Marblegate Asset Mgmt. v. Educ. Mgmt. Corp.

• Decision Date: 30 December 2014
• Docket Number: No. 14 Civ. 8584KPF.,14 Civ. 8584KPF.
• Citation: 75 F.Supp.3d 592
• Parties: MARBLEGATE ASSET MANAGEMENT, et al., Plaintiffs, v. EDUCATION MANAGEMENT CORP., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

75 F.Supp.3d 592

MARBLEGATE ASSET MANAGEMENT, et al., Plaintiffs

v.EDUCATION MANAGEMENT CORP., et al., Defendants.

No. 14 Civ. 8584KPF.

United States District Court, S.D. New York.

Signed Dec. 30, 2014.

Sean E. O'Donnell, Jessica Greenwood, Joseph Lee Sorkin, Lucy Caitlin Malcolm, Akin Gump Strauss Hauer & Feld LLP, New York, NY, Ariel Lavinbuk, Donald Burke, Lawrence Saul Robbins, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, for Plaintiffs.

Emil A. Kleinhaus, John F. Lynch, Alexander Lees, Jasand Patric Mock, Lauren Marie Kofke, Mohit Gourisaria, Stephen R. Diprima, Wachtell, Lipton, Rosen & Katz, New York, NY, for Defendants.

AMENDED OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Plaintiffs Marblegate Asset Management, LLC, Marblegate Special Opportunities Master Fund, L.P. (together “Marblegate”), Magnolia Road Capital LP, and Magnolia Road Global Credit Master Fund L.P. (together “Magnolia,” and with Marblegate “Plaintiffs”) hold unsecured debt in Defendant Education Management LLC, which along with Defendant Education Management Finance Corporation is a subsidiary of Defendant Education Management Corporation (“EDMC,” or together “Defendants”). Plaintiffs seek a preliminary injunction to block a proposed restructuring of Defendants' debt that would force Plaintiffs either to convert their debt to equity or to risk the elimination of their practical ability to recover their principal and remaining interest payments. The Ad Hoc Committee of Term Loan Lenders of Education Management LLC (“Intervenors”) is a group of primarily secured creditors who support the restructuring, and who have intervened in opposition to the motion.

Plaintiffs acknowledge that a restructuring of Defendants' debt is almost certainly necessary to avoid insolvency, and that EDMC's insolvency is an unappealing option for all parties involved. Their complaint centers around the deal they and the other unsecured creditors have received in this version of the restructuring, and their contention that the restructuring, absent their consent, violates the Trust Indenture Act of 1939, 15 U.S.C. §§ 77aaa –77bbbb. While Plaintiffs' legal arguments have merit, this Court is unwilling to introduce a highly disruptive injunction into the delicate regulatory and financial ecosystem in which the parties operate. More to the point, the Court is unwilling to accord to holders of $20 million in unsecured notes the legal right to stop a $1.5 billion restructuring. Because Plaintiffs have failed to demonstrate a likelihood of irreparable harm, and because the balance of the equities and the public interest weigh against granting the injunction, the motion is denied.

BACKGROUND¹

A. Factual Background

1. The Parties

EDMC, founded in 1962, is one of the country's largest for-profit providers of college and graduate education, with an enrollment of roughly 118,090 students and 20,800 employees. (West Decl. ¶¶ 4, 11). In 2014 EDMC derived 78.6% of its net revenues from federal student aid programs under Title IV of the Higher Education Act of 1965, 20 U.S.C. §§ 1070 –1099. (Id. at ¶ 13). Eligibility for Title IV funds is determined on both an institutional and a company-wide basis. Each institution must be (i) authorized by the relevant state agency; (ii) institutionally accredited by an accreditation agency recognized by the Department of Education (“DoE”); and (iii) certified as an eligible institution by the DoE. (Id. at ¶ 14). Because EDMC operates 18 institutions across the country, its institutions operate under the regulatory purview of a number of state agencies and regional accrediting agencies. (Id. at ¶ 19). EDMC regularly negotiates the eligibility of its institutions with each of these regulatory bodies, some of whom have expressed their concern over its financial condition. (Id. at ¶¶ 23–24).

The DoE's oversight poses a special set of challenges for EDMC, as it assesses the eligibility of EDMC as a whole to receive Title IV funds. Because EDMC has not met the financial responsibility standards established by the Secretary of Education pursuant to 20 U.S.C. § 1099c(c), it is only provisionally certified, enabling the Secretary to require the posting of a letter of credit, id. § 1099c(c)(3)(A). The DoE currently requires EDMC to post a $302.2 million letter of credit, equal to 15% of its Title IV funds received. (West Decl. ¶¶ 16–18). Of critical importance, an institution loses its eligibility for Title IV funds if it, or a controlling affiliate, files for bankruptcy or has an order for relief in bankruptcy filed against it. See 20 U.S.C. § 1002(a)(4)(A) ; Conditions of Institutional Eligibility, 34 C.F.R. § 600.7(a)(2).

Marblegate is an investment management firm that focuses in part on “event-driven distressed corporate credit restructuring.” (Milgram Decl. ¶ 3). Marblegate primarily invests in corporate debt rather than equity, and among its debt positions owns primarily first lien loans and secured bonds. (Id. at ¶ 5). Having had experience investing in the for-profit education sector, Marblegate began exploring investing in EDMC in September 2012. (Id. at ¶ 6). Despite the decline in EDMC's financial position, Marblegate determined that an investment in the unsecured notes of Education Management LLC made sense due to EDMC's then-limited debt burden and the interaction of the Title IV eligibility requirements with the notes' eligibility under the Trust Indenture Act. (Id. at ¶¶ 10–11). Marblegate believed that, with bankruptcy not a viable option due to Title IV, EDMC would have to pay the notes in full or obtain Marblegate's consent to any modification due to the Trust Indenture Act. (Id. at ¶ 12). Marblegate thus began purchasing notes in January 2013. (Id. ). Marblegate then participated in a February 2013 exchange offer, exchanging the old notes for new notes (the “Notes”) governed by the March 5, 2013 Indenture (the “Indenture”), ultimately acquiring $14.3 million of the Notes. (Id. at ¶¶ 13–15).

Magnolia is “an event-driven credit hedge fund” that, like Marblegate, invests primarily in corporate debt. (Donath Decl. ¶ 4). Magnolia took a “cautiously optimistic” view of EDMC's financial health, and, assessing EDMC's legal obligations in a similar manner as Marblegate, invested in the Notes in June 2013, expecting that the Notes would eventually have to be refinanced, and that any such refinancing would be on terms favorable to Magnolia. (Id. at ¶¶ 9–10). Magnolia presently owns approximately $6 million of the Notes. (Id. at ¶ 11).

Intervening in the litigation pursuant to Federal Rule of Civil Procedure 24(b) is the Steering Committee for the Ad Hoc Committee of Term Loan Lenders (the “Steering Committee,” or “Intervenors”), a group of six asset management firms that collectively hold a significant portion of EDMC's secured debt and unsecured Notes (see infra ) and support the Proposed Restructuring. Those firms are: HG Vora Capital Management, LLC, KKR Credit Advisors (US) LLC (“KKR”), Oak Hill Advisors, LP, Oaktree Capital Management, L.P., Regiment Capital Advisors, LP, and Centerbridge Partners, L.P.

2. EDMC's Debt

EDMC has outstanding debt of $1.553 billion. (Beekhuizen Decl. ¶ 7). This consists of $1.305 billion in secured debt, divided between $220 million drawn from a revolving credit facility and $1.085 billion in term loans, and $217 million in unsecured Notes. (Id. ). The secured debt is secured by collateral in “virtually all of the assets of” EDMC and its subsidiaries. (Id. at ¶ 8). The secured term loans were, until September 2014, governed by the Second Amended and Restated Credit and Guarantee Agreement (amended and restated as of December 7, 2010) (the “2010 Credit Agreement”) (Def. Ex. 6). Among other provisions, the 2010 Credit Agreement gave the secured creditors, upon an “Event of Default,” the right to “sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes[.]” (2010 Credit Agreement § 6.1(h)).

The unsecured Notes are partially held by Plaintiffs (though Magnolia also owns a small amount of secured debt (Donath Decl. ¶ 14)). The Notes are due in 2018 with periodic interest payments, and are governed by the March 5, 2013 Indenture (the “Indenture”) (Malcolm Decl. Ex. B), which has several relevant provisions. First, the Notes are qualified under the Trust Indenture Act (Indenture § 12.01), and under Section 6.07 the Notes receive the same protections provided for in Section 316(b) of the Act, 15 U.S.C. § 77ppp(b) :

Rights of Holders of Notes to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, and Additional Interest, if any, and interest on the Note, on or after the respective due dates expressed in the Note ... or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder.

(Indenture § 6.07).

One feature of the Notes that increased their value in the eyes of Marblegate and Magnolia was that, despite being issued by Education Management LLC, they were guaranteed by EDMC, the parent corporation (the “Parent Guarantee”). (See Donath Decl. ¶ 9; Hrg. Tr. 61–62). Yet the Indenture contains provisions by which the Parent Guarantee can be removed. First, Section 9.02 allows a majority of Noteholders to waive the Parent Guarantee on behalf of all Noteholders:

With Consent of Holders of Notes. Except as provided below in this Section 9.02, the Issuers and the Trustee may amend or supplement this Indenture, the Notes and the Guarantees with the consent of the Holders of at least a majority in principal amount of the Notes ... then outstanding voting as a single class (including ... consents obtained in connection with a tender offer or exchange offer

...