Appeals court rules for Education Management on debt-cutting plan

Education Management

17/01/2017 17:03

By Tom Hals 
    WILMINGTON, Del, Jan 17 (Reuters) - Education Management 
Corp  EDMC.PK  scored a victory in its fight against an investor 
opposed to its $1.5 billion debt-cutting plan on Tuesday, when a 
U.S. appeals court overturned a decision in a closely watched 
case involving creditors' rights. 
    The U.S. Court of Appeals in Manhattan said a lower court 
erred in its ruling that a Depression-era law, the Trust 
Indenture Act, barred Education Management's plan to restructure 
its debt. 
    The appeals court also said the holdout creditor opposing 
the debt-cutting plan, Marblegate Asset Management LLC, could 
pursue its right to repayment by suing Education Management. 
However, the court said Marblegate could not invoke the Trust 
Indenture Act to retain an "absolute and unconditional" right to 
payment. 
    The dispute stems from Education Management's business of 
providing post-secondary education at Argosy University and the 
Art Institutes campuses, which ran into severe financial 
problems. The company needed to cut its debt without filing for 
bankruptcy, which would have caused it to lose access to federal 
student loan programs. 
    Creditors holding 98 percent of the liabilities agreed to 
swap their loans and bonds for new debt and equity in the 
company, according to the court ruling. Lenders would get about 
55 percent of the $1.3 billion they were owed, and investors 
holding $217 million in notes would get a 33 percent recovery. 
    To carry out the deal over Marblegate's opposition, the 
company's lenders foreclosed on Education Management's assets. 
They then sold them to an Education Management subsidiary and 
divided ownership of the unit. 
    Marblegate still had the legal right collect, but those 
claims were brought against a corporate parent without assets. 
    Marblegate sued to force Education Management to pay in 
full, invoking the Trust Indenture Act. 
    U.S. District Judge Katherine Failla in Manhattan ruled in 
2015 that the company violated that law by undermining 
Marblegate's practical ability to collect on its debt. 
    Education Management appealed, saying the law only 
guaranteed a legal right to a payment, not the ability to 
collect.  
    Judges Jose Cabranes and Raymond Lohier, in a 42-page 
opinion agreed, citing in large part the law's legislative 
history. 
    Judge Chester Straub filed a separate 16-page dissent. 
    The U.S. Chamber of Commerce had warned in a friend-of-court 
filing that the lower court ruling expanded the law to ban 
out-of-court restructurings supported by a majority of 
bondholders. 
 
 (Reporting by Tom Hals in Wilmington, Delaware; Editing by Lisa 
Von Ahn) 
 ((thomas.hals@thomsonreuters.com; +1 610 544 2712; Reuters 
Messaging: thomas.hals.thomsonreuters.com@reuters.net)) 
 
Keywords: EDMC RESTRUCTURING/RULING