Last year, plaintiffs successfully used an obscure provision of the 1939 Trust Indenture Act (the TIA) to challenge restructurings by Education Management, LLC (Marblegate) and Caesars Entertainment Operating Co. (Caesars). In each case, the Southern District of New York held that Section 316(b) of the TIA (which provides that the right of security holders under a TIA-qualified indenture to receive payment of principal or interest shall not be impaired without their consent) bars certain out-of-court restructurings, even where no payment terms of the indenture are modified or waived. Issuers in Marblegate and Caesars were faulted for restructuring maneuvers that stripped the applicable issuer of assets and guarantees.

In a recent decision, the Southern District clarified the scope of bondholder rights protected by TIA Section 316(b). Waxman v. Cliffs Natural Resources (2016 WL 7131545, S.D.N.Y. Dec. 6, 2016) involved a January 2016 exchange offer commenced by Cliffs Natural Resources in which bondholders exchanged unsecured notes for secured notes (so-called 1.5L Notes, ranking between first lien debt and second lien debt in priority with respect to shared collateral), in return for a significant reduction in principal. The offer, which was open only to “Qualified Institutional Buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (QIBs), was challenged by several non-QIBs who were not able to participate in the exchange. Plaintiffs challenged the offer post-closing on a number of grounds, one of which was TIA Section 316(b), and they invoked the Marblegate and Caesars cases in support of their claim.  

The court held that Cliffs had not violated TIA Section 316(b), explaining that Marblegate and Caesars preclude only “an involuntary, out-of-court pseudo-bankruptcy” outside of judicial supervision, and where plaintiffs are left holding a “worthless right to collect principal and interest.” The court held that the Cliffs exchange simply did not implicate TIA Section 316(b). The court identified the following as indicia of an exchange offer that would implicate TIA Section 316(b):  

• The transaction contemplates disposition of assets.
• The transaction amends the terms of the indenture.
• The transaction modifies or removes a guarantee.

A Second Circuit decision is pending in the Marblegate appeal; but in the interim, Cliffs provides some guidance to the post-Marblegate/Caesars landscape.