lohier of the Second Circuit Court of Appeals wrote the Jan. 17 opinion for the majority, overruling the Southern District of New York and holding that the TIA did not bar agreements between Education Management Corp. and most of its creditors owed about $1.5 billion to restructure the company’s debts.
While the majority of the court decided the applicable TIA provision was ambiguous and required judicial interpretation, Judge Chester J. Straub, in dissent, found that language of the statute was clear and provided that the rights of indenture holders couldn’t be altered by the agreements.
The dissent condemned the out-of-court restructuring as “collusively engineered” to exclude the minority bondholders in violation of the TIA.
The agreement forced the company’s bond-holders to agree to a modification of the indenture’s “core payment terms” or receive no payment at all, Straub wrote, thereby violating the TIA.
One expert told Bloomberg BNA that the result of the decision reduces the leverage of minority bondholders and increases risk and costs associated with out-of-court restructurings.
Finding itself unable to manage its $1.3 billion in secured and $217 million unsecured debt, EDMC and an ad hoc committee of its creditors worked out a deal that amounted to a restructuring of its debt obligations. The agreement was designed to incentivize creditors to consent to it, the court said, and provided that non-consenting unsecured creditors would receive nothing from the new company purchasing all EDMC’s assets.
Marblegate Asset Management, LLC was the sole non-consenting creditor. It sued to block the transaction in federal court, on grounds the agreement violated Section 316(b) of the TIA, which provides that the rights of indenture holders can’t be changed without their consent. The district court agreed and blocked the deal.
The case “would have been a non-event had EDMC been in a position to use the bankruptcy process to restructure,” Karol K. Denniston, a partner in the restructuring department of Squire Patton Boggs, San Francisco, told Bloomberg BNA by e-mail Jan. 18.
In Chapter 11, which protects companies (or individuals) from creditors while they seek to reorganize their debt or liquidate pursuant to a plan which must be approved by the bankruptcy court, EDMC could likely have achieved the same result by confirming a plan over Marblegate’s objection, essentially “cramming down” their interest, in the jargon of the Bankruptcy Code.
However, EDMC, a for-profit higher education company “that relies heavily on federal funding” would lose its eligibility for such funding if it filed for bankruptcy, the court explained.
The decision “has reduced the leverage of non-consenting minority bondholders looking for better treatment,” Denniston told Bloomberg BNA. But it also opens the door for parties “now looking for ways to implement out-of-court restructurings through heavily negotiated restructuring and support agreements,” she said.
Denniston also said that the decision could lead to increased risk and costs associated with out-of-court workouts. She said that restructuring outside of bankruptcy court leaves fraudulent transfer and successor liability claims open to future litigation, where a Chapter 11 plan confirmation order would often resolve such issues with finality. “This kind of litigation is expensive and time consuming and something that most issuers and holders [of indentures] want to avoid or at least limit,” she said.
Judge José A. Cabranes joined in the decision.
Sean E. O’Donnell, Akin Gump Strauss Hauer & Feld LLP, New York, argued for Marblegate. EDMC was represented by Emil A. Kleinhaus, Wachtell, Lipton, Rosen & Katz, New York, and Antonia M. Apps, Milbank, Tweed, Hadley & McCloy LLP argued for an intervening committee of creditors in the case.
To contact the reporter on this story: Daniel Gill in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)