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General Growth Properties
To the surprise of many, when General Growth Properties Inc. (“GGP”) commenced a Chapter 11 proceeding in April 2009, it caused 166 solvent bankruptcy remote entities that were current on all their indebtedness (the “General Growth SPEs”) that each owned a single mall property to also file Chapter 11 petitions. In August, in a highly anticipated test of the legal structures underpinning securitized financing, the United States Bankruptcy Court for the Southern District of New York denied a motion to dismiss bankruptcy cases filed by General Growth SPEs. In re: General Growth Properties, Inc., 2009 WL 2448423, No. 09-11977 (Bankr. S.D.N.Y. Aug. 11, 2009). The GGP case is significant as it is the first decision to analyze comprehensively a bankruptcy remote structure in many years, and it seems to undercut many market assumptions that these entities were largely insulated from bankruptcy risk.
In the past 20 years or so, real estate finance has evolved from mortgage loans made by a bank or institution that held the loans until maturity and maintained its relationship with the borrowers, to non recourse loans utilizing so called “bankruptcy remote” structures, which loans were then securitized and sold to investors as commercial mortgage backed securities (“CMBS”). The economics of CMBS loans were favorable to borrowers because, among other things, the bankruptcy remote structure was implemented to isolate the assets from other parts of a borrower's business, ensuring that cash flows would be dedicated solely to the specific CMBS debt. Perhaps more importantly, CMBS loans were designed to minimize the risk that a borrower would utilize bankruptcy to delay a lender from foreclosing a defaulted mortgage, or from taking advantage of the cramdown provisions of the Bankruptcy Code.
Elements of a Bankruptcy Remote Structure
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