Pending motions in the Bankruptcy Court for the Southern District of New York in General Growth Properties’ (GGP) bankruptcy case (Case No. 09-11977) are expected to shed new light on how courts may treat real estate special-purpose entities in bankruptcy and may also have implications for the efficacy of bankruptcy-remote SPE structures used in asset-backed securitization transactions.

Introduction

On August 11, the U.S. Bankruptcy Court for the Southern District of New York denied five motions to dismiss certain Chapter 11 bankruptcy cases filed by debtors, including a number of issuers of commercial mortgage-backed securities (CMBS), that are owned by mall operator General Growth Properties, Inc. (GGP). The movants, including special servicers of the CMBS issued by GGP, based their dismissal motions primarily on a claim that the debtor’s cases were filed in bad faith.

On August 11, 2009, Judge Gropper of the United States Bankruptcy Court for the Southern District of New York denied motions to dismiss bankruptcy petitions of several special-purpose entity subsidiaries (SPEs) of General Growth Properties, Inc. (GGP) that were solvent, financially healthy companies structured to be remote from the bankruptcy risks of GGP and its other affiliates.

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.

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.

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

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