Outcome of appeal to have significant implications for the capital markets
In a closely watched appeal before the United States Court of Appeals for the Second Circuit challenging the district court’s decision in Marblegate Asset Management, LLC v. Education Management Finance Corp., Milbank, Tweed, Hadley & McCloy LLP argued on behalf of the Steering Committee for the Ad Hoc Committee of Term Loan Lenders of Education Management, LLC. At issue is the out-of-court restructuring of Education Management Corporation and its affiliates, with the support of an overwhelming majority of their secured and unsecured creditors, that reduced the Company’s debt burden by approximately $1.1 billion. As part of the restructuring, secured lenders that were owed approximately $1.3 billion foreclosed on their collateral and triggered a contractual release of a guaranty that the parent corporation had provided in favor of the Company’s unsecured noteholders. One of the unsecured noteholders holding 2% of the company’s overall debt -- a hedge fund that specializes in trading distressed debt -- challenged the Company’s restructuring and sought an injunction. The district court below denied the requested injunction and allowed the restructuring to proceed, but held that section 316(b) of the Trust Indenture Act entitled the holdout hedge fund to full payment of principal and interest on its notes. The appeal now before the Second Circuit challenges the district court’s decision as to the meaning of the Trust Indenture Act.
This appeal, closely watched by corporate debt issuers and legal and restructuring professionals, presents a question of first impression regarding the proper interpretation and application of section 316(b) of the Trust Indenture Act. The Loan Syndications and Trading Association and the Chamber of Commerce of the United States have filed an appellate brief as amici curiae in support of the committee’s position. The district court’s decision, which has since been followed in other decisions stemming from a transaction undertaken by Caesars Entertainment Corporation and its affiliates, has caused substantial uncertainty in the commercial market for public debt, generated considerable academic scholarship, and spawned a series of new lawsuits challenging the propriety of corporate transactions that are now pending before the district courts.
According to commentators who have written about the case, as a result of the district court’s decision, “out-of-court restructurings of public debt have largely ground to a halt,” and borrowers are increasingly pursuing private debt offerings, rather than public offerings that are subject to the Trust Indenture Act. The outcome of the appeal may therefore have significant implications for the capital markets. The Milbank team is led by Los Angeles financial restructuring partner Gregory Bray, New York litigation partner Antonia Apps, Washington, DC litigation partner Aaron Renenger, New York litigation special counsel Alex Lees and Washington, DC litigation associate James Burke. As Milbank told the Court of Appeals at the argument: “We’re arguing for the bond market to keep going in an untrammeled way. . . .By giving [Marblegate] 100 cents on the dollar when secured lenders with senior priority were required to comprise their claims at a significant discount . . .effectively turn[s] the capital structure on its head. . . The secured lenders exercised their foreclosure rights in a way that did not violate any provision of the indenture, save an extraordinarily broad interpretation of the Trust Indenture Act that would wreak havoc on the capital markets.”
