Second Circuit Rules on § 316(b) in Marblegate
by | posted in: Workouts and Pre-Packs | 0

Last week, the Second Circuit decided Marblegate Asset Management, LLC v. Education Management Corp., holding that § 316(b) of the Trust Indenture Act (“TIA”) protects only bondholders’ formal, legal right to repayment, not their practical ability to recover. The Second Circuit’s 2–1 decision thus resolves uncertainty surrounding out-of-court bond workouts and returns to the pre-Marblegate practice.

The majority viewed the statute’s text as ambiguous and consulted the legislative history; it emphasized legislative history supporting the idea that § 316(b) protects only against the formality of a bondholder vote altering payment terms and discarded legislative history to the contrary as shards. The dissent concluded that the transaction “annihilated” a bondholder’s right to payment and, hence, ran afoul of statute’s plain language — which requires that a bondholder’s right to payment cannot be affected or impaired without the affected bondholder’s consent.

Law firms reacted rapidly to the decision. Wachtell Lipton, which represented the winning appellant, and Weil Gotshal both extoll the opinion. Paul, Weiss and Morgan Lewis see in the decision a clear rule that bars only express changes to core terms. Several firms, such as Shearman & Sterling and White & Case, emphasized that the decision will facilitate out-of-bankruptcy restructurings.

Squire Patton Boggs highlights limitations, arguing that the law remains “neither clear nor predictable” on when an out-of-court restructuring goes so far as to impair bondholders’ right to repayment. They caution against assuming that any action short of a direct alteration of core repayment terms is now permissible.

In his American Bankruptcy Institute column, Bill Rochelle notes that the decision’s focus on legislative history, including views contemporaneous with the statute’s passage, was unusual and, by implication, indicates that the dissent’s textual decision-making mode fits better with current Code interpretation. Seyfarth Shaw notes the decision’s limited practical effect because of the widespread use of binding votes in pre-packaged Code restructurings, which avoid § 316(b)’s restrictions.

The Roundtable has posted previously on Marblegate and § 316(b). In one post, Mark Roe argued that bondholders should not be barred by statute from choosing in their indenture whether to be allowed to reposition their bonds via a fair vote. Other posts include a summary of the National Bankruptcy Conference’s proposed amendments to the Bankruptcy Code to facilitate bond restructuring; a 28-law firm legal opinion white paper on transactional complications arising from the Marblegate district court decision; and an international perspective on the TIA’s prohibition on collective action clauses.

Third Circuit holds Sec. 1113 of the Bankruptcy Code applicable to already-expired CBAs
by | posted in: Avoidance | 0

By Mark A. Salzberg and Jill S. Kirila of Squire Patton Boggs

The Bankruptcy Code prohibits a debtor from unilaterally rejecting a collective bargaining agreement (CBA). Instead, in order for a debtor employer to be able to reject a CBA, the debtor must comply with the procedural and substantive requirements of Sec. 1113 of the Bankruptcy Code and then obtain authority from the Bankruptcy Court. What is less clear is whether Sec. 1113 applies to a CBA that has already expired by its own terms. This is a crucial question since, under the National Labor Relations Act, an employer cannot unilaterally change the terms and conditions of a CBA even after its expiration. Instead, the employer must continue to perform in accordance with the expired CBA until a new CBA is negotiated or an impasse is reached.

Earlier this year, the Third Circuit Court of Appeals became the first circuit level court to address the question of whether Sec. 1113 is applicable to an already-expired CBA. The Court ruled in favor of the employer, Trump Entertainment Resorts, Inc., and held that Sec. 1113 applied to expired CBAs and that Trump Entertainment could reject the CBA because it had complied with the requirements of Sec. 1113. This ruling is certain to have a significant effect on labor issues arising in Chapter 11 bankruptcy cases.

The full memo is available here: Third Circuit holds Sec. 1113 of the Bankruptcy Code applicable to already-expired CBAs

Cram-down interest rates in controversy
by | posted in: Cramdown and Priority, Valuation | 0

By Maxwell Tucker of Squire Patton Boggs

The correct method to determine the adequacy of the “cram-down” interest rate offered under a contested Chapter 11 plan remains subject to debate.  Most bankruptcy courts first cite the “prime plus” formula set forth in Till v. SCS Credit Corp., 541 U.S. 465 (2004)(plurality opinion), then refer to various risk factors that may require an upward adjustment from the prime rate.

The recent bankruptcy court opinion issued in In re Couture Hotel Corporation, found in my blog post linked here, provides an excellent roadmap for parties contesting cram-down interest rates.  The debtor’s Chapter 11 plan proposed to repay the loan with principal and interest amortized over thirty (30) years, and proposed that interest shall accrue at the rate of 4.25% interest per annum.  The lender objected to the plan, contending that an interest rate in excess of 10% was required.  Both parties offered expert testimony in support of their contentions.

For reasons explained in the opinion, the bankruptcy court disagreed with each expert’s testimony.  The sixty-two page Couture Hotel opinion, rich in fact findings, provides detailed reasons for the court’s rejection of the respective experts’ risk adjustments, while refraining from giving an advisory opinion as to what interest rate would be adequate.