At issue is the out-of-court restructuring of Education Management Corporation and its affiliates, with the support of an overwhelming majority of their secured and unsecured creditors, that reduced the Company's debt burden by approximately $1.1 billion. As part of the restructuring, secured lenders that were owed approximately $1.3 billion foreclosed on their collateral and triggered a contractual release of a guaranty that the parent corporation had provided in favor of the Company's unsecured noteholders. One of the unsecured noteholders holding 2% of the company's overall debt -- a hedge fund that specializes in trading distressed debt -- challenged the Company's restructuring and sought an injunction. The district court below denied the requested injunction and allowed the restructuring to proceed, but held that section 316(b) of the Trust Indenture Act entitled the holdout hedge fund to full payment of principal and interest on its notes.
The district court's decision generated significant uncertainty in the world of debt restructurings and the capital markets: market participants, scholars, and prominent restructuring advisors viewed the decision as calling into question the legality of a wide variety of corporate transactions by bond issuers; the ability of issuers to restructure obligations outside of costly bankruptcy proceedings; and the right of secured creditors to exercise their state-law foreclosure rights. The decision generated considerable academic scholarship, and spawned a series of new lawsuits challenging the propriety of corporate transactions that are now pending before the district courts.
According to commentators who have written about the case, as a result of the district court's decision, "out-of-court restructurings of public debt [had] largely ground to a halt," and borrowers were increasingly pursuing private debt offerings, rather than public offerings that are subject to the Trust Indenture Act. Yesterday's ruling by the Second Circuit should restore confidence in an issuer's ability to reorganize outside of bankruptcy and in its secured creditors' ability to exercise remedies without being accused of violating the TIA.
The decision represents a critical development in the law governing corporate debt. It holds that section 316(b) only prohibits non-consensual, formal amendments to an indenture's "core payment terms." This bright-line rule, which conforms to the traditional understanding of the statute, makes unmistakably clear that corporate transactions do not violate section 316(b) merely because of the practical effect they may have on a bondholder's ability to collect payment. The decision will affect an array of recent lawsuits commenced under the TIA, in which bondholders sought to challenge various types of corporate transactions based on allegations that the transactions made issuers less financially capable of paying their debts.
The appeal was argued by Milbank Litigation partner Antonia Apps on behalf of the Steering Committee for the Ad Hoc Committee of Term Loan Lenders of Education Management, LLC. The Milbank team also included Financial Restructuring partner Gregory Bray, Litigation partner Aaron Renenger, Litigation special counsel Alexander Lees and associate James Burke argued on behalf of the Steering Committee for the Ad Hoc Committee of Term Loan Lenders of Education Management, LLC. Wachtell, Lipton, Rosen & Katz, argued on behalf of Education Management.
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SOURCE Milbank, Tweed, Hadley & McCloy LLP