Second Circuit Overturns Marblegate, Rejecting Expansive Interpretation of Section 316(b) of the Trust Indenture Act: In Split Decision, Appeals Court Rules That Section 316(b) of the Trust Indenture Act of 1939 Prohibits Only Formal Non-Consensual Amendments to a Qualified Indenture’s Core Payment Terms

Sullivan & Cromwell LLP - January 19, 2017

On January 17, 2017, a split panel of the U.S. Court of Appeals for the Second Circuit held that the series of transactions to restructure the debt of Education Management Corporation did not violate Section 316(b) of the Trust Indenture Act of 1939.  The Court concluded that Section 316(b) prohibits “only non-consensual amendments to an indenture’s core payment terms”, overturning a widely publicized and controversial decision from the district court for the Southern District of New York that expansively interpreted Section 316(b) to protect bondholders’ “practical ability” to receive payments.

While the Court’s much-anticipated ruling is potentially subject to further appeal, it likely ends the uncertainty created by several lower court decisions in 2014 and 2015.  The Second Circuit’s narrow interpretation of Section 316(b) will give participants in “out-of-court” financial restructurings and distressed liability management exercises involving U.S. bonds greater flexibility to structure and execute those transactions.