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EDMC debt restructuring decision detailed

Concern about the impact on students factored into a federal judge’s decision to deny two hedge funds’ attempt to block a debt restructuring deal for Education Management Corp., even though she said their claims had merit.

In an amended order filed Tuesday, U.S. District Judge Katherine Polk Failla in Manhattan explained why, two weeks ago, she denied the preliminary injunction sought by New York-based Magnolia Road Capital and Connecticut hedge fund Marblegate Asset Management.

The case offered a rare example of when considerations of the public good weighed into a contract dispute between two companies.

Magnolia Road Capital and Marblegate were justified in their complaint against the downtown operator of for-profit colleges, Failla wrote. And if they pursued the case, they would probably win, she said. Magnolia last week dropped out of the lawsuit without explanation.

But recouping their combined $20 million investment in EDMC did not outweigh the larger harm that could be caused by blocking the $1.5 billion debt restructuring deal. The deal helps EDMC, which has 20,800 and 118,090 students, overcome a major financial hurdle that threatened its stability.

And given that the hedge funds still had other options for recouping some of their investment, including by joining the agreement, Failla declined to “introduce a highly disruptive injunction into the delicate regulatory and financial ecosystem in which the parties operate.”

“(T)here is little question that the harms on (EDMC’s) side of the ledger vastly outweigh those on the plaintiffs’,” Failla wrote.

EDMC and Marblegate declined to comment Wednesday. A status conference on the case is scheduled for Jan. 6.

Considering public interest can be a factor in whether to grant an injunction, but it doesn’t arise often in contract disputes, said Bruce Antkowiak, a law professor at St. Vincent College. “Lots of contract suits that are obviously of great importance to the parties, but beyond that, it doesn’t really register on the public interest scale,” Antkowiak said.

Failla’s initial decision appeared to go against the hedge funds, but the amended order Tuesday offered a more nuanced perspective. Failla said Marblegate and Magnolia had a strong argument and should be compensated for their legal fees and the debt they own, which in Marblegate’s case is $14.3 million. A federal law known as The Trust Indenture Act protects bond investors from financial losses related to “nonconsenual debt restructurings.”

Marblegate is among a small minority of EDMC investors opposing the deal that would make creditors the majority owners of the troubled company, in exchange for wiping out $1.1 billion in EDMC debt, leaving $400 million.

Requiring EDMC to repay that debt to the hedge funds would certainly cause problems to the restructuring deal, but that should not prevent the hedge funds from being paid, Failla said.

“Whatever the ultimate cost to EDMC, its creditors, its employees, and its students, the (federal law) simply does not allow the company to precipitate a debt reorganization outside the bankruptcy process to effectively eliminate the rights of nonconsenting bondholders,” she said.

Chris Fleisher is a staff writer for Trib Total Media.

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