Appeals court rules for Education Management on debt-cutting plan

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By Tom Hals | WILMINGTON, Del

WILMINGTON, Del Education Management Corp 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.



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