Sutton 58 Associates LLC v. Pilevsky et al., is a New York case which gets to the heart of the enforceability of classic single-purpose entity restrictions in commercial real estate lending. At issue is how far a third-party may go to cause a violation of a borrower’s SPE covenants, and whether those covenants are enforceable at all.

A Defaulted Construction Loan and Frustrated Attempts to Foreclose:

Last year, a California Bankruptcy Court wiped out $10.2 million in default interest (“DRI”) when it ruled that a 5% DRI was an unenforceable penalty in a Chapter 11 bankruptcy case where the construction lender fully recovered principal, interest, and other costs of collection.

The Second Circuit issued its much anticipated decision in Marblegate Asset Management LLC v. Education Management Corp., holding that “Section 316(b) prohibits only non-consensual amendments to an indenture’s core payment terms.” At issue is whether the phrase “right . . . to receive payment” forecloses “more than formal amendments to payment terms that eliminate the right to sue for payment.” The Second Circuit held that it does not.

Since Marblegate was decided in 2014, the only court to address claims under §316(b) of the Trust Indenture Act (“TIA”) in the context of a corporate restructuring transaction is

The Second Circuit Court of Appeals heard oral arguments in Marblegate Asset Management LLC v. Education Management Corp. on May 12, 2016. One might have thought from the courtroom’s overflow crowd that it was the opening argument in a mob trial, but this is a case about a bond indenture. At issue is whether an out-of-court debt restructuring that did not amend the indenture’s principal and interest terms, but that effectively precluded the noteholders’ ability to be repaid, violated § 316(b) of the Trust Indenture Act (TIA).