United States: Losing Your Marbles: A Sensible Interpretation Of Section 316 Of The Trust Indenture Act

Last Updated: February 8 2017
Article by William P. Mills, III

Most Read Contributor in United States, December 2018

The U.S. Court of Appeals for the Second Circuit issued its ruling in Marblegate Asset Management, LLC v. Education Management Corp. that provided much needed clarity to creditors and issuers involved in out-of-court restructurings affecting noteholders.  The issue for the court was whether Education Management Corp. ("EDMC") violated the Trust Indenture Act (the "TIA") when it implemented a restructuring that impaired the rights of one of its unsecured noteholders, Marblegate Asset Management, LLC (the "Noteholder").  The issue in front of the court was whether Section 316(b) of the TIA prohibits either (i) any action that could affect a noteholder's practical ability to recover payment or (ii) just actual amendments to the payment terms of an indenture. The majority Appeals Court opinion overturned the District Court's decision, which was that the foreclosure and restructuring by EDMC violated Section 316(b) of the TIA, and held that the TIA "prohibits only non-consensual amendments to an indenture's core payment terms."  The dissenting opinion supported the District Court's interpretation that Section 316(b) should protect noteholders from "collusively engineered" restructurings.

The Facts

EDMC was in severe financial distress but could not avail itself of a bankruptcy filing because such a filing would have caused EDMC to lose eligibility for certain federal funding it received as a for-profit higher education company.  EDMC's subsidiaries had approximately $1.3 billion of secured debt under a credit agreement and approximately $217 million of unsecured debt in the form of notes.  At the time of the proposed restructuring EDMC was a guarantor of all of the debt.  The terms of the notes, agreed upon by the noteholders at the time the notes were issued, provided that the parent guarantee would be automatically released without any consent from noteholders upon the release of any parent guarantee provided in the future to the holders of secured debt.

The restructuring consisted of a number of steps. First, the secured creditors would foreclose on EDMC's assets and release EDMC from its guarantee of the secured debt (which would result in a concurrent release of EDMC's guarantee of the notes).  Second, the foreclosed assets would be sold to a newly-formed subsidiary of EDMC to which the existing creditors had no recourse. The new subsidiary would issue debt and equity only to consenting creditors.  Non-consenting secured creditors would receive junior debt in the new subsidiary and non-consenting noteholders would receive nothing, although they would retain their claim against the original bond issuer, which had been transformed into "an empty shell" without any assets and most likely eliminating recourse by non-consenting noteholders on the unsecured bonds.

Section 316(b)

Section 316(b) of the TIA is entitled "Prohibition of impairment of holder's right to payment" and the relevant part requires the consent of any affected noteholder to take action that would impair or affect such noteholder's "right ... to receive payment".  In the Appeals Court decision, EDMC prevailed in its argument that this consent requirement should apply only to changes of "core payment terms".  The Noteholder, on the other hand, argued that Section 316(b) "would be rendered meaningless if issuers and secured creditors could collaborate to restructure debt without formally amending any payment terms", an argument which had prevailed in the District Court.

All parties agreed that the actual language of Section 316(b) is ambiguous and could lead to multiple interpretations. Nonetheless, the Appeals Court decision noted that, if the intent of the legislation had been to protect the practical ability to receive payment, then the second half of Section 316(b), which prohibits the impairment of the right to sue for payment, would be entirely superfluous because limiting the right to sue for payment is "the most obvious impairment of the creditor's practical ability to collect".  Moreover, the court noted that "no other provision in the TIA purports to regulate an issuer's business transactions, which would be a likely result of the Noteholder's broad reading". 

The Second Circuit's Analysis

The court spent considerable time reviewing the legislative history to determine their view of the intention behind the relevant TIA provision.  The court came to the conclusion that the intent of the provision was only to "restrict the power of the majority to change...particular phases of the contract" (Douglas Testimony) and not to govern out-of-court restructurings. This view was based on (i) a 1936 SEC Report focused on protective organizations in restructurings (and a specific part of that report focused on "Trustees Under Indentures"), (ii) 1938 testimony to Congress of then-SEC Chairman William O. Douglas and (iii) a subsequent 1940 SEC Report.

In addition, and most important for issuers and creditors in the post-Marblegate environment, the Second Circuit recognized that to adopt the broader reading of the provision would require the courts to make a determination in every case as to whether a restructuring constitutes an out-of-court restructuring designed to eliminate non-consenting holders' ability to receive payment.  Since the District Court's original ruling, issuers and creditors have struggled with their ability to enter into modifications and restructurings for fear of non-consenting noteholders arguing that any such amendment, waiver or modification might affect the noteholders' ability to receive payment.  In its broadest interpretation, it could have been argued that transactions such as permitting an asset sale could have been viewed, depending on the facts and circumstances, as prohibited by Section 316(b).

In its effort to interpret Section 316(b) in a way that provides greater clarity to issuers and creditors as to what is permitted and what is prohibited, the court reiterated its dissatisfaction for interpreting boilerplate indenture provisions based on "the relationship of particular borrowers and lenders" or the "particularized intentions of the parties to an indenture" (the Appeals Court quoting from Sharon Steel Corp. v. Chase Manhattan Bank, N.A.).  As many courts have noted in prior decisions "uniformity in interpretation" of contracts is essential.

Finally, the court pointed out that if the Noteholder's interpretation were followed, Section 316(b) could be read to prohibit all out-of-court restructurings in which the assets are not sufficient to satisfy 100% of the outstanding debt.  In such scenarios, any non-consenting holder would have its practical right to receive payment impaired by the agreed restructuring.


The Appeals Court's Marblegate decision provides more clarity to issuers, creditors and market participants by limiting the remit of Section 316(b) to formal amendments of an Indenture's "core payment terms". The leverage of non-consenting noteholders has been significantly reduced, as they will have to rely much more heavily on other federal and state remedies, as the Appeals Court noted in its decision.  That said, out-of-court restructurings are still not entirely free from risk.  Absent the protection of a formal bankruptcy filing, third party creditors and non-consenting noteholders could still disrupt out-of-court restructuring processes by seeking payment of principal, interest or other damages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions