The Examiners: Expect Courts to Continue Wading Into Bondholder Batt...

How does bondholders’ use of the Trust Indenture Act affect companies’ ability to complete out-of-court restructurings?

The holders of bonds issued pursuant to the Trust Indenture Act of 1939 fully expect the protections afforded under that act to govern any attempt to modify their rights under a restructuring. For this reason, perhaps this question would better be posed as: “Should the Trust Indenture Act of 1939 be construed broadly or narrowly when examining the rights of minority noteholders in an out-of-court restructuring?” That question has been the subject of recent judicial scrutiny as a result of legal proceedings related to the Educational Management Corp. and Caesars restructuring efforts. Depending on how the relevant courts decide the question, we will know the true effect of the TIA on the ability of those companies to complete their proposed out-of-court restructurings.

What is clear is that minority noteholders have gained traction in the proceedings. The District Court for the Southern District of New York in Marblegate Asset Management LLC v. Education Management Corp. provided a detailed examination of the history of the TIA, delving deeply into the legislative history including various U.S. Securities and Exchange Commission reports and the accompanying testimony and debate on the congressional record. The arguments made from 1936 through 1939 ring true today as the congressional parties were focused on the potential for abuse in a restructuring without the supervision of any court or administrative agency. The district court ultimately found that the proposed restructuring violated the rights of the minority noteholder under the TIA.

Due to the sheer volume of notes issued under the TIA and the current economic climate, more courts will likely be asked to adjudicate this issue if the parties are not able to find a balance between protecting the rights of minority holders and the debt relief needed. Such decisions will provide significant guidance as the restructuring community deals with imminent maturity dates and underperforming companies.

Brett Miller is the managing partner of the New York office of Morrison & Foerster LLP, where he is a partner in the business restructuring & insolvency group and co-chair of the distressed real estate group.