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Bankruptcy Keyed to Levitan, 3rd Ed.
Marblegate Asset Management, LLC v. Education Management Finance Corporation
Citation:
846 F.3d 1 (2017)Facts
EDMC, a for-profit higher education company, found itself in severe financial distress with its enterprise value well below its $1.5 billion in outstanding debt. Bankruptcy was not a viable option because it would cause EDMC to lose eligibility for Title IV federal funding, which was essential to its business. EDMC’s debt consisted of secured debt (approximately $1.3 billion) and unsecured notes ($217 million). The unsecured notes were governed by an indenture qualified under the TIA and guaranteed by EDMC (the “Notes Parent Guarantee”).
To address its unsustainable debt, EDMC and its creditors devised two potential restructuring options. The first required unanimous consent from all creditors. The second option, the “Intercompany Sale,” would be implemented if any creditor refused to consent. Under this option, secured creditors would foreclose on EDMC’s assets, release EDMC from the Secured Parent Guarantee (which would automatically release the Notes Parent Guarantee), and sell the foreclosed assets to a new EDMC subsidiary. The new entity would distribute debt and equity only to consenting creditors and continue the business.
Marblegate, holding notes with a face value of $14 million, was the only creditor (representing 2% of EDMC’s debt) that refused to consent to the restructuring. Marblegate sued to enjoin the Intercompany Sale, arguing it violated Section 316(b) of the TIA by effectively eliminating its practical ability to receive payment on its notes without its consent.
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