On Jan. 17, the U.S. Court of Appeals for the Second Circuit vacated the decision of the District Court for the Southern District of New York in Marblegate Asset Management, LLC v. Education Management Finance Corp., finding that Section 316(b) of the Trust Indenture Act (TIA) “prohibits only non-consensual amendments to an indenture’s core payment terms." Section 316(b) of the TIA provides, in relevant part, that “the right of any holder…to receive payment of the principal of and interest … shall not be impaired or affected without the consent of such holder.” This decision, combined with the recent ruling of the Southern District in granting a motion to dismiss in Waxman v. Cliffs Natural Resources Inc. under a similar analysis, likely ends the uncertainly as to whether Section 316(b) of the TIA recognizes claims of “substantive” impairment of payment in addition to express amendments to indenture payment provisions that has arisen by a number of TIA decisions since 2014. The Second Circuit ruled that it was unclear from the text of the statute whether the provision was meant only to protect against formal amendments to payment terms or to more broadly protect noteholders’ substantive ability to collect payment. Looking to the legislative history of the TIA, the court found that it does not support a reading that it was meant to prohibit debt restructurings that could be implemented without altering the contractual payment terms of the indenture. Rather, the court held that the TIA supports a reading that Section 316(b) only prohibits amendments to payment terms of the indenture without the consent of all affected noteholders.
Marblegate retains the right, however, to seek an en banc rehearing by the entire Second Circuit or appeal the decision to the United States Supreme Court.