Thursday, December 10, 2015

Law Professors Urge Congress to Postpone ‘Hasty’ Changes to Trust Indenture Act

By Kevin Kulling, J.D.

A group of corporate finance legal scholars is urging Congress to postpone acting on proposed amendments to the Trust Indenture Act of 1939. The group, making its plea in a letter addressed to congressional leaders, cautioned that a “hasty amendment” to the TIA could have “broad negative unintended consequences to the securities markets” and recommended legislative hearings and an opportunity for public comment on the proposed amendment before any changes to the law are finalized.

Letter to Congress. Sent by eighteen law professors from various law schools, the letter noted that several members of Congress have recently been lobbied to amend the TIA, first through a rider to the highway bill and now through a rider to the omnibus appropriations legislation. According to the letter, the proposed amendment would narrowly define impairment of the right to payment and the right to institute suit for nonpayment. The letter is addressed to Mitch McConnell, the Senate Majority Leader, Sen. Harry Reid, the Minority Leader, Paul Ryan, Speaker of the House, and Nancy Pelosi, the House Minority Leader.

The professors reminded lawmakers that Congress passed the TIA in the wake of the Great Depression to protect bondholders in restructurings. “Among other things, the TIA provides that no bondholder’s right to payment or to institute suit for nonpayment may be impaired or affected without that individual bondholder’s consent. These provisions are intended to protect bond investors by requiring any restructuring of bonds to occur subject to the transparency of a court supervised bankruptcy process, absent bondholder consent to a debt restructuring.”

The professors said they hold “differing opinions about whether the act should be amended, and if so, how.” Several signers believe the Act should be amended, “but not in the way proposed,” the letter said.

A call for hearings and public comment. The lack of public comment on proposed changes to the TIA also was a significant concern. “The proposed amendment has not been subjected to the customary vetting through public hearings and other mechanisms that are critical to improving the public confidence in Congress’ ability to govern. There have been no hearings on the matter, no opportunity to hear from a diverse group of experts or the public, and no attempt to establish a legislative record.”

The letter also said that the current proposed amendment would be retroactive and apply to litigation that is presently on appeal, a reference to lower court cases that found in favor of minority bondholders and against some private equity firms, including firms that control Education Management Corp. and Caesars Entertainment, the casino operator.

“The amendment of federal securities laws is not something that should be undertaken lightly…Accordingly, we urge you to postpone any amendment of the Trust Indenture Act until after legislative hearings that enable more deliberate and careful consideration.”