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.

As the automotive industry continues to restructure, whether through self-liquidation or government intervention, suppliers will inevitably be confronted with many of the same issues prevalent 4-5 years ago, including a supplier’s obligation to continue to provide goods post-petition and the supplier’s rights to adequate assurance as a condition to such shipment.

On August 11, a United States bankruptcy judge denied motions to dismiss the Chapter 11 cases of 21 special purpose entity (“SPE”) subsidiaries (the “Subject Debtors”) of General Growth Properties, Inc. (“GGP”). A final order denying the motions was entered on August 28. The decision raises a number of issues, primarily with respect to the role of independent managers, that are of particular interest to the commercial mortgage-backed securities (“CMBS”) industry.

Lessons from the GGP Cases

The Seventh Circuit U.S. Court of Appeals recently ruled that an environmental clean-up obligation under the Resource Conservation and Recovery Act (“RCRA”) is not dischargeable in bankruptcy, even when the debtor no longer has any internal clean-up operations and would have to contract a third party to provide such services at significant cost.

On August 11, 2009, the US Bankruptcy Court for the Southern District of New York denied five motions to dismiss bankruptcy cases filed by certain bankruptcy remote, special purpose subsidiaries (SPEs) of General Growth Properties, Inc. (GGP). The motions were filed by or on behalf of secured lenders to the SPEs (Movants) who argued that the bankruptcy filings were inconsistent with the bankruptcy remote structures that they had negotiated with GGP.

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  

Auto Cast, Inc. files Chapter 11 in the Western District of Michigan.  

Cooper-Standard Holdings Inc. and its affiliated debtors file Chapter 11 in the District of Delaware.  

In a decision made on August 11, 2009, the U.S. Bankruptcy Court for the Southern District of New York allowed solvent, special purpose entity subsidiaries of a bankrupt parent company, General Growth Properties, Inc., to maintain their Chapter 11 bankruptcy cases, raising several important issues related to the use of special purpose entities structured to be "bankruptcy-remote."

GGP Business Model and 2009 Bankruptcy Filings

A Delaware bankruptcy court recently delivered the first decision applying section 562 of the Bankruptcy Code to a claim based on the termination of a repurchase agreement. In re American Home Mortgage Corp., Bankr. Case no. 07-1104, Dkt. no. 8021 (Bankr. D. Del. Sept. 8, 2009). The court’s ruling creates additional uncertainty in the calculation of bankruptcy claims, not only with respect to repurchase agreements but also with respect to other safe harbored financial contracts.

The U.S. Bankruptcy Court for the Southern District of New York recently declined to dismiss the Chapter 11 petitions of several subsidiaries of General Growth Properties, Inc. (GGP) demonstrating that special purpose entities (SPEs), designed to avoid bankruptcy, can be subject to bankruptcy proceedings despite having strong cash flows, no debt defaults and "bankruptcy remote" structures.