## Facts

- A for-profit higher-education company and its subsidiaries faced severe financial distress, with roughly $1.3 billion in secured debt and $217 million in unsecured debt.
- The company sought an out-of-court restructuring to avoid risks associated with bankruptcy, including potential loss of essential federal funding.
- Unsecured notes were issued under an indenture subject to the Trust Indenture Act of 1939 (TIA); a noteholder held about $14 million and refused to consent to the restructuring.
- The restructuring plan offered two paths:
  - A consensual exchange requiring unanimous noteholder consent to alter payment terms, exchanging existing debt for new secured loans and equity.
  - If any noteholder refused, an intercompany foreclosure and asset sale would transfer substantially all assets to a new subsidiary, leaving the original obligor entities as asset-less shells.
- Under indenture mechanisms tied to the transaction, guarantees supporting the unsecured notes would be released, leaving nonconsenting noteholders with claims against entities lacking meaningful assets.
- The holdout noteholder did not allege that principal, interest, or maturity terms were formally amended, but argued the transactions eliminated the practical ability to obtain payment.
- The district court enjoined the restructuring as violating TIA § 316(b) and ordered continued guarantees and full payment; the issuers and related parties appealed.

## Issues

1. Whether TIA § 316(b) prohibits only nonconsensual amendments to an indenture’s core payment terms (principal, interest, maturity), or also prohibits transactions that effectively eliminate nonconsenting holders’ practical ability to recover while leaving those terms unchanged.
2. Whether releasing guarantees and transferring assets through foreclosure and sale mechanisms contemplated by the indenture can “impair or affect” a holder’s right to receive payment under § 316(b) absent a formal amendment of payment terms.

## Decision

- The Second Circuit vacated the district court’s judgment and remanded.
- The court held that TIA § 316(b) prohibits only nonconsensual amendments to core payment terms (amount of principal and interest, and date of maturity).
- The court held that § 316(b) does not reach restructuring transactions that impair practical recovery so long as the indenture’s express payment terms are not amended without the holder’s consent.
- Applying that rule, the challenged restructuring did not violate § 316(b) because the notes’ core payment terms remained unchanged and the holder retained the legal right to sue for payment.

## Legal Principles

- TIA § 316(b) protects an individual holder from nonconsensual amendments to an indenture’s core payment terms, functioning as a narrow limitation on majority-action amendment provisions.
- The phrase protecting the “right … to receive payment … or to institute suit” safeguards legal rights under the indenture, not a guaranteed level of practical recoverability in an out-of-court restructuring.
- Transactions that leave holdouts with little or no realistic prospect of recovery do not violate § 316(b) if they do not formally amend principal, interest, or maturity terms and do not eliminate the holder’s legal right to sue.
- Indenture-authorized mechanisms (including guarantee releases triggered by specified transactions) are not treated as prohibited impairments under § 316(b) merely because they reduce the economic value of the notes.
- A broader “practical ability to pay” interpretation is disfavored where it would extend § 316(b) beyond indenture amendment mechanics and create uncertainty for common restructuring techniques (e.g., foreclosures, asset sales, exchange offers).

## Conclusion

The Second Circuit confined TIA § 316(b) to protecting holders against nonconsensual changes to core payment terms, rejecting a rule that would invalidate restructurings based on their practical effect on recovery when the indenture’s payment terms and the holder’s legal right to sue remain intact.


Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp., 846 F.3d 1 (2d Cir. 2017)