Debt Restructurings and the Trust Indenture Act

This article demonstrates that the Trust Indenture Act, a Depression-era statute governing bond indentures, cannot have been intended to prohibit debt restructurings like the one in Marblegate. In that decision, a federal court recently held that a debt restructuring violated the non-impairment provision of the statute because it presented unsecured bondholders with a choice between exchanging their bonds for equity and being left with claims against an empty shell by virtue of a foreclosure by secured creditors. This article shows that, in the 1930s, transactions like the one in Marblegate were not, as the court suggested, an unforeseen legal device, but a generally accepted debt restructuring technique. There is no indication that Congress intended to outlaw them. More importantly, most bond indentures at the time already contained the non-impairment provision relied on by the court, well before it was mandated by the statute. That provision co-existed with restructurings like the one in Marblegate, and it did not occur to anyone, let alone Congress, that the provision would have prohibited such transactions. Still, as the article also shows, the provision was not irrelevant boilerplate, and making it mandatory was critical to the SEC’s policy. This does not mean that minority bondholders have no protections in debt restructurings outside bankruptcy. These restructurings are subject to fraudulent conveyance and other laws protecting creditors generally, just as they would have been in the 1930s.