In an eagerly-awaited decision, the Second Circuit Court of Appeals has vacated the district court's decision in Marblegate Asset Management, LLC v. Education Management Finance Corp. The district court's decision had created much uncertainty and confusion in the restructuring and indenture trustee community. The Court of Appeals has now held that Section 316(b) of the Trust Indenture Act (“TIA”) is not violated by a restructuring merely because it makes payment to dissenting holders unlikely or impossible.
In Marblegate, the restructuring was accomplished by a foreclosure on the issuer's assets by secured bondholders, transfer of the assets to a “sister” of the issuer, the exchange of new securities of that sister for the issuer’s notes held by consenting holders and release of a parent guarantee of the issuer's unsecured notes. These steps left dissenting noteholders with all of their legal rights against the issuer intact but no practical means to obtain repayment of their notes. The district court found that the release of the parent guarantee would violate the TIA.
The Court of Appeals vacated the district court’s decision, holding that Section 316(b) prohibited only non-unanimous amendments of the core payment terms of an indenture and prohibitions on individual noteholder suits after maturity, but did not deal with foreclosure-based restructurings that impair the practical ability of holders to be paid. The Court of Appeals found that Section 316(b) did not open the door to inquiry as to whether coercive or majority-driven restructuring techniques that did not involve amendment of the core terms impaired the practical ability of dissenting holders to be paid or involved a subjective intent to impair that practical ability. The Court reached these conclusions after finding Section 316(b) to be "ambiguous" and reviewing the legislative history of the TIA, as well as legal precedent concerning the proper interpretation of standard bond provisions. The Court also observed that dissenting noteholders after a foreclosure-based restructuring retained all other state and federal remedies, including contractual claims, voidable transfer claims and successor liability claims. A copy of the decision is accessible here.
One of the three judges on the Court of Appeals, however, dissented, arguing that Section 316(b) unambiguously prohibits any conduct that impairs or affects the right of any holder to receive payment to the point of making that right worthless. The possibility of en banc or Supreme Court review remains. As they stand, neither the majority nor dissenting opinion supports any claim that the TIA is violated by a restructuring that coerces consent by diminishing the value of unexchanged securities. And, unless reversed by subsequent proceedings, the majority opinion would eliminate any lingering liability concerns under the TIA for an indenture trustee’s involvement in a restructuring that rendered a dissenting holder’s right of repayment worthless, so long as it did not do so by amendments of the core indenture payment terms or limitations on noteholder rights to sue for payment.