By Alan F. Denenberg, Joseph A. Hall, Michael Kaplan, Jeffrey M. Oakes, Richard D. Truesdell, Jr., and Sarah Ashfaq of Davis Polk & Wardwell LLP
Companies have long relied upon out-of-court restructurings to keep them afloat during times of financial distress. In Marblegate Asset Management v. Education Management Corp. (S.D.N.Y. 2014), the Southern District of New York found that a proposed out-of-court restructuring, objected to byminority creditors, likely violated provisions of the Trust Indenture Act of 1939 (TIA), a Depression-era federal statute intended to protect rights to payment under a TIA-qualified indenture, which governs debt securities offered in any U.S. public offering. Unlike earlier TIA cases, a critical element of the proposed restructuring in Marblegate was explicitly permitted by the governing indenture, and no consent of the objecting creditors was required by the indenture. Nonetheless, the Court read the TIA to give creditors a substantive right to protection against out-of-court restructurings that they did not consent to on an individual basis, although it ultimately did not grant the plaintiffs’ motion for a preliminary injunction. But the potential for a minority creditor to obstruct a company’s ability to restructure, especially in light of indenture provisions the creditor knowingly accepted at the time it purchased its securities, could have serious consequences. While the debtor company’s actions in Marblegate were certainly aggressive, the Court’s view, if adopted by other courts, could have the potential to create an overriding ability for any creditor to block a restructuring — even when permitted by the indenture — directly leading to more court-administered bankruptcies. If followed to that conclusion, the opinion would be a potentially material and unwelcome change to the legal landscape.
To read more, click here.