January 19, 2017

Second Circuit Overturns Marblegate, Rejecting Expansive Interpretation of Section 316(b) of the Trust Indenture Act

In Split Decision, Appeals Court Rules That Section 316(b) of the Trust Indenture Act of 1939 Prohibits Only Formal Non-Consensual Amendments to a Qualified Indenture's Core Payment Terms

SUMMARY

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.

In its highly anticipated Marblegate Asset Management LLC v. Education Management Corp. decision,[1] the U.S.

This week the U.S. Court of Appeals for the Second Circuit issued its highly-anticipated ruling in Marblegate Asset Management, LLC v. Education Management Corp. (“Marblegate”). At issue in Marblegate was whether Education Management Corp. (“EDMC”) violated the Trust Indenture Act when it implemented a restructuring that impaired the rights of Marblegate Asset Management, LLC (“MAM”). The Second Circuit reversed the District Court’s decision in favor of MAM, and held that EDMC’s restructuring did not violate the TIA.

On January 17, 2017, the US Court of Appeals for the Second Circuit ruled in favor of the defendant in Marblegate Asset Management, LLC v. Education Management Finance Corp.1, by vacating the decision of the District Court for the Southern District of New York (the "District Court") and finding that "Section 316(b) [of the Trust Indenture Act] prohibits only non-consensual amendments to an indenture’s core payment terms." This decision, combined with the recent ruling of the District Court in granting a motion to dismiss in Waxman v. Cliffs Natural Resources Inc.

Court holds that TIA § 316(b) prohibits only non‐consensual amendments to an indenture’s core payment terms.

On January 17, 2017, the Court of Appeals for the Second Circuit issued its long-anticipated opinion in Marblegate Asset Management, LLC v. Education Management Finance Corp., 1 ruling that Section 316(b) of the Trust Indenture Act of 1939, 15 U.S.C. § 77ppp(b) (the “Act”), prohibits only non-consensual amendments to core payment terms of bond indentures.

Section 316(b) of the Trust Indenture Act of 1939 (“TIA”) provides that, subject to certain exceptions, the right of a holder of an indenture security to receive principal and interest payments, or to institute suit to enforce such payments after they become due, shall not be impaired or affected without such holder’s consent. Market participants had long viewed Section 316(b) of the TIA as a “boilerplate” provision, contained or incorporated by reference in most high yield indentures, that protected only a bondholder’s right to bring suit to enforce payment obligations.

Most of us are familiar with that old saw “location, location, location”. While location might enhance the value of real estate, including the location as part of the collateral description in the UCC financing statement can limit the protections provided to a secured creditor and may provide a strategy for attack by a bankruptcy trustee. First Niagara Bank learned this valuable lesson but only after spending substantial legal fees to protect a security interest where perfection should have been routine.

Section 316(b) of the Trust Indenture Act (the "TIA") states the right of a bondholder to receive payments pursuant to an indenture security cannot be "impaired or affected without the consent of such holder." Historically, issuers and bondholders have not engaged in extensive litigation based on the argument that Section 316(b) provides a broad restriction protecting bondholders' substantive right to actually receive such payments.