Appeals court rules for Education Management on debt-cutting plan

WILMINGTON, Del (Reuters) - 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.