Marblegate Asset Management, LLC v. Education Management Finance Corp.
2017 U.S. App. LEXIS 782
| 2d Cir. | 2017Background
- EDMC, a Title IV–dependent for-profit education company, faced severe distress in 2014 and negotiated an out-of-court restructuring to avoid bankruptcy that would have jeopardized federal funding.
- EDM Issuer issued unsecured Notes (high ~20% yield) under a TIA-qualified Indenture; EDMC provided a Notes Parent Guarantee. Secured creditors nonetheless held broad foreclosure rights under a separate 2010 credit agreement later amended in 2014.
- A restructuring plan (the "Intercompany Sale") would effectuate foreclosure by consenting secured creditors, release the Secured Parent Guarantee (and thereby the Notes Parent Guarantee), transfer assets to a new EDMC subsidiary, and distribute value only to consenting creditors — leaving non-consenting unsecured holders (Marblegate) with an issuer shell and little practical recovery.
- Marblegate sued under § 316(b) of the Trust Indenture Act alleging the Intercompany Sale, though not amending indenture terms, impaired its "right to receive payment" by eliminating practical ability to collect; the district court agreed and enjoined release of the Notes Parent Guarantee.
- On appeal, EDMC argued § 316(b) protects only non-consensual amendments to an indenture’s core payment terms (principal, interest, maturity) or restrictions on suing; the Second Circuit majority accepted this narrower reading, vacated the judgment, and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of § 316(b) — what "right to receive payment" protects | § 316(b) protects not just formal contract terms but a creditor's practical ability to be paid; transactions that strip assets or effect involuntary restructurings impair the right | § 316(b) protects the legal entitlement under the indenture (amount, interest, maturity) and the right to sue; it does not bar ordinary business transactions or foreclosure reorganizations that do not amend indenture terms | The phrase is ambiguous, but legislative history and purpose show § 316(b) prohibits non-consensual amendments to core payment terms, not all transactions that impair practical recovery |
| Whether the Intercompany Sale violated § 316(b) | The Sale, though not amending the Indenture, was an involuntary restructuring that eliminated Marblegate's practical recovery and thus violated § 316(b) | The Sale did not change the Indenture's payment terms or prevent suit; § 316(b) therefore was not violated | The Sale did not violate § 316(b) because it did not amend core payment terms or bar suit; Marblegate retains legal remedies outside § 316(b) |
| Role of legislative history in interpreting § 316(b) | History supports protecting minority holders from nonconsensual majoritarian restructurings | History (SEC reports and testimony) shows focus on collective-action and no-action clauses and contemplated foreclosure reorganizations; § 316(b) was meant to bar formal amendments to payment terms | Legislative history favors the narrower interpretation: drafters targeted formal amendment mechanisms (collective-action/no-action clauses), not foreclosures |
| Remedies for dissenting holders after a narrow reading | § 316(b) would be toothless if limited; dissenting holders lose protection against engineered foreclosures | Dissenting holders retain state-law remedies (fraudulent conveyance, successor liability, challenges under UCC), and sophisticated holders can contractually protect themselves | Court recognized alternative state and contract remedies; § 316(b) does not create absolute immunity from commercial tactics but protects against non-consensual amendment of core payment terms |
Key Cases Cited
- Process Am., Inc. v. Cynergy Holdings, LLC, 839 F.3d 125 (2d Cir. 2016) (standard of review for district court legal conclusions)
- F.C.C. v. NextWave Pers. Commc’ns Inc., 537 U.S. 293 (1993) (definition of "right to payment" as enforceable obligation)
- Dennis v. Higgins, 498 U.S. 439 (1991) (definition of a legal "right")
- Humana Inc. v. Forsyth, 525 U.S. 299 (1999) (definition of "impair")
- NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d Cir. 2012) (discussion of collective-action clauses and bondholder rights)
- Bank of New York v. First Millennium, Inc., 607 F.3d 905 (2d Cir. 2010) (°316(b) does not guarantee "absolute and unconditional" rights to payment)
- Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (3d Cir. 1982) (dangers of ad hoc interpretation of boilerplate provisions)
- Brenntag Int’l Chems., Inc. v. Bank of India, 175 F.3d 245 (2d Cir. 1999) (irreparable harm where debtor cannot satisfy judgments)