The Essential Resource for Today’s Busy Insolvency Professional Feature B Y J ASON W. H ARBOUR AND S HANNON E. D AILY Marblegate : Second Circuit Limits TIA Prohibition to Altering Legal Right to Payment I n a 2-1 decision, the U.S. Court of Appeals for college and graduate education through campus and online instruction. 4 To support its programs, the Second Circuit held that § 316 (b) of the Trust Indenture Act (TIA) prohibits only amend- EDMC depends on federal funding under title IV of the Higher Education Act of 1965. 5 By 2014, ments to the legal right to payment without the con- sent of bondholders, but does not prohibit changes EDMC had developed an unsustainable debt burden that would limit the practical ability to receive pay- of approximately $1.5 billion, consisting of $1.3 bil- Jason W. Harbour ments. 1 The Second Circuit’s holding reverses the lion in secured loans and $217 million in unsecured Hunton & Williams LLP U.S. District Court for the Southern District of New notes (the “notes”) issued by EDMC’s subsidiar- Richmond, Va. York, which held that § 316 (b) protected noncon- ies and fellow appellants, Education Management senting bondholders from an out-of-court restructur- Finance Corp. and Education Management LLC ing that would deprive them of the practical ability (together, the “EDM issuer”; and collectively with to collect future payments. 2 EDMC, the “appellants”). 6 The Second Circuit’s Marblegate decision A credit agreement between the EDM issuer applies a narrow interpretation to § 316 (b) that and secured creditors (the “2010 credit agreement”) would allow financially distressed companies to governed the secured debt and gave EDMC’s pursue out-of-court restructurings that impair its secured creditors the right to deal with the collateral, bondholders’ practical ability to receive future pay- substantially all of EDMC’s assets, as the “absolute owner” upon a default. 7 The notes were governed Shannon E. Daily ments as long as the legal right to receive payment Hunton & Williams LLP remains unaltered. Marblegate is consistent with by an indenture that is covered by the TIA. EDMC Richmond, Va. decisions from other jurisdictions that previously guaranteed the notes as the parent company of the EDM issuer (the “notes guarantee”). 8 have held that § 316 (b) only prohibits amendments to an indenture’s core payment terms absent bond- Due to the fact that EDMC depended on Jason Harbour is a holder consent. 3 title IV funding, it could not fjle for bankruptcy, as partner and Shannon it would have stripped EDMC of its eligibility to Daily is an associate in the Bankruptcy, receive federal student-aid funds. In August 2014, Background Restructuring and EDMC reached an agreement with the major- Education Management Corp. (EDMC) is a Creditors’ Rights ity of its creditors. 9 In the short term, holders of for-profjt higher-education company that provides Practice at Hunton the majority of EDMC’s secured and unsecured & Williams LLP in 1 Marblegate Asset Mgmt. LLC v. Educ. Mgmt. Fin. Corp. , Nos. 15-2124, 15-2141, 2017 debt agreed to accept the payment of interest-in- Richmond, Va. U.S. App. LEXIS 782, *1 (2d Cir. 2017) (“ Marblegate ”). kind through fjscal year 2015. 10 EDMC’s secured 2 See Marblegate Asset Mgmt. LLC. v. Educ. Mgmt. Corp. , 111 F. Supp. 3d 542 (S.D.N.Y. 2015) (“ Marblegate II ”). 3 See, e.g., YRC Worldwide Inc. v. Deutsche Bank Trust Co. Am. , No. 10-civ-2106, 2010 4 Marblegate , 2017 U.S. App. LEXIS 782, at *3. 5 See 20 U.S.C. §§ 1070-1099; see also Brief for Education Management Appellants at 7 U.S. Dist. LEXIS 65878, at *7 (D. Kan. 2010) (“TIA § 316 (b) does not provide a guarantee against the issuing company’s default or its ability to meet its obligations. Accordingly, [Doc. No. 64], Marblegate Asset Mgmt. LLC v. Educ. Mgmt. Fin. Corp. , No. 15-2124 (2d the fact that the deletion of section 5.01 might make it more difficult for holders Cir. Sept. 9, 2015) (“Appellants’ Brief”). to receive payment directly from plaintiff does not mean that the deletion without 6 Marblegate , 2017 U.S. App. LEXIS 782, at *3-4. unanimous consent violates TIA § 316 (b).”); Magten Asset Mgmt. Corp. v. Northwestern 7 Id . at *4. 8 Id . at *4-5. Corp. (In re Northwestern Corp.) , 313 B.R. 595, 600 (Bankr. D. Del. 2004) (holding that § 316 (b) only applies to bondholder’s legal rights, not practical ability to receive princi- 9 Appellants’ Brief at 7. pal and interest). 10 Id . at 7-8. 66 Canal Center Plaza, Suite 600 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abi.org
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