Two recent opinions concerning the law of substantive consolidation should be of interest to business owners and commercial real estate market participants. The doctrine of substantive consolidation allows a bankruptcy court, in certain circumstances, to augment the assets of a debtor’s bankruptcy estate with the assets of others affiliated with the debtor. The two decisions both involved efforts by chapter 7 trustees to substantively consolidate the assets of related, non-debtor entities with the bankruptcy estate administered by each trustee.

The influential Delaware bankruptcy court issued a recent decision that all secured lenders need to be aware of. In this decision, the bankruptcy court held that the fees of the official creditors’ committee were not limited by the dollar-amount cap in the financing order because the debtors confirmed their chapter 11 plan. The creditors’ committee argued that it was entitled to over $8 million in fees while the secured lender asserted that the committee’s fees were capped at $250,000 due to what the bankruptcy court referred to as a “standard carve-out provision” in the financing order.

ATopTech, Inc. (“ATopTech” or “Debtor”), an electronic design automation software company manufacturing software solutions for engineers to assist them in the physical design of integrated circuits, filed a voluntary petition for chapter 11 bankruptcy relief on January 13, 2017 in the United States Bankruptcy Court for the District of Delaware.

In addition, ATopTech filed a motion to sell its businesses under section 363 of the Bankruptcy Code and has selected a stalking horse bidder. The Debtor expects that the sale will be completed by March 31, 2017.

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.

(6th Cir. B.A.P. Jan. 17, 2017)

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.

If your bank is in the process of a merger or has agreed to buy or sell a portfolio of mortgage loans, notices must be provided to the borrowers before and after the transaction closes. Care must be taken to determine the notices required and how they are worded to avoid violating potentially conflicting laws.