On April 16, 2009 and April 22, 2009, General Growth Properties, Inc. (“GGP”) and certain of its subsidiaries (the “Debtors”), including many subsidiaries structured as special purpose entities (the “SPE Debtors”), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (the “Court”).

Opinion Serves to Remind Lenders That “Bankruptcy Remote” Does Not Mean “Bankruptcy Proof”

Judge Allan L. Gropper of the Bankruptcy Court for the Southern District of New York issued a much-anticipated order on August 11, 2009, in the challenge to the bankruptcy filings by certain special-purpose-entity (“SPE”) affiliates of General Growth Properties, Inc. (“GGP”).

As is now well known, General Motors, Inc. and Chrysler LLC financially restructured themselves with the help of the United States Treasury. These restructurings occurred very quickly – Chrysler and GM each filed for bankruptcy and sold substantially all of their automobile-producing assets to newly created companies2 within approximately forty days. Each company used the bankruptcy process to massively deleverage and free itself from personal injury liability claims.

By some accounts, there is over $300 billion of commercial real estate debt set to mature over each of the next four years. As a result of a lack of demand, a lack of liquidity and lackluster valuations, a significant portion of this debt will go into default. In many cases, bankruptcies will ensue for both the projects and their owners.

Deadlines for the Filing of Proofs of Claims In the Chrysler and Lear Bankruptcies Have Been Set

1. Deadline Relating to Chrysler Bankruptcy:

An opinion issued earlier this year by the Delaware Bankruptcy Court in In re SemCrude, L.P., et al. (Bankr. Del., No. 08-11525; January 9, 2009) may end much of the practice of so-called “triangular setoffs” by creditors in bankruptcy cases. The Court in SemCrude found that creditors violate section 553 of the Bankruptcy Code by setting off amounts among multiple debtors, even when exercising contractual assignment rights. This ruling is likely to have far-reaching impact given the dearth of case law on this fairly common contractual provision.

In the recent heyday of real estate and structured finance, the use of “bankruptcy–remote” special purpose entities (SPEs) as borrowers was a fundamental underwriting requirement by lenders in many loans, and a critical factor considered by ratings agencies, to shield lenders and their collateral from the potentially adverse impact of bankruptcy filings by their borrowers’ parents and siblings.

On August 11, 2009, in a long-anticipated ruling in the Chapter 11 case of General Growth Properties, Inc. (GGP), the court denied the motions to dismiss that had been brought on behalf of several of the property-level lenders.1 Few, if any, observers expected that the court would grant these motions and actually dismiss any of the individual SPE borrowers from the larger GGP bankruptcy, as doing so would have likely opened the door for the other secured lenders to seek dismissal.

Masuda Funai routinely represents creditors in bankruptcy proceedings in order to protect their contractual and legal interests and rights to payment. The following is a list of some recent larger U.S. bankruptcy filings in various industries. To the extent you are a creditor to any of these debtors, or other entities which may have filed for bankruptcy protection, you as a creditor are entitled to certain protections under the Bankruptcy Code.  

AUTOMOTIVE  

Cooper-Standards files Chapter 11.  

The recent equitable subordination cases of In re Kreisler and Erenberg, 546 F.3d 863 (7th Cir. 2008) and Credit Suisse v. Official Committee of Unsecured Creditors (In re Yellowstone Mountain Club, LLC), Bankr. D. Mont., No. 09-00014 show a possible deviation in the courts regarding the proper application of the doctrine of equitable subordination. Accordingly, secured lenders should stay abreast of these different interpretations and possibly consider adjusting their lending practices.