Marblegate Decision: Broad interpretation of the TIA focuses on minority bondholders and increases scrutiny to amend indentures



July 08, 2015

Corporate Trust Alert

Author(s): Richard C. Pedone, George J. Skelly, Erik Schneider

In the recent Marblegate decision, the court entered judgment in favor of the non-consenting bondholder plaintiffs thereby confirming its prior pre-trial ruling (discussed in our March alert) that the Trust Indenture Act of 1939 (“TIA”) may require unanimous bondholder consent for amendments that release a guarantor of bonds. Crucially, the court found that the TIA not only provides bondholders with the right to sue for payment, but also the practical right to receive such payment. As a result, the debt restructuring at issue was held to violate the TIA even though the bond indenture itself expressly allowed for such amendment and did not require unanimous bondholder consent.

Updated Alert—On March 17, 2015, we published an alert discussing the details of pre-trial rulings holding that the Trust Indenture Act of 1939 (“TIA”) may require unanimous bondholder consent for amendments that release a guarantor of the bonds, even though the bond indentures themselves either expressly allowed or did not require unanimous bondholder consent for such amendments.

On June 23, 2015, in Marblegate Asset Management, LLC, et.al. v. Education Management Corp., et al., U.S. District Court Judge Katherine Polk Failla entered judgment for the plaintiff minority bondholders and held that the defendant issuer’s out-of-court debt restructuring plan violated the TIA and therefore was not permitted. The court interpreted Section 316(b) of the TIA broadly by holding that the defendant issuer’s debt restructuring plan violated the TIA even when it did not directly affect a bondholder’s legal right to payment or amend any term of the indenture explicitly governing any individual bondholder’s right to receive payment. In the ruling, the court examined the text, history and purpose of the TIA and concluded that the right protected by Section 316(b) is a bondholder’s practical right to receive payment and therefore, a debt-restructuring violates the TIA when it deprives dissenting bondholders of their right to the payment of principal and interest on their indenture security.

In the June 23 decision, the first ever final order on the issue, the court emphasized that Section 316(b) of the TIA not only provides bondholders with the right to sue for payment, but also the practical right to receive such payment. Therefore, the majority approved out-of-court reorganization consisting of a release of the bond’s guarantor and a transfer of assets violated the TIA because it effectively denied the non-consenting bondholders their right to receive payment.

The Marblegate decision, if affirmed on appeal, promises to have a significant impact on minority holders, issuers, bond holders and trustees. Going forward, any out-of-court debt restructuring plans and any proposed supplemental indentures should be carefully scrutinized even if majority consent is obtained. This decision has the potential to increase the number of bankruptcy proceedings if issuers cannot obtain the consent of all holders to their out-of-court restructurings. In its decision, the court noted the “potentially troubling implications of the Trust Indenture Act in rewarding holdouts” and “its arguable obsolescence given the expense and complexity of modern bankruptcy.”

Because it only decided the issue before it, the court did not address the possible impact of the ruling on previously agreed-upon debt restructuring agreements or amendments to indentures governed by the TIA and falling within the scope of Section 316(b) which had been approved by a majority (rather than all) of holders.

On July 2, 2015, the defendant issuer filed a Notice of Appeal to the U.S. Court of Appeals for the Second Circuit. While it is unclear whether the Second Circuit will affirm or overturn the Marblegate decision, parties dealing with public debt restructurings, nonetheless, need to be cautious as they deal with future restructurings and the uncertain implications of this and other decisions on the effectiveness of past amendments that may be affected.

Please look out for updated client alerts for further developments on this and other cases.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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