On August 11, 2009, in a closely monitored dispute in the bankruptcy proceeding of General Growth Properties, Inc. (“GGP”), the Bankruptcy Court for the Southern District of New York rejected motions filed by several mortgage lenders to dismiss the bankruptcy filings of certain special purpose entity subsidiaries (SPEs) of GGP. In re General Growth Properties, Inc., et al., No. 09-11977, slip op. (Bankr. S.D.N.Y. Aug. 11, 2009).
On August 11, the Honorable Allan L. Gropper issued an opinion of the U.S. Bankruptcy Court for the Southern District of New York denying five motions to dismiss certain Chapter 11 bankruptcy cases of several property-specific special purpose subsidiaries (SPE Debtors), including a number of issuers of commercial mortgage-backed securities (CMBS), that are owned by mall operator General Growth Properties, Inc.
A federal district court in Delaware, applying New York law, has affirmed a bankruptcy court's dismissal of an adversary proceeding brought by a bankrupt home mortgage company against its directors and officers liability insurers, holding that coverage for a pre-petition lawsuit against the mortgage company was barred by application of an “inadequate consideration” exclusion.Delta Fin. Corp. v. Westchester Surplus Lines Ins. Co., 2009 WL 2392882 (D. Del. Aug. 4, 2009).
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.
Today, the Government Accountability Office (GAO) released a report entitled, “Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing Enterprises’ Long-term Structures.” Last September, the Federal Housing Finance Agency placed the GSEs into conservatorship fearing that their deterioration would harm U.S. financial stability.
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
The Federal Deposit Insurance Corporation (FDIC) announced that Residential Credit Solutions was the winning bidder in a pilot sale of receivership assets conducted to test the funding mechanism for the Legacy Loans Program. The FDIC, as a receiver of Franklin Bank, SSB, owns a portfolio of residential mortgage loans with an unpaid principal balance of approximately $1.3 billion, which the FDIC will convey to a limited liability company. Residential Credit Solutions will pay $64,215,000 in cash for a 50% stake in the limited liability company using 6-to-1 leverage.
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.
Receiverships have gained in popularity in foreclosure cases and in other types of litigation in recent years. Orders appointing receivers and setting forth the receiver’s duties frequently include a provision allowing the receiver to market and sell real estate. However, the question of whether a receiver legally has the ability to convey title to real estate, free and clear of liens and encumbrances, appears to have been answered in the negative, at least by one appellate district in Ohio.
On October 25, commercial real estate financing company Capmark Financial Group Inc., together with over 40 of its affiliates, filed a voluntary petition for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. The debtors cite among the reasons for their filing the declined values of their loan portfolio, tightening of credit markets and a heavy debt burden. Capmark, formerly a part of GMAC's residential mortgage business until 2006, listed $20.1 billion in assets and $21 billion in liabilities on its petition.