Vol 14 (2017) - Issue 6

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The Second Circuit Interpretation of the Trust Indenture Act in Marblegate Restores Confidence in Out-of-Court Restructurings with Requisite Majority Approval

Introduction
Section 316(b) of the Trust Indenture Act (the 'TIA'), entitled ‘Prohibition of impairment of holder’s right to payment’, provides that: '...the right of any holder of any indenture security to receive payment of the principal of and interest on such security… shall not be impaired or affected without the consent of such holder'. The practical impact of this federal statute is that issuers seeking to restructure their debts in a manner that impairs the rights of all debt holders must either obtain the consent of each and every holder, leave dissenting holders unimpaired, or resort to restructuring through an in-court process. But what exactly constitutes impairment of 'the right... to receive payment'? For example, if a guaranty of the subject debt is released without amending the indenture’s core payment terms, so that, as a practical matter, the lender will never receive payment, has an impairment of 'the right... to receive payment' occurred? In January 2017, the United States Court of Appeal for the Second Circuit (the 'Court') considered this very question, and with a 2-1 majority, answered it in the negative. This decision, from one of the most influential courts of appeals in matters concerning the finance industry, reaffirms a narrow interpretation of TIA section 316(b), in stark contrast to recent jurisprudence in lower courts applying a more expansive reading of impairment of the right to repayment. The Marblegate decision should help restore confidence to issuers seeking to restructure bond debt out of court with requisite majority approval, without the risk that such transactions will be unwound for failure to obtain unanimous approval.