United States District Court, S.D. New York
For Marblegate Asset Management, L.L.C., Marbelgate Special Opportuinities Master Fund, L.P., Plaintiffs: Sean E O'Donnell, LEAD ATTORNEY, Jessica Greenwood, Joseph Lee Sorkin, Akin Gump Strauss Hauer & Feld LLP (NYC), New York, NY; Donald Burke, PRO HAC VICE, Ariel Lavinbuk, Lawrence Saul Robbins, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC; Lucy Caitlin Malcolm, Akin Gump Strauss Hauer & Feld ( 1 Battery Pk.), New York, NY.
For Education Management Corporation, Education Management L.L.C., Education Management Finance Corp., Defendants: Emil A. Kleinhaus, John F. Lynch, LEAD ATTORNEYS, Alexander Lees, Jasand Patric Mock, Lauren Marie Kofke, Mohit Gourisaria, Stephen R. DiPrima, Wachtell, Lipton, Rosen & Katz, New York, NY.
For Steering Committee for the Ad Hoc Committee of Term Loan Lenders of Education Management, Intervenor: Antonia Marie Apps, Milbank, Tweed, Hadley & McCloy LLP (NYC), New York, NY; Linda Dakin-Grimm, Milbank, Tweed, Hadley & McCloy LLP, Los Angeles, CA.
AMENDED OPINION AND ORDER
KATHERINE POLK FAILLA, United States 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.
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 (U.S.) LLC (" KKR" ), Oak Hill Advisors, LP, Oaktree Capital Management,
L.P., Regiment Capital Advisors, LP, and Centerbridge ...