General Growth Properties Wins Key SPE ruling

This is a huge, huge win for General Growth Properties (GGWPQ). Interesting comments from debt holders that they acknowledge the CMBS market is effectively closed. So, if we know we are no going to liquidate, we know we cannot refinance because the debt markets are closed, then all that remains is debt maturity extensions, right?

There are some very telling statements in the ruling:

There was no evidence to counter the Debtors’ demonstration that the CMBS market, in which they historically had financed and refinanced most of their properties, was “dead” as of the Petition Date,32 and that no one knows when or if that market will revive. Indeed, at the time of the hearings on these Motions, it was
anticipated that the market would worsen, and there is no evident means of refinancing billions of dollars of real estate debt coming due in the next several years.

The following testimony of Allen Hanson, an officer of Helios, is telling: “Q. Helios is aware that there are debt maturities that will occur in 2009, 2010, 2011 and 2012 that the CMBS market will not be able to handle through new CMBS issuances, correct? A. Based on the circumstances we see today, yes.”

Regarding SPE structure as “bankruptcy remote”:

There is no question that the SPE structure was intended to insulate the financial position of each of the Subject Debtors from the problems of its affiliates, and to make the prospect of a default less likely. There is also no question that this structure was designed to make each Subject Debtor “bankruptcy remote.” Nevertheless, the record also establishes that the Movants each extended a loan to the respective Subject Debtor with a balloon payment that would require refinancing in a period of years and that would default if financing could not be
obtained by the SPE or by the SPE’s parent coming to its rescue.

Movants do not contend that they were unaware that they were extending credit to a company that was part of a much larger group, and that there were benefits as well as possible detriments from this structure. If the ability of the Group to obtain refinancing became impaired, the financial situation of the subsidiary would inevitably be impaired.

Later:

Delaware law in turn provides that the directors of a solvent corporation are authorized – indeed, required – to consider the interests of the shareholders in exercising their fiduciary duties. In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), the Delaware Supreme Court held for the first time that the directors of an insolvent corporation have duties to creditors that may be enforceable in a derivative action on behalf of the corporation. But it rejected the proposition of several earlier Chancery cases that directors of a Delaware corporation have duties to creditors when operating in the “zone of insolvency,” stating [w]hen a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. 930 A.2d at 101 (emphasis supplied).34

This statement is a general formulation that leaves open many issues for later determination – for example, when and how a corporation should be determined to be insolvent. But there is no contention in these cases that the Subject Debtors were insolvent at any time – indeed, Movants’ contention is that they were and are solvent. Movants therefore get no assistance from Delaware law in the contention that the Independent Managers should have considered only the interests of the secured creditor when they made their decisions to file Chapter 11 petitions, or that there was a breach of fiduciary duty on the part of any of the managers by voting to file based on the interests of the Group.

The record at bar does not explain exactly what the Independent Managers were
supposed to do. It appears that the Movants may have thought the Independent Managers
were obligated to protect only their interests. For example, an officer of ING Clarion testified that “the real reason” he was disturbed by the Chapter 11 filings was the inability of the Independent Managers to prevent one:

Well, my understanding of the bankruptcy as it pertains to these borrowers is that there was an independent board member who was meant to, at least from the lender’s point of view, meant to prevent a bankruptcy filing to make them a bankruptcy-remote, and that such filings were not anticipated to happen.(Altman Dep. Tr. 159:7-13, June 5, 2009.)

However, if Movants believed that an “independent” manager can serve on a board solely for the purpose of voting “no” to a bankruptcy filing because of the desires of a secured creditor, they were mistaken. As the Delaware cases stress, directors and managers owe their duties to the corporation and, ordinarily, to the shareholders. Seen from the perspective of the Group, the filings were unquestionably not premature.

Conclusion:

The Debtors here have established that the filings were designed “to preserve value for the Debtors’ estates and creditors,” including the Movants. Movants are wrong in the implicit assumption of the Motions that their rights were materially impaired by the Debtors’ Chapter 11 filings. Obviously, a principal purpose of bankruptcy law is to protect creditors’ rights. See Young v. Higbee Co., 324 U.S. 204, 210 (1945). Secured creditors’ access to their collateral may be delayed by a filing, but secured creditors have a panoply of rights, including adequate protection and the right to post-petition interest and fees if they are oversecured. 11 U.S.C. §§ 361, 506(b).

Movants complain that as a consequence of the filings they are receiving only interest on their loans and have been deprived of current amortization payments, and Metlife complains that it is not even receiving interest on its mezzanine loan, which is secured only by a stock interest in its borrower’s subsidiary. However, Movants have not sought additional adequate protection, and they have not waived any of their rights to recover full principal and interest and post-petition interest on confirmation of a plan. Movants complain that Chapter 11 gives the Debtors excessive leverage, but Metlife asserts it has all the leverage it needs to make sure that its rights will be respected.

It is clear, on this record, that Movants have been inconvenienced by the Chapter 11 filings. For example, the cash flows of the Debtors have been partially interrupted and special servicers have had to be appointed for the CMBS obligations. However, inconvenience to a secured creditor is not a reason to dismiss a Chapter 11 case. The salient point for purposes of these Motions is that the fundamental protections that the Movants negotiated and that the SPE structure represents are still in place and will remain in place during the Chapter 11 cases. This includes protection against the substantive consolidation of the project-level Debtors with any other entities.

There is no question that a principal goal of the SPE structure is to guard against substantive consolidation, but the question of substantive consolidation is entirely different from the issue whether the Board of a debtor that is part of a corporate group can consider the interests of the group along with the interests of the individual debtor when making a decision to file a bankruptcy case. Nothing in this
Opinion implies that the assets and liabilities of any of the Subject Debtors could
properly be substantively consolidated with those of any other entity.

These Motions are a diversion from the parties’ real task, which is to get each
of the Subject Debtors out of bankruptcy as soon as feasible. The Movants assert
talks with them should have begun earlier. It is time that negotiations commence in
earnest.

Gropper/GGP SPE Ruling

Disclosure (“none” means no position):Long GGWPQ