General Growth Properties Bankruptcy Questions about Special Purpose & other Series Entities

Aug. 27, 2009 - PRLog -- General Growth Properties, Inc. (“GGP”) a large shopping center owner and operator, GGP Limited Partnership (“GGP LP”) and 166 of their shopping center subsidiaries filed Chapter 11 raising concerns for the separateness of special purpose entities and other series entities that have been created in recent years. The ostensible purpose of this type of entity, special purpose entity (SPE), is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary objectives. SPE’s are typically used by companies to isolate the firm from financial risk. A company will transfer assets to the SPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. Many of the shopping center subsidiaries were formed as bankruptcy-remote, special purpose entities (“SPEs”), had financed their properties with commercial mortgage-backed securities (“CMBS”). The CMBS loans mostly were not in default, solvent entities with excess cash flow and continued to be adequately collateralized. The cases have been procedurally consolidated and are being jointly administered. The court’s rulings in the case to date seemed to have maintained in the separateness of the SPEs.

The debtors filed motions seeking approval to, among other things, continue using their prepetition cash management system, use the secured lenders’ cash collateral and obtain debtor-in-possession (“DIP”) financing. Prior to the filings, the SPEs and other GGP subsidiaries practice was to upstream their income to a commingled account (the “Main Operating Account”) from which the expenses of all subsidiaries were paid and intercompany loans were made. The debtors indicated that they kept track and record all upstreamed cash and intercompany loans.

Initially, the debtors proposed that a DIP loan would be made to GGP and GGP LP and guaranteed by the SPEs. Many of the SPE debtors’ secured lenders objected to the debtors’ motions. The secured lenders argued, among other things, that the debtors’ use of their cash collateral, the continuation of the cash management system and the court’s approval of the DIP loan would constitute a de facto substantive consolidation of the debtors’ estates and violate the terms of the SPE debtors’ organizational documents and/or loan documents.

The court rejected objections stating that approval of the DIP loan and the cash collateral motion did not result in a substantive consolidation of the debtors’ estates. In addition to approving the DIP loan, the court also approved the debtors’ cash collateral and cash management motions. While there are still important unresolved issues, the angst generated by the bankruptcy filings of the SPEs has abated, at least temporarily, because the court’s orders have respected the separateness of the SPEs.

A few secured lenders have moved to dismiss the cases of some of the SPEs for cause on the ground that they were filed in bad faith. The lenders argue that the loans made to these SPEs are not in default, that each property is generating cash flow that is more than sufficient to cover the debt service, property taxes and operating expenses, and that the loans will not mature for at least a year.

According to these lenders, its respective SPE debtor’s bankruptcy case was not filed for a legitimate reorganizational purpose. The motions to dismiss raise many of the same issues about the debtors’ bankruptcy-remote status. Additionally, one lender has argued that its SPE debtor’s case should be dismissed because the corporate resolutions that authorized its bankruptcy filing were ineffective under state law and the filing violated the SPE’s organizational documents. That lender is pursuing the facts relating to the formal requirements of the bankruptcy filing, including the identity of any independent directors who consented to the filing and whether they met the requirements to serve as independent directors

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