Key Notes:

  • The U.S. Second Circuit struck down the Southern District of New York’s Marblegate ruling
  • This decision clarifies the Trust Indenture Act’s Section 316(b)
  • A holder’s right to payment under the TIA is not “absolute and unconditional”
  • The Second Circuit’s ruling remains subject to further appeal

On Tuesday, a panel of the U.S. Court of Appeals for the Second Circuit overturned a 2015 lower court ruling by U.S. District Judge Katherine Failla of the Southern District of New York in Marblegate Asset Management LLC v. Education Management Corp. (please see our previous memo for background information and discussion). The Second Circuit’s decision clarifies the applicability of Section 316(b) of the Trust Indenture Act (TIA) in the context of debt restructurings.

The Second Circuit panel’s 2-1 decision effectively reverses the broad reading of Section 316(b) of the TIA advanced by Marblegate and adopted in the lower court judge’s Marblegate opinion. Although the Second Circuit agreed with the district court that the text of Section 316(b) is “ambiguous,” the appeals court relied heavily on legislative history, various testimony and Securities and Exchange Commission reports in analyzing the original intent of the statute. In the Second Circuit’s analysis, the majority appeared to conclude that the pre-Marblegate status quo was most in line with the purpose of Section 316(b) of the TIA. In this reading, the TIA only protects “core payment terms” (such as amount owed and maturity date) with respect to a noteholder’s right to payment – it is not an “absolute and unconditional” right to payment as the lower court judge’s opinion had indicated.

Under yesterday's decision, the inquiry as to impairment of a noteholder’s right to payment is whether such noteholder’s “legal right” to payment has been impaired, not whether a broader “practical right” to payment has been impaired. As a noteholder, Marblegate’s legal right to payment would only have been impaired if there had been a “formal amendment” to the indenture that amended “core payment terms.”

Functionally, the Second Circuit’s decision permits Marblegate Asset Management LLC to proceed with its suit against Education Management Corp., but deprives it of one of its key arguments under the TIA.

Importantly, the Second Circuit’s panel decision remains subject to an appeal by Marblegate to the full Second Circuit or to the United States Supreme Court. In the meantime, trustee banks may want to consider continuing whatever Marblegate-related protocols or protections they have in place.