- Case Type:
- Case Status:
- Reversed and Remanded
- 2017 U.S. App. LEXIS 782 (2nd Circuit, Jan 17,2017) Not Published
- Section 316(b) of the Trust Indenture Act prohibits only non‐consensual amendments to an indenture’s core payment terms; it does not protect a creditor's practical ability to collect on payments. Thus, an intercompany sale of assets undertaken pursuant to a consensual foreclosure agreement with the Debtor-Company's senior secured lenders to facilitate a restructuring is a permissible modification even though the transaction removed assets from the reach of the dissenting bondholder. The bondholder retained the right to sue to collect payments due and had other State law remedies available.
- Procedural context:
- Appeal from Judgement of US District Court, SDNY holding that that a series of transactions meant to restructure a Debtor-Company's debt over the objections of certain junior noteholders violated Section 7 316(b) of the Trust Indenture Act of 1939, 15 U.S.C. § 77ppp(b).
- The Debtor-Company, EDMC is a for-profit higher education company that relies heavily on federal funding became financial distressed. Bankruptcy was not a real option to restructure its debt since the Company would lose its eligibility for federal funds. As a result, EDMC began negotiations with its senior secured creditors on a restructuring plan. EDMC’s debt picture also included significant unsecured debt, issued through an indenture governed by the Trust Indenture Act. The ultimate restructuring plan worked out between EDMC and the senior secured lenders involved two potential options to relieve EDMC of its debt obligations. The first option required unanimous consent and was essential a debt-equity swap with outstanding secured debt being exchanged for $400 million in new secured term loans and new stock convertible into roughly 77 percent of EDMC's common stock and the unsecured debt being exchanged for equity worth roughly 19 percent of EDMC's common stock. In the absence of unanimous consent, the second option, which was referred to as the "Intercompany Sale,” resulted in the secured creditors exercising their preexisting rights and Article 9 of the Uniform Commercial Code (UCC) to foreclose on EDMC's assets. After the foreclosure, assets would be transferred to a new subsidiary company constituted for purposes of the Intercompany Sale with a recasting of debt. The new EDMC subsidiary would then distribute debt and equity only to consenting creditors and continue the business. The Intercompany Sale was structured to incentivize creditors to consent. While non-consenting secured creditors would still receive debt in the new EDMC subsidiary, that debt would be junior to the debt of consenting secured creditors. Non-consenting Noteholders would not receive anything from the new company. Not a single term of the Indenture was altered and nonconsenting unsecured creditors therefore retained a contractual right to collect payments due under the Notes. However, the foreclosure would transform the EDMC Issuer into an empty shell. The appellee, Marblegate, was the only unsecured creditor to withhold consent and challenge the Intercompany Sale.
- CABRANES, STRAUB, and LOHIER
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