Marblegate Asset Management, LLC v. Education Management Finance Corporation

846 F.3d 1 (2017)

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Marblegate Asset Management, LLC v. Education Management Finance Corporation

United States Court of Appeals for the Second Circuit
846 F.3d 1 (2017)

Facts

Education Management Corporation (EDMC) (defendant), a for-profit higher-education company, carried $1.3 billion in secured debt and $217 million in unsecured debt. Finding itself in a state of financial distress, EDMC entered negotiations with a committee of its creditors to restructure its debt without resorting to bankruptcy. Two possible plans emerged. The first, which required the unanimous consent of all creditors, called for an exchange of debt for new secured term loans and stock. The second, which would go into effect if any creditors withheld their consent, called for the foreclosure and sale of EDMC’s assets and the release of EDMC from its guarantee of the secured notes, which would in turn effect a release from the guarantee of the unsecured notes pursuant to the terms of the indenture. The consenting secured creditors would then receive priority over nonconsenting unsecured creditors. Unsecured noteholders Marblegate Asset Management, LLC, and Marblegate Special Opportunity Master Fund, L.P. (collectively, Marblegate) (plaintiffs) were the only creditors that refused to consent. Marblegate brought suit in federal district court to enjoin the sale of assets. Marblegate’s suit hinged on § 316(b) of the Trust Indenture Act, which prohibited the impairment of a bondholder’s right to receive or bring suit for payment. The court found in favor of Marblegate. EDMC and its subsidiaries, Education Management, LLC (defendant) and Education Management Finance Corporation (defendant), appealed. The United States Court of Appeals for the Second Circuit granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Lohier, J.)

Dissent (Straub, J.)

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