Bankruptcy Court Denies Motions to Dismiss Chapter 11 Cases of GGP Subsidiaries
On August 11, 2009, the United States Bankruptcy Court for the Southern District of New York denied five motions to dismiss certain Chapter 11 cases filed by debtors (Debtors) that are owned directly or indirectly by General Growth Properties, Inc. (GGP). Each of the parties (Movants) that had filed a motion to dismiss one or more of the Debtors’ cases was a secured lender with a loan to one or more of the Debtors. The primary ground on which dismissal of the cases was sought was that the Debtors’ cases had been filed in bad faith.
Little Sympathy for the Movants
The court’s opinion provides insight into the process by which GGP and its subsidiaries filed their Chapter 11 cases, and how the wholesale lack of attention paid pre-petition by the commercial mortgage-backed securities (CMBS) market loan servicers to GGP’s requests to discuss restructuring came back to haunt the Movants. It also illustrates the court’s almost dismissive attitude towards the asserted plight of the Movants, describing them as “inconvenienced” by the Chapter 11 cases, while at every turn using the Movants’ asserted bases for outrage against the Movants themselves.
Transactional and Organizational Document Provisions
The court noted that there was no dispute that the Debtors were intended to function as special purpose entities (SPE) and had been formed with the goal and purpose of maintaining their existence separate from their affiliates and parent. Much of the discussion early in the General Growth Chapter 11 cases related to the failure of the separateness, special purpose and, in particular, independent director provisions of the CMBS loan documents and the Debtor organizational documents to prevent the subsidiary SPEs from filing Chapter 11 petitions, and to provide the related protections that the Movants mistakenly believed that they had from such a filing. Although the clear focus of the bankruptcy court’s opinion is on denying the motions to dismiss based upon the “bad faith filing” doctrine, there is a fair amount of discussion of and around the CMBS transactional and organizational document provisions and the professed surprise of the Movants that those document provisions did not have the effect intended by the Movants.
The Bad Faith Argument
The Movants’ bad faith filing allegations were largely premised on the assertion that many of the subsidiary-SPEs were not insolvent or in financial distress, and therefore, argued the lenders, the commencement of a Chapter 11 case as to each of those entities was in bad faith. The court reiterated well-established law that there is no insolvency test for Chapter 11 debtors, and that there is no requirement of immediate financial extremis. Rather, the court noted that the Bankruptcy Code encourages debtors to file early so as to maximize the value available to creditors. It also noted that a subsidiary entity need not base its decision to file bankruptcy solely on its own need for reorganization, but could also consider the needs or benefits of the group of which it is a part in determining whether it should seek Chapter 11 protection.
Substantive Consolidation
As to the Movants’ concerns about substantive consolidation, the court stated that “[n]othing in this Opinion implies that the assets and liabilities of the [Debtors] could properly be substantively consolidated with those of any other entity.” Rather, the court indicated an expectation that all of the Debtors will maintain their status as separate entities. That, the court posited, is a very different question from whether the cash flow generated by those entities can be upstreamed to the GGP parent entity for use on an enterprise-wide basis. According to the court, that use of funds is appropriate as long as appropriate adequate protection is provided to the entities holding an interest in those funds.
Independent Manager Positions
The aspects of the court’s opinion addressing the independent manager provisions are worthy of study. The court takes up several pages of the opinion to point out that the independent manager provisions in the CMBS loan and organizational documents are just that – document provisions requiring appointment of independent managers – not document provisions requiring appointment of managers wholly beholden to the lender-creditor, and not alterations of applicable law or of the organizational documents of the SPE-subsidiary entities. The court determined that under applicable non-bankruptcy law all directors, whether independent or not, have fiduciary duties to the entity itself that redound to the benefit of that entity’s shareholders.
The opinion also discusses in some detail the means by which subsidiary-SPEs, which may have had independent managers who might have inaccurately believed themselves to be beholden to the lender-creditors, were placed into Chapter 11. The court’s decision not to dismiss indicates that the shareholders of those subsidiary-SPEs – which in many cases was the management of the GGP parent – appropriately exercised their rights as shareholders to fire those independent managers and to appoint new independent managers, consistent with basic tenets of corporate governance. Those newly appointed independent managers, who the court found “satisfied the requirements of that position,” then exercised their rights, consistent with their fiduciary duty, to vote to have the SPE-subsidiaries file Chapter 11 petitions. Each Debtor’s bankruptcy filing may have been a default, or one more default, under the CMBS loan documents, but the filings were just that – one more default. They did not invalidate the appropriately taken corporate action as voted by the newly appointed independent managers.