Marblegate Asset Management, L.L.C. et al v. Education Management Corporation et al

Filing 78

OPINION AND ORDER: For the reasons set forth in this Opinion, the Intercompany Sale as envisioned in the Restructuring Support Agreement and since carried out in part would violate Plaintiffs' rights under the Trust Indenture Act. Pursuant to Section 10.06(c) of the Fourth Supplemental Indenture (Supp. Ex. 2), Education Management Corporation shall guarantee any past and future payments of principal and interest to Marblegate on their respective due dates under the March 5, 2013 Indenture. The Clerk of Court is directed to enter judgment for Plaintiffs, terminate all pending motion, adjourn all remaining dates, and close the case. (Signed by Judge Katherine Polk Failla on 6/23/2015) (tn)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------------------------X
:
MARBLEGATE ASSET MANAGEMENT,
:
:
LLC, et al.,
:
:
Plaintiffs,
:
:
v.
:
EDUCATION MANAGEMENT CORP., et al., :
:
Defendants. :
:
----------------------------------------------------- X

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: June 23, 2015
______________

14 Civ. 8584 (KPF)
OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:
This is the second opinion stemming from the restructuring of the debt of
Education Management Corporation, Education Management L.L.C., and
Education Management Finance Corporation (collectively, “EDMC” or
“Defendants”). Defendants, in negotiations with the Steering Committee for the
Ad Hoc Committee of Term Loan Lenders of Education Management (the
“Steering Committee” or “Intervenors”), agreed to a debt restructuring in which
bondholders would receive partial recovery in the form of debt and/or equity.
Marblegate Asset Management, L.L.C., and Marblegate Special Opportunities
Master Fund, L.P. (collectively, “Marblegate” or “Plaintiffs”), dissented from the
restructuring plan, as a result of which, under the restructuring as originally
conceived, they would retain their original claims but be left with no assets as
security for those claims. Marblegate sought a preliminary injunction under
the Trust Indenture Act of 1939 (the “Trust Indenture Act” or the “Act”), 15

U.S.C. §§ 77aaa-77bbbb; the Court denied the request for injunctive relief in
Marblegate Asset Management v. Education Management Corp., — F. Supp. 3d
—, No. 14 Civ. 8584 (KPF), 2014 WL 7399041 (S.D.N.Y. Dec. 30, 2014)
(“Marblegate I”). EDMC subsequently carried out the restructuring, while
leaving in place mechanisms to pay Marblegate’s claims if necessary.
Marblegate now seeks declaratory, monetary, and potentially injunctive relief.
EDMC counterclaims for declaratory relief allowing it to remove the
mechanisms put in place to preserve Marblegate’s rights. The Court, having
converted the preliminary injunction hearing into a bench trial at the request of
the parties and having received supplemental exhibits and briefing, now rules
in favor of Plaintiffs for the reasons set forth in this Opinion and Order.
BACKGROUND 1
A.

Factual Background
The Court assumes familiarity with its prior Opinion denying

Marblegate’s request for a preliminary injunction, but briefly retraces the
relevant facts. The case arises out of EDMC’s decision to restructure roughly
$1.5 billion in debt. Marblegate I, 2014 WL 7399041, at *3. EDMC, a for-profit
education company, was inhibited from restructuring through bankruptcy by

1

The facts set forth in this Opinion are taken from the Court’s previous Opinion in
Marblegate I, 2014 WL 7399041; the exhibits and testimony presented at the hearing
held on November 18 and 19, 2014, for which the same identifying terminology is used
as in Marblegate I; the supplemental exhibits submitted by the parties in connection
with the instant bench trial (“Supp. Ex. [number]”); and the exhibits to the Lees
Declaration submitted with Defendants’ and Intervenors’ supplement brief (“Lees Decl.
Ex. [number]”).
For convenience, the parties’ supplemental briefs are cited as “Def. Supp. Br.” and “Pl.
Supp. Br.”

2

its reliance on federal funds distributed through Title IV of the Higher
Education Act of 1965, 20 U.S.C. §§ 1079-1099. Marblegate I, 2014 WL
7399041, at *1-2. Declaring bankruptcy would have rendered EDMC ineligible
for Title IV funds, depriving it of nearly 80% of its revenue. Id. 2 Accordingly,
EDMC negotiated an agreement with a group of its largest creditors to carry
out the Proposed Restructuring. Id. at *6-7.
Prior to the since-consummated restructuring, EDMC’s debt consisted of
$1.305 billion in secured debt (divided between $220 million drawn from a
revolving credit facility and $1.085 in secured term loans) and $217 million in
unsecured notes (the “Notes”), for a total debt of $1.553 billion. Marblegate I,
2014 WL 7399041, at *3. The instant case focuses on the unsecured Notes,
which were qualified under the Trust Indenture Act (Indenture §§ 6.07, 12.01).
Although the Notes were unsecured and issued by a subsidiary, Education
Management LLC, they were guaranteed by EDMC (the “Parent Guarantee”).
Id. at *3-4 The Parent Guarantee recited, however, that it could be released
either by majority vote of the Noteholders (Indenture § 9.02) or by a
corresponding release of the Parent Guarantee by the secured lenders

2

A stark example of the consequences of such an event was recently provided by
Corinthian Colleges, Inc., which, having had its access to Title IV funds suspended in
2014, closed its remaining campuses and filed for bankruptcy over a ten-day span from
late April to early May 2015. See For Profit College Company Files for Bankruptcy, N.Y.
Times, May 5, 2015, at A16.

3

(Indenture § 10.06), 3 and accordingly the Notes’ offering circular cautioned
investors not to assign any value to the Parent Guarantee. Id.
The Ad Hoc Committee of Term Loan Lenders with which EDMC
negotiated consisted of creditors holding 80.6% of EDMC’s secured debt and
80.7% of the Notes; the negotiations were primarily carried out by the Steering
Committee, which collectively held 35.8% of EDMC’s secured debt and 73.1%
of the Notes. Marblegate I, 2014 WL 7399041, at *6. EDMC and the Steering
Committee arrived at the Proposed Restructuring, which would provide secured
term loan lenders debt and equity in EDMC amounting to roughly a 55%
recovery; holders of Notes would receive equity amounting to roughly a 33%
recovery of value. Id.
The Restructuring Support Agreement anticipated 100% voluntary
participation by creditors, but contained a stick that would come into effect if
any creditors did not consent. That stick, the Intercompany Sale, would
involve several steps:
(i) the secured lenders would release EDMC’s parent
guarantee of their loans … , thus triggering the release
of EDMC’s parent guarantee of the Notes under
Indenture § 10.06; (ii) the secured lenders would
exercise their rights under the 2014 Credit Agreement
and Article 9 of the Uniform Commercial Code to
foreclose on “substantially all the assets” of Defendants;
and (iii) the secured lenders would immediately sell
these assets back to a new subsidiary of EDMC. This
new subsidiary would then distribute debt and equity
to the creditors who had consented to the Restructuring
3

The Secured Lenders did not have such a guarantee at the time of the issuance of the
Notes, but obtained one shortly prior to the restructuring. Marblegate I, 2014 WL
7399041, at *7.

4

Support Agreement in accordance with that document’s
terms.
Marblegate I, 2014 WL 7399041, at *7 (internal footnotes and citations
omitted). As EDMC explicitly warned the Noteholders in its Exchange Offer,
the result of the Intercompany Sale would be that “substantially all of our
assets will have been transferred to New EM Holdings and will not be available
to satisfy the claims of [dissenting Noteholders]. As a result, we anticipate that
such Holders will not receive payment on account of their Notes.” Id. (quoting
Exchange Offering Circular 3). Thus, although the Intercompany Sale would
not formally alter the dissenting Noteholders’ right to payment on their Notes, it
was unequivocally designed to ensure that they would receive no payment if
they dissented from the debt restructuring.
B.

The Preliminary Injunction Hearing
Marblegate, which held roughly $14 million of Notes, declined to

participate in the Exchange Offer, and on October 28, 2014, filed a motion for a
temporary restraining order and a preliminary injunction. Marblegate I, 2014
WL 7399041, at *8. 4 The parties agreed to halt both the Proposed
Restructuring and Marblegate’s motion to allow for expedited discovery and
briefing prior to a hearing on November 18 and 19, 2014. Id. 5 In advance of
the hearing, the parties provided the Court with over 400 exhibits, in addition

4

Marblegate was initially joined by Magnolia Road Capital L.P. and Magnolia Global
Credit Master Fund L.P., which subsequently dismissed their claims pursuant to
Federal Rule of Civil Procedure 41. (Dkt. #53).

5

During this pause, the Steering Committee filed its motion to intervene, which the
Court granted pursuant to Federal Rule of Civil Procedure 24(b). (Dkt. #23).

5

to the affidavits and deposition testimony of six fact witnesses and six experts.
After hearing cross-examination and redirect of these witnesses on November
18, and oral argument on November 19, the Court issued its opinion in
Marblegate I on December 15, filing it publicly on December 30, 2014. The
Court denied the motion for a preliminary injunction due to the adequacy of
Plaintiffs’ remedies at law, but found that they would likely succeed on the
merits of their claims under the Trust Indenture Act. See id. at *10-21.
C.

Subsequent Developments
On January 5, 2015, EDMC proceeded with the Intercompany Sale,

subject to certain alterations to protect the rights of Marblegate in the event of
a final ruling in Plaintiffs’ favor. (See Dkt. #60). 6 The secured creditors
foreclosed on the assets of Education Management LLC and sold them to
Education Management II LLC, thus reducing EDMC’s debts from $1.5 billion
to $400 million. (Id.). However, EDMC refrained from removing the Parent
Guarantee from Marblegate’s Notes, and amended the Indenture to so allow.
(Id.). EDMC then filed its answer to the Complaint, counterclaiming for
declaratory relief enabling it to release the Parent Guarantee from the Notes.
(Dkt. #61). Due to these steps, as Plaintiffs allow, injunctive relief is no longer
necessary, as a final ruling concerning the legal status of Marblegate’s claims

6

These alterations included a decision by EDMC to refrain from delivering certain
documents needed to effectuate the release of the Parent Guarantee, as well as an
amendment to the relevant Indenture making clear that EDMC II would continue to
guarantee the unsecured notes held by Marblegate until such time as the Parent
Guarantee was released. (Dkt. #60).

6

will allow it to recover on the Notes to whatever extent is legally warranted.
(See Pl. Supp. Br. 19).
The parties subsequently entered into a stipulation, endorsed by the
Court, retroactively consolidating the preliminary injunction hearing and the
record thereof into a trial on the merits pursuant to Federal Rule of Civil
Procedure 65(a)(2), and granting an additional period to supplement the record
and the briefing. (Dkt. #70). Pursuant to this stipulation, the parties jointly
filed 13 supplemental exhibits with the Court on February 3, 2015.
Defendants and Intervenors then filed a joint supplemental brief on February
9, 2015 (Dkt. #71), and the briefing was complete with the filing of Plaintiffs’
supplemental reply brief on March 11, 2013 (Dkt. #73). The Court now
considers whether Section 316(b) of the Trust Indenture Act, 15 U.S.C.
§ 77ppp(b), entitles Plaintiffs to full payment on their Notes, or whether EDMC
may release the Parent Guarantee and leave Plaintiffs to attempt collection
from the now asset-free Education Management LLC.
DISCUSSION
The question put before the Court is straightforward: does a debt
restructuring violate Section 316(b) of the Trust Indenture Act when it does not
modify any indenture term explicitly governing the right to receive interest or
principal on a certain date, yet leaves bondholders no choice but to accept a
modification of the terms of their bonds? Examining the text, history, and
purpose of the Trust Indenture Act, the Court concludes that the answer is yes.

7

A.

Section 316(b) of the Trust Indenture Act
1.

Text

Section 316(b) of the Trust Indenture Act reads in relevant part:
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). The text poses two questions: what does the “right ... to
receive payment” consist of, and when is it “impaired or affected” without
consent? Read narrowly, Section 316(b) protects bondholders only against
involuntary modification of their payment terms or their right to sue for
payment; read broadly, it protects bondholders against being forced to accept a
lesser payment than they bargained for, absent a restructuring in bankruptcy.
At least two courts have found that Section 316(b) protects only the legal
right to demand payment, rather than any substantive right to receive it, and
thus that only formal modification of the right to sue or the payment terms
impairs or affects the right to demand payment. See YRC Worldwide Inc. v.
Deutsche Bank Trust Co. Am., No. 10 Civ. 2106 (JWL), 2010 WL 2680336, at *7
(D. Kan. July 1, 2010) (“TIA § 316(b) does not provide a guarantee against the
issuing company’s default or its ability to meet its obligations. Accordingly, the
fact that the deletion of section 5.01 might make it more difficult for holders to
receive payment directly from plaintiff does not mean that the deletion without
8

unanimous consent violates TIA § 316(b)[.]”); In re Nw. Corp., 313 B.R. 595,
600 (Bankr. D. Del. 2004) (“[S]ection 316(b) applies to the holder’s legal rights
and not the holder’s practical rights to the principal and interest itself ... there
is no guarantee against default.” (emphases in original)).
Meanwhile, at least two other courts, both in this District, have
interpreted the right protected by Section 316(b) to be a broader right to receive
payment, and thus held that a debt restructuring that deprives dissenting
bondholders of assets against which to recover can violate the Trust Indenture
Act. See MeehanCombs Global Credit Opportunities Funds, LP v. Caesars
Entm’t Corp., No. 14 Civ. 7091 (SAS), 2015 WL 221055, at *4-5 (S.D.N.Y.
Jan. 15, 2015) (citing Marblegate I, 2014 WL 7399041); Federated Strategic
Income Fund v. Mechala Grp. Jam. Ltd., No. 99 Civ. 10517 (HB), 1999 WL
993648, at *5-7 (S.D.N.Y. Nov. 2, 1999).
The Court, in adopting the latter position in Marblegate I, did not rely
upon the text alone, finding that it “lends itself to multiple interpretations.”
2014 WL 7399041, at *16. Rather, it looked also to the statutory history and
purpose of the Trust Indenture Act, finding that they supported a broad
reading meant to inhibit involuntary debt restructurings outside the formal
mechanisms of bankruptcy. Id. at *18-19. Defendants and Intervenors now
urge the Court to reconsider that evaluation, arguing that a more extensive
analysis of the legislative history supports their narrow reading of Section
316(b). The Court, having considered the full legislative history provided by

9

Defendants and Intervenors, continues to find that it supports Plaintiffs’
broader reading of Section 316(b).
2.

Legislative History

The impetus for the Trust Indenture Act was provided by a 1936 report of
the Securities and Exchange Commission (the “1936 SEC Report”) (Lees Decl.
Ex. J), referenced repeatedly throughout the House and Senate deliberations.
See 15 U.S.C. § 77bbb(a) (Section 302 of the Trust Indenture Act, citing to the
1936 SEC Report as a basis for the Act). The primary author of the 1936 SEC
Report was William O. Douglas, who would subsequently become a
commissioner and then Chairman of the SEC before being appointed an
Associate Justice of the United States Supreme Court. He testified before the
Subcommittee of the Senate Committee on Banking and Currency in 1937 in
support of the proposed Trust Indenture Act of 1937 (see Lees Decl. Ex. F
(“1937 Senate Hearings”)), and again before the Subcommittee of the House
Committee on Interstate and Foreign Commerce in 1938 in support of the
proposed Trust Indenture Act of 1938 (see Lees Decl. Ex. B (“1938 House
Hearings”)). Neither version became law, and an amended version of the Trust
Indenture Act was reintroduced in 1939, with substantial changes to the
language of what became Section 316(b), and was signed into law on August 3,
1939. The Court now examines the relevant legislative history over this threeyear period, as well as a 1958 SEC manual that Defendants and Intervenors
argue sheds light on the proper interpretation of the Act.

10

a.

The 1936 Report

The SEC compiled its report — of which Part VI, entitled “Trustees Under
Indentures,” is referred to as the “1936 SEC Report” — pursuant to the
Securities Exchange Act of 1934. (1936 SEC Report at iii). The 1936 Report
touches on issues relevant to Section 316(b) at two places: first, when
discussing protection of minority bondholders (id. at 61-66), and second, when
discussing majority reorganizations (id. at 143-51).
Defendants and Intervenors, discussing the 1936 SEC Report’s section
on minority protection, point out its highlighting of a 1926 Eighth Circuit case
in which the terms of an indenture prevented a bondholder from bringing suit
for payment at all in the face of a trustee’s inaction. (See 1936 SEC Report at
62 (discussing Allan v. Moline Plow Co., 14 F.2d 912 (8th Cir. 1926))). It is true
that the Report, among multiple other sources of legislative history, makes
clear that such “no-action clauses” were one of the evils that the Trust
Indenture Act was intended to address. But the 1936 SEC Report goes on
immediately to note that the problems of minority bondholders are at their
height when confronting voluntary restructurings conducted by foreclosure
sales outside the supervision of a judicial or administrative process, where the
incentives of the majority would be to offer as little as possible in cash or new
securities to dissenting bondholders. (See id. at 63-64). The remedy
prescribed by the Report in this section is a more active indenture trustee in
reorganization negotiations, but as discussed infra, the Trust Indenture Act

11

generally evolved over the course of its legislative history from strengthening
the hands of trustees and the SEC to imposing mandatory indenture terms.
Debt restructurings are also discussed at Part B of Appendix C of the
Report. (See 1936 SEC Report at 143-51). The Report noted the problems
stemming from requiring unanimous consent of bondholders to reorganize
outside bankruptcy: “reorganizers would be faced with the necessity of dealing
with a dissenting minority, with the consequences that foreclosure proceedings
(and later on, [bankruptcy] proceedings) would be necessary.” (Id. at 145). But
the Report also noted that provisions allowing majority amendment of security
and payment obligations
give rise to abuses and problems which must be faced
if the interests of security holders are not to be made
subordinate to the desires and conveniences of the
dominant group. The risk is that if these provisions
come into vogue and no controls are set up over them,
the next cycle of reorganizations will take place on a
voluntary basis without supervision of any court or
administrative agency.
(Id. at 150). Acknowledging these competing concerns, the SEC deferred to a
future report a full analysis and recommendations (id.); it is unclear whether
such a report ever materialized.
b.

The Trust Indenture Act of 1937
i.

Text

The proposed Trust Indenture Act of 1937 gave the SEC relatively broad
regulatory authority, including allowing it to require that qualified indentures
contain language regarding

12

[t]he rights, powers, and remedies of the indenture
security holders and the manner in which and
conditions upon which such rights, powers and
remedies may be exercised, including the right and
power of the indenture security holders with respect
to … bringing action to collect the principal of and
interest upon the indenture securities at their
respective due dates[.]
Trust Indenture Act of 1937, S. 2344, 75th Cong. § 7(m)(5) (1st Sess. 1937)
(1937 Senate Hearings at 12). The language of the 1937 Act is narrower than
the contemporary Section 316(b), focusing on the right to bring an action.
Moreover, it does not automatically protect, but instead merely gives the SEC
authority to require such protections.
ii.

Testimony and Debate

The congressional record does not shed a great deal of light on the
significance of Section 7(m)(5); both Commissioner Douglas, testifying, and the
SEC, in a report adopted into the record, passed over it fairly briefly. (See 1937
Senate Hearings at 70, 86). Other portions of the discussion before the Senate
subcommittee, however, suggest a broad concern with debtors taking
advantage of creditors, and are worth noting. Commissioner Douglas pointed
out the inherent conflict between the interests of issuers and security holders,
explaining that issuers would have several “desire[s] antithetical in principle to
the interests of investors,” among them a desire “to have the greatest possible
freedom to withdraw collateral and sell pledged property.” (Id. at 24-25). There
was also a concern raised by Senator Robert Wagner as to whether the Act
would prevent the substitution of worthless collateral for collateral on which a
security holder had relied; Commissioner Douglas noted that the SEC was
13

empowered to block such provisions, though Senator Wagner and others
worried that such protections would be at the SEC’s discretion rather than
automatic. (Id. at 36-39).
c.

The Trust Indenture Act of 1938
i.

Text

The Trust Indenture Act, as it then stood, read in relevant part:
The indenture to be qualified shall contain provisions
which the Commission deems adequate … with respect
to the following matters —
***
(3) The rights, powers, and remedies of the indenture
security holders and the manner in which and
conditions upon which such rights, powers, and
remedies may be exercised, including the rights,
powers, and remedies of the indenture security holders
with respect to (A) accountings by the indenture trustee,
(B) bringing action to collect the principal of and interest
upon the indenture securities upon their respective due
dates, and (C) calling and holding meetings of the
indenture security holders and taking action at such
meetings. The indenture to be qualified may contain
provisions authorizing the holders of not less than a
majority in principal amount of the indenture securities
at the time outstanding to consent to the postponement
of any interest payment for a period not exceeding one
year from its due date, or to the waiver of any default
and its consequences, except a default in the payment
of the principal of any indenture security upon the date
of maturity specified therein[.]
Trust Indenture Act of 1938, H.R. 10292, 75th Cong. § 7(m)(3) (3rd Sess. 1937)
(1938 House Hearings at 12-13) (emphasis added). The structure of the 1938
Act thus largely tracked that of the 1937 Act with regard to this section, giving

14

the SEC the power to require indenture provisions narrowly tailored to the
right to bring suit.
ii.

Testimony and Debate

Then-SEC Chairman Douglas was the “main proponent” of the 1938 Act
during the House hearings held on April 25, 1938. (See Lees Decl. Ex. A
(“1939 House Minutes”) at 9512). Accordingly, his testimony on the 1938 Act
is given significant attention in the parties’ briefing. Douglas specifically
discussed Section 7(m)(3) of the bill in addressing the “bogey” that had been
raised about the 1938 Act, namely, “that the bill, by its terms, would impose an
impossible requirement of the consent of 100 percent of the bondholders in
order to amend it.” (1938 House Hearings at 35). Douglas stated that there
was “absolutely no basis for that contention,” and that the 1938 Act would
allow indentures to contain provisions for amendment subject only to the
exception laid out in Section 7(m)(3):
The effect of this exception is merely to prohibit
provisions authorizing such a majority to force a nonassenting security holder to accept a reduction or
postponement of his claim for principal, or a reduction
of his claim for interest or a postponement thereof for
more than 1 year. In other words, this provision merely
restricts the power of the majority to change those
particular phases of the contract. Evasion of judicial
scrutiny of the fairness of debt-readjustment plans is
prevented by this exception…. In other words, the bill
does place a check or control over the majority forcing
on the minorities a debt-readjustment plan. It does go
that far; but it does not prohibit any other restriction or
appropriate amendments of the indenture by the
consent of the parties.

15

(Id. at 35-36). 7
Defendants and Intervenors take Douglas’s testimony to support a
narrow interpretation of Section 7(m)(3), noting that his statements were
specifically framed as a response to an overbroad reading of the 1938 Act as
prohibiting nearly all amendments. (See Def. Supp. Br. 3-5). Plaintiffs
respond, and the Court agrees, that Douglas understood Section 7(m)(3) as
preventing precisely what was intended in the instant case: a “majority []

7

Although the Congressional Reports record Douglas as saying that “this provision
merely restricts the power of the majority to change those particular phases of the
contract,” Defendants and Intervenors believe that this is a misstatement or
typographical error, and that Douglas said or intended to say “phrases.” (See Def.
Supp. Br. 5; Dkt. #74 (letter to Court)). Plaintiffs, understanding “phases” to have a
broader meaning than “phrases,” urge the Court to accept the statement as transcribed
in the official record. (Pl. Br. 13-14).
While the meaning of the Trust Indenture Act does not rest on the presence or absence
of a single letter, the Court is inclined to credit the official recording of “phases,” in its
meaning as an aspect of a problem. See Webster’s New International Dictionary 1838
(2d ed. 1953) (defining “phase” in part as “[a]ny aspect or side, as of situation or
question”); Webster’s Revised Unabridged Dictionary 1075 (1913) (defining “phase” in
part as “[a]ny appearance or aspect of an object of mental apprehension or view; as, the
problem has many phases”). In his later writings, then-Justice Douglas repeatedly
employed the word “phase” in this sense. See, e.g., Superintendent of Ins. of State of
N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.10 (1971) (“We only hold that the
alleged fraud is cognizable under § 10(b) and Rule 10b-5 in the bond sale and we
express no opinion as to Manhattan’s standing under § 10(b) and Rule 10b-5 on other
phases of the complaint.”); Thompson v. Tex. Mexican Ry. Co., 328 U.S. 134, 143-44
(1946) (“These matters involve not only the interests of the two parties to the trackage
agreement but phases of the public interest as well.”); Nebraska v. Wyoming, 325 U.S.
589, 642 (1945) (“We have already considered Wyoming’s exception that storage water
should have been included in the allocation. We have also considered the other phases
of her argument in favor of mass allocation.”); Panhandle E. Pipe Line Co. v. Fed. Power
Comm’n, 324 U.S. 635, 639 (1945) (“The Commission … [did not] make an allocation of
costs between the regulated and unregulated phases of the business as it did
[elsewhere.]”); Colo. Interstate Gas Co. v. Fed. Power Comm’n, 324 U.S. 581, 588 (1945)
(“It is of course immaterial that the revenues from the intrastate sales or the direct
industrial sales may exceed their costs, since the authority to regulate those phases of
the business is lacking. To the extent, however, that the revenues from the interstate
wholesale business exceed the costs allocable to that phase of the business, the
interstate wholesale rates are excessive.”); United States v. Powers, 307 U.S. 214, 217
(1939) (“[The Criminal Appeals Act’s] substantive phases were not altered one whit or
tittle; its sanctions were neither reduced nor increased…. The amendment merely
perpetuated the entire Act for another term.”).

16

forc[ing] a non-assenting security holder to accept a reduction or postponement
of his claim for principal.” (See Pl. Supp. Br. 12 (quoting 1938 House Hearings
at 35-36)).
iii.

Senate Report

Douglas’s testimony was largely incorporated into the Senate’s report on
the 1938 Act (the “1938 Senate Report”), which understood Section 7(m)(3) as
providing an exception to the general allowance of amendments,
the effect of which is to prohibit provisions authorizing
such a majority to force a non-assenting security holder
to accept a reduction or postponement of his claim for
principal, or a reduction of his claim for interest or a
postponement thereof for more than 1 year. Evasion of
judicial scrutiny of the fairness of debt-readjustment
plans is prevented by this prohibition….
This
prohibition does not prevent the majority from binding
dissenters by other changes in the indenture or by a
waiver of other defaults, and the majority may of course
consent to alterations of its own rights.
S. Rep. No. 75-1619, at 19 (1938) (Lees Decl. Ex. D). The 1938 Senate Report
thus sheds little additional light on the congressional understanding of Section
7(m)(3), except to suggest that its understanding aligned with that of Douglas.
iv.

Additional Commentary

Defendants and Intervenors additionally point to an address on the 1938
Act by Edmund Burke, who would later testify on behalf of the SEC before the
House on the 1939 Act, before the American Bar Association. (Lees Decl. Ex. G
(“Burke Address”)). Burke focused on the concern that Section 7(m)(3) of “the
bill will prevent provisions permitting holders of a majority of bond issue to

17

waive principal and interest defaults, and that this prohibition will force
issuers into bankruptcy.” (Id. at 11). He reiterated that this provision would
prohibit provisions authorizing a majority to force a
non-assenting bondholder to accept a reduction or
postponement of his claim for principal, or a reduction
of his claim for interest, or a postponement of his claim
for interest for more than one year. In other words, the
effect of this prohibition will be to limit, to that extent,
the control of the majority over the destinies of the
individual minority security holder. If an investor buys
a $1,000 bond payable on January 1, 1940, the
majority cannot turn it into a $500 bond payable in
1960, without his consent, and without resort to the
reorganization machinery now provided by law. There
is nothing in this provision, however, which would
prevent the majority from waiving its own rights.
(Id.).
d.

The Trust Indenture Act of 1939
i.

Evolution into Final Version

In contrast to the comparatively minor changes between the 1937 and
1938 Acts, the Trust Indenture Act of 1939 had undergone significant
structural revisions when it was first introduced before the House and Senate
in January 1939. Section 7(m) was now relocated to Section 314 (see Lees
Decl. Ex. C (“February 1939 Senate Hearings”) at 19), though the relevant text
remained largely the same:
The indenture to be qualified shall contain provisions
which the Commission deems adequate … with respect
to the rights, powers, and remedies of the indenture
security holders and the manner in which and
conditions upon which such rights, powers, and
remedies, may be exercised, including the rights,
powers, and remedies of the indenture security holders
with respect to —
18

***
(b) bringing action to collect the principal of and interest
upon the indenture securities upon their respective due
dates[.]
Trust Indenture Act of 1939, S. 477, 76th Cong. § 314(b) (1st Sess. 1939)
(February 1939 Senate Hearings at 14). As with the 1937 and 1938 Acts, the
initial 1939 Act continued to focus on the right to bring suit, and left it to the
SEC to determine what provisions were necessary.
During hearings before the Senate Subcommittee of the Committee on
Banking and Currency, Senator Robert Taft, among others, expressed concern
about the enormous discretion provided to the SEC, and wondered if it would
not be simpler to set out mandatory indenture provisions in the statute itself.
(February 1939 Senate Hearings at 48). In response to these concerns, the
initial 1939 Act was altered to convert many the regulatory objectives into
specific statutory requirements, and was reintroduced by Congressman William
Cole in March 1939. (See Lees Decl. Ex. E (“April 1939 House Hearings”) at 1).
The relevant statutory text now read:
The indenture to be qualified shall provide that,
notwithstanding any other provision thereof, 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 subsection (a).

19

Trust Indenture Act of 1939, H.R. 5220, 76th Cong. § 316(b) (1st Sess. 1939)
(April 1939 House Hearings at 31). This version would become law with two
alterations, neither relevant here: relocation of the notwithstanding clause to
the beginning of the subsection, and the addition of another exception allowing
limitation of the right to initiate suit where such initiation would risk forfeiture
of the lien. See 15 U.S.C. § 77ppp(b). 8
Comparison of the final text of Section 316(b) with the prior versions
reveals two significant distinctions. First, the indenture provisions are
mandatory rather than reliant upon the SEC to designate them as such.
Second, and more importantly, the right is no longer expressed as the right to
bring an action, but instead as the right “to receive payment,” which right
could not be “impaired or affected without the consent of such holder.”
ii.

Testimony and Debate on the Final Section 316(b)

The SEC’s analysis of Section 316(b) acknowledged these changes, noting
that under this subsection “the indenture must provide that, except as to an
interest postponement so consented to, the right of any indenture security
holder to receive his principal and interest when due and to bring suit therefor
may not be impaired without his consent.” (April 1939 House Hearings at
219). Broadly conceived, however, the section continued to have the same
overarching purpose: “Evasion of judicial scrutiny of the fairness of debtreadjustment plans is prevented by this prohibition.” (Id.). From this identity
8

In addition, the period by which interest payments could be postponed, now contained
in Section 316(a), was extended from one year to three years. See 15 U.S.C.
§ 77ppp(a)(2).

20

of purpose, along with the incorporation of Douglas’s testimony on the 1938
Act, Defendants and Intervenors conclude that the alteration in language was
merely intended to convert the grant of authority to the SEC into specific
statutory requirements, and thus that “section 316(b), in the form ultimately
enacted, was not intended to differ in scope from the proposed language on
which Chairman Douglas commented in 1938.” (Def. Supp. Br. 7). Though the
Court acknowledges the paucity of commentary on the difference between
Section 316(b) and its predecessor Sections 314(b), 7(m)(3), and 7(m)(5), it
cannot ignore the decidedly different text. Moreover, when the bill was
introduced before the full House, Congressman Carl Mapes noted that “[t]he
bill which is introduced today … is a very different bill from the one that was
introduced originally in the last Congress and quite different from the one that
was passed by the Senate in this Congress.” (1939 House Minutes at 9513).
Burke also testified before the Senate subcommittee at length on the
SEC’s behalf. With regard to Section 316(b), he noted that it “seem[ed] to have
drawn considerable fire.” (April 1939 House Hearings at 284). Burke testified
that “[a]ll that the section does is preserve the individual holder’s right to bring
an action at law to collect his interest and principal in accordance with the
terms of his contract, unless he has himself consented to a variation from that
contract.” (Id.). Despite this limiting interpretation of Section 316(b), however,
he went on to state,
When an investor buys a bond, he buys a right to get a
thousand dollars on a particular date. All that this
subsection says is that he shall not be deprived of that
individual right without his consent. As a matter of fact,
21

he cannot be deprived of that right unless the indenture
specifically so provides.
(Id. at 285 (emphases added)). Burke went on to make clear that majorities
could renegotiate their own rights and agree to reduce or postpone their claims;
they simply could not bind a nonconsenting security holder. (Id.).
iii.

House and Senate Reports

The House and Senate reports on the 1939 Act were identical to the
SEC’s analysis:
Under subsection (b), the indenture must provide that,
except as to an interest postponement so consented to,
the right of any indenture security holder to receive his
principal when due and to bring suit therefore may not
be impaired without his consent. Evasion of judicial
scrutiny of the fairness of debt-readjustment plans is
prevented by this prohibition…. This prohibition does
not prevent the majority from binding dissenters by
other changes in the indenture or by a waiver of other
defaults, and the majority may of course consent to
alterations of its own rights.
H.R. Rep. 76-1016, at 56 (1939); S. Rep. No. 76-248, at 26-27 (1939).
e.

The 1958 Manual

Defendants and Intervenors point to an SEC manual from June 1958,
prepared for internal use, that analyzed Section 316(b). (Lees Decl. Ex. K (the
“1958 SEC Manual”)). The Court is not convinced that there is a great deal of
interpretive guidance to be derived from a non-public document, prepared 19
years after the passage of the Act, by an administrative body that was
specifically denied the ability to issue regulations to enforce the relevant

22

statutory provision. 9 Nevertheless, the Court considers two passages
highlighted by Defendants and Intervenors.
First, the 1958 Manual states that “[i]n view of the emphasis upon the
right to sue for principal and interest in the legislative history of Section 316(b),
the staff has acquiesced in the view that it relates solely to a suit on the bonds
and does not accord any right to pursue a remedy under the indenture.” (1958
SEC Manual at 145). The distinction drawn here, however, is not between the
right to sue and the right to receive, but rather between the right to sue for
payment on the bonds and the right to pursue other remedies specified within
the indenture, such as, in the example provided by the 1958 SEC Manual,
appointment of a receiver. (See id. at 145-46; see also id. at 148 (“The
provision of the indenture prohibiting the holder of an indenture security from
bringing action until the trustee has neglected or refused to take action after
notice, appears to conflict with Section 316(b) of the Act. Accordingly, the
provision should be restricted to remedies under the indenture and should not
impair his right to sue for principal or interest under the indenture security.”)).
Defendants and Intervenors point additionally to the Manual’s statement
that “[t]he provisions of Section 316(b) are regarded available to non-assenters

9

Given that the SEC has not claimed interpretive authority here, any Chevron-style
argument is appropriately absent from Defendants’ and Intervenors’ briefing. Assuming
that the SEC does have some interpretive authority over Section 316(b) of the Trust
Indenture Act, and to the extent there is any such interpretation at all present in the
1958 SEC Manual, such an interpretation is purely in the form of a “policy statement,”
which is “‘entitled to respect,’ but only to the extent that [it is] persuasive.” Christensen
v. Harris Cty., 529 U.S. 576 (2000) (quoting Skidmore v. Swift & Co., 519 U.S. 452, 461
(1944)). As explained infra, the Court does not find anything in the 1958 SEC Manual
purporting to limit Section 316(b) to the formal right to sue; to the extent such an
interpretation is present, it is unpersuasive due to its conflict with the text.

23

to a plan of debt-readjustment so as to accord them the right to sue on their
bonds.” (1958 SEC Manual at 143). While the SEC’s focus in the Manual does
appear to have been on the right to sue, nothing in this statement or elsewhere
in the Manual indicates that the right protected in Section 316(b) extends
solely to the right to sue, which reading would read the right “to receive
payment” out of the statute.
B.

Application to the EDMC Restructuring
1.

The Trust Indenture Act Should Be Read Broadly

The legislative history weighs in favor of Plaintiffs’ reading of Section
316(b) in two regards. First, the textual changes to what became Section
316(b) over the course of its legislative history demonstrate that the Act’s
protections were broadened from a mere right to sue into a more substantive
right. Second, the purpose of the Act, as expressed consistently throughout
the legislative history, was to prevent precisely the nonconsensual majoritarian
debt restructuring that occurred here, even if the Act’s authors did not
anticipate precisely the mechanisms through which such a restructuring might
occur.
a.

Textual Changes

Section 316(b), as enacted, represented a significant break from its
predecessor sections in wording. Section 7(m)(5) of the 1937 Act, Section
7(m)(3) of the 1938 Act, and Section 314(b) of the initial 1939 Act each spoke to
“bringing action to collect the principal of and interest upon the indenture

24

securities upon their respective due dates.” Yet Section 316(b), while
maintaining the right to bring suit, added an entirely separate right:
[T]he 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). Ordinary principles of statutory
interpretation suggest that the first clause cannot be repetitive of the second,
lest the disjunctive “or” be disregarded. See Loughrin v. United States, 134 S.
Ct. 2384, 2390 (2014) (“To read the next clause, following the word ‘or,’ as
somehow repeating that requirement, even while using different words, is to
disregard what ‘or’ customarily means. As we have recognized, that term’s
‘ordinary use is almost always disjunctive, that is, the words it connects are to
be given separate meanings.’” (quoting United States v. Woods, 134 S. Ct. 557,
567 (2013))).
Moreover, though the legislative history does not reveal a specific intent
to strengthen the protections of Section 316(b), the alteration and expansion of
its protections over the course of its drafting should be assumed to be
intentional, rather than accidental. Cf. Doe v. Chao, 540 U.S. 614, 623 (2004)
(“The deletion of ‘general damages’ from the bill is fairly seen, then, as a
deliberate elimination of any possibility of imputing harm and awarding
presumed damages.”); Directv, Inc. v. Barczewski, 604 F.3d 1004, 1007 (7th
Cir. 2010) (“[U]nwillingness to give effect to a change in statutory language
25

unless the legislative history contains a reassuring ‘We really mean it!’ is
incompatible with decisions of the Supreme Court.” (citing Harrison v. PPG
Indus., Inc., 446 U.S. 578, 592 (1980); Swain v. Pressley, 430 U.S. 372, 378-79
(1977))). Accordingly, to interpret Section 316(b) as protecting merely the right
to sue for payment, and not any substantive right to receive such payment,
would be unfaithful to the text and the drafting history.
b.

Purpose

Furthermore, while the text of Section 316(b) underwent changes, its
purpose — as revealed in the 1936 Report, testimony before Congress in three
legislative sessions, and House and Senate reports on the various bills —
remained fixed. As Defendants and Intervenors note, both the SEC and
Congress demonstrated concern over no-action clauses that would prohibit
minority bondholders from even attempting to enforce their rights; such a
concern corresponds to Section 316(b)’s protection of “the right of any holder of
any indenture security … to institute suit for the enforcement of any such
payment.” 15 U.S.C. § 77ppp(b).
Yet proceeding in tandem with such concerns are broader worries that,
as the SEC fretted in 1936, “the next cycle of reorganizations will take place on
a voluntary basis without supervision of any court or administrative agency,”
and over the objections of minority bondholders. (1936 SEC Report at 150).
This concern about debt reorganizations taking place by majority vote, outside
of judicial supervision, is echoed in the relevant congressional testimony and
reports. (See 1938 House Hearings at 35-36 (“The effect of this exception is
26

merely to prohibit provisions authorizing such a majority to force a nonassenting security holder to accept a reduction or postponement of his claim
for principal, or a reduction of his claim for interest or a postponement thereof
for more than 1 year…. Evasion of judicial scrutiny of the fairness of debtreadjustment plans is prevented by this exception…. In other words, the bill
does place a check or control over the majority forcing on the minorities a debtreadjustment plan.”); 1938 Senate Report at 19 (“Evasion of judicial scrutiny of
the fairness of debt-readjustment plans is prevented by this prohibition.”); H.R.
Rep. 76-1016, at 56 (1939) (same); S. Rep. No. 76-248, at 26-27 (1939) (same)).
From the debate surrounding the Trust Indenture Act, it is apparent that
its framers understood involuntary reorganizations to operate in a rather
straightforward fashion: a majority of the bondholders would simply vote to
amend the payment or interest provisions of the indenture. But, reading the
text and the purpose of the legislation fairly, there is no reason to think that
the Trust Indenture Act was targeted only at a particular method of
restructuring — straightforward amendment — as opposed to an undesirable
result: allowing “a majority to force a non-assenting security holder to accept a
reduction or postponement of his claim.” (1938 House Hearings at 35
(testimony of Chairman Douglas)). The Trust Indenture Act, by protecting the
individual’s right to “receive” the bargained-for principal and interest, is broad
enough to prevent that result, whether carried out straightforwardly or
circuitously. Accordingly, courts should give effect to the purpose of the Act,

27

and not allow minority bondholders to be forced to relinquish claims outside of
the formal mechanisms of debt restructuring.
2.

The EDMC Restructuring Violates Section 316(b) of the Trust
Indenture Act

As discussed in Marblegate I, there is “little question that the
Intercompany Sale is precisely the type of debt reorganization that the Trust
Indenture Act is designed to preclude.” 2014 WL 7399041, at *19. The
instruments effecting the reorganization explicitly labeled it as an “out-of-court
restructuring” designed to make sure that any dissenting Noteholders “will not
receive payment on account of their Notes.” Id. (quoting Restructuring Support
Agreement § 4.01(c); Exchange Offering Circular 7-8). The restructuring,
supported and adopted by an overwhelming majority of bondholders, did not
directly amend any term explicitly governing any individual bondholder’s right
to receive payment. Nevertheless, the restructuring gave dissenting
bondholders a Hobson’s choice: take the common stock, or take nothing. In
effect, Marblegate bought a $14 million bond that the majority now attempts to
turn into $5 million of stock, with consent procured only by threat of total
deprivation, without resort to the reorganization machinery provided by law.
(See Burke Address at 11 (“[T]he effect of this prohibition will be to limit, to that
extent, the control of the majority over the destinies of the individual minority
security holder. If an investor buys a $1,000 bond payable on January 1,
1940, the majority cannot turn it into a $500 bond payable in 1960, without
his consent, and without resort to the reorganization machinery now provided
by law.”)).
28

As contemplated, on January 5, 2015, EDMC’s secured lenders
foreclosed on the assets of Education Management L.L.C. and sold the assets
to Education Management II L.L.C., leaving no assets in Education
Management L.L.C. for Marblegate to recover against. (Supp. Ex. 1). EDMC
now seeks to remove the Parent Guarantee so as to sever the final avenue for
Marblegate’s recovery. Such a removal, if sanctioned by the Court, would allow
“the next cycle of reorganizations [to] take place on a voluntary basis without
supervision of any court or administrative agency” (1936 SEC Report at 150),
so long as the mechanism involves foreclosure and asset sale rather than
simple amendment. The Court declines to so enfeeble the Trust Indenture Act,
and thus rules in Plaintiffs’ favor.
In arriving at its decision, the Court does not opine on the wisdom or
fairness of EDMC’s Proposed Restructuring plan, or on whether Marblegate’s
seemingly advantageous position post-restructuring vis-à-vis even secured
creditors represents an unjustified windfall, a “tyranny of the minority,” or
simply an astute investment strategy. Furthermore, the Court recognizes the
potentially troubling implications of the Trust Indenture Act in rewarding
holdouts; its arguable obsolescence given the expense and complexity of
modern bankruptcy, see generally Mark J. Roe, The Voting Prohibition in Bond
Workouts, 97 Yale L.J. 232 (1987); and the unforeseen interplay between
Section 316(b) and Title IV’s funding requirements. And yet, for the many
reasons delineated in this and the prior Opinion, the Court finds it beyond

29

peradventure that Section 316(b) requires the satisfaction of Plaintiff’s claims
in the factual circumstances of this case.
CONCLUSION
For the reasons set forth in this Opinion, the Intercompany Sale as
envisioned in the Restructuring Support Agreement and since carried out in
part would violate Plaintiffs’ rights under the Trust Indenture Act. Pursuant to
Section 10.06(c) of the Fourth Supplemental Indenture (Supp. Ex. 2),
Education Management Corporation shall guarantee any past and future
payments of principal and interest to Marblegate on their respective due dates
under the March 5, 2013 Indenture.
The Clerk of Court is directed to enter judgment for Plaintiffs, terminate
all pending motion, adjourn all remaining dates, and close the case.
SO ORDERED.
Dated:

June 23, 2015
New York, New York

__________________________________
KATHERINE POLK FAILLA
United States District Judge

30