Education Management Corp. Seeks to Reverse Ruling
May 12 2016 - 6:10PM
Dow Jones News
Warning that the ability of troubled businesses to restructure
their debt outside of bankruptcy proceedings is on the line,
lawyers representing for-profit education company Education
Management Corp. and its lenders have urged an appeals court to
reverse a lower court's ruling.
A panel of three judges for the U.S. Court of Appeals for the
Second Circuit in New York on Thursday heard arguments in
bondholder Marblegate Asset Management LLC's dispute with the
company.
Last year a federal judge, siding with Marblegate, said
Education Management's 2014 out-of-court restructuring violated a
Depression-era law meant to protect bondholders. The company and
its lenders appealed.
"There is great uncertainty caused by this decision:
Out-of-court restructurings have come to a halt since this decision
came in," Emil Kleinhaus, Education Management's lawyer, said in
arguing in favor of overturning the lower court ruling.
Marblegate lawyer Sean O'Donnell acknowledged that if the
district court's decision stands, it may result in more bankruptcy
filings. But, he said, that is preferable to having "the majority
decide what's best for the minority."
The courtroom arguments concerned the reach of the law, called
the Trust Indenture Act. The question is whether the law merely
prevents a company from altering payment terms it previously
promised bondholders without their consent or if it goes further to
defend bondholders' ability to collect what they are owed.
"Isn't the law there to place a check or control over the
majority in a debt restructuring? Isn't that what happened?" asked
Judge Jose Cabranes, quoting William Douglas, the former U.S.
Supreme Court justice and chairman of the Securities and Exchange
Commission.
Education Management's Mr. Kleinhaus responded that bondholders
are already protected by other laws, as well as terms of each bond
issue.
At issue is Education Management's 2014 out-of-court
restructuring, which it negotiated with lenders after grappling
with declining enrollment and a debt load of $1.5 billion. A
chapter 11 filing wasn't an option since the company, which
operates the Art Institute schools, would then have been cut off
from federal funding.
Education Management reached a deal with 98% of its lenders to
swap $1.3 billion in secured loans for new debt and shares in the
company, while $217 million in unsecured notes would be traded for
additional shares. For those, such as Marblegate, who didn't sign
on to the deal, the bonds would be worthless.
Marblegate, which owned $14 million in unsecured bonds,
challenged the restructuring in court. Last year, U.S. District
Judge Katherine Polk Failla found that the deal violated the Trust
Indenture Act by essentially leaving Marblegate with no choice but
to accept the restructuring so as to avoid going empty-handed.
The appellate court isn't expected to issue its ruling soon, but
the restructuring industry and others will be watching closely. The
Trust Indenture Act is at the center of a number of pending legal
battles, including one between Caesars Entertainment Corp. and
bondholders of its bankrupt operating unit.
Also watching are the big investment firms that buy up debt in
troubled companies, seeking a handsome profit once a turnaround is
complete.
"We're arguing for the bond market to keep going in an
untroubled way," said Antonia Marie Apps, a lawyer for the
investment firms, such as Centerbridge Partners and Oaktree Capital
Management, that served as Marblegate's lenders and held of much of
the bond debt. Letting the district court's decision stand, she
argued, "turns the capital structure upside down."
Write to Lillian Rizzo at Lillian.Rizzo@wsj.com
(END) Dow Jones Newswires
May 12, 2016 17:55 ET (21:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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