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.

That claim, in turn, was based largely on the fact that certain of the independent managers of the CMBS issuers were secretly fired by GGP and replaced with new independent managers prior to the bankruptcy filings. The court held neither such replacement of the independent managers nor any of the other allegations was grounds for dismissal of the filings. However, the court clarified that its ruling was not a general indictment of the bankruptcy-remoteness technology utilized by GGP and many other issuers in securitization transactions, stating:

There is no question that a principal goal of the SPE [special-purpose entity] 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.

Click here for the opinion.