Marblegate Asset Management v. Education Management Corporati
Filing
OPINION, Dissenting, by Judge Straub, FILED.[1948199] [15-2124, 15-2141]
Case 15-2124, Document 196, 01/17/2017, 1948199, Page1 of 16
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STRAUB, Circuit Judge, dissenting:
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Trust Indenture Act (the “TIA”) prohibits Defendant‐appellant
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Education Management Corporation (“EDMC”) from engaging in an
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out‐of‐court restructuring that is collusively engineered to ensure
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that certain minority bondholders receive no payment on their
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notes, despite the fact that the terms of the indenture governing
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those notes remain unchanged. Because the plain text of the statute
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compels the conclusion that it does, I would answer that question in
The question before this Court is whether Section 316(b) of the
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the affirmative and uphold the judgment of the District Court. I
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therefore respectfully dissent.
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I begin my analysis with the language of Section 316(b) of the
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TIA. See United States v. DiCristina, 726 F.3d 92, 96 (2d Cir. 2013),
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cert. denied, 134 S. Ct. 1281 (2014) (quoting United States v. Kozeny, 541
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F.3d 166, 171 (2d Cir. 2008) (“When interpreting a statute, we ‘must
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begin with the language employed by Congress and the assumption
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that the ordinary meaning of that language accurately expresses the
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legislative purpose.’”). “Where the statute’s language is ‘plain, the
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sole function of the courts is to enforce it according to its terms.’”
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Kozeny, 541 F.3d at 171 (quoting United States v. Ron Pair Enters., Inc.,
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489 U.S. 235, 241 (1989)). Indeed, it has been pronounced “time and
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again that courts must presume that a legislature says in a statute
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what it means and means in a statute what it says there.” Conn.
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Nat’l Bank v. Germain, 503 U.S. 249, 253‐54 (1992).
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In interpreting the language of the statute, I am guided by
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standard principles of statutory construction. Statutes should be
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read so as “to give effect, if possible, to every clause and word of a
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statute.” Duncan v. Walker, 533 U.S. 167, 174 (2001) (quoting United
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States v. Menasche, 348 U.S. 528, 538‐39 (1955)). See also United States
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v. Nordic Vill., Inc., 503 U.S. 30, 36 (1992) (noting that it is a “settled
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rule that a statute must, if possible, be construed in such fashion that
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every word has some operative effect”); United States v. Anderson, 15
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F.3d 278, 283 (2d Cir. 1994) (“[C]ourts will avoid statutory
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interpretations that render provisions superfluous.”). Further, “[t]he
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‘whole act’ rule of statutory construction exhorts us to read a section
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of a statute not ‘in isolation from the context of the whole Act’ but to
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‘look to the provisions of the whole law, and to its object and
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policy.’” United States v. Pacheco, 225 F.3d 148, 154 (2d Cir. 2000)
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(quoting Richards v. United States, 369 U.S. 1, 11, (1962)). Here, the
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plain language of Section 316(b) requires the conclusion that the
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Intercompany Sale as envisioned in the Restructuring Support
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Agreement violates the TIA.
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Section 316(b) of the TIA reads as follows:
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(b) Prohibition of impairment of holderʹs right to payment
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 . . . .
15 U.S.C. § 77ppp(b) (emphasis added).
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As delineated by the District court, “[t]he text poses two
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questions: what does the ‘right . . . to receive payment’ consist of,
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and when is it ‘impaired or affected’ without consent?” Marblegate
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Case 15-2124, Document 196, 01/17/2017, 1948199, Page4 of 16
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Asset Mgmt., LLC v. Educ. Mgmt. Corp., 111 F. Supp. 3d 542, 546
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(S.D.N.Y. 2015) (“Marblegate II”). EDMC and the Steering
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Committee1 (together, “Appellants”) read the text narrowly, with
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EDMC arguing that “[o]n its face, the statutory text is unambiguous
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in protecting only the ‘right’ of a noteholder to receive payment
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when due and to sue for enforcement of such payment.” EDMC
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App. Br. 19; see also Steering Committee App. Br. 20 (“The language
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of the TIA demonstrates that Section 316(b) was intended to be a
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narrow limitation on the ability of noteholders to delegate to a
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Noteholder Majority the power to alter their right to payment of
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principal and interest through amendments of the indenture’s
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provisions, and not a broad proscription on all out‐of‐court
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restructurings, however effected.”) By contrast, Marblegate reads
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the text broadly, arguing that “the right to receive payment is
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‘impaired’ or ‘affected’ when the ability to receive payment under
1 “Steering Committee” refers to the Steering Committee for the Ad Hoc
Committee of Term Loan Lenders of EDMC, an intervenor‐appellant in this
appeal.
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the bond is stripped away—not only through formal amendment of
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a bond’s payment terms, but also by other means.” Marblegate
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App. Br. 24. I am persuaded by Marblegate’s reading of the statute.2
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The terms “right,” “impair,” and “affect” are undefined in the
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TIA, so we must look to their ordinary meaning. See Taniguchi v.
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Kan Pacific Saipan, Ltd., 132 S. Ct. 1997, 2002 (2012) (“When a term
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goes undefined in a statute, we give the term its ordinary
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meaning.”). A “right” is typically defined as “[s]omething that is
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due to a person by just claim, legal guarantee, or moral principle,” or
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“[a] legally enforceable claim that another will do or will not do a
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given act.” Black’s Law Dictionary (10th ed. 2014). On the basis of
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this definition, Appellants argue that actions only violate Section
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316(b) if those actions affect the “legal entitlement” to payment – i.e.
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by altering the terms of the bond so that a bondholder can no longer
2 Although Marblegate agreed at oral argument that the limiting principle it
proposed requires reference to the legislative history, see Oral Tr. 44:10—45:17,
this acknowledgment does not alter its reading of the plain text as covering the
actions at issue in this case.
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legally claim the right to receive payment under their original terms.
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Nothing in Section 316(b), Appellants urge, entitles bondholders to
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actual payment on their notes.
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This argument, however, nearly eliminates the import of the
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terms “impair” and “affect” and imposes qualifications in Section
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316(b) that simply do not exist. The term “impair” means “to
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diminish the value of.” Id; see also Humana Inc. v. Forsyth, 525 U.S.
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299, 301 (1999) (“The dictionary defines ‘impair’ as to weaken, make
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worse, lessen in power, diminish, relax, or otherwise affect in an
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injurious manner.”) The term “affect” means “to produce an effect
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on; to influence in some way.” Black’s Law Dictionary (10th ed.
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2014). Even defined as a “legal entitlement” or “claim,” it is
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unquestionable that the “right” to receive payment can be
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“diminished” or “affected” without actual modification of the
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payment terms of the indenture. By making it impossible for a
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company to pay the amount due on its notes, for example, the
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“right” to receive payment is “diminished” because it literally has
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been made worthless. Surely, a bondholder’s right or “legal
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entitlement” to receive payment is impaired when actions are taken
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to ensure that the bondholder either consents to a change in his
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payment terms or receives no payment on his notes at all.3 See
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Black’s Law Dictionary (10th ed. 2014) (explaining that the term
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“impair” is “commonly used in reference to diminishing the value of
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a contractual obligation to the point that the contract becomes
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invalid or a party loses the benefit of the contract” (emphasis added)).
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Had Congress intended merely to protect against modification
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of an indenture’s payment terms, it could have so stated. Nothing in
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the language of Section 316(b), however, cabins the prohibition on
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impairing or affecting the “right . . . to receive payment” to mere
3 Of course, there are a number of actions that could be said to impair the right of
noteholders to receive payment, ranging from poor business decisions at one end
to deliberate attempts to devalue the business at the other. But whereas
noteholders clearly give their implied consent for ordinary course business
transactions and decisions to be carried out, and are compensated for the risk
that the business will be run unsuccessfully by the interest that they receive on
the notes, the same cannot be said of a deliberate act to render their right to
receive payment worthless. In that latter circumstance, Section 316(b) requires
the noteholder’s explicit consent.
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amendment of the indenture. In fact, that Congress used the broad
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phrase “impaired or affected” implies that it did not intend Section
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316(b) to be limited in its scope to mere amendments. Because we
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are compelled to give every term in a statute effect, our reading of
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the statute must account for rather than ignore this phraseology. Cf.
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United States v. Woods, 134 S. Ct. 557, 567 (2013) (explaining that the
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“ordinary use” of the word “or” is “almost always disjunctive, that
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is, the words it connects are to be given separate meanings” (internal
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quotation marks omitted)). Further, Section 316(b) is written in the
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passive voice; its prohibition is nowhere limited to actions taken by
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a noteholder majority. Despite Appellants’ arguments to the
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contrary, nothing in the text of the statute requires the narrow
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reading that Section 316(b) merely prohibits modification of an
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indenture’s core payment terms (amount and due date) by
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noteholder majority action without consent of the individual
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noteholder.
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Although not determinative to my analysis, it is worth
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considering the structural argument that Appellants make in further
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support of their textual interpretation. See EDMC App. Br. 21 (“The
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statute’s focus on legal entitlements is reaffirmed by its structure.);
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Steering Committee App. Br. 21. This argument, however, is also
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unconvincing. Section 316(a) of the TIA relates to collective action
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clauses—i.e., clauses permitting a certain percentage of holders to
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consent to changes to the indenture terms.4 Unlike Section 316(b),
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Section 316(a) states in relevant part:
(a) Directions and waivers by bondholders
The indenture to be qualified‐‐
(1) shall automatically be deemed (unless it is expressly provided therein
that any such provision is excluded) to contain provisions authorizing the
holders of not less than a majority in principal amount of the indenture
securities or if expressly specified in such indenture, of any series of
securities at the time outstanding (A) to direct the time, method, and
place of conducting any proceeding for any remedy available to such
trustee, or exercising any trust or power conferred upon such trustee,
under such indenture, or (B) on behalf of the holders of all such indenture
securities, to consent to the waiver of any past default and its
consequences; or
(2) may contain provisions authorizing the holders of not less than 75 per
centum in principal amount of the indenture securities or if expressly
specified in such indenture, of any series of securities at the time
outstanding to consent on behalf of the holders of all such indenture
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which is mandatory, Section 316(a) is permissive. It states, for
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example, that an indenture may contain provisions permitting the
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majority of noteholders to consent on behalf of all noteholders “to
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the waiver of any past default and its consequences.” 15 U.S.C.
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§77ppp(a). It also permits indentures to contain provisions whereby
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75% of noteholders can consent on behalf of all noteholders “to the
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postponement of any interest payment for a period not exceeding
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three years from its due date.” Id.
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Appellants argue that Section 316(b) should thus be read as an
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“exception” to 316(a); while 316(a) states what collective action
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clauses are permitted, 316(b) simply states what collective action
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clauses are not permitted. But nothing in either of the two
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provisions in Section 316 indicates that 316(b) is meant to be an
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exception to 316(a). Moreover, as Marblegate urges, it is perhaps
securities to the postponement of any interest payment for a period not
exceeding three years from its due date.
15 U.S.C. § 77ppp(a).
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more reasonable to view 316(a)(2)—which permits a 75% vote to
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defer interest for three years—as an exception to 316(b). See 15
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U.S.C. §77ppp(b) (prohibiting modification of right to receive
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payment without noteholder’s consent “except . . . as provided in
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paragraph (2) of subsection (a) of this section.”).
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At a minimum, the language of Section 316(b) covers the
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actions taken by EDMC and the Steering Committee here. The
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Restructuring Support Agreement presented Marblegate with what
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the District Court rightfully deemed a Hobson’s choice—to accept a
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modification of the payment terms of its notes, or to receive no
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payment at all. The Intercompany Sale, which stripped the issuers
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of their assets and removed the parent guarantee, ensured that no
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future payments of principal or interest would be made on the
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notes. This scheme did not simply “impair” or “affect” Marblegate’s
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right to receive payment—it annihilated it.5 The methodology used
Appellants argue that Marblegate’s right to receive payment was not
annihilated, or even impaired or affected, by their actions because Marblegate
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to accomplish that annihilation is of little interest when the end
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result is squarely at odds with the plain intent of Section 316(b). See
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In re Olson, 818 F.2d 34, 47 (D.C. Cir. 1987) (noting that interpreting a
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statute in a manner that “would undercut [its] plain intent . . . and
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permit the accomplishment by indirect means of a result that the
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statute prohibits being accomplished by direct means” would
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produce “an unreasonable result”). We therefore need look no
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further than the plain text of Section 316(b) to hold that the
still maintains a legal claim for payment and it may sue, perhaps in state court,
for enforcement of that payment. But this argument misses the point. Even if
Marblegate maintains a “legal claim” for payment upon which it can sue, that
legal claim was surely impaired by actions that intentionally made the company
unable to pay any judgment awarded against it. The effect of the Intercompany
Sale was to transfer all or substantially all of EDMC’s assets to a new, wholly
owned subsidiary of EDMC, and EDMC explicitly warned that this meant its
assets “would not be available to satisfy the claims of [dissenting] Holders.”
App’x 52. The Intercompany Sale thus deliberately placed EDMC’s assets
beyond the reach of non‐consenting noteholders, while the effect of the release of
the parent guarantee would be to eliminate noteholders’ ability to seek payment
from EDMC’s guarantor. We have held that a company’s complete inability to
pay a monetary judgment constitutes a risk of irreparable harm when a company
is nearly insolvent in the context of preliminary injunctions. See Brenntag Int’l
Chems., Inc. v. Bank of India, 175 F.3d 245, 249‐50 (2d Cir. 1999). Surely, then, a
bondholder’s right to receive payment on its bond by the bringing of a lawsuit
has been impaired or harmed when the company has rendered itself unable to
satisfy any monetary judgment. While the right to sue remains intact, the ability
to recover anything as a result of that suit has vanished, rendering the suit
meaningless.
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Intercompany Sale, as envisioned by the Restructuring Support
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Agreement, violates the TIA. Based on the plain terms of Section
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316(b), I would hold that an out‐of‐court debt restructuring
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“impairs” or “affects” a non‐consenting noteholder’s “right to
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receive payment” when it is designed to eliminate a non‐consenting
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noteholder’s ability to receive payment, and when it leaves
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bondholders no choice but to accept a modification of the terms of
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their bonds.
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I am cognizant of the parade of horrors that Appellants
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predict will result from interpreting the TIA in the manner above.
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However, threatening dire commercial consequences from the
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refusal to read a statute in a manner inconsistent with its plain
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language is not a sufficient basis to override the correct
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interpretation of the law. We must not forget the long‐standing
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imperative that making law is the job of the legislature and not of the
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courts. Where, as here, the statute’s language is plain and
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unambiguous, the “sole function of the courts is to enforce it
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according to its terms.” Ron Pair Enters., Inc., 489 U.S. at 241
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(quoting Caminetti v. United States, 242 U.S. 470, 485 (1917); accord
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DiCristina, 726 F.3d at 96. Certain undesirable consequences might
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well arise from the fact that Section 316(b) prohibits actions such as
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those taken by EDMC in this case. But “[r]esolution of the pros and
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cons of whether a statute should sweep broadly or narrowly is for
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Congress.” United States v. Rodgers, 466 U.S. 475, 484 (1984). See also
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Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 576 (1982) (“The
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remedy for any dissatisfaction with the results in particular cases
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lies with Congress and not with this Court. Congress may amend
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the statute; we may not.”).6 The bond market has surely undergone
6 Significantly, Congress recently abandoned two proposals to amend § 316(b),
first through a 2015 highway bill rider and then through an omnibus
appropriations legislation rider. The proposals would have narrowed the
definitions of impairment of the right to payment and the right to institute suit
for nonpayment. In response to the latter proposal, 18 law professors sent a
letter to members of Congress urging them to reject the proposed amendment,
which would have been undertaken without legislative hearings or public
comment, because the amendment “could have broad negative unintended
consequences in the securities market.” Letter sponsored by Georgetown
University Law Center to Members of Congress (Dec. 8, 2015). Several major
asset managers also sent a letter expressing their disapproval for amendment
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significant alterations since the enactment of the TIA, including that
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the main players are now sophisticated corporate entities on both
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sides. But it is not for this Court to alter the TIA on its own accord,
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and “none of this establishes why the plaintiffs should be barred
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from vindicating their rights under the [TIA]” as it currently stands.
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NML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230, 248 (2d Cir.
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2013). “Our role is not to craft a resolution that will solve all the
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problems that might arise in hypothetical future litigation involving
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other bonds and other [parties],” id., but it is instead to interpret the
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TIA in as fastidious a manner as we are able. In so doing I would
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hold that Section 316(b) of the TIA bars the actions at issue in this
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case.
without the opportunity for hearings and public comment, as “the adverse
consequences to the economy and to capital markets could be significant.” Letter
from BlackRock, Inc, DoubleLine Group LP, Oaktree Cap. Mgmt., L.P., Pac. Inv.
Mgmt. Co, T. Rowe Price Assocs., & Western Asset Mgmt. Co. to Members of
Congress (Dec. 14, 2015). This past March, the Chamber of Commerce sent a
letter “encourag[ing] Congress to clarify the rules of the road on this important
subject.” Letter from R. Bruce Josten, U.S. Chamber of Commerce, to Members of
Congress (Mar. 31, 2016). That Congress has to date declined the invitation to
take up this issue does not provide this Court with a directive to override and
narrow the clear language of § 316(b).
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CONCLUSION
Because the Intercompany Sale as proposed under the
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Restructuring Support Agreement would have the effect of
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imposing on Marblegate a choice between a modification of their
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core payment terms or receiving no payment at all—thereby clearly
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impairing Marblegate’s right to receive payment under the original
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terms of the indenture—I would hold that it violates the plain text of
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Section 316(b) of the Trust Indenture Act and affirm the judgment of
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the District Court. Our system of governance is organized such that
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Congress is tasked with writing the law and the federal courts are
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tasked with applying, not rewriting, it. If Congress and the parties
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affected by the TIA are unsatisfied with the law’s consequences, it is
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for Congress rather than this Court to amend it. I therefore
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respectfully dissent.
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