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Second Circuit Reverses District Court in <i>Marblegate</i>, Making It Easier to Restructure Bonds Outside of a Chapter 11 Case
On Jan. 17, 2017, in a closely watched dispute surrounding Section 316(b) of the Trust Indenture Act of 1939, the U.S. Court of Appeals for the Second Circuit issued its long-anticipated decision in Marblegate Asset Management, LLC v. Education Management Finance Corp., No. 15-2124-CV(L), 2017 WL 164318 (2d Cir. Jan. 17, 2017) (the “Decision”). In a 2-1 ruling reversing the district court, the court of appeals construed Section 316(b) narrowly, holding that it only prohibits “non-consensual amendments to an indenture's core payment terms” and does not protect noteholders' practical ability to receive payment. Decision at *1.
In so ruling, the Second Circuit considered the issue arising in the recent Southern District of New York District Court decisions in Marblegate (Marblegate Asset Management v. Education Management Corp., 75 F.Supp.3d 592 (S.D.N.Y. 2014) (Marblegate I); Marblegate Asset Management, LLC v. Education Management Corp., 111 F.Supp.3d 542 (S.D.N.Y. 2015) (Marblegate II)), and two cases relating to Caesars Entertainment (BOKF, N.A. v. Caesars Entertainment Corp., 144 F.Supp.3d 459 (S.D.N.Y. 2015); MeehanCombs Glob. Credit Opportunities Funds, LP v. Caesars Entm't Corp., 80 F.Supp.3d 507 (S.D.N.Y. 2015) (collectively, BOKF/MeenhanCombs)), as to when an out-of-court debt restructuring may violate Section 316(b) of the TIA.
Some, but not all, of the cases before and after them that have dealt with the issue have treated Section 316(b) as providing a narrow and specific protection for noteholders: requiring noteholder unanimity to alter the legal right to repayment under the terms of an indenture and the right to sue to enforce that right, but not protecting the practical right to receive payment.
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