United States: Second Circuit Reverses Marblegate Holding On TIA § 316(B)

Last Updated: January 24 2017
Article by Josh Dorchak and Sabin Willett

Court holds that TIA § 316(b) prohibits only non‐consensual amendments to an indenture's core payment terms.

The US Court of Appeals for the Second Circuit limited the ability of minority bondholders to challenge majority-controlled workouts that are implemented out of court (outside the chapter 11 process) in a January 17 ruling in Marblegate Asset Management, LLC et al. v. Education Management Finance Corp. et al.1

By a two-one vote, the Second Circuit ruled that section 316(b) of the Trust Indenture Act (TIA)2 bars contractual but not practical impairment of the payment rights of non-consenting minority holders.


Marblegate arose from a workout. The obligor, in financial distress, negotiated a deal with its creditors in which the relevant obligors would be subject to a foreclosure sale that would effectively eliminate their ability to make any payment to creditors. Under the terms of the deal, creditors were offered debt and equity in a new corporate entity, which would be the recipient of the foreclosed assets. Unsecured bondholders who declined to accept the deal would be left with their debt technically intact, albeit with a claim against now asset-less obligors (and a disclosure document stating that they would not be paid anything). Of the bondholders, 98% consented. Marblegate—holding 2%—did not consent and brought suit.

The claim in Marblegate turned on a hotly debated phrase in section 316(b) of the TIA:

Notwithstanding any other provision of the indenture to be qualified, the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder, except as to a postponement of an interest payment consented to as provided in paragraph (2) of subsection (a) of this section, and except that such indenture may contain provisions limiting or denying the right of any such holder to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver, or loss of the lien of such indenture upon any property subject to such lien.3

The question is whether the phrase "the right. . .to receive payment of the principal and of interest. . .shall not be impaired or affected without. . .consent" means only that indenture provisions governing principal and interest may not be amended without the holder's consent, or whether the practical ability of the obligor to make payment of those amounts may not be impaired—through other actions or amendments—absent consent.

Marblegate prevailed in district court, where Judge Katherine Failla accepted the latter view, holding that the TIA protects the "ability" of the holder to receive payment. The company argued that the TIA protects only the contractual right to receive payment, and that a transaction that strips assets from an obligor—leaving it contractually bound but unable to meet its obligations—does not violate the TIA.

The company appealed, and the case was brought before the Second Circuit.

Second Circuit Ruling

On January 17, the Second Circuit agreed with the company and reversed the district court's decision. 

Circuit Judge Raymond Lohier (writing for himself and Judge José Cabranes) began by observing that section 316(b) is ambiguous. He expressed concern that a broad ruling would effectively hobble consensual workouts by "transform[ing] a single provision of the TIA into a broad prohibition on any conduct that could influence the value of a note or a bondholder's practical ability to collect payment."4 The majority reviewed the legislative history of the section at length, construing a 1936 SEC report and testimony of then SEC Chairman William O. Douglas and others to support the conclusion.

Circuit Judge Chester Straub dissented, reasoning that the plain text of the TIA barred the transaction. Quoting the district court, he observed that "[t]he text poses two questions: what does the 'right . . . to receive payment' consist of, and when is it 'impaired or affected' without consent?"5 He concluded, as had the district court, that limiting the scope of the statute to modifications of contractual payment clauses "nearly eliminates the import of the terms 'impair' and 'affect' and imposes qualifications in Section 316(b) that simply do not exist."6 A right to receive a payment is impaired ("annihilated" in this case, he wrote) when the obligor is stripped of the assets with which it would make payment. Judge Straub noted that the US Congress could have drafted section 316(b) more narrowly to prevent only amendments to indentures had its intent been so limited.

The Second Circuit reversed and remanded to the district court. One remaining issue, related to the survival of a parent guaranty, is left somewhat murky by the text of the decision and this issue may be clarified by the district court on remand. Nevertheless, the essential rule of the case is clear—so long as core payment terms are not amended, section 316(b) of the TIA does not support litigation challenges by non-consenting lenders asserting that the obligor has been stripped of the financial ability to honor those obligations.

Key Takeaways

The Second Circuit's decision will likely help debtors and bondholder groups seeking to effect restructurings outside of chapter 11. Holdouts who object to exchange treatment that impairs the practical ability of the obligor to satisfy their claims—but not their technical contractual right to be paid—will not prevail under the TIA.

The panel ruling in Marblegate may not be the last word. En banc review in the Second Circuit is rare, but this is the kind of case that might interest the full court, given the significance of the issue and the panel split.


1. Slip op., no. 15-2124 (2d Cir. Jan. 17, 2017).

2. 15 U.S.C. section 77ppp(b)

3. 15 U.S.C. § 77ppp(b) (emphasis added).

4. Slip op. at 15.

5. Marblegate Asset Mgmt., LLC v. Educ. 1 Mgmt. Corp., 111 F. Supp. 3d 542, 546 (S.D.N.Y. 2015).

6. Dissent, slip op. at 6. 

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.